Opposition Brief — Levy v. Southbrook International Investments, Ltd.

Sepreme Court, U.S.

FILED

ue ‘Apa 4 202

No. 01-1272

SE SF HE CLERK

IN THE

Supreme Court of the United States

MARK LEVY, Derivatively on behalf of ImmunoGen, Inc.,

Petitioner,

v,

SOUTHBROOK INTERNATIONAL INVESTMENTS, LTD.,

Respondent.

On PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

BRIEF IN OPPOSITION FOR RESPONDENT

SOUTHBROOK INTERNATIONAL

INVESTMENTS, LTD.

HERBERT TEITELBAUM

Counsel of Record

NoAH WEISSMAN

ROBINSON SILVERMAN PEARCE

ARONSOHN & BERMAN LLP

1290 Avenue of the Americas

. New York, New York 10104

(212) 541-2000

Attorneys for Respondent

3 Southbrook International Investments, Ltd.

173302 cel

COUNSEL PRESS on

(800) 274-3321 * (800) 359-6859

»

) i

QUESTIONS PRESENTED

1. Whether the Court of Appeals properly held

that respondent Southbrook International Investments Ltd.

(“Southbrook’”), a holder of ImmunoGen, Inc. (“ImmunoGen”’)

convertible preferred stock, was not a beneficial owner of more

than 10% of ImmunoGen common stock, under Section 16(b)

(“Section 16(b)”) of the Securities Exchange Act of 1934

(“Exchange Act’), 15 U.S.C. § 78p(b), because Southbrook’s

contractual right to convert preferred stock into common stock

was limited to the extent that its common stock ownership would

exceed 4.9% (“Conversion Cap”).

2. Whether the Court of Appeals properly held, in

accordance with Auer v. Robbins, 519 U.S. 452 (1997),

that the Securities and Exchange Commission’s (“SEC”)

interpretation of Rule 13d-3(d) is binding upon the court “unless

[it is] ‘plainly erroneous or inconsistent with the regulation[].’ ”

3. Whether the SEC exceeded its statutory authority in

adopting Rule 13d-3(a) as the basis for defining the term

“beneficial owner” contained in Section 16(b).

4. Whether the Court of Appeals properly affirmed the

District Court’s holding that the Conversion Cap does not violate

either (i) the “sham transaction” doctrine because it is a

legitimate means of structuring a transaction so as not to violate

~ Section 16(b) or (11) Section 29(a) of the Exchange Act because

it does not waive compliance with the Exchange Act.

i

STATEMENT PURSUANT TO RULE 29.6

Respondent, Southbrook International Investments Ltd.,

has no parent corporation and no publicly held company owns

10% or more of its stock.

ili

TABLE OF CONTENTS

ES, os id g's is 0 abuso oa

Statement Pursuant to Rule 29.6 ...............

EERE SS Sy ay an ta

Dee GO PNAS Sik bcc cic cccceccece

ew baedwebe’

Reasons for Denying the Writ ..................

1.

Il.

The Second Circuit’s Decision Does Not

Conflict with Decisions of This Court .....

A. The Second Circuit’s Decision Does Not

Conflict With This Court’s Precedent on

Statutory Interpretation .............

B. The Second Circuit’s Decision Does Not

Conflict with This Court’s Decisions on

the Deference To Be Afforded an

Agency’s Interpretation of Its Own Rules

he OS TINUE ois a ks ces

The Second Circuit’s Decision Does Not

Conflict With Decisions of Other Courts of

ER Sieh CSN cake dr awhaexaes’s

Page

iv :

Contents

A. The Deference Standard Identified By

The Second Circuit Does Not Conflict

With A Decision of the Seventh Circuit

B. The Second Circuit Decision Does Not

Conflict With Decisions in Other Circuits

on the Issue of Sham Transactions ....

Ill. The Second Circuit’s Decision Does Not

Raise Issues of National Importance ......

A. The Second Circuit’s Decision Does Not

Conflict With Section 29(a) of the

ES. Perret. ey ar

B. SEC Rule 13d-3 Is Not Inconsistent With

OCHO EUG awk ns SS

NN i aS eC i ee

Appendix — Brief Of The Securities And Exchange

Commission, Amicus Curiae, In Support Of

Appellee On Issues Addressed ...............

