Reply Brief — City & County of Denver v. Sonnenfeld

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No. 96-1268 APR 25

In The PN ates

Supreme Court of the United States

October Term, 1996

®

THE CITY AND COUNTY OF DENVER, COLORADO,

Petitioner,

BONNIE SONNENFELD, individually and on behalf of

all those similarly situated, KARL NICOLETTI, on behalf

of himself and all others similarly situated, HILDA

EBLING STOLLER TRUST, by Hilda Stoller a/k/a Hilda

Stoller Milstein, Trustee, and LARRY RABINOWITZ, on

behalf of himself and all others similarly situated,

Respondents.

«

On Petition For Writ Of Certiorari

To The United States Court Of Appeals

For The Tenth Circuit

>

PETITIONER’S REPLY BRIEF

*

James M. Lyons

Counsel of Record

FREDERICK J. BAUMANN

JoANN L. Vocrt

ROTHGERBER, APPEL, Powers &

JoHNson LLP

1200 Seventeenth Street,

Suite 3000

Denver, CO 80202

Tel: (303) 623-9000

Attorneys for Petitioner,

The City and County

of Denver, Colorado

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-2831

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TABLE OF CONTENTS

RA Ce FO CTS vb nk ccdeeeranaccaveceess ii, iii

I. CERTIORARI REVIEW IS WARRANTED NOT-

WITHSTANDING THE INTERLOCUTORY

NATURE OF THE TENTH CIRCUIT’S DECI-

PEE abbas eH etE Ra dana kaneebas Ketewusoubeas 1

Il. WHETHER THERE IS AN IMPLIED PRIVATE

RIGHT OF ACTION UNDER FEDERAL SECU-

RITIES LAWS AGAINST MUNICIPAL

ISSUERS IS AN UNSETTLED QUESTION

THAT SHOULD BE DECIDED BY THIS

RPM Shs K5648% cae eS Avia event een bakeees 3

III. LEGISLATIVE HISTORY CANNOT BE

IGNORED, OR CITED ONLY SELECTIVELY,

IN DECIDING THE QUESTION PRESENTED

ET Tre oer er ae ee gear DRS 5

IV. THERE WAS NO JUDICIAL RECOGNITION

OF A PRIVATE RIGHT OF ACTION UNDER

THE SECURITIES LAWS AGAINST MUNICI-

SOMAEEAE EO BOE TOFS og viteccincckenrenes 7

V. INFERRING A PRIVATE RIGHT OF ACTION

AGAINST MUNICIPAL ISSUERS IS UNNEC-

ESSARY FOR THE PROTECTION OF INVES-

TORS AND IS CONTRARY TO PUBLIC

RMA AG 6 85a eos ahs anes ae een 8

ii

TABLE OF AUTHORITIES

CasES

Air Line Pilots Ass'n, Int'l v. UAL Corp., 897 F.2d

SIS OU Che. BOI oi icicectvccesntasesiaees

Baron v. Shields, 131 F. Supp. 370 (S.D.N.Y. 1954)

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

of Denver, N.A., 511 U.S. 164, 114 S. Ct. 1439, 128

Ss EOP CUOMO ac ensccscscadvesseseeteders

Coleman v. Paccar, Inc., 424 U.S. 1301 (1976) .....

Fed. Power Comm’n v. Transcont’l Gas Pipe Line

Corp., S23 US. TRB GASPED. 000 csccesseecisssess

Hamilton-Brown Shoe Co. v. Wolf Bros. & Co., 240

tt 8: Peer rrr ere ee ee ree

In re CitiSource, Inc. Sec. Litigation, 694 F. Supp.

BOSD GOEAIY.. BOE osc dcicackvisscncovesecces

In re Wash. Pub. Power Supply Systems Sec. Litiga-

tion, 623 F. Supp. 1466 (W.D. Wash. 1985), aff'd,

S23 F.2d 1309 Oth Cie. 1987)... .. 5 .ccceseses

J.I. Case Co. v. Borak, 377 U.S. 426 (1964)........

Nixon v. Fitzgerald, 457 U.S. 731 (1982)..........

