Opposition Brief — California Public Employees' Retirement System v. New York Stock Exchange, Inc. (No. 07-946)

FILED

uy) FEB 19 2008

No. 07-946 | OFFICE OF THE SLERK

IN THE

Supreme Court of the United States

CALIFORNLA PUBLIC EMPLOYEES’ RETIREMENT SYSTEM

(CALPERS)

Petitioner,

NEW YORK STOCK EXCHANGE, INC.,

Respondent.

On Petition for a Writ of Certiorari

To The United States Court of Appeals

For The Second Circuit

OPPOSITION TO PETITION FOR

WRIT OF CERTIORARI

DANIEL E. LOEB DEBRA M. TORRES

EUGENE N. HANSEN Counsel of Record

FRIED, FRANK, HARRIS, FRIED, FRANK, HARRIS,

SHRIVER & JACOBSON LLP SHRIVER & JACOBSON LLP

1001 Pennsylvania Ave., N.W. One New York Plaza

Washington, DC 20004 New York, NY 10004

(202) 639-7000 (212) 859-8000

February 19, 2008

PARSE ORION, TIE ie 5° EIR LTT A REE TOGO ERS AERIS ESN ~ CB RRELE, SELLE SLICE IEA PRIS ERE SOAP OME TE

LEGAL PRINTERS, Washington DC e 202-747-2400 e legalprinters.com

QUESTION PRESENTED

Did the Second Circuit properly hold, as other

circuit courts have held, that there is no “bad faith”

or “deliberate inaction” exception to the well-

established principle that self-regulatory

organizations are absolutely immune from private

claims arising from the allegedly improper exercise

of the regulatory authority delegated to them under

the Securities Exchange Act of 1934?

PARTIES TO THE PROCEEDING

Petitioner, California Public Employees’

Retirement System (“CalPERS”), is a_ court-

appointed lead plaintiff in a putative securities class

action against Respondent New York Stock

Exchange, Inc. (the “NYSE”) and several othe:

defendants (the “Specialist Firms’) that are not

before the Court on this Petition: as of the date

hereof, the putative class has not been certified.

Petitioner mischaractcrizes the relationship

between the NYSE and the Specialist Firms by

suggesting that the NYSE owns, or has some other

proprietary interest in, the Specialist Firms. See,

e.g., Petition at 11, 3 (referring to the NYSE and “its”

Specialist Firms and “the NYSE’s Specialists”). The

Consolidated and Amended Complaint (“Complaint”)

makes no such allegation, and the NYSE does not

own (and has never owned), directly or indirectly,

any of the Specialist Firms.

RULE 29.6 CORPORATE DISCLOSURE

STATEMENT

Respondent, at all times relevant to the

allegations in the Complaint, was a New York not-

for-profit corporation with no public shareholders.

Pursuant to a 2006 merger between the NYSE and

Archipelago Holdings, Inc., the NYSE’s status as a

self-regulatory organization and national securities

exchange was transferred to New York Stock

Exchange LLC, a limited liability corporation and

wholly owned subsidiary of a publicly held successor

entity, NYSE Group, Inc. (“Group”). In 2007, Group

combined with Euronext N.V. to become NYSE

Euronext, a publicly held corporation and the world’s

lll

largest exchange group. As of the date hereof, no

publicly held corporation owns 10% or more of the

stock of NYSE Euronext.

1V

TABLE OF CONTENTS

QUESTION PRESENTED

PARTIES TO THE PROCEEDING

RULE 29.6 CORPORATE DISCLOSURE

STATEMENT

TABLE OF AUTHORITIES

STATEMENT OF THE CASE

I FIG ai asia ska iiacasnc acids eas ceniesnieindacandnnes :

Procedural History

REASONS FOR DENYING THE PETITION

| THERE IS NO CONFLICT BETWEEN THE

SECOND CIRCUIT'S DECISION AND ANY

OTHER CIRCUIT COURT DECISION............. 14

. PETITIONER FAILS TO MANUFACTURE A

CONFLICT WITH THIS COURT'S

PRECEDENTS

A. Absolute Immunity Is Appropriate

Regardless Of Allegations Of Fraud Or

Inaction

1. Butz And Other Cases Involving

Constitutional Claims Against

Individual Officials Have No

PS BO os acct ntetcica ns ctisnacnnvininscs 18

2. Settled Law Rejects Petitioner’s

Proposed “Fraud” And “Inaction”

Exceptions To The Absolute Immunity

NN hao Eo ctdanhagunbensanie 20

B. There Is No Conflict With Silver v. NYSE... 24

C. There Is No Conflict With Richardson v.

McKnight

aga k (iy Clam ddcsencsadaiidvde xucascnnsinxes 26

TABLE OF AUTHORITIES

PAGE

CASES

Austin Mun. Sec., Inc. v. NASD, Inc..

757 F.2d 676 (Sth Cir. 1985)............

Barbara v. NYSE, Inc..

99 F.3d 49 (2d Cir. 1996)......

Barr v. Matteo.

360 U.S. 564 (1959)...

Behrens v. Pelletier.

516 U.S. 299 (1996)..

Butz v. Economou.

438 U.S. 478 (1978) are ; 17, 18-2

Central Bank of Denver, N.A. v. First Interstate

Bank of Denver, 511 U.S. 164 (1994),

cleavinger v. Saxner,

Se ee, OE Ds. canenscaveccenese

D'Alessio v. NYSE, Inc..,

258 F.3d 93 (2d Cir.) Oe

D'Alessio v. NYSE, Inc..

125 F. Supp. 2d 656 (S.D.N.Y. 2000) ....

DL Capital Group, LLC v. NASDAQ

Stock Market, Inc..,

409 F.3d 93 (2d Cir. 20085)..............

D.L. Cromwell Invus., Inc. v. NASD

Regulation, Inc., 279 F.3d 155 (2d Cir. 2002).....16

Dura Pharm., Inc. v. Broudo,

544 U.S. 336 (2005) 2 SPREE

Forrester v. White,

484 U.S. 219 (1988)....

Georgia v. Pa. R.R. Co.,

324 U.S. 489 (1945)...........

Gordon v. NYSE, Inc..