Page

12

13

TABLE OF CITED AUTHORITIES

Page

Cases: ;

Atchison, Topeka & Santa Fe Railway Co. v. Pena,

44 F356 457 (7a Cit, 1994) oe ek 12,13

Auer v. Robbins,

EP te SOARED 8 ee 1, 10, Ti,

Bershad v. McDonough, :

428 F.26 GPa CHM Cot, ISTE) ie eek 13

Bowles v. Seminole Rock & Sand Co.,

2oo Cad: MP es ae kc eee eS 10

Chevron U.S.A., Inc. v. Natural Res. Def. Counsel, Inc.,

BOT A. Bat EMPEY hos 04k the Cas 10

Connecticut Nat'l Bank v. Germain,

ae hes ee CED ears ches as tee 6

Foremost-McKesson, Inc. v. Provident Sec. Co.,

RAS Cha Ae OOO es ok a hax eeSea eee lee passim

Gollust v. Mendell,

Ok RI, AED AIPONY. oon s ce nsecunese aes 16

Harsco Corp. v. Segui,

Pe Tuan aot Cle Oe 1996) 6k as eee 15

Kern County Land Co. v. Occidental Petroleum Corp.,

EL We PE EP ERD os sabes ase ces RRs 6

- wi

Cited Authorities

Page

McMahan & Co. v. Wherehouse Entm t, Inc.,

GS F.36 1066 C36 Cae Te eaies bs 6 00ba%,. 15

Press v. Quick & Reilly, Inc,

218 B36 131. Ce Ca akc sdsc cds veees 9

Reliance Elec. Co. v. Emerson Elec. Co.,

404 UB. SEG Care awk bai 20655006 805 cdc 0s 11,14

Riseman v. Orion Research, Inc.,

eee Bye oe S| ere eee 13

Roberston v. Methow Valley Citizens Council,

490 U.S .:Fae See Abn eth wa taneds fans ees 10

Skidmore v. Swift & Co.,

323 US: IBCs civ iidsibeadeevens Jaks 11

United States v. Mead Corp.,

SOR: Cs Sa AOD. 00 db-cncdhnanevecn cued ie 10, 11

Federal Statutes:

13. UA Pe 4 foe ivieaed besa iis passim

1S USA 8 FR bs b-ada seitvsastabiageetia passim

yheox 8 Se’ Ri” S Bee ee eS passim

17 CER; COMA aks is otek wae i

vil

Cited Authorities

Er Ss EEE oe iedeccetydedsices'ess és

7 Cle, DOP RMUPOMMLEIUD cccccccccscceeses

FY Sects MCRPOUIEED cicdccrontecenecescs

Pe RA Be AAO eek nccessretsavisoceses

Secondary Sources:

Filing and Disclosure Requirements Relating to

Beneficial Ownership, Securities Exchange Act of

1934, Release No. 14692, 1978 SEC LEXIS 1716

EP is oe ccen a igs cdeuawe ib Shae ee

1

STATEMENT OF THE CASE

Respondent Southbrook entered into a convertible preferred

stock purchase agreement (“Convertible Agreement”), dated as

of October 16, 1996, with ImmunoGen, for the purchase

of ImmunoGen preferred stock (“Preferred Stock”).

The Convertible Agreement provided Southbrook with a right

to convert the Preferred Stock into ImmunoGen common stock

(“Common Stock”) and to exercise certain warrants to purchase

Common Stock.

Southbrook’s rights were expressly limited by

the Conversion Cap in the Convertible Agreement.

The Conversion Cap prohibits Southbrook from converting

any shares of Preferred Stock or exercising any of its warrants

to the extent that the conversion would result in Southbrook

owning more than 4.9% of the outstanding shares of the

Common Stock:

The Purchaser may not use its ability to convert

[Preferred Stock] hereunder or under the terms of

the Vote Certificates or to exercise its right to

acquire shares of Common Stock under the

Warrants to the extent that such conversion or

exercise would result in the Purchaser owning

more than 4.9% of the outstanding shares of the

Common Stock.

(Section 3.10 of the Convertible Agreement (J. A. at A-36').)

The Conversion Cap’s restrictions on Southbrook’s right

to convert were reiterated in key documents. Each certificate

1. Citation to “J. A.” refers to the Joint Appendix filed by the

parties before the Federal Court of Appeals for the Second Circuit.