STATUTES AND RULES

Private Securities Litigation Reform Act of 1995,

Pub. L. No. 104-67, 109 Stat. 737 (1995).......

BE TSE. © TS hi kc avcctcccendeussdcasssecris

G2. Th. Mes caocnn Catepeqaesiaahsswstensis

ili

TABLE OF AUTHORITIES - Continued

Page

OTHER AUTHORITIES

Gellis, Ann Judith, Municipal Securities Market:

Same Problems — No Solutions, 21 Del. J. Corp. L.

Ne UREA aoa ics ha ove ia O56 oo ied oe oe. 8, 9

Schwarz, Thomas J., Municipal Bonds and the Secu-

rities Laws: Do Investors Have an Implied Private

Remedy?, 7 Sec. Reg. L. J. 119 < . EASE eee a2

Steinberg, Marc I., Securities Regulation: Liabilities

ee I NN as rg ne pee oa 3

I. CERTIORARI REVIEW IS WARRANTED NOT-

WITHSTANDING THE INTERLOCUTORY

NATURE OF THE TENTH CIRCUIT’S DECISION.

The question which Denver presents for review was

decided by the Tenth Circuit on interlocutory appeal.

That fact does not “militate against the exercise of cer-

tiorari jurisdiction,” as Respondents contend (Brief in

Opposition (“Brief”) at 1).

Respondents cite a 1916 case, Hamilton-Brown Shoe

Co. v. Wolf Bros. & Co., 240 U.S. 251 (1916), in support of

their contention. However, in Hamilton, this Court simply

held that its denial of certiorari after an interlocutory

appeal did not preclude it from reviewing issues that

arose during the interlocutory proceedings when it

granted certiorari after a second appeal. Id. at 257-58.

More recently, this Court has made it clear that the inter-

locutory nature of an appeal does not warrant denial of

certiorari where the question presented is otherwise

appropriate for review. See Fed. Power Comm'n v. Trans-

cont’l Gas Pipe Line Corp., 423 U.S. 326, 330-31 (1976) (“We

agree with the Commission that the challenged order,

although interlocutory in nature, is properly reviewable

by this Court pursuant to 28 U.S.C. § 1254(1)”); Nixon v.

Fitzgerald, 457 U.S. 731, 742-43 (1982); Coleman v. Paccar,

Inc., 424 U.S. 1301, 1304 (1976) (per Rehnquist, J., as

Circuit Justice); see also Air Line Pilots Ass’n, Int’l v. UAL

Corp., 897 F.2d 1394, 1397 (7th Cir. 1990) (“A litigant in a

federal case is not compelled to wait until the case is over

before seeking certiorari, because it is not a requirement

of certiorari to review an order of a federal court that the

order be a final decision”). Indeed, in at least one of the

cases relied on by Respondents in their brief, J.I. Case Co.

v. Borak, 377 U.S. 426, 428 (1964), the securities law issue

on which certiorari was granted had been decided by the

court of appeals on interlocutory appeal.

In Nixon, concerns of judicial economy warranted

immediate review where the question presented was a

pure issue of law as to which the court of appeals had

made a binding decision. 457 U.S. at 743 n.23. In Fed.

Power Comm'n, the Court found it appropriate to review

an interlocutory order because “any review by this Court

of the propriety of the order must be immediate to be

meaningful.” 423 U.S. at 331. The same considerations

warrant immediate review of the issue in this case as

well. Whether there is an implied private right of action

under the securities laws against municipal issuers is a

pure question of law, and has been definitively decided

by the Tenth Circuit. Resolution of the issue requires no

additional factual development in the lower courts.

Although Respondents’ class action against Denver and

other parties is proceeding, nothing in the ongoing litiga-

tion will have any bearing on the issue presented for

review.

The Tenth Circuit’s decision means that Denver must

now mount a defense in what promises to be protracted

and expensive securities fraud class action suits. Denver

should net be required to defend, go through a trial on

the merits and pursue a further appeal if — as it believes —

Respondents had no right of action against it from the

outset. There is no basis for deferring review of the

question presented here simply because it was decided by

the Tenth Circuit on interlocutory appeal.