Gregoire v. Biddle.

177 F.2d 579 (2d Cir. 194

Harlow v. Fitzgerald,

457 U.S. 800 (1982)

MFS Sec. Corp. v. NYSE, Inc.,

277 F.3d 613 (2d Cir.).

Mitchell v. Forsyth,

472 U.S. 511 (1985)

MME&S Fin., Inc. v. NASD, Inc.,

364 F.3d 908 (8th Cir. 2004)..

P’ship Exch. Sec. Co. v. NASD, Inc.,

169 F.3d 606 (9th Cir. 1999)

Richardson v. McKnight,

521 U.S. 399 (1997)................0c.cccsececeseeees

Silver v. NYSE.

373 U.S. 341 (1963)

Sparta Surgical Corp. v. NASD, Inc.,

159 F.3d 1209 (9th Cir. 1998)

Stoneridge Inv. Partners, LLC v.

Scientific-Atlanta, Inc.

128 S. Ct. 761 (2008)

United States v. Solomon.

509 F.2d 8683 (2d Cir. 1975)

Weissman vu. NASD, Inc.,

500 F.3d 1293 Clith Cir. ZOOT) .veccccccosscccccncsacc: 2

Wood v. Strickland,

420 U.S. 308 (1978)

STATUTES

Securities Exchange Act of 1934,

BS STG, Se ee OR i cnictstaca renee 1

15 U.S.C. § 78ce(a)(26)

15 U.S.C. §

15 U.S.C. §

15 U.S.C. § 78s

5 U.S.C. §

15 U.S.C. §

42 U.S.C. § 1

RULES

ON Ae ID Sceinscschsnnasnhainssasaok diet oaaeees ae 13

Sup. Ct. R. 10(c)

NYSE Rule 104

OTHER AUTHORITIES

H.R. Rep. No. 94-123 (1975)

Pub. L. No. 94-29,

89 Stat. 155 (19735).................... sulshivcaesete eee 4

S. Rep. No. 94-75 (1975)

as reprinted in

1976 U.S.C CAL. 270, QOS iiccesisscsnseconasere

William |. Friedman, 7he Fourteenth

({mendment’s Public/Private Distinctior

imong Security Regulator: in thre 17S

Marketpla e sited

) 4

}

3 Ann. Rev

BRIEF OF RESPONDENT NEW YORK STOCK

EXCHANGE, INC. IN OPPOSITION TO

PETITION FOR WRIT OF CERTIORARI

Respondent New York Stock Exchange, Inc. (the

“NYSE”) respectfully requests that this Court deny

the petition for a writ of certiorari (“Petition,” cited

herein as “Pet.”) filed by the California Public

Employees’ Retirement System (“Petitioner”).

STATEMENT OF THE CASE

This case concerns an attempt to circumvent the

well-established principle that _— self-regulatory

organizations (“SRQs”), such as the NYSE, are

entitled to absolute immunity from private claims

arising out of their allegedly improper or inadequate

regulation of their members’ conduct on the national

securities exchanges. Petitioner contends that the

NYSE is not entitled to absolute immunity because

the NYSE’s alleged failure to conduct adequate

surveillance, investigation, and discipline of seven

“Specialist Firms” for improper proprietary trading

was deliberate. The Second Circuit properly held

that the NYSE 1s entitled to absolute immunity with

respect to Petitioner's claims because they arise from

the NYSE’s exercise of discretion with respect to the

quasi-governmental regulatory authority delegated

to the NYSE by Congress under the Securities

Exchange Act of 1934, 15 U.S.C. § 78a et seg

(“Exchange Act’). See Petitioner's Appendix (Pet.

App.) at 2la-22a. In doing so, the Second Circuit

expressly rejected Petitioner's argument that

absolute SRO immunity does not apply to allegations

of deliberate regulatory misconduct or inaction. /d

at ?4a-2ba

As Petitioner tacitly acknowledges, the Second

Circuit's decision is completely consistent with the

decision of every other circuit court that has ruled on

the question of absolute SRO immunity; each of

these decisions rejects the assertion of a bad faith or

fraud “exception” to the immunity doctrine. See DL

Capital Group, LLC v. NASDAQ Stock Market, Inc.,

409 F.3d 93 (2d Cir. 2005); D'Alessio v. NYSE, Inc.,

258 F.3d 93 (2d Cir.), cert. denied, 534 U.S. 1066

(2001); P’ship Exch. Sec. Co. v. NASD, Inc., 169 F.3d

606 (9th Cir. 1999); Sparta Surgical Corp. v. NASD,

Inc., 159 F.3d 1209 (9th Cir. 1998); Barbara uv.

NYSE, Inc., 99 F.3d 49 (2d Cir. 1996); Austin Mun.

Sec., Inc. v. NASD, Inc., 757 F.2d 676 (5th Cir. 1985);

see also Weissman v. NASD, Inc., 500 F.3d 1293

(11th Cir. 2007) (en banc); MF'S Sec. Corp. v. NYSE,

Inc., 277 F.3d 613 (2d Cir.), cert. denied, 536 U.S.

924 (2002). The Second Circuit’s decision is likewise

consistent with prior Second Circuit decisions that

SROs are not “state actors” for purposes of

determining whether individuals subject to their

regulatory jurisdiction may assert claims against

them for deprivations of constitutional rights. See,

e.g., United States v. Solomon, 509 F.2d 863 (2d Cir.

1975).

Finally, there is no inconsistency between the

Second Circuit’s holding that the NYSE is absolutely

immune from Petitioner’s claims and any of this

Court's precedents. The precedents cited by

Petitioner in an attempt to create the appearance of

such a_ conflict involve alleged constitutional

violations by individuals employed’ by _ the

government or performing quasi-governmental

functions; as such, they do not conflict with or

undermine the absolute immunity of the NYSE,

3

which mirrors the immunity of the SEC in

connection with the performance of its own

regulatory duties.

