Opposition Brief — At Home Corp. v. Cox Communications, Inc. (No. 06-147)
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my Supreme Court, U.S. |
(a) FILED
| AUG 30 2006
No. 06-147
OFFICE OF THE CLERK
IN THE
Supreme Court of the Anited States
AT HOME CORPORATION,
Pet *‘ioner,
Vv.
Cox COMMUNICATIONS, INC., COX @HOME, INC.,
COMCAST CORPORATION, COMCAST ONLINE
COMMUNICATIONS, INC., COMCAST PC INVESTMENTS, INC.,
BRIAN L. ROBERTS, AND DAVID M. Wooprow,
Respondents.
On Petition for a Writ of Certiorari to the
United States Court of Appeals
for the Second Circuit
BRIEF IN OPPOSITION ON BEHALF
OF THE COMCAST RESPONDENTS
MICHAEL S. SHUSTER *
SHERON KORPUS
JAMES T. CAIN
KASOWITZ, BENSON, TORRES
& FRIEDMAN LLP
1633 Broadway
New York, New York 10019
- (212) 506-1700
* Counsel of Record Counsel for Comcast
Respondents
cee a SEN A NR AN RE SN EE EEN INO PCO ON
WILSON-EPES PRINTING CO., INC. ~ (202) 789-0096 = WASHINGTON, D.C. 20001
COUNTERSTATEMENT OF
QUESTIONS PRESENTED
1. With respect to a hybrid derivative security (i.e., one
permitting exercise at either a fixed or a floating exercise
price depending upon the market price of the underlying
equity security at the time of exercise), whether the courts
below properly ruled that the acquisition of the instrument
constitutes a Section 16(b) transaction in the underlying secu-
rity pursuant to 17 C.F.R. § 240.16b-6(a), and that the even-
tual exercise of the instrument pursuant to its fixed-price
component is a non-event for Section 16(b) purposes by
operation of 17 C.F.R. § 240.16b-6(b).
2. Whether the lower courts properly ruled that Com-
cast’s acquisitions of the shares of three cable companies are
not equivalent to Section 16(b) purchases of At Home war-
rants held by those companies in their investment portfolios
that can be matched to Comcast’s deemed sale of At Home
stock.
CORPORATE DISCLOSURE STATEMENT
No publicly-held corporation owns 10% or more of the
stock of Comcast Corporation. Comcast Online Commu-
nications, Inc. and Comcast PC Investments, Inc. certify that
Comcast Corporation is their corporate parent and that no
publicly-held corporation other than Comcast Corporation
owns 10% or more of their stock.
(ii)
TABLE OF CONTENTS
COUNTERSTATEMENT OF QUESTIONS
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BRIEF IN OPPOSITION ON BEHALF OF THE-
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DEA TERETE OF TERS CASE. q.cccncsccricessesvernsonverinnvecvens
A. The Complaint And The District Court’s
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B. The Second Circuit’s Decision And The seal S
pS RIE AR tO A eo PNT EEO A
REASONS FOR DENYING THE WRIT.........0.0.......