Il. WHETHER THERE IS AN IMPLIED PRIVATE

RIGHT OF ACTION UNDER FEDERAL SECURI-

TIES LAWS AGAINST MUNICIPAL ISSUERS IS

AN UNSETTLED QUESTION THAT SHOULD BE

DECIDED BY THIS COURT.

Certiorari review is warranted when a court of

appeals has decided an important question of federal law

that has not been, but should be, settled by this Court.

Sup. Ct. R. 10(c). Contrary to Respondents’ assertions, the

issue presented here is just such a question.

Respondents state that the Tenth Circuit’s decision is

in accord with the “vast majority” of district courts and

commentators (Brief at 5); that the decision is consistent

with the precedents of this Court and with the position of

the SEC (id. at 13); and that there is “great unanimity of

opinion on this issue” (id.). Not so.

Neither this Court nor any federal appeals court

except the Tenth Circuit has addressed the issue raised in

Denver's petition. As evidenced by the authorities cited

by each side in this case, the commentators are split; as

recently as 1995, a leading treatise stated that “the extent

of liability of municipal issuers under the federal securi-

ties laws is far from settled.” Marc I. Steinberg, Securities

Regulation: Liabilities and Remedies (1995), § 13.05, at 13-20.

Respondents’ “vast majority” of district courts consists of

exactly two cases — neither of which can serve as a basis

for upholding the Tenth Circuit’s decision.!

1 The first of these, In re Wash. Pub. Power Supply Systems

Sec. Litigation, 623 F. Supp. 1466 (W.D. Wash. 1985), aff'd, 823

F.2d 1349 (9th Cir. 1987), ignored legislative history and simply

hypothesized that the language of the 1975 amendment defining

As for the SEC, Respondents are correct in stating

that that agency has “long taken the position that the

securities laws’ antifraud provisions apply to munici-

palities” (Brief at 13 n.7). However, this is not the same as

taking a position on the question whether municipal

issuers are subject to private damages actions for alleged

violations of the securities laws. As to that issue, no less

an authority than former SEC Chairman Roderick M.

Hills stated during Senate hearings on the Municipal

Securities Full Disclosure Act of 1976 that he “was certain

of the SEC’s authority to act under the securities acts

against fraud in municipal securities transactions, but he

“person” to include governments “appears to expand” the class

of persons liable for fraudulent practices to include

municipalities, and that in expanding the definition of person,

Congress “must have intended” that governments were to be

treated the same as other persons under the Act except where

specifically exempted. Id. at 1479. It is evident from this

language that the court was simply making an assumption

without any support for such assumption in the case law or in

the legislative history. Further, as noted in Denver’s petitioti,

the Ninth Circuit’s decision on the appeal of this case casts

doubt on the district court’s resolution of the municipal issuer

liability issue. See Petition at 8 n.3. In In re CitiSource, Inc. Sec.

Litigation, 694 F. Supp. 1069 (S.D.N.Y. 1988), the primary issue

was not whether New York City was subject to liability as an

issuer, but whether it could be held liable for alleged

misrepresentations made by its employees that led to the

decline in value of CitiSource stock. Id. at 1072-73. In answering

this question in the affirmative, the court acknowledged that the

principal concern of Congress in 1975 was not with municipal

issuers, but with professionals trading in the municipal

securities market, and added: “Congress took pains to make

explicit that it did not intend by the 1975 amendments to

regulate municipalities qua issuers.” Id. at 1074 n.8.

was uncertain as to whether a municipal securities inves-

tor could bring a private suit under the securities acts.”

Thomas J. Schwarz, Municipal Bonds and the Securities

Laws: Do Investors Have an Implied Private Remedy?, 7 Sec.

Reg. L. J. 119, 153-54 (1979), citing Hearings on S. 2574

and S. 2969 before the Subcomm. on Securities of the

Senate Comm. on Banking, Housing & Urban Affairs,

94th Cong., 2d Sess. 22 (1976).

In sum, the issue on which Denver seeks review is far

from “settled,” as Respondents contend. The Tenth Cir-

cuit attempted to resolve the issue, but its analysis is

flawed and its result is wrong. The issue needs to be

decided by this Court.