Factual Background

The Parties. Petitioner, the public employee

retirement system for the State of California,

purports to bring a class action lawsuit on behalf of

millions of unidentified public investors who bought

or sold unidentified securities on the NYSE trading

floor from October 17, 1998 through October 15,

2003 (“Relevant Period”). The district court

appointed Petitioner lead plaintiff, along with

Empire Programs, Ine. (“nich subsequently

withdrew as co-lead plaintiff). As of the date hereof,

the district court has not ruled on Petitioner’s

pending motion for class certification, which has

been opposed by the Specialist Firms.

The NYSE, at all times relevant to the

allegations in the Amended and Consolidated

Complaint (“Complaint”), was a New York not-for-

profit corporation registered with the Securities and

Exchange Commission (“SEC”) as a_ national

securities exchange in accordance with Section 6 of

the Exchange Act, 15 U.S.C. § 78f.1 The NYSE,

therefore, acted as an SRO within the meaning of

the Exchange Act. 15 U.S.C. § 78c(a)(26).

More than two years after the close of the alleged class

period, the NYSE’s status as a national securities exchange

under the Exchange Act was transferred to New York Stock

Exchange LLC, now an indirect subsidiary of NYSE Euronext,

a publicly held corporation.

The Exchange Act establishes a scheme of

regulation of the securities marketplace that

combines self-regulation by the securities exchanges

with oversight and direct regulation by government

agencies (in this case the SEC). See S. Rep. No. 94-

75, at 23, as reprinted in 1975 U.S.C.C.A.N. 179,

201-02. Section 19(g)(1) delegates regulatory

authority to the NYSE and to other SROs, providing,

in pertinent part, that “every self-regulatory

organization shall comply with the provisions of [the

Exchange Act], the rules and_ regulations

thereunder, and its own rules, and ... enforce

compliance ... with such provisions by its members

and persons associated with its members....” 15

U.S.C. § 78s(g)(1). The Exchange Act, in turn,

provides the SEC with broad and exclusive authority

to oversee (i) the NYSE’s compliance with the

Exchange Act, the rules and regulations thereunder,

and its own rules and (11) the NYSE’s enforcement of

its members’ compliance with those provisions. 15

U.S.C. §§ 78s(g)(1) & (h)(1).2 The Exchange Act

empowers the SEC to take adverse action against

the NYSE should it fail to fulfill these duties,

including censure, suspension, or revocation of its

status as an SRO, and the imposition of penalties.

Id. The Exchange Act provides no express private

See Pub. L. No. 94-29, 89 Stat. 155 (1975). “The legislative

history of the 1975 amendments underscored that self

regulatory organizations ‘are intended to be subject to the

SEC’s control and have no governmentally derived authority to

act independently of SEC oversight.” Sparta Surgical Corp. v.

NASD, Inc., 159 F.3d 1209, 1214 (9th Cir. 1998) (quoting H.R.

Rep. No. 94-123, at 48-49 (1975)).

RK

vo

right of action against SROs for alleged regulatory

failures.

The Complaint’s Factual Allegations.* The

Complaint principally concerns alleged misconduct

by the seven so-called “Specialist Firms” operating

on the NYSE’s trading floor during the Relevant

Period. The Specialist Firms are independently

owned member organizations of the NYSE; as such,

they are subject to regulation by the NYSE as well

as the SEC. Pet. App. at 4a-5a; JA2:85-88 (Compl. 4

19).

The NYSE itself does not execute trades. Pet.

App. at 5a. Rather, it provides a trading facility for

its members, including the Specialist Firms, and

regulates its members pursuant to the authority

delegated to it by the Exchange Act. Jd. During the

Relevant Period, each of the approximately 2,800

securities then listed for trading on the NYSE was

assigned to one of the seven Specialist Firms, with

each Specialist Firm conducting an auction market

for the respective securities assigned to it. Id. at 5a-

6a. To execute purchases or sales of a particular

security, buyers and sellers presented bids (either

electronically or through a broker) to the Specialist

Firm assigned to that security. Jd. When acting as

agent for investors, the Specialist Firms were

obligated to match executable orders to buy and sell

in a timely manner at the best possible price. Id.

3 The NYSE refers here to the alleged facts as recited in the

district court and Second Circuit opinions and, where

appropriate, to the Complaint itself, which appears in the

Second Circuit Joint Appendix at Tab 2 and is cited as “JA2:__

(Compl. 94 _).”

6

Throughout the Relevant Period, the Specialist

Firms were not permitted to act as a principal on one

side of a securities transaction except in certain

enumerated circumstances. Jd. at 7a, citing NYSE

Rule 104 (prohibiting a specialist from trading for its

own account “unless such dealings are reasonably

necessary to permit such specialist to maintain a fair

and orderly market”). For example, if there were no

matching public orders to sell and orders to buy, the

specialist was permitted to execute an order to buy

by selling stock from the specialist’s proprietary

account; conversely, a specialist was permitted to

execute an unmatched order to sell by buying the

investor's stock for the specialist’s proprietary

account. Id. at 6a-7a.

The Complaint alleges that, throughout the

Relevant Period, the Specialist Firms failed to match

executable public orders to buy and sell against each

other and, instead, traded for their own accounts in

circumstances not permitted by the rules. In

particular, the Complaint alleges that the Specialist

Firms engaged in (i) “interpositioning,” described as

“taking advantage of the spread between the bid and

offer prices by buying stock from one public investor,

and then selling it to another, locking in a

guaranteed riskless profit,” and (i1) “trading ahead,”

or filling an order from the Specialist Firm’s

inventory ahead of orders received from customers.

See id. at 8a; JA2:109-14 (Compl. 49 76-90).

The Complaint, in turn, faults the NYSE for not

properly regulating the Specialist Firms. The

Complaint charges, inter alia, that the NYSE:

0 “deliberate[ly] failfed] to properly oversee,

regulate or supervise’ its securities

exchange or discipline its member

Specialist Firms for’ their blatant

violations,” JA2:72-73 (Comp. 4 5); see also

id. at 74-77, 199-201 (Compl. 4/4 8, 230-32);

“conductled] its regulatory activities and

[took] disciplinary action” against the

Specialist Firms in a “deliberately

constrained and contracted manner ... to

give the public ilusion of meaningful

oversight,” id. at 183 (Compl. J 193); and

“routinely failed to act when it knew or had

reason to know of improper conduct by its

member firms. When NYSE’s regulatory

unit did act, it failed to compel any

meaningful compliance ... by issuing small

fines or letters,” 1d. at 181 (Compl. % 188).