I. ON COUNT I, THE SECOND CIRCUIT
CORRECTLY HELD THAT THE ACQUISI-
TION OF THE PUT OPTION WAS A
SECTION 16(B) SALE AND THAT ITS
SUBSEQUENT FIXED-PRICE EXERCISE
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A. The Lower Courts Correctly Applied The
Rules Under Section -16(b) To The Put
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B. The Arguments Presented In The Bond-
holders’ Peiition Do Not Identify Any
Error In The Lower Courts’ Application Of
TRO ADDICROIS RUIOS ...cccinescsccccscesccecrsecceesee
1. The Bondholders Improperly "aise A
New Argument In Their + “tiorari
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TABLE OF CONTENTS—Continued
Page
2. The Bondholders’ Reliance On Rule
16a-1(c) Is Misplaced ...............cceeceeeeeee 12
3. The Bondholders’ Self-Defeating
“Market Reality’ And “Increased
Te IIS icnisciciisresissvcsnnvntinhaiitins 14
4. The Bondholders’ Spurious “Hind-
sight” Argument .................04 valeninssvetee 17
Il. ON COUNT IJ, THE LOWER COURTS
CORRECTLY DETERMINED THAT COM-
CAST’S PURCHASES OF CABLE COM-
-PANY SECURITIES COULD NOT BE
MATCHED TO ITS DEEMED SALE OF AT
SER PGEL THR RIPE D S0Ce isncicusidinsssmstiservinreedoeaniebosaeed 18
A. The Lower Courts Correctly Ruled That
The Challenged Transactions Fall Outside
The Scope Of Section 16(b) As Deter-
mined By The Statute’s Plain Language ..... 18
B. The Countertextual Reading Of Section
16(b) Advocated By The Bondholders
Would Create An Unprecedented Expan-
sion Of The Statute Far Beyond Its Literal
AMG INVENGOR SCOMC..0cesccssscesceressecsscncvissecenee 22
NEAT sinker doenvubeeneecesssintncadsncnismniveseveninndeciensaeees 25
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(iv)
TABLE OF AUTHORITIES
CASES Page
American Standard Co. v. Crane Co,
510 F.2d 1043 (2d Cir. 1974)... eeeeeeeee 3, 19, 20
Burnette v. Carothers,
ER hae 1 ED, | sone ae
Cioffi v. Averill Park Cent. Sch. Distr. Bd. of Ed.,
GEG FFG USS GS CE, BOGGS) cccccccvsnncerevereecesonsoics
City of Springfield, Mass. v. Kibbe,
A nn I FD Laika diinetcbemirsubicencadeniticenedienay 11-12
Davenport v. Harry N. Abrams, Inc.,
Ee cle Be GE Gls BOE eenchcrnecennceninesinneoions
Gwozdzinsky v. Zell/Chillmark Fund, L.P.,
ee ed Pe Ee As BFF ivicsencecsctctctcnensectonns
Heublein, Inc. v. Gen. Cinema Corp.,
pp G Reo. fo 1: | een ere ne
Kern County Land Co. v. Occidental Petroleum
oe UME & 4. os | 21, 22
Mellon Bank N.A. v.United Bank Corp.,
re EO le Gi. BED eicsnsncscnerenesensiovevsincie
Reliance Elec. Co. v. Emerson Ele. Co.,
ee A DIE EEE vihcdsniiichiccinieisisntonincalnisctnnsoides
Schaffer v. CC Invs., LDC, 280 F. Supp. 2d 128
(S.D.N.Y.), recon. granted in part, No. 99-
2821, 2003 WL 22480052 (S.D.N.Y. Oct. 31,
Strauss v. Comcast Corp., 149 Fed. Appx. 15 (2d
pe aI il die ccciachais aadipnieatmep ndccboapicmiinestanceimiaiees
U.S. v. Ortiz, 422 U.S. 891 (1975).........ccccsecesseeees
STATUTES, REGULATIONS AND RULES
re ae 6, 12
ee a. 6, 13, 14, 16, 18
PR 0 i
a SRE SS eee Se arene ata 17, 19
TABLE OF AUTHORITIES—Continued
OTHER Page
Ownership Reports and Trading by Officers,
Directors, and Principal Security Holders,
Exchange Act Release No. 28,869, 1991 WL
re RS | ERR nen 7
(vi)
IN THE
Supreme Court of the Gnited States
No. 06-147
AT HOME CORPORATION,
Petitioner,
V.
Cox COMMUNICATIONS, INC., COX @HOME, iNC.,
COMCAST CORPORATION, COMCAST ONLINE
COMMUNICATION, INC., COMCAST PC INVESTMENT, INC.,
BRIAN L. ROBERTS, AND DAVID M. WOODROW,
Respondents.