2

evidencing Preferred Stock (“Convertible Certificate”)

contained a legend stating that it was subject to this

Conversion Cap. The Conversion Cap also is reflected in

the certificate of designation (“Certificate of Designation”)

for each class of Preferred Stock. As well, these restrictions

were fully disclosed in various filings by ImmunoGen with

the SEC under the Securities Act of 1933 and the Exchange

Act, and in ImmunoGen’s 1997 proxy statement for its annual

stockholders meeting. (J. A. at A-135 - 347.)

At various times, Southbrook exercised its conversion

rights, converting Preferred Stock into Common Stock.

Southbrook also sold Common Stock. It was undisputed that

Southbrook, consistent with the Conversion Cap, never

acquired actual ownership of more than 4.9% of ImmunoGen

Common Stock, much less the 10% threshold required to

trigger Section 16. Also undisputed is that Southbrook never,

at any time, had the power to acquire, vote, direct the voting

of, dispose of, or direct the disposition of, more than 4.9%

of ImmunoGen Common Stock.

After Southbrook’s conversions and sales, Petitioner

requested that Respondent ImmunoGen institute an action,

- pursuant to Section16(b), to require Southbrook to disgorge

any alleged short-swing profits it earned from its investment

in ImmunoGen Preferred Stock. After analyzing Petitioner’s

request, ImmunoGen, upon whose behalf Petitioner purports

to act, declined. This derivative action ensued against

Southbrook, pursuant to Section 16(b). Section 16(b) imposes

strict liability upon investors that beneficially own more than

10% of a company’s stock, requiring disgorgement of profits

earned on purchases and sales of the securities that occur

within a six-month period.

2

Southbrook moved, pursuant to Rule 12(b)(6) of the

Federal Rules of Civil Procedure, to dismiss the action.

Southbrook explained that it was never at any time an actual

owner and, as a result of the Conversion Cap, was never a

beneficial owner of more than 10% of ImmunoGen Common

Stock. Without the right to acquire more than 10% of the

Common Stock at any time, including the 60 day period

referenced in Rule 13d-3(d), Southbrook contended it was

never a 10% beneficial owner of the Common Stock.

While Petitioner conceded that Southbrook adhered to

the Conversion Cap’s limitations and had not owned more

than 4.9% of the Common Stock, it argued, in its opposition

to the motion, that Southbrook should be deemed the

beneficial owner of all the Common Stock it could acquire

and dispose of, under the Convertible Agreement, through

seriatim conversions and sales. Petitioner urged the District

Court to equate 10% beneficial ownership with the power to

buy relatively small blocks of stock over 60 days, if the

purchases, when aggregated without regard to the sales, added

up to more than 10% of the Common Stock. Thus, under

Petitioner’s view, Section 16(b) would apply even though

an investor never at any poirit, within 60 days or otherwise,

exceeded or had the right to exceed the statutory threshold.

In addition, Petitioner argued that the Conversion Cap was

void either under the Seventh Circuit’s “sham transaction”

doctrine or pursuant to Section 29(a) of the Exchange Act.

The United States District Court for the Southern District

of New York granted Southbrook’s motion to dismiss, and

Petitioner appealed to the United States Court of Appeals

for the Second Circuit. Following oral argument, the Second

Circuit requested that the SEC submit an amicus curiae brief

_ addressing, among other issues, how the Commission

4

interprets Rule 13d-3. Specifically, the Second Circuit invited

the SEC to present its view as to whether, under Rule 13d-3,

an investor that holds a convertible security may be a 10%

beneficial owner of the underlying common stock, despite

the existence of a 4.9% conversion cap. In its amicus brief,

the SEC advocated that the Second Circuit affirm the District

Court’s ruling that a valid and binding 4.9% conversion cap

prevents the investor from being, by virtue of its conversion

rights, a beneficial owner of more than 4.9% of the Common

Stock. (Brief of the Securities and Exchange Commission,

Amicus Curiae, In Support Of Appellee On Issues Addressed

(“Amicus”), dated March 2001, at 12.)?