While the Petition argues that the NYSE

“actively engaged with [the] Specialist Firms in

wide-ranging manipulative, self-dealing and

misleading conduct,” Pet. at 6, the Complaint is

devoid of any allegation that the NYSE executed or

directed the execution of any improper proprietary

trades by the Specialist Firms. Instead, the only

means of “active participation” alleged in the

Complaint is the NYSE’s’ supposed intentional

failure to exercise its regulatory authority to “halt,

expose or discipline” the Specialist Firms’

misconduct “to the extent necessary to deter, stop or

prevent” the misconduct. JA2:72 (Compl. % 5). The

Complaint alleges that these purported regulatory

failures constitute violations of Sections 6(b), 10(b),

and 20(a) of the Exchange Act. Jd. at 202-09 (Compl.

WJ 234-60). The Complaint also asserts a state-law

claim against the NYSE for “aiding and abetting a

8

breach of fiduciary duty” by the Specialist Firms. Jd.

at 210-11 (Compl. 44 261-65).

The Complaint makes extensive reference to a

Wall Street Journal article dated November 3, 2003,

which reports that the SEC had commenced an

examination of the NYSE’s regulation of the

Specialist Firms, id at 73-77 (Compl. 9{ 7-8), but

acknowledges that the examination began after the

SEC learned earlier in 2003 that the NYSE was

conducting its own investigation into improper

trading by some of the Specialist Firms. JA:73

(Compl. 4 7). The Complaint also makes repeated

references to the joint investigation conducted by the

SEC and the NYSE into the Specialist Firms’

improper trading and the Specialist Firms’

subsequent settlements with both the SEC and the

NYSE for violations of Section 10(b) of the Exchange

Act and NYSE rules. Jd. at 77-79 (Compl. J 10-

11).4 As a result of these settlements, the Specialist

Firms agreed to pay more than $245 million in

disgorgement and penalties and to the establishment

of a restitution fund for injured public investors. Jd.

Additionally, the Petition refers to a settlement

between the SEC and the NYSE which occurred

after the filing of the Complaint. Pet. at 8-10. The

NYSE, without admitting or denying the SEC’s

findings, agreed to entry of an order imposing a

censure and requiring the NYSE to cease and desist

from future violations of the securities laws. Pet.

4 The full text of the SEC’s press releases announcing the

settlements with the Specialist Firms, which reference the joint

nature of the investigation, is available on the SEC’s website.

See, e.g., http://www.sec.gov/news/press/2004-42.htm.

9

App. at 140a.° The NYSE also agreed to take certain

remedial measures in addition to those already

adopted. Jd. In particular, the SEC criticized the

NYSE’s (3) specialist surveillance for having

parameters inadequate to detect all instances of

trading ahead or interpositioning, (i1) investigatory

procedures for being insufficiently rigorous, and (i111)

discipline of Specialist Firms found to have engaged

in improper trading. Jd. at 142a.

The SEC did not charge the NYSE with violations

of Section 10(b), nor did it allege that the NYSE had

aided and abetted the Specialist Firms’ violations of

Section 10(b). Pet. App. at 140a-44a.° Instead, the

SEC charged the NYSE with the failure to comply

with Section 19(g) of the Exchange Act, 15 U.S.C. §

78s(g), because it “failed to adequately monitor and

police specialist trading activity....” Pet. App. at 141

(emphasis supplied). In doing so, the SEC exercised

its exclusive authority under the Exchange Act, 15

U.S.C. §§ 78s(g)(1) & (h)(1), to oversee and review

the NYSE’s regulatory performance.

Procedural History

After the filing of the Complaint on September

16, 2004, the NYSE moved to dismiss on the basis of

5 The Petition cites only to the SEC’s press release

announcing the settlement with the NYSE. Pet. at 10. The

SEC order is publicly available on the Internet at

http://www.sec.gov/litigation/admin/34-51524. pdf.

6 Although private litigants may not bring a claim for aiding

and abetting a federal securities violation, Central Bank of

Denver, N.A. u. First Interstate Bank of Denver, 511 U.S. 164

(1994), the SEC is authorized to bring aiding and abetting

claims. See 15 U.S.C. § 7&t(e).

10

absolute SRO immunity, as well as several other

grounds.’ Notwithstanding controlling Second

Circuit precedent to the contrary, Petitioner opposed

the motion by arguing, among other things, that the

NYSE’s alleged regulatory failures were motivated

by non-regulatory motives. Pet. App. at 70a-71a.

The district court rejected Petitioner’s arguments

and dismissed all of Petitioner’s claims against the

NYSE with prejudice. Pet. App. at 67a, 138a-39a.

In relevant part, the district court determined that

the NYSE’s alleged “failure to adequately monitor

the conduct of the Specialist Defendants” was

subject to absolute immunity because it “falls within

the scope of its quasi-governmental authority.” Id.

at 71a.9

‘ The Specialist Firms moved separately to dismiss the

allegations against them. Those motions were granted in part

and denied in part. Pet. App. at 75a-106a.

Q

© Petitioner incorrectly states that “[m]Jost claims” were

dismissed with prejudice by the district court. Pet. at 3.

9 With respect to the Complaint’s allegations that the NYSE

made misstatements concerning its rules, its regulatory

conduct, and the operation of the auction market in various

public materials, the district court held that plaintiffs lacked

standing under Section 10(b) to pursue such claims because the

alleged misstatements did not concern any of the issuers of the

securities traded by plaintiffs. Pet. App. at 72a-75a.