On Petition for a Writ of Certiorari to the
United States Court of Appeals
for the Second Circuit
BRIEF IN OPPOSITION ON BEHALF
OF THE COMCAST RESPONDENTS
In their petition for a writ of certiorari, petitioners,
representing former bondholders of the defunct At Home
Corporation (the “Bondholders”), challenge the dismissal of
two, alternative claims under Section 16(b) of the Securities
Exchange Act of 1934 (relating to “short swing” profits on
purchases and sales of securities by an issuer’s insiders, all as
defined). Each of these claims arises from the acquisition and
exercise of a hybrid derivative security’ (the “Put Option”)
' A “hybrid” derivative is a right to buy or scll a security that contains
both fixed and floating price components and is exercisable at one or the
other depending upon the terms of the instrument and the market price of
2
which gave Comcast’ the right to sell its At Home common
stock to AT&T Corp. at the greater of $48 per share or the
applicable thirty trading-day average market price of At
Home stock. For their first claim, the Bondholders challenge
the lower courts’ determination that Comcast’s acquisition of
the Put Option was equivalent to a sale of the underlying At
Home securities by virtue of Securities and Exchange
Commission (“SEC”) Rule 16b-6(a), and that Comcast’s sub-
sequent exercise of the Put Option at its fixed price
component was an exempt event under Rule 16b-6(b). For
their second claim, the Bondholders. argue that the lower
courts improperly ruled that Comcast’s deemed sale of Af
Home stock could not be matched to Comcast’s purchases
of the stock of three other cable companies whose securi-
ties portfolios happened to contain, among other things, At
Home warrants.
The Bondholders have failed to identify any reason for
granting certiorari in this case. There is no split of authority
among the circuit courts: the Second Circuit is the only court
of appeals to have applied Section 16(b) in the context of
hybrid derivative securities. No aspect of the Second Cir-
cuit’s decision touches upon any important federal question
that conflicts with relevant Supreme Court authority. With
respect to Count I of the Complaint, the Bondholders con-
tinuously maintained throughout this litigation that the Put
Option was different from “any instrument in any other
reported case” and that the analytical approach adopted in
the security. See Petitioncr’s App. A (Second Circuit opinion) at 4a (“The
Letter Agreement grants a ‘hybrid option’ because the pricing formula has
both fixed and floating components.”’); Petitioner’s App. B (district court
decision) at 23a (“The question presented . . . is how to apply § 16(b) to
options containing both a fixed and a floating component (‘hybrids’).”).
? Respondents Comcast Corporation, Comcast Online Communica-
tions, Inc., and Comcast PC Investments, Inc. are collectively referred to
herein as “Comcast.”
3
those cases “simply does not ‘work’ when applied to the
unique instrument at issue here.” Appellant’s Br. at 24, 37.
This Court has also previously denied certiorari with respect
to the very issue asserted in Count II, letting stand the Second
Circuit’s determination that Section 16(b) applies only to
single-issuer transactions. See American Standard Co. v.
Crane Co., 510 F.2d 1043 (2d Cir. 1974), cert den’d, 421
U.S. 1000 (1975). Indeed, though the Bondholders fail to
mention the fact in their petition, the Second Circuit issued its
decision after requesting an amicus brief from the SEC that
also concluded that these claims should be dismissed. In
truth, the only reason for this petition is that it represents the
Bondholders’ last chance at obtaining a windfall recovery
based on two novel theories of short-swing liability that have
been reviewed and rejected by the courts below and the SEC
as contrary to both the letter and the spirit of Section 16(b).
For these and the reasons discussed below, the Bondholders’
petition should be denied.
STATEMENT OF THE CASE
A. The Complaint And The District Court’s Decision
In Count I of their Complaint, the Bondholders alleged that
Comcast’s purported exercise of the Put Option at its fixed
price component on January 11, 2001 constituted a Section
16(b) sale of the underlying At Home securities that could be
matched to a putative deemed “purchase” of At Home stock
on May 18, 2001 under the six-month short-swing profits
rules and regulations. See Complaint §{] 64—72 (Petitioner’s
App. G at 57a—59a). In Count II, the Bondholders alter-
natively alleged that Comcast’s acquisition of the Put Option
on March 28, 2000 constituted a deemed Section 16(b) sale of
the underlying At Home stock that could be matched not with
any actual or deemed purchase of At Home securities, but
rather with Comcast’s acquisitions of all of the outstanding
shares of three different cable companies which happened to
4
hold At Home warrants in their investment portfolios. See id.
{| 73-76 (Petitioner’s App. G at 59a).