III. LEGISLATIVE HISTORY CANNOT BE

IGNORED, OR CITED ONLY SELECTIVELY, IN

DECIDING THE QUESTION PRESENTED

HERE.

In regard to the role of legislative history in resolving

the issue presented for review, Respondents’ position

appears to be that legislative history is irrelevant — unless

something can be found in that history that would sup-

port the Tenth Circuit’s conclusion.? Denver believes leg-

islative history is not only relevant, but in fact must be

2 Respondents first argue that recent decisions of this Court

cast doubt on the value of legislative history as an interpretive

device (Brief at 7); they then “submit that this Court has

provided more than enough ‘guidance’ on the uses of legislative

history as an interpretive tool” (id. at 9); and they finally

conclude that it “is unnecessary to resort to legislative history in

this case” (id. at 9-10). In the next breath, Respondents launch

into a discussion of legislative history relied on by the Tenth

Circuit which, in their view, demonstrates that Congress

considered in order to decide whether Congress intended

that there should be a private right of action against

municipal issuers.

This issue cannot be resolved simply by looking at

“clear statutory language” (Brief at 9). In the first place,

there is no language whatever in any federal securities

statute that affords a private right of action for alleged

violations of the antifraud provisions. Moreover, Respon-

dents’ reliance on Central Bank of Denver, N.A. v. First

Interstate Bank of Denver, N.A., 511 U.S. 164, 114 S. Ct.

1439, 128 L.Ed.2d 119 (1994), for this proposition is mis-

placed. In Central Bank, the Court’s concern was not with

whether a private right of action existed, but with deter-

mining the scope of conduct prohibited by Section 10(b).

The Court carefully distinguished the inquiries required

to resolve the two issues. When the issue is the scope of

conduct prohibited by Section 1i0(b), “the text of the

statute controls our decision.” 128 L.Ed.2d at 129. How-

ever, when the issue relates to the elements of a private

liability scheme, a court must infer how Congress would

have addressed the issue, since “Congress did not create

a private § 10(b) cause of action and had no occasion to

provide guidance about the elements of a private liability

scheme.” Id.

“clearly intended that municipal securities would remain

subject to the antifraud provisions.” Id. at 10. If anything,

Respondents’ analysis illustrates the truth of the statement that

using legislative history to interpret statutory language is “like

looking over a crowd and picking out your friends” (see Petition

at 17), and supports Denver’s argument that this Court needs to

provide guidance as to how legislative history should be used to

ascertain congressional intent.

IV. THERE WAS NO JUDICIAL RECOGNITION OF A

PRIVATE RIGHT OF ACTION UNDER THE

SECURITIES LAWS AGAINST MUNICIPALITIES

PRIOR TO 1975.

The Tenth Circuit found that the lack of discussion of

a private right of action against municipalities in the

legislative history of the 1975 securities amendments was

“not necessarily anomalous.” In the court’s view, Con-

gress may have intended the 1975 amendments as a clari-

fication of existing law because there was “some

authority suggesting municipalities could be subject to

the well-established private cause of action under

§ 10(b).” Petition at App. 9. Denver pointed out in its

petition that this explanation was unsupportable, since

the one case cited by the Tenth Circuit (Baron v. Shields,

131 F. Supp. 370 (S.D.N.Y. 1954)) did not even address the

issue.

Respondents assert that “several othei pre-1975 fed-

eral securities cases similarly recognized a Section 10(b)

private right of action against municipal defendants.”

Brief at 8 n.2. This statement is misleading at best. The

“several other cases” cited by Respondents are simply

other rulings by the same district court in cases brought

by various bond purchasers against a bridge commission

in Nebraska and its members. As in Baron (which is cited

in all these rulings), there is nothing in any of these cases

to indicate that the issue of the availability of a private

right of action against municipal issuers was even raised,

let alone decided.

V. INFERRING A PRIVATE RIGHT OF ACTION

AGAINST MUNICIPAL ISSUERS IS UNNECES-

SARY FOR THE PROTECTION OF INVESTORS

AND IS CONTRARY TO PUBLIC POLICY.