The district court did not reach the other grounds for

dismissing Petitioner’s claims of regulatory failure, including

(among others) that: (i) Petitioner has no private right of

action against the NYSE under Section 6(b) of the Exchange

Act, see, e.g.,. MM&S Fin., Inc. v. NASD, Inc., 364 F.3d 908,

910-11 (8th Cir. 2004), and (ii) Petitioner’s claim that the

NYSE’s alleged regulatory failures constitute “manipulation”

under Section 10(b) is foreclosed by this Court’s decision in

LI

On appeal to the Second Circuit, Petitioner

argued that the controlling Second Circuit

precedent, which holds that allegations of bad faith

or fraudulent intent do not defeat an SRO’s

entitlement to absolute immunity, was inapplicable

“where the NYSE does not act and has essentially, in

[plaintiffs’] words, ‘abandoned’ its duty to regulate.”

Pet. App. at 16a.!° In short, Petitioner argued that

bad faith regulatory inaction — unlike affirmative

regulatory action allegedly taken in bad faith — is

inconsistent with, and therefore outside, the scope of

the NYSE’s regulatory authority.

A unanimous Second Circuit panel affirmed the

district court’s finding of absolute immunity, relying

on its settled, uniform precedent: “The common

thread in these cases is that absolute immunity

attaches where the activity ‘relate|s] to the proper

functioning of the regulatory system’..... Thus, so

long as the ‘alleged misconduct falls within the scope

| Footnote continued from previous page]

Central Bank of Denver, 511 U.S. 164, where the Court ruled

that there was no private right of action for aiding and abetting

violations of Section 10(b). See also Stoneridge Inv. Partners,

LLC v. Scientific-Atlanta, Inc. 128 S. Ct. 761 (2008) (rejecting

theory of scheme hiability). In addition, the Complaint fails to

plead loss causation, see Dura Pharm, Inc. v. Broudo, 544 U.S.

336 (2005). and other requisite elements of a securities fraud

claim, including reliance and scienter.

‘0 Notwithstanding Petitioner’s “abandonment” argument, the

Complaint explicitly alleges that the NYSE took affirmative

action to monitor and regulate the Specialist Firms’ proprietary

trading. See, e.g., JA2:73 (Compl. 4 7), 135 (Compl. 4 129), 140

(Compl. 4 130), 145 (Compl. 9 131), 150 (Compl. 4 133), 160

(Compl. 4 135), 183 (Compl. 4 193).

of the quasi-governmental powers delegated to the

NYSE,’ absolute immunity attaches.” Pet. App. at

15a (quoting D/‘Alessio, 258 F.3d at 106) (alteration

in original). The Second Circuit further noted that,

“as in other absolute immunity contexts, we focus on

the nature of the function performed, not the

identity of the actor who performed it.” Jd. at 14a

(quoting Forrester v. White, 484 U.S. 219, 229 (1988).

The court expressly’ rejected Petitioner’s

arguments that absolute immunity did not apply to

claims arising from alleged regulatory inaction, Pct.

App. at 16a-19a, or to claims arising from alleged

fraud or bad faith, id. at 24a-26a, holding that the

alleged acts and inactions did not “fall outside” the

outer perimeter of the NYSE’s regulatory authority.

The court stated that “[iJt is clear that these claims

all involve the NYSE’s action or inaction with respect

to trading on the Exchange, which is indisputably

within the NYSE’s regulatory powers.” Pet. App. at

21a (emphasis supplied). The court further held that

“immunity depends only on whether specific acts and

forbearances were incident to the exercise of

regulatory power, and not on the propriety of those

actions or inactions.” Jd. at 19a (emphasis in

original).!!

11 Not relevant for purposes of the Petition, the Second

Circuit vacated that part of the district court’s judgment that

held that Petitioner and other members of the putative class

lacked standing to pursue a Section 10(b) claim against the

NYSE for its alleged misstatements; the Second Circuit

remanded the misrepresentation claim to the district court and

invited the NYSE to renew its motion to dismiss these claims

on grounds not previously reached by the district court,

13

REASONS FOR DENYING THE PETITION

No reason, compelling or otherwise, supports

granting the Petition in this case. See Sup. Ct. R.

10.12. The Second Circuit decision does not conflict

with any decision of the Second Circuit or of any

other Court of Appeals decision concerning absolute

SRO immunity — a point implicitly conceded by

Petitioner. Finally, the Petition provides the Court

with no reason to “clarify” the scope of SRO

immunity from claims of alleged regulatory failure

by its citation of this Court’s decisions concerning

the scope of immunity afforded to individual

government officials sued for alleged violations of

constitutional rights. To the extent that

comparisons with cases involving individual officials’

immunity is instructive, the Second Cuircuit’s

decision is completely consistent with this Court’s

precedents holding government officials absolutely

immune from non-constitutional claims arising from

the exercise of discretion within the outer perimeter

of their official authority.

[Footnote continued from previous page]

including Petitioner’s failure to adequately plead loss causation

and reliance. See Pet. App. at 26a-29a.

12 This is not the first time this Court has been asked to

review a Second Circuit decision holding the NYSE absolutely

immune from claims arising from the allegedly improper and

inadequate exercise of its delegated regulatory authority. See

D/Alessio v. NYSE, Inc., 258 F.3d 93, 105 (2d Cir.), cert. denied,

534 U.S. 1066 (2001).

14

THERE IS NO CONFLICT BETWEEN

THE SECOND CIRCUIT'S DECISION

AND ANY OTHER CIRCUIT COURT

DECISION

There is no conflict between or within any of the

Courts of Appeals for this Court to resolve. Every

circuit court that has considered whether an SRO

enjoys absolute immunity from suit when exercising

its regulatory authority under the Exchange Act has

held the SRO to be absolutely immune. See, e.g., DL

Capital Group, 409 F.3d at 97 (“There is no question

that an SRO and its officers are entitled to absolute

immunity when they are, in effect, ‘acting under the

aegis of their regulatory duties.”) (citation omitted):