According to the SEC, Rule 13d-3 defines beneficial

ownership to include only voting and investment power

Over a security, or the “right” to acquire that security

within sixty days. (Amicus at 17-18.) The SEC pointed

out that Southbrook’s right to acquire Common Stock

through conversion was limited by the Conversion Cap:

once Southbrook owned 4.9% of the Common Stock, the

Conversion Cap prevented it from converting any more

Preferred Stock. (/d. at 20-21.) At that point, Southbrook

would have no “right” to acquire more shares unless it

first divested itself of all or part of its existing holdings.

(Id. at 21-22.) The SEC explained further that Southbrook

would cease to have either voting or investment power

over the divested securities within the meaning of SEC

regulations. (/d.)

While the SEC acknowledged that an investor who could

dispose serially of large amounts of stock “may be ‘n

2. For the Court’s convenience, Southbrook has lodged

11 copies of the Amicus with the clerk’s office of the United States

Supreme Court.

5

a position to exert influence over the company, that

general observation does not displace the clear language of

Rule 13d-3.” (Jd. at 12.) The SEC noted that “it would be

especially inappropriate to expand that language in the

context of Section 16, which the Supreme Court has long

held should be construed narrowly because it is a strict

liability statute.” (Jd. at 12-13.) The SEC concluded that a

4.9% conversion cap, if valid and binding, prevents the holder

of a convertible security from becoming a beneficial owner

of more than 4.9% of the underlying stock. (/d. at 24.)

The Second Circuit affirmed the District Court’s

judgment, and thereafter, denied a petition for en banc review.

The Court rejected Petitioner’s seriatim conversion argument

and his argument to declare the Conversion Cap void under

the “sham transaction” doctrine and Section 29(a) of the

Exchange Act. In holding that Southbrook could not be the

beneficial owner of more than 4.9% of the Common Stock

because “it does not have the ‘right to acquire’ more than

4.9% of ImmunoGen common stock ‘within sixty days’ of

each divestment,” the Second Circuit analyzed the plain

language of Section 16(b), Rule 16a-1, Section 13(d), and

Rule 13d-3, as well as this Court’s holding in Foremost-

McKesson, Inc. v. Provident Securities Co., 423 U.S. 232

(1976). The SEC’s view, as expressed in its amicus brief and

Releases, also was considered by the Court: “[b]ecause the

SEC’s position is neither plainly erroneous nor inconsistent

with the regulations and comports with our interpretation,

we adopt it.” (Op. at A-11° (emphasis added).)

~~ 3. €itation to “Op.” refers to the opinion below of the United

States Court of Appeals for the Second Circuit attached as an appendix

to the Petition for Writ of Certiorari.

6

REASONS FOR DENYING THE WRIT

I. The Second Circuit’s Decision Does Not Conflict with

Decisions of This Court

A. The Second Circuit’s Decision Does Not Conflict

With This Court’s Precedent on Statutory

Interpretation

Petitioner argues that the Second Circuit disregarded this

Court’s precedent on statutory interpretation, which states

that “[w]hen the words of a statute are unambiguous, then,

this first canon is also the last: ‘judicial inquiry is complete.’ ”

(Pet. at 5, quoting Connecticut Nat'l Bank v. Germain, 503

U.S. 249, 254 (1992).) In particular, Petitioner contends that

the Second Circuit’s analysis of “beneficial ownership” under

Section 16(b) improperly considered Congress’ purpose in

adopting Section 16(b). Petitioner’s argument misconstrues

both this Court’s admonition regarding the application of

Section 16(b), and the Second Circuit’s analysis.

This Court repeatedly has admonished that Section 16(b)

and its regulations must be construed: narrowly with

consideration given to Congress’ purpose in enacting the

statute. In Kern County Land Co. v.-Occidental Petroleum

Corp., this Court instructed that before imposing Section

16(b) liability on a transaction, a court must “inquire whether |

the transaction may serve as a vehicle for the evil which

Congress sought to prevent ... thereby endeavoring to

implement congressional objectives without extending the

reach of the statute beyond its intended limits.” 411 U.S.

582, 594-595 (1973). In Foremost-McKesson, this Court

cautioned against adopting an approach to Section 16(b)

liability “that is not consistent with the premises upon which

~

7

Congress enacted the section.” 423 U.S. at 243. Accordingly,

the Second Circuit’s decision followed Supreme Court

precedent on statutory interpretation by considering in its

analysis of beneficial ownership Congress’ purpose in

enacting Section 16(b).