Comcast moved to dismiss both counts for failure to state a
claim. The district court granted the motion with respect
to Count I on the grounds that, under the applicable SEC
rules, a Section 16(b) “sale” event occurs when a derivative
containing a fixed price component (such as the Put Option)
was established, and the subsequent exercise of the derivative
at that fixed price is an exempt (irrelevant) occurrence. See
Petitioner’s App. D at 25a—-26a. Consequently, the court held
that Count I failed to state a claim because more than six
months had elapsed between the “only conceivable purchase-
equivalent event” (the Put Option’s putative “cancellation” on
May 18, 2001) and the “only sale-equivalent event” alleged
(the Put Option’s establishment on March 28, 2000). See id.
at 25a. The district court dismissed Count II because: it
determined that Comcast’s purchases of the cable companies’
shares were not vehicles for speculating in the At Home war-
rants held by those companies in their investment portfolios
and thus fell outside the scope of Section 16(b). See id.
at 29a.
B. The Second Circuit’s Decision And The SEC’s
Amicus Brief
On appeal, the Second Circuit affirmed the dismissal of the
Bondholders’ claims. After oral argument but prior to render-
ing its decision, the Second Circuit solicited comment from
the SEC on the Bondholders’ novel Section 16(b) theories.
With respect to the issue presented in Count I, the SEC
reasoned that the establishment of the Put Option must
be deemed the operative Section 16(b) event because the
hybrid’s fixed price component presented an immediate
opportunity to abuse inside information, whereas the subse-
quent exercise of the option at the fixed price was exempt
under Rule 16b-6(b). See Comcast’s App. A at 13a. On
Count II, the SEC concluded that Comcast’s purchases of the
5
cable companies’ securities did not constitute purchases of At
Home securities within the scope of Section 16(b) because
“indirect and incidental acquisition[s]” pursuant to change of
control transactions are not vehicles for speculative insider
trading of the sort that Congress enacted the statute to
prevent. /d. at 17a.
As to Count I, the Second Circuit agreed with the SEC and
the district court that the Put Option was indeed a hybrid
derivative containing “both fixed and floating [price] com-
ponents.” Petitioner’s App. A at 4a. From this foundation,
the court held that Rules 16b-6(a) and (b) easily “decide[d]
this case” by their plain terms. /d. at 8a. Because the Put
Option contained a fixed price, Rule 16b-6(a) mandated that
the acquisition of the Put Option be considered a Section
16(b) sale of the underlying At Home shares; further, because
the Put Option was eventually exercised pursuant to its fixed
price component, that event was exempt by operation of Rule
16b-6(b). See id.
The Second Circuit also affirmed the district court’s dis-
missal of Count II, but on different grounds. The circuit court
found that the plain language of Section 16(b) precluded
matching transactions in the securities of more than one
issuer:
Section 16(b) speaks of matching transactions in the
equity securities of one issuer, and disgorging ‘any profit
realized . . . from any purchase and sale, or any sale and
purchase, of any equity security of such issuer.’ Use of
the singular (‘any equity security’ and ‘such issuer’)
supports an inference that a transaction in the equity
securities of one company [i.e., the cable companies]
cannot be matched with a transaction in the equity
securities of another [i.e., At Home].
Id. at 10a.
6
REASONS FOR DENYING THE WRIT
I. ON COUNT I, THE SECOND CIRCUIT COR-
RECTLY HELD THAT THE ACQUISITION OF
THE PUT OPTION WAS A SECTION 16(B)
SALE AND THAT ITS SUBSEQUENT FIXED-
PRICE EXERCISE WAS EXEMPT
A. The Lower Courts Correctly Applied The
Rules Under Section 16(b) To The Put Option
SEC Rule 16a-1(c) defines the term “derivative security” to
include “any option . . . with an exercise or conversion priv-
ilege at a price related to [or] a value derived from the value
of an equity security.” 17 C.F.R. § 240.16a-l(c). As alleged
in the Complaint, the Put Option is plainly an “option” with
an exercise price “related to” or “derived from the value of”
an equity security (here, At Home common stock). More
precisely, within the broader class of derivative securities, the
Put Option qualifies as a “put equivalent position” because it
“increases in value as the value of the underlying equity
decreases.” Jd. § 240.16a-1(h).
In light of the recognized equivalence between derivative
instruments and their underlying equity securities (see infra
n.3), Rule 16b-6(a) provides that the “establishment of ...a
put equivalent position . . . shall be deemed a sale of the
underlying securities for purposes of Section 16(b).” /d.