MFS Sec. Corp., 277 F.3d at 617 (NYSE is immune

from hability for claims arising out of the discharge

of its duties under the Exchange Act.”) (quotation

marks and citation omitted); D’Alessio, 258 F.3d at

105 (“The NYSE, as a SRO, stands in the shoes of

the SEC in interpreting the securities laws for its

members and in monitoring compliance with those

laws. It follows that the NYSE should be entitled to

the same immunity enjoyed by the SEC when it 1s

performing functions delegated to it under the SEC’s

broad oversight authority.”); P’ship Exch. Sec. Co.,

169 F.3d at 608 (“[I|f the action is taken under the

‘aegis of the Exchange Act’s delegated authority,’ the

NASD is protected by absolute immunity from

money damages|.]”) (citation omitted): Sparta

Surgical Corp., 159 F.3d at 1213 (“Extending

immunity when a self-regulatory organization is

exercising quasi-governmental powers is consistent

with the structure of the securities market as

constructed by Congress.”); Barbara, 99 F.3d at 59

(“We think that absolute immunity is particularly

appropriate in the unique context of the self-

regulation of the national securities exchanges.”):

Austin Mun. Sec., Inc., 757 F.2d at 692 (holding that

“the NASD is entitled to absolute immunity for its

role in disciplining its members and associates”).'*

Faced with this unanimity among applicable

precedents, Petitioner lamely attempts to

manufacture a “conflict” within the Second Circuit

by pointing to United States v. Solomon, 509 F.2d

863 (2d Cir. 1975), a case holding that SROs are not

“state actors” for purposes of alleged constitutional

deprivations. Pet. App. at 15-17.'4 Solomon,

however, is completely inapposite; in that case, the

Second Circuit held that the NYSE’s ability to

suspend or sanction a member that fails to cooperate

with an investigation by the NYSE into a violation of

its rules does not make it a “state actor” or an

“agent” of the government for purposes of violating a

also Weissman { NASD. Inc.. 500 F 3d 1293, 1296

Cir. 2007) (en banc) (“Because they perform a variety of

vital governmental functions, but lack the sovereign immunity

that governmental agencies enjoy, SROs are protected by

absolute immunity when they perform therr statutorily

delegated adjudicatory, regulatory, and _ prosecutorial

functions. )

Notably, Petitioner did not argue in the district court that

absolute SRO immunity is contrary to existing Second Circuit

precedent. Similarly, Petitioner did not make this argument

before the Second Circuit, nor did it seek rehearing or suggest

rehearing en banc alter the Second Circuit issued its ruling

These failures fatally undermine Petitioner's contention, Pet. at

15-16. that a purported intra-circuit conflict presents an

important issue of federal law that should be settled by this

an — ~ - <

Court. See Sup. Ct. R. 10(c)

16

member’s Fifth Amendment right against sclf-

incrimination. Solomon, 509 F.2d at 869.15

There is no inconsistency between the Second

Circuit’s holding in Solomon and its holding in this

case that the NYSE may not be sued by Petitioner

for alleged misuse of its regulatory authority. See,

e.g., D'Alessio v. NYSE, Inc., 125 F. Supp. 2d 656,

659 (S.D.N.Y. 2000) (rejecting argument that

absolute SRO immunity is inconsistent with

Solomon), aff'd, 258 F.3d 93 (2d Cir. 2001). The

cooperative scheme of regulation established by

Congress pursuant to the Exchange Act, in which

the NYSE independently exercises regulatory

authority subject to SEC oversight, did not give the

NYSE the power to deprive a person of life or liberty

as a result of his statements. Solomon, 509 F.2d at

867.

The only “authority” cited by Petitioner to

support its contention — raised for the first time in

this Court — that “clarification ” is needed as to the

scope of absolute SRO immunity is a single law

journal article. Pet. at 15; 1d. at 17 (quoting

William I. Friedman, The Fourteenth Amendment's

Public/Private Distinction Among Securities

Regulators in the U.S. Marketplace — Revisited, 23

Ann. Rev. Banking & Fin. L. 727 (2004)). However,

the articles author does not challenge’ the

entitlement of SROs to absolute immunity, 23 Ann.

Rev. Banking & Fin. L. at 766 and, instead, merely

urges judicial reconsideration of the principle that

SROs are not state actors for purposes of alleged

1S See also D.L. Cromwell Invs., Inc. v. NASD Regulation, Inc.,

279 F.3d 155 (2d Cir. 2002).

deprivations of constitutional rights. Jd. at 767.

That question is not presented by the Petition.

il. PETITIONER FAILS TO MANUFACTURE

A CONFLICT WITH THIS COURT'S

PRECEDENTS

In the absence of any actual conflict within or

between the lower courts, Petitioner attempts to

create a conflict between the Second Circuit’s

decision and several different lines of this Court’s

precedent. Once again, Petitioner never raised any

of these arguments below, and for goad reason: they

lack all merit.

A. Absolute Immunity Is Appropriate

Regardless Of Allegations Of Fraud Or

Inaction

Petitioner principally contends that absolute SRO

immunity is inappropriate where a complaint alleges

deliberate regulatory inaction by an SRO. Pet. at d-

10, 14, 26-30. In making this argument, Petitioner

contends that the Second Circuit decision here is

inconsistent with dicta in Butz v. Economou, 438

U.S. 478, 507 (1978), in which this Court noted that

absolute immunity should be limited to “exceptional

situations.” Pet. at 26. Petitioner then baldly

asserts that if suits against top-ranking presidential

aides do not involve “exceptional situations,” then

claims against the NYSE likewise do not involve

“exceptional situations.” Pet. at 26-27. This

argument is based on a false analogy.

18

1. Butz And Other Cases Involving

Constitutional Claims Against

Individual Officials Have No

Application Here

Butz, and the other decisions of this Court cited

by Petitioner to support the proposition that the

NYSE’s immunity does not apply to claims of

deliberate misconduct, are inapposite for several

reasons. First, each of these decisions concerns

individual government officials sued for money

damages. arising from alleged violations of

constitutional rights.!6 Such suits were directed at

individual government officials because damage

claims against the government or agencies that

employed them were barred by sovereign immunity.

