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

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No. 07-946

IN THE

Supreme Court of the United Sees

CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT SYSTEM

(CalPERS)

Petitioner,

Vv.

NEW YORK STOCK EXCHANGE, INC.,

Respondent.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Second Circuit

REPLY IN SUPPORT OF

PETITION FOR A WRIT OF CERTIORARI

ERIC ALAN ISAACSON

Counsel of Record

MARK SOLOMON

BYRON S. GEORGIOU

WILLIAM J. DOYLE II

COUGHLIN STOIA GELLER

RUDMAN & ROBBINS LLP

655 West Broadway

Suite 1900

San Diego, CA 92101

(619) 231-1058

Counsel for Petitioner

California Public

Employees’ Retirement

System (CalPERS), on.

behalf of itself and all

others similarly situated

WILSON-EPES PRINTING CO., INC. — (202) 789-0096 -— WASHINGTON, D.C. 20002

TABLE OF AUTHORITIES

CASES Page

Ace Beverage Co. v. Lockheed Info. Mgmt.

Serus., 144 F.3d 1218 (9th Cir. 1998)

Barbara v. N.Y. Stock Exch., Inc., 99 F.3d

49 (2d Cir. 1996)

Butz v. Economou, 438 U.S. 478 (1978)

D’Alessio v. N.Y. Stock Exch., Inc., 258

F.3d 93 (2d Cir. 2001)

Dewey v. Des Moines, 173 U.S. 193 (1899) ..

DL Capital Group, LLC v.: Nasdaq Stock

Mht., Inc., 409 F.3d 93 (2d Cir. 2005)

Elder v. Holloway, 510 U.S. 510 (1994)

Elder v. Holloway, 984 F.2d 991 (9th Cir.

Harlow v. Fitzgerald, 457 U.S. 800 (1982)..

Hepting v. AT&T Corp.; 439 F. Supp. 2d

974 (N.D. Cal. 2006)

Lebron v. National Railroad Passenger

Corp., 513 U.S. 374 (1995)

MFS Sec. Corp. v. N.Y. Stock Exch., Inc.,

277 F.3d 613 (2d Cir. 2002)

PGA Tour, Inc. v. Martin, 532 U.S. 661

(2001)

Procunier v. Navarette, 4384 U.S. 555

(1978)

Richardson v. McKnight, 521 U.S. 399

(1997)

Yee v. City of Escondido, 503 U.S. 519

IN THE

Supreme Court of the United States

No. 07-946

CALIFORNIA 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

REPLY IN SUPPORT OF

PETITION FOR A WRIT OF CERTIORARI

The New York Stock Exchange’s (“NYSE”) opposi-

tion to the Petition for a Writ of Certiorari seems to

have two major themes: First, that Petitioner failed to

make its position known below, and second, that the

NYSE was not really engaged in any active wrong-

doing with its Specialists. Neither theme rings true.

The NYSE repeatedly states that Petitioner failed

to cite specific cases, or to make arguments below,

concerning the availability of absolute immunity to a

private non-governmental organization such as the

NYSE. The NYSE asserts, for example, that “Peti-

tioner attempts to create a conflict between the

Second Circuit’s decision and several different lines

of this Court’s precedent,” but that “Petitioner never

raised any of these arguments below.” NYSE Oppo-

sition to Petition for Writ of Certiorari (“NYSE

Opposition”) at 17.

In truth, Petitioner's Opening Brief (“Second Cir-

cuit Opening Brief”) before the Second Circuit em-

phasized this Court’s holdings that those -claiming

the immunity bear the burden of proving that public

policy requires such broad protection of their actions.

Second Circuit Opening Brief at 22-23. It cited this

Court’s decision in Butz v. Economou, 438 U.S. 478,

507 (1978), as limiting immunity “to those excep-

tional situations where it is demonstrated that

absolute immunity is essential for the conduct of

the public business,” and this Court’s decision in

Richardson v. McKnight, 521 U.S. 399, 412 (1997), as

denying immunity to private prison guards because

those “who seek exemption from personal liability

have the burden of showing that such an exemption

is justified.” Second Circuit Opening Brief at 22-23

(quoting Butz and Richardson).

The argument in Petitioner’s Opening Brief before

the Second Circuit began by noting that

the Supreme Court has displayed a reluctance to

extend broad immunity to private actors per-

forming public functions. See Richardson, 521

U.S. 399 (no qualified immunity for prison guards

where state delegates the public function of

operating prisons to private firms). And absolute

immunity can legitimately apply only in “those

exceptional situations where it is demonstrated

that absolute immunity is essential for the con-

duct of the public business.” Butz, 438 U.S. at 507.

Second Circuit Opening Brief at 24.

Petitioner’s Reply Brief before the Second Circuit

(“Second Circuit Reply Brief”) similarly emphasized

this Court’s precedents limiting the availability of

immunity:

The NYSE contends that as a nongovern-

mental private entity to which some quasi-

governmental functions have been delegated, it

must be entitled to the same broad governmental

immunity that would be accorded a genuine gov-

ernment actor. Yet the Supreme Court has

rejected that viewpoint, holding in Richardson v.