Petitioner also contends that the Second Circuit

misconstrued the policy underlying the “within sixty days”

provision contained in Rule 13d-3’s definition of beneficial

ownership. Petitioner argues that the Second Circuit

improperly focused on “the right to acquire the ability to

contro!” within 60 days, as opposed to focusing on the ability

of Southbrook to “affect control” through seriatim

conversions of small blocks of Preferred Stock over sixty

days.* (Pet. at 7.) Petitioner’s argument misrepresents the

SEC’s reason for including the “within sixty days” limitation

in Rule 13d-3 and the Second Circuit’s analysis of this Rule.

As the SEC explained in its Release issued in 1978

(“1978 Release”), Rule 13d-3(d)(1)(i) deems a person to be

a beneficial owner of a security if he has the “ ‘right to acquire

beneficial ownership of such security, at any time within sixty

4. Petitioner does not raise a valid issue to the extent he is

arguing that Southbrook should be deemed the beneficial owner of

more than 10% of the Common Stock because it could “affect control”

by serially converting small blocks of Preferred Stock into Common

Stock, and then transferring those small blocks of Common Stock to

a single investor who would eventually amass a 10% block of

Common Stock. Rule 13d contains a “group” theory of liability, which

deems an investor the beneficial owner of transferred stock only if it

and the transferee “agree to act together for the purpose of acquiring,

holding, voting or disposing of equity securities of an issuer... .”

17 C.F.R. 240.13d-5(b)(1). There was no claim that such transfers

occurred or that such a “group” agreement existed between

Southbrook and some third party.

8

days, through: . . . conversion of a convertible security. ...’”

Filing and Disclosure Requirements Relating to Beneficial

Ownership, Securities Exchange Act of 1934, Release

No. 14692, 1978 SEC LEXIS 1716, at *14 (April 21, 1978).

The 1978 Release explains that “when sixty days or less are

left until the right to acquire may be exercised . . . the ability _

of the holder of such right to affect control is sufficient to

warrant the imposition of ...” insider status. Jd. at *15.

The corollary to this principle is that “as the point in time in

which the right to acquire may come to fruition is extended

into the future the relation of the right’s ability to influence

control is correspondingly attenuated.” Jd.

The Second Circuit recognized both of these principles

in its analysis of Petitioner’s seriatim conversion

theory. The Court first noted that the right to acquire control

of a large block of stock within 60 days conferred on the

investor “the power over corporate affairs associated

with significant equity ownership,” which “implicates access

to inside information and the potential for insider trading.”

(Op. at A-10.) After correctly quoting from the 1978 Release,

the Court went on to explain that the 1978 Release establishes

that, in incorporating the “within sixty days” provision, the

SEC “was contemplating a time limitation in connection with

the right to acquire the ability to control.” (Op. at A-10.)

Insider status would be irrefutably conferred, as a

matter of law, only where the right to acquire the Common

Stock through conversion could result in Southbrook owning

a 10% block of Common Stock within 60 days. (/d.)

The “within sixty days” provision is not a direction

to aggregate serial purchases (and ignore any sales) over

60 days. That notion finds no support in the language of

Section 16(b) or Rule 13d, relevant legislative history or the

9

precedents of this Court. Rather, the “within sixty days”

provision is an acknowledgment that an investor who has

the “right to acquire” a 10% block of stock within a short

period may have the ability to “affect control” and,

correspondingly, have access to inside information.

The Second Circuit did not ignore the issue of whether

Southbrook had the ability to “affect control” by its “right to

acquire” Common Stock through conversion, as Petitioner

contends. The Court simply found that Southbrook did not

have the ability to “affect control” through serial conversions

because the Conversion Cap prevented Southbrook from

having “the ‘right to acquire’ more than 4.9% of ImmunoGen

common stock ‘within sixty days’ of each divestment.”

(Op. at A-11.) The Second Circuit analysis comports with

the purpose of the “within sixty days” provision, and the

SEC’s interpretation of its own Rule supports the Second

Circuit’s view. Both adhere to this Court’s instruction that

Section 16(b) operates only “within narrowly drawn limits.”