By contrast, this case involves damages claims

against the NYSE, a self-regulatory organization

that “stands in the shoes of the SEC in interpreting

the securities laws for its members and monitoring

compliance with those laws.” D’Alessio, 258 F.3d at

105. Because claims by investors arising out of

alleged regulatory failures of the SEC would be

barred by sovereign immunity, “[i]t follows that the

NYSE should be entitled to the same immunity

16 See, e.g., Butz v. Economou, 438 U.S. 478 (1978) (federal

hearing examiner and administrative law judge given absolute

immunity from constitutional claims); Harlow v. Fitzgerald,

457 U.S. 800 (1982) (Presidential aides given qualified

immunity from constitutional claims); Mitchell v. Forsyth, 472

U.S. 511 (1985) (Attorney General given qualified immunity

from constitutional claims); Cleavinger v. Saxner, 474 U.S. 193

(1985) (members of prison disciplinary committee given

qualified immunity from constitutional claims); Wood v.

Strickland, 420 U.S. 308 (1978) (school board members given

qualified immunity from constitutional claims).

19

enjoyed by the SEC when it is performing functions

delegated to it under the SEC’s broad oversight

authority.” Id.

Even if the NYSE could be analogized to an

“individual” SEC official rather than the SEC itself,

it would still be entitled to absolute immunity under

Barr v. Matteo, 360 U.S. 564 (1959), because this

case does not involve alleged constitutional

violations. In Barr, this Court held that the

defendant official was absolutely immune from an

intentional tort claim because the official’s conduct,

while not specifically required by law, was within

the “outer perimeter” of the official’s discretionary

authority. Jd. at 575. This Court emphasized that

the official’s immunity was absolute despite the

plaintiffs allegations of malicious intent. Id.

By contrast, in Butz, this Court held that certain

defendants were entitled only to qualified immunity

because constitutional violations had been alleged.

See 438 U.S. at 507 (emphasizing that absolute

immunity in cases of alleged constitutional

violations was appropriate only in “exceptional

circumstances’).!7_ In doing so, this Court expressly

stated that providing only qualified immunity,

rather than absolute immunity. in cases alleging

constitutional violations did not disturb, and is fully

consistent with, its prior holding in Barr. Butz, 438

U.S. at 506.

\7 These “exceptional situations” included instances where the

official charged with constitutional violations had _ been

performing functions analogous to adjudicatory or prosecutorial

functions. Butz, 438 U.S. at 508-17.

20

In short, neither Butz nor any of this Court’s

other precedents is inconsistent with the Second

Circuit’s holding that the NYSE is absolutely

immune from the claims asserted by Petitioner.

2. Settled Law Rejects Petitioner’s

Proposed “Fraud” And “Inaction”

Exceptions To The Absolute

Immunity Doctrine

Further, this Court in Barr expressly rejected

Petitioner’s argument that the allegedly dishonest

exercise of official authority is outside the bounds of

that authority and, therefore, beyond the protections

of absolute immunity. Barr, 360 U.S. at 572. The

Court explained that the question of whether

conduct is absolutely immune depends on “the

relation of the act complained of to ‘matters

committed by law to [the official’s] control or

supervision,” id., at 573 (citations omitted), rather

than the officials’ subjective intent:

The decisions have, indeed, always imposed as

a limitation upon the immunity that the

official’s act must have been within the scope of

his powers; and it can be argued that official

powers, since they exist only for the public

good, never cover occasions where the public

good is not their aim, and hence that to

exercise a power dishonestly is necessarily to

overstep its bounds. A moment’s reflection

shows, however, that that cannot be the

meaning of the limitation without defeating

the whole doctrine.

Barr, 360 U.S. at 572 (quoting Gregoire vu. Biddle,

177 F.2d 579, 581 (2d Cir. 1949)). Thus, “it has been

thought in the end better to leave unredressed the

21

wrongs done by dishonest officers than to subject

those who try to do their duty to the constant dread

of retaliation.” Jd. at 571-72 (quoting Gregoire, 177

F.2d at 581).

Without absolute immunity, the NYSE’s ability to

monitor, investigate, and discipline its members for

violations of NYSE rules and the federal securities

laws would be seriously hindered because the NYSE

while subject to SEC oversight and guidance

must independently exercise’ discretion in

determining how to perform its regulatory functions.

Immunity promotes the sound exercise of discretion

because it minimizes the risk that decisions will be

made with an eye toward litigation and not the

public good. See, e.g., Barr, 360 U.S. at 571

(explaining rationale for absolute immunity and

noting, inter alia, that “the threat of [lawsuits] might

appreciably inhibit the fearless, vigorous, and

effective administration of policies of government’).

Absolute SRO immunity is based on precisely the

same principle. D Alessio, 258 F.3d at 105 (absolute

SRO immunity “is a matter not simply of logic but of

intense practicality, since, in the absence of such

immunity, the [NYSE’s] exercise of its quasi-

governmental functions would be unduly hampered

by disruptive and_- recriminatory Jawsuits.”)

(alteration in original) (citation and quotation marks

omitted).

This principle cannot be circumvented by the

simple expedient of alleging an “unworthy purpose”

on the part of those exercising such discretion. Barr,

360 U.S. at 575. See DL Capital Group, 409 F.3d at

99 (“It is, after all, hard to imagine the plaintiff (or

plaintiffs counsel) who would — when otherwise

wronged by an SRO but unable to seek moncy

22

damages — fail to concoct some claim of fraud in

order to try and circumvent the absolute immunity

doctrine.”). Immunity would be of little value if it

could be overcome by artful pleading. As this Court

has recognized, immunity is more than a defense; it

is an entitlement to freedom from the expense,

inconvenience, and distraction of litigation. See, e.g.,

Behrens v. Pelletier, 516 U.S. 299, 308 (1996)

(ammunity defense is “meant to give government.

officials a right, not merely to avoid standing trial,

but also to avoid the burdens of such pretrial

matters as discovery’) (internal quotations omitted);

Mitchell v. Forsyth, 472 U.S. 511, 525 (1985) (“[T]he

essence of absolute immunity is its possessor’s

entitlement not to have to answer for his conduct in

a civil damages action.”).