McKnight, 521 U.S. 399 (1997), that even if

prison officials ordinarily are entitled to qualified

immunity as government actors, see Procunier v.

Navarette, 434 U.S. 555 (1978), when the mani-

festly public function of operating prisons is

delegated to private companies, the immunity

vanishes.

Second Circuit Reply Brief at 2-3.

This is the very same argument advanced now in

the Petition for Certiorari, with citations to many of

the same authorities that Petitioner cited below.’

The NYSE is entitled to oppose Petitioner’s conten-

tions “that Richardson stands for the broad propo-

sition that immunity ‘vanishes’ when a private actor

is involved.” NYSE Opposition at 25 (quoting Peti-

tion for a Writ of Certiorari at 20). But it cannot

‘Compare, e.g., Petition for Certiorari at 20 & n.13 (citing

Richardson, 521 U.S. at 401; Ace Beverage Co. v. Lockheed Info.

Mgmt. Serus., 144 F.3d 1218, 1219-20 (9th Cir. 1998); Hepting v.

AT&T Corp., 439 F. Supp. 2d 974, 1006-10 (N.D. Cal. 2006),

appeal pending, 9th Cir. Nos. 06-17132, 06-17137)), with Second

Circuit Reply Brief at 2-3 & n.1 (similarly citing Richardson,

Ace Beverage, and Hepting for the same points).

legitimately pretend that Petitioner never argued the

point below.

Petitioner explained below, as in its Petition before

this Court, that Richardson itself emphasized

that the need for governmental immunities is

reduced when public functions are delegated to

private companies competing in the marketplace,

where they are “subject to the ordinary com-

petitive pressures that normally help private

firms adjust their behavior in response to the

incentives that tort suits provide—pressures not

necessarily present in government departments.”

Second Circuit Reply Brief at 3 (quoting Richardson,

521 U.S. at 409, 412).

“The NYSE is such an entity,” Petitioner argued

below, as it does now before this Court, noting

that the NYSE “currently is a for-profit company

competing with other organizations—such as the

American Stock Exchange and NASDAQ—to provide

a market for securities; and though nominally a non-

profit corporation during the Class Period, it was

planning to reorganize and operate as a for-profit

company.” Compare Second Circuit Reply Brief at 3

n.2 (citing Second Circuit Opening Brief at 10 n.5),

with Petition for a Writ of Certiorari at 22.

Petitioner’s Reply Brief before the Second Circuit

also argued that the “availability of absolute immu-

nity, at-issue in this appeal, is even more narrowly

constrained than is the mere qualified immunity with

which Richardson dealt,” Second Circuit Reply Brief

at 3 (citing Harlow v. Fitzgerald, 457 U.S. 800, 807

(1982)), insisting again that “[a]bsolute immunity is,

indeed, limited ‘to those exceptional situations where

it is demonstrated that absolute immunity is essen-

tial for the conduct of the public business.” Second

Circuit Reply Brief at 2-3 (quoting Butz, 438 U.S. at

507).

Nor is there any merit to the NYSE’s suggestion

that it is improper for Petitioner to cite authorities

before this Court that were not specifically cited

below. In Elder v. Holloway, 510 U.S. 510, 512

(1994), this Court held that appellate review “is to be

conducted in light of all relevant precedents,” and not

just those cited in the lower courts. This Court cited

with approval Judge Kozinski’s dissent from denial of

en banc rehearing in that case, which had empha-

sized that “with questions of law, we deem the matter

fairly raised if the issue is presented to the district

court; citation to a particular case has never been

seen as part and parcel of fairly raising the issue

below.” Elder v. Holloway, 984 F.2d 991, 999 (9th

Cir. 1993) (Kozinski, J., dissenting from denial of en

banc rehearing).

As a matter of fact, this Court’s precedents permit

a party even to raise new arguments in favor of the

position it advanced below.” In Lebron v. National

Railroad Passenger Corp., 513 U.S. 374 (1995), for

example, the petitioner had argued below “that

Amtrak’s actions were subject to constitutional

* See, e.g., PGA Tour, Inc. v. Martin, 532 U.S. 661, 678 n.27

(2001) (where general issue was raised below, Court rejects

respondent's contention “that petitioner’s failure to make this

exact argument below precludes its assertion here”); Yee v. City

of Escondido, 503 U.S. 519, 535 (1992) (having asserted a claim

below, petitioners “could have formulated any argument they

liked in support of that claim here”); Dewey v. Des Moines, 173

U.S. 193, 198 (1899) (“Parties are not confined here to the same

arguments which were advanced in the courts below upon a

Federal question there discussed.”).

requirements because Amtrak, although a private

entity, was closely connected with federal entities.”

Id. at 378-79. Only following a grant of certiorari had

he “first explicitly presented—in his brief on the

merits—the alternative argument that Amtrak was

itself a federal entity.” Id. at 379. This Court applied

its “traditional rule,” that in proceedings before this

Court, “parties are not limited to the precise argu-

ments they made below.” Id. (quoting Yee, 503 U.S.

at 534).