(/d. quoting Foremost-McKesson, Inc. v. Provident Sec. Co.,

423 U.S. 232, 251 (1976).)

B. The Second Circuit’s Decision Does Not Conflict

with This Court’s Decisions on the Deference To

Be Afforded an Agency’s Interpretation of Its

Own Rules In an Amicus Brief

Petitioner also argues that the Second Circuit applied

the wrong standard in determining the level of deference to

be given the SEC’s interpretation of its own rules. According

to Petitioner, the Second Circuit should not have applied the

deference standard set forth in Press v. Quick & Reilly, Inc.,

218 F.3d 121, 128 (2d Cir. 2000), which, in turn, is based ~

upon the deference standard set forth by this Court in

10

Auer v. Robbins, 519 U.S. 452 (1997).° Petitioner contends

that the Second Circuit should have undertaken the analysis

employed by this Court in United States v. Mead Corp.,

533 U.S. 218 (2001), to determine the appropriate level of

deference. The bases of the Second Circuit’s opinion is

mischaracterized by Petitioner, and the deference standard

Petitioner advocates is, under the circumstances of this case,

incorrect.

While the Second Circuit recites the Auer deference

standard and notes that the SEC’s amicus “supports

[Southbrook’s] reading of [Rule 13d-3],” the Second Circuit

also made clear that it had independently analyzed the Rule

and determined that the SEC’s position “comports with our

interpretation. . . .” (Op. at A-11.) The Petitioner completely

ignores this portion of the opinion.

Even assuming the Second Circuit did not conduct its

own analysis, it set forth the appropriate deference standard.

The Auer standard is to be applied to circumstances, as here,

where an agency interprets its own rules. 519 U.S. at 462

(holding that where the rule at issue “is a creature of

the [agency’s] own regulations, [the agency’s] interpretation

of it is, under our jurisprudence, controlling unless

‘plainly erroneous or inconsistent with the regulation’ ”);

see also Roberston v. Methow Valley Citizens Council,

490 U.S. 332, 359 (1989) (same); Bowles v. Seminole Rock

& Sand Co., 325 U.S. 410, 414 (1945) (same). In contrast,

Mead Corp., concerned rulings issued by the United States

5. Contrary to Petitioner’s contentions, the Second Circuit did

not apply the deference standard from Chevron U.S.A., Inc. v. Natural

Res. Def. Counsel, Inc., 467 U.S. 837 (1984), which properly is

applied to an administrative agency’s interpretation of an ambiguous

statute that it administers. Jd. at 842-843.

* 4

11

Customs Service, which Congress did not intend to have the

force of law. 533 U.S. at 232. Thus, these rulings were held

not to be entitled to the level of deference mandated by Auer.

Id. at 220-228; see also Skidmore v. Swift & Co., 323 U.S.

134 (1944) (considering the level of deference to be afforded

Fair Labor Administrator’s informal bulletins and rulings).

Petitioner’s argument based on Mead Corp., is inapposite.

Equally unavailing is Petitioner’s argument that this

Court’s decisions in Foremost-McKesson and Reliance

Electric Co. v. Emerson Electric Co. require a different

deference standard. In those cases, the Court rejected the

SEC’s interpretation of Section 16(b), because “the SEC’s

own rules undercut such interpretation” and the SEC’s

interpretation “not only strain{ed], but flatly contradict[ed],

the words of the statute.” Reliance Elec. Co. v. Emerson Elec.

Co., 404 U.S. 418, 427-28 (1972); see Foremost-McKesson,

423 U.S. at 260. The SEC in this case was neither interpreting

a congressional statute (in which case, its view would be

afforded less deference), nor was it advocating an

interpretation that is contradicted by the statute’s words

or the Commission’s rules. As discussed above, the SEC’s

view as expressed to the Second Circuit was clearly supported

by the 1978 Release and by this Court’s interpretation of

Section 16(b) and Section 13(d).

Petitioner also argues that it is a violation of the

Constitution’s Separation of Powers doctrine for the judiciary

to afford binding deference to the SEC’s interpretation of its

rules. Petitioner ignores that the Second Circuit reached an

independent decision based on its own analysis of the SEC

rule at issue and adopted the SEC’s view because it

comported with the Court’s own view. Nevertheless,

12

assuming the Second Circuit merely applied the Auer

standard, it did not abdicate complete authority to the SEC

to interpret its own rules. The Court, under the Aver standard,

still would have to evaluate whether the SEC’s view was

“plainly erroneous or inconsistent with the regulations.”