Although they claim that the issue raised by Denver

is not important enough to be reviewed by this Court,

Respondents assert at the same time that any result other

than the one reached by the Tenth Circuit would have a

“devastating impact” on the municipal securities market.

Brief at 13-14. In support of this statement, Respondents

refer to assorted municipal bond fiascoes in New York,

Washington and California,> and cite expressions of con-

cern from various sources about the effect of a holding

that the antifraud statutes do not “apply to” municipal

issuers. Id. at 16 and 16 n.10. However, whatever the

merits of these concerns, they say nothing about the issue

raised here — namely, whether there is an implied private

right of action against municipal issuers under the securi-

ties laws. As explained in Denver’s petition, the securities

laws can “apply to” municipal issuers, in the sense of

subjecting them to SEC enforcement actions for violations

of antifraud provisions, without subjecting municipalities

to private damages liability under Section 10(b) and Rule

10b-5.

3 In contrast to the situations described by Respondents,

there has never been a default on the Denver bonds. Moreover,

Respondents’ own authority commented, after discussing the

effect of municipal bond defaults in New York, Washington, and

Orange County, that: “A Rule 10b-5 suit cannot correct these

municipal securities market disasters.” Ann Judith Gellis,

Municipal Securities Market: Same Problems — No Solutions, 21 Del.

J. Corp. L. 427, 469 (1996).

Respondents also assert that “there is no reason to

believe that the SEC has sufficient resources or incentives

to effectively police the municipal securities industry” (id.

at 16), and cite a law review article in support of that

statement. However, the same article notes that since the

appointment of Arthur Levitt as Chairman of the SEC,

the SEC has, both directly and indirectly, advo-

cated for major regulation of the municipal

securities market. It has also focused its enforce-

ment energies on cleaning up the market. It has

conducted a record number of investigations

against municipal securities dealers. Within

days of the news of Orange County’s debacle in

December 1994, the SEC began an investigation

to see if there were any violations of the anti-

fraud provisions of the federal securities laws.

In March 1995, the SEC created, for the first

time, a division specifically devoted to issues of

municipal finance, the Office of Municipal

Finance.

Gellis, supra, 21 Del. J. Corp. L. at 429.

There is no basis for inferring a private right of action

against municipal issuers based on the perception that

existing mechanisms are inadequate, or that failure to do

so will somehow mean that municipal issuers will no

longer need to be concerned about the adequacy of their

bond disclosures. Municipal issuers are subject to certain

regulation by the SEC, which is empowered in appropriate

cases to order restitution for municipal securities inves-

tors. See Schwarz, 7 Sec. Reg. L. J. at 154. In addition,

municipal securities investors may have remedies against

issuers under state law, and may bring private actions

against underwriters, brokers and dealers in municipal

securities under the federal securities laws as well.

10

As Denver pointed out in its petition, not only is

implication of a private right of action against municipal

issuers unnecessary, but it will also have serious effects

on the ability of municipalities to use bonds to fund their

capital needs. Respondents attempt to downplay this con-

cern by suggesting that the widely recognized abuses that

accompany private securities fraud actions have some-

how been “eliminated” by Congress’s enactment of the

Private Securities Litigation Reform Act of 1995, Pub. L.

No. 104-67, 109 Stat. 737 (1995) (Brief at 15). While it is to

be hoped that this legislation will alleviate some of the

most burdensome aspects of defending a securities fraud

class action, it is unlikely to eliminate meritless 10b-5

actions. Under the Tenth Circuit’s opinion, municipal

issuers such as Denver can be sued in private damages

litigation, and will still have to defend themselves. There

is no reason to impose on them the financial hardship

that such a defense will entail even under the 1995

Reform Act, when doing so is both unnecessary to protect

investors and contrary to the intent of Congress.

Respectfully submitted,

James M. Lyons,

Counsel of Record

FREDERICK J. BAUMANN

JoANN L. Voct

ROTHGERBER, APPEL, Powers &

JoHNson LLP

1200 Seventeenth Street,

Suite 3000

Denver, CO 80202

(303) 623-9000

Attorneys for Petitioner, The City

& County of Denver, Colorado