§ 240.16b-6(a) (emphasis added). To avoid double liability
and recovery with respect to the same instrument, Rule 16b-
_ 6(b) provides that the exercise of a put equivalent position is
an exempt event for Section 16(b) purposes:
[T]he closing of a derivative security position as a result
of its exercise or conversion shall be exempt from the
operation of Section 16(b), and . . . the disposition of
underlying securities at a fixed exercise price due to
the exercise of a put equivalent position shall [also] be
exempt. ...
Comcast’s App. B at 35a (emphasis added).
7
Applying these rules, a Section 16(b) sale event occurred
on March 28, 2000 when the Put Option was established, and
the subsequent closing of the Put Option when it was
exercised at its fixed-price component more than ten months
later was a non-event for purposes of the statute. Because the
putative “purchase” event alleged in Count I occurred on May
18, 2001, nearly fourteen months after the establishment of
the Put Option, Section 16(b) does not apply.
This result—reached by both the lower courts and the
SEC—is entirely proper, given that the acquisition of a de-
rivative instrument such as the Put Option guarantees its
holder an opportunity to sell a maximum number of under-
lying shares at a minimum price of $48 per share. If the
acquisition of the option were not deemed to be a sale event,
then the holder of such an instrument with inside information
that would adversely affect stock price could simply (i) ac-
quire such an option with a minimum exercise price of $48
per share, (ii) buy shares in the market the next day, say,
at $45 per share, (iti) wait six months and a day before
exercising the option, and (iv) realize an unrecoverable $3 per
share short-swing profit. In other words, the approach which
the Bondholders steadfastly advocated below would reopen
the very loophole that the SEC sought to close through its
1991 amendments of the rules under Section 16(b).°
> One of the factors motivating the SEC’s 1991 amendments to the
rules under Section 16(b) was the concern that the former rules permitted
insiders to exploit non-public information without liability by engaging in
transactions in fixed price derivative securities as exemplified above. See
Ownership Reports and Trading by Officers, Directors, and Principal
Security Holders, Exchange Act Release No. 28,869, 1991 WL 292000
(Feb. 21, 1991), at *11 (“The functional equivalence of derivative securi-
ties and their underlying equity securities for Section 16 purposes requires
that the acquisition of the derivative security be deemed the significant
event, not the exercise. Failure to recognize [this] would permit insiders
8
B. The Arguments Presented In The Bondholders’
Petition Do Not Identify Any Error In The
Lower Courts’ Application Of The Applicable
Rules
1. The Bondholders Improperly Raise A New
Argument In Their Certiorari Petition
In their petition, the Bondholders claim that the “driving
issue” in this case, which was incorrectly decided by the
circuit court, is “when the matching sale occurred for § 16(b)
purposes” with respect to the Put Option: (i) upon acquisition
on March 28, 2000; (ii) on February 2, 2001, fifteen trading
days following exercise; “or (111) on both dates as At Home
argued to the Second Circuit.” Cert. Pet. at 9 (italics in origi-
nal; underlining added). As to the third point, this repre-
sentation is misleading. The Bondholders never argued in the
district court that a sale event occurred both upon establish-
ment and exercise of the Put Option, and did not address this
argument in the Second Circuit until after oral argument was
complete and the parties were asked to comment on the
SEC’s amicus brief.
In the Second Circuit, the Bondholders argued that the
district court committed reversible error when it held that “a
Section 16(b) sale ‘first’ occurred when the Put [Option] was
created and that a ‘second’ Section 16(b) event might have
occurred when the number of shares and price per share were
fixed 11 months later’ when the Put Option was exer-
cised (if such exercise were at the floating price component).
Appellant’s Br. at 2. Indeed, in criticizing the district court’s
observation that a hybrid option exercised at its floating price
component (a situation not raised by the facts in this case)
may result in two events, the Bondholders vehemently argued
that the Put Option was not a hybrid derivative, did not
to evade disgorgement of short-swing profits simply by . . . buying under-
lying stock and buying put options.”) (emphasis added).