If the SEC’s interpretation of the rule failed to meet that

standard, the Second Circuit would not have endorsed it.

The Second Circuit never relinquished its judicial authority

to the SEC.

II. The Second Circuit’s Decision Does Not Conflict With

Decisions of Other Courts of Appeals

A. The Deference Standard Identified By The

Second Circuit Does Not Conflict With A Decision

of the Seventh Circuit

Petitioner argues that the Second Circuit’s decision

conflicts with a decision in the Seventh Circuit, which

supposedly held that an administrative agency’s interpretation

of its rules, 23 years after the rulé was promulgated, is not

entitled to deference. See Atchison, Topeka & Santa Fe Ry.

Co. v. Pena, 44 F.3d 437, 442 (7th Cir. 1994). Once again,

Petitioner ignores that the Second Circuit conducted its

own analysis of Rule 13d-3 and adopted the SEC’s

interpretation because it comported with the Court’s own

view. The deference standard, therefore, is irrelevant.

But even if the deference standard were relevant,

the Second Circuit’s decision does not conflict with Atchison.

In that case, the Seventh Circuit was analyzing “interpretive

rules,” which are rules issued by an agency that lacks rule-

making authority. The Seventh Circuit concluded that

interpretative rules are not entitled to the same level of

13

deference granted to agency rules promulgated by an agency

with rule-making authority. Jd. The Atchison Court ultimately

afforded the agency’s view of its “interpretive rules” no

deference because, in addition to applying a lower deference

standard, it found that the agency’s view was a “post-hoc

rationalization,” which was “inconsistent with twenty-three

years of agency enforcement,” and unsupported by

“administrative document(s] . . . issued contemporaneously

with the passage of the statute.” Jd. at 442. No such finding

can legitimately be made here, and unlike the agency in

Atchison, the SEC has rule-making authority.

B. The Second Circuit Decision Does Not Conflict

With Decisions in Other Circuits on the Issue of

Sham Transactions

Petitioner also argues that a Seventh Circuit decision and

a First Circuit decision conflict with the Second Circuit’s

rejection of Petitioner’s argument that the Conversion Cap

is void under the “sham transaction” doctrine. Neither the

Seventh nor First Circuit has held that conversion caps

represent sham transactions.

Under the “sham transaction” doctrine, an investor will

be deemed the beneficial owner of stock, regardless of the

form of the underlying transaction, if the essential rights of

ownership of the underlying stock have been passed to the

investor. Bershad v. McDonough, 428 F.2d 693, 697-98

(7th Cir. 1970) (finding “sham transactions” where shares

referenced in option were endorsed in blank for-transfer to

option holder, option holder received irrevocable proxy to

vote shares, and option holder’s board nominees replaced

that of option issuer); cf Riseman v. Orion Research, Inc.,

749 F.2d 915, 921 (1st Cir. 1984)(holding that an investor

14

shall be deemed to have purchased common stock where

investor held option that created irrevocable obligation to

receive common stock although formalities to stock transfer

had not yet occurred).

The Conversion Cap in this case does not resemble

the sort of transaction that falls within the reach of the

“sham transaction” doctrine. Nor is Section 16(b) liability

triggered simply by the fact that Southbrook and ImmunoGen

sought to structure their transaction to avoid application of

that doctrine. This Court has held that “[lJiability cannot be

imposed simply because the investor structured his

transaction with the intent of avoiding liability under

§ 16(b).” Reliance Elec., 404 U.S. at 422. That is precisely

the circumstance here, as the Second Circuit pointed out.

Ill. The Second Circuit’s Decision Does Not Raise Issues

of National Importance

A. The Second Circuit’s Decision Does Not Conflict

With Section 29(a) of the Exchange Act

Petitioner argues that the Conversion Cap raises issues

of national importance because it conceals material facts

from investors and violates Section 29(a) of the Exchange

Act. First, the details of Southbrook’s transaction, including

the Conversion Cap, were fully disclosed in various

filings by ImmunoGen with the SEC under the Securities

Act of 1933 and Exchange Act, as well as in ImmunoGen’s

1997 proxy statement for its annual stockholders meeting.

(See e.g. ImmunoGen Form 10-Q for the quarterly period

_ending September 30, 1996 (J. A. at A-242-328); ImmunoGen |

Proxy Statement, dated Oct. 10, 1997, at 3 Fn. 4 (J. A. at

A-333).)