Petitioner’s final attempt to create a bad faith

exception to the NYSE’s immunity from suit is its

“abandonment” argument, which posits that even if

bad faith action falls within the outer perimeter of

the NYSE’s regulatory authority, bad faith inaction

falls beyond it. Pet. at 5-10, 14, 26-30. This is a

distinction without a difference. As the Second

Circuit made clear, “[t]he power to exercise

regulatory authority necessarily includes the power

to take no affirmative action.” Pet. App. at 16a; id.

at 19a (“the immunity depends only on whether

specific acts and forbearances were incident to the

exercise of regulatory power, and not on the

propriety of those actions or inactions”) (emphasis in

original). The Second Circuit’s holding 1s completely

consistent with the protection afforded by Barr to

the exercise of discretion in performing

governmental functions. 360 U.S. at 570 (noting an

official “may have legal authority to act, but ... may

23

have such large discretion in the premises that it

will not always be his absolute duty to exercise the

authority with which he is tmvested.”). See also

Georgia v. Pa. R.R. Co., 324 U.S. 439, 474 (1945)

(“The authority to bring such suits includes the

discretionary authority not to bring them, if the

responsible officers of the government are of the

opinion that a suit is not warranted or would be of

disservice to the national interest.”).

Finally, Petitioner argues that because “the SEC

had to intervene to enforce the law — upbraiding the

NYSE for failure to act as a regulator,” this Court

should conclude that “the NYSE was not in fact

‘acting in its capacity as a SRO.” Pet. at 28

(emphasis in original) (citation omitted). The exact

opposite is true. The fact that the SEC exercised its

oversight authority over the NYSE confirms that the

NYSE’s alleged failure to regulate the Specialist

Firms involved its exercise of discretionary

regulatory authority. Private actions challenging

the NYSE’s alleged regulatory inaction necessarily

“stand[] as an obstacle to the accomplishment and

execution of the full purposes and objectives of

Congress,” Barbara, 99 F.3d at 59 (finding absolute

immunity for the NYSE), just as much as suits

alleging improper regulatory action.

Indeed, private suits against the NYSE for

alleged regulatory failure would stand as an obstacle

to the purposes and objectives of the Exchange Act

even if the SEC had not taken action with respect to

the NYSE’s regulation of the Specialist Firms. The

fact that the SEC has already taken such action

serves only to undermine Petitioner’s argument

further.

24

B. There Is No Conflict With Silver uv.

NYSE

Petitioner also argues that this Court’s decision

in Silver v. NYSE, 373 U.S. 341 (1963), defeats the

Second Circuit’s finding of absolute SRO immunity.

According to Petitioner, Silver permits the NYSE to

be held lable “for exercising its self-regulatory

powers in an arbitrary and unlawful fashion.” Pet.

at 18.

Silver — which Petitioner has never before cited

in this litigation — is completely inapposite. The

Court in that case addressed only the narrow

question whether the Exchange Act impliedly

repealed the federal antitrust laws in a suit by a

non-member against the NYSE for alleged anti-

competitive conduct. Silver, 373 U.S. at 342. This

Court held in Silver that there was no implied repeal

of the antitrust statutes as to the NYSE’s allegedly

anti-competitive actions because the SEC did not

have the statutory authority to review or oversee

those actions. Id. at 360 (“Should review of exchange

self-regulation be provided through a vehicle other

than the antitrust laws, a different case as to

antitrust exemption would be presented.”).18 The

Court never addressed, let alone ruled on, the

question of the NYSE’s absolute immunity from suit

18 [n Gordon v. NYSE, Inc., 422 U.S. 659, 683 (1975), this

Court explained and distinguished its prior decision in Silver

by noting that in Silver “there was no implied repeal of the

antitrust laws in that factual context because the Exchange Act

did not provide for SEC jurisdiction or review of particular

applications of rules enacted by the exchanges.” By contrast, in

Gordon, the SEC had direct authority to oversee the matters at

issue. /d. at 688-89.

under the Exchange Act or common law when

exercising its delegated authority to enforce its

members’ compliance with the federal securities

laws and its own rules — a matter which, in contrast

to the conduct at issue in Silver, has been the subject

of extensive SEC review and oversight.

C. There Is No Conflict With Richardson

v. McKnight

Inexplicably, Petitioner argues that the Second

Circuit’s decision conflicts with Richardson uv.

McKnight, 521 U.S. 399 (1997). Pet. at 20-25. In

Richardson, the Court held that prison guards

employed by a private contractor were not entitled

even to qualified immunity from suits alleging

constitutional violations under 42 U.S.C. § 1983.

Although Petitioner’s claims against the NYSE do

not concern either privately contracted prison guards

or alleged constitutional violations, Petitioner

nonetheless contends that Richardson stands for the

broad proposition that immunity “vanishes” when a

private actor is involved. Pet. at 20. Not so.

In Richardson, this Court took pains to

emphasize the narrowness of its holding. 521 U.S.

at 413 (““[W]e have answered the immunity question

narrowly, in the context in which it arose.”). The

Court stressed that “[t]he case does not involve a

private individual ... serving as an adjunct to

government in an essential governmental activity, or

acting under close supervision.” Id. (emphasis

supplied).!9 By contrast, the NYSE performs quasi-

19 Indeed, the Court’s holding in Richardson was so narrow

that the Court assumed, rather than decided, that the privately

employed prison guards were even subject to liability under

26

governmental functions pursuant to extensive SEC

oversight, and obtains its regulatory authority

through an act of Congress rather than through a

competitive bidding and _ contracting process.

Richardson thus provides no support for Petitioner's

suggestion that immunity “vanishes” due to the

NYSE’s status as a private entity.

CONCLUSION

The Second Circuit’s decision is correct and fully

consistent with other circuit law and the precedent

of this Court. For all the above reasons, the NYSE

respectfully that the Court deny the

Petition.

requests

Respectfully submitted,

DANIEL E. LOEB

EUGENE N. HANSEN

FRIED, FRANK, HARRIS,

SHRIVER & JACOBSON LLP

1001 Pennsylvania Ave., N.W.

Washington, DC 20004

(202) 639-7000

February 19, 2008

DEBRA M. TORRES

Counsel of Record

FRIED, FRANK, HARRIS,

SHRIVER & JACOBSON LLP

One New York Plaza

New York, NY 10004

(212) 859-8000

[Footnote continued from previous page

L Yas

Section 1983.

(1997).

Richardson v.

McKnight, 52