The Second Circuit panel below was bound, unless

that court chose to convene en banc, by the existing

Second Circuit precedents recognizing absolute im-

munity for SROs and their employees, including

D’Alessio v. N.Y. Stock Exch., Inc., 258 F.3d 93 (2d

Cir. 2001); DL Capital Group, LLC v. Nasdaq Stock

Mkt., Inc., 409 F.3d 95 (2d Cir. 2005); MF'S Sec. Corp.

v. N.Y. Stock Exch., Inc., 277 F.3d 613 (2d Cir. 2002);

Barbara v. N.Y. Stock Exch., Inc., 99 F.3d 49 (2d

Cir. 1996). One cannot expect Petitioner to argue its

position before a Second Circuit panel, bound by

these decisions as controlling precedents, as it would

before this Court, which is not similarly bound.

There is no basis for the NYSE’s suggestion that

arguments must be advanced in identical fashion

before both courts.

Neither is there any basis for its suggestion that

determination of the issue presented should turn on

whether Petitioner named individual employees as

defendants in addition to the NYSE itself—for the

Second Circuit has rejected any distinction. See, e.g.,

D/’Alessio, 258 F.3d at 106 (holding that “the NYSE

and its various officers were entitled to absolute

immunity”) (emphasis added); DL Capital, 409 F.3d

at 97 (“an SRO and its officers are entitled to abso-

lute immunity”).

The NYSE’s Opposition to Petition for Writ of Cer-

tiorari also seeks to leave the impression that the

NYSE did not actively engage in any misconduct,

writing that

the Complaint is devoid of any allegation that

the NYSE executed or directed the execution of

any improper proprietary trades by the Special-

ist 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 disci-

pline” the Specialist Firms’ misconduct “to the

extent necessary to deter, stop or prevent” the

misconduct. JA2:72 (Compl. { 5).

NYSE Opposition at 7.

In fact, the Complaint alleges not just passive inac-

tion, but active misconduct as well. For example,

it alleges that NYSE officials routinely tipped off

Specialists ahead of impending investigations, so

that the Specialists could cover the tracks of. their

improper and illegal conduct. JA2:121-22 ({116).

Indeed, it specifies that Toni-Ann Turco, who had

previously worked in the NYSE Division of Market

Surveillance, during the Class Period worked as the

head of one Specialist Firm’s compliance depart-

ment—where she was tipped off to investigations by

the NYSE’s Lucy Palmieri. Jd. Turco often bragged

that “it pays to have friends at the Exchange.” Id.

The Complaint alleges that the NYSE worked with

the Specialist Firms to facilitate improper trading by

helping to doctor the Specialist Firms’ weekly trading

reports to create records of fictitious trades and

conceal the improper trading. JA2:123-24 (¥120-

126). The NYSE did this by flagging the individual

specialists’ weekly transaction reports containing

improper trading, alerting the specialists to the prob-

lem, then giving the Specialists the rest of the week

to “correct” the reports—allowing them to violate

NYSE trading rules, cover up the violations, and

escape without any penalty. Id.

The NYSE—through Richard Grasso himself—alse

strongly encouraged the Specialists to engage in

“freezing the book” on a regular basis, while the

NYSE’s public-relations people simultaneously told

public investors that “there was no such thing... as

‘freezing the book.” JA2:115-17 (7991-98).

The Second Circuit’s opinion itself notes Peti-

tioner’s

allegations that the NYSE knowingly permitted,

or even actively encouraged, the Specialist Firms

to submit doctored or altered regulatory reports

to the NYSE and that it alerted the Specialist

Firms to impending internal NYSE investiga-

tions so that the Firms could conceal evidence of

wrongdoing. Lead Plaintiffs’ allegations here

focus on the NYSE’s approach to weekly Form 81

Reports (“Form 81”), which every Specialist Firm

was required to submit when it engaged in prin-

cipal trades. The NYSE floor officials, Lead

Plaintiffs claim, permitted their names and badge

numbers to be used in preparing false Form 8ls,

essentially vouching for trades that they knew to

be improper or wrong and even when the NYSE

discovered a possible falsification, it would send

the relevant Form 81 back to the Firm and

permit the Form 81 to be resubmitted with the

“correct” information. Officials at the Exchange

also allegedly “tipped off’ at least one of the

Specialist Firms about an imminent investiga-

tion before the official announcement, permitting

it, now forewarned, to alter the records to conceal

its misconduct.

Petition for a Writ of Certiorari Appendix at 22a-23a.

“At first glance, none of these actions appears to

fall within the ambit of the powers delegated to the

Exchange.” Id. at 23a.

In sum, Petitioner argued below that this Court’s

precedents bar the kind of broad absolute immunity

granted to the NYSE in this case, and the NYSE

was in fact an active participant in the misconduct

alleged. The issues presented are important ones,

and the Petition for a Writ of Certiorari should be

granted.

Respectfully submitted,