15

Second, Section 29(a) is inapplicable, as the District

Court held and the Second Circuit affirmed. Section 29(a)

provides that “[a]ny condition, stipulation or provision

binding any person to waive compliance with any provision

of this chapter or of any rule or regulations thereunder .. .

shall be void.” 15 U.S.C. § 78cc(a). Courts apply this section

when the parties to a transaction that violates the law

expressly waive compliance with the violated law.

E.g. Harsco Corp. v. Segui, 91 F.3d 337 (2d Cir. 1996)

(holding stipulation void that waives compliance with

Exchange Act); cf’ McMahan & Co. v. Wherehouse Entm ,

Inc., 65 F.3d 1044, 1050-51 (2d Cir. 1995) (holding provision

void that expressly waived “substantive rights under the

securities laws”). There is no agreement in this case providing

that Southbrook may own more than 10% of the Common

Stock and not report it under Sections 16(a) or 13(d), or that

Southbrook would not be liable for short-swing trading

under Section 16(b). The Conversion Cap merely

prevents Southbrook from owning more than 4.9% of the_

Common Stock.

B. SEC Rule 13d-3 Is Not Inconsistent With Section

16(b)

- Petitioner argues that if the Second Circuit’s

interpretation of Rule 13d-3 is correct, it is inconsistent

with Section 16(b)’s purpose. The SEC, Petitioner contends,

therefore, exceeded its authority to promulgate rules

pursuant to Section 3(b) of the Exchange Act by

adopting Rule 13d-3’s definition of beneficial ownership for

— Section 16(b). Rule 13d-3’s definition of beneficial

~ ownership and the Second Circuit’s interpretation of that rule

are entirely consistent with Section 16(b)’s purpose.

16

This Court has explained that “Congress passed § 16(b)

of the 1934 Act to ‘preven[t] the unfair use of information

which may have been obtained by [a] beneficial owner,

director, or officer by reason of his relationship to the issuer.’”

Gollust v. Mendell, 501 U.S. 115, 122 (1991). “Prohibiting

short-swing trading by insiders with nonpublic information

was an important part of Congress’ plan. . . .” Jd. To eliminate

such trading, Section 16(b) “imposes a form of strict liability

on” certain statutory insiders. Jd. at 123.

Because the statute imposes strict liability without regard

to fault, Congress fixed “ ‘narrowly drawn limits’ on the class

of corporate insiders who may be defendants under Section

16(b).” Jd. A narrow construction of the statute is required

“even though in some cases a broader view of statutory

liability could work to eliminate an ‘evil that Congress sought

to correct through Section 16(b).’ ” Jd. For this reason, insider

status coupled with the irrebutable presumption of insider

trading would be imposed upon Southbrook only where it

has had the right to acquire, both at the purchase and the sale

in question, a 10% block of the Common Stock within 60

days. See id.

Southbrook could not assemble, within 60 days or at any

other time, a block of stock large enough to exceed the

threshold Congress set as justifying Section 16(b)’s

presumption of trading on inside information. Accordingly,

a definition of beneficial ownership that presumes possession

of inside information based on the right to acquire a 10%

block of common stock within sixty days, as opposed to the

ability to trade actively in small blocks of stock, adheres to

Congress’ purpose. As this Court held in Foremost-

McKesson, “trading by mere stockholders was viewed

[by Congress] as being subject to abuse only when the size

17

of their holdings afforded the potential for access to corporate

information.” 423 U.S. at 253. The SEC did not euceed | its

authority in promulgating Rule 13d-3.

CONCLUSION

For all of the foregoing reasons, the Petition for a Writ

of Certiorari should be denied.

Respectfully submitted,

HERBERT TEITELBAUM

Counsel of Record

NOAH WEISSMAN

ROBINSON SILVERMAN PEARCE

ARONSOHN & BERMAN LLP

1290 Avenue of the Americas

New York, New York 10104

(212) 541-2000

Attorneys for Respondent

Southbrook International Investments, Ltd.

APPENDIX

la

APPENDIX — BRIEF OF THE SECURITIES AND

EXCHANGE COMMISSION, AMICUS CURIAE, IN

SUPPORT OF APPELLEE ON ISSUES ADDRESSED

[Omitted here but submitted

separately as Lodging]