9
contain a fixed price component, did not present an oppor-
tunity for speculative abuse upon acquisition, and thus could
not have given rise to Section 16(b) events both at acquisition
and at exercise:
¢ “Under governing SEC Rules, a Put Instrument [such
as the Put Option] without a fixed price per share is
not considered a derivative security, and there is no
Section 16(b) event, i.e. no sale, when such an in-
strument is created.” Appellant’s Br. at 20 (empha-
sis in Original);
¢ “You could have two transactions [with a hybrid
derivative]. Jt can’t be done [with the Put Option] in
our case... .” Oral Argument Transcript at 5
(emphasis added);
¢ “(Aj security [like the Put Option] where neither the
price per share nor the number of shares are known
is not deemed a derivative security, and the crea-
tion of such a security is not [an event] under Sec-
tion 16(b).” Appellant’s Reply Brief at 9 (emphasis
added).
Rather, the Bondholders insisted that the Put Option “func-
tioned” or “operated as a floater” (i.e., an instrument with
only a floating price) and thus did not become a “deriv-
ative security” subject to Section 16(b) at all until notice of
exercise was given and the share price became determinate.”
* See also Appellant’s Br. at 33 (“As alleged in the Complaint, the [Put
Option] does not contain one fixed and one floating component.” (em-
phasis added)); id. at 37 (“[The Put Option] was not susceptible to a fixed
conversion at a minimum level and then an additional conversion per a
floating component.” (emphasis added)); Oral Argument Transcript at 36
(“[T]he one thing that is crystal clear is we said [the establishment of the
Put Option] was not a sale. There was no event under 16(b) until after
[Comcast] gave notice [of its intent to exercise] and you knew the number
of shares and the price of those shares.” (emphasis added)).
* See, e.g., Appellant’s Br. at 5 (arguing that the Put Option “func-
tioned as a ‘floating put’”); id. at 20 (“the Put at issue here operated as a
10
On this basis, the Bondholders argued that the first and only
Section 16(b) event with respect to the Put Option occurred
upon its exercise:
¢ “On February 2, 2001 (i.e., 15 trading days after
Comcast exercised the Put Option)], and on/y at that
time, did AT&T have a binding obligation to buy a
fixed number of shares at a set price; at only that
time was a ‘put equivalent position’ established
which, under SEC Rules, is the equivalent of a
Section 16(b) sale.” Appellant’s Br. at 17 (emphasis
added); :
¢« “fBjecause the [Put Option] here functions like a
floater, the Court should apply Rule 16a-1(c)(6) on
its face, and treat the Put as a derivative security
within the meaning of the Rule on/y when the price
per share is set for the first time—that is, 15 days
after notice of exercise was given... .” Id. at 41
(emphasis added).
¢ “Only fifteen days after... Comcast gave notice to
AT&T of [its] intent to exercise the [Put Option] did
this instrument become a derivative security and a
‘sale’ occur under Section 16(b).” Appellant’s Reply
Br. at 9 (emphasis added).°
floater”); id. at 28 (arguing that the Put Option “functioned as a floater”);
41 (same).
® See also Appellant’s Br. at 20 (“{A]s alleged in the Complaint, the
Section 16(b) sale occurred . . . after notice had been given and the
number of shares and price per share was [sic] first set.”); id. at 32-(“[A]s
alleged in the Complaint, the Put [Option] was not established under the
SEC Rules until February 2, 2001 when the number of shares and price
per share were set by operation of the [hybrid] pricing mechanism. . . .”);
Appellant’s Reply Br. at 9 (“Only fifteen days after . . . Comcast gave
notice to AT&T of [its] intent to exercise the [Put Option] did this in-
strument become a derivative security and a ‘sale’ occur under Section
16(b).” (emphasis added)).
1]
In sum, up until after oral argument in the Second Circuit,
it has never been the Bondholders’ position that the Put
Option presented two opportunities for speculative abuse,
much less that it gave rise to two distinct Section 16(b)
events. To the contrary, the Bondholders expressly argued
that recognizing the possibility of two sale events to calculate
profits on a hybrid option exercised at its floating price
component would be an “egregious error” that would “only
serve to confuse market participants, their advisors and
courts.”’ Appellant’s Reply Br. at 12. As this Court has
routinely recognized, certiorari should not be granted where a
petitioner presses an argument which it did not raise (or, as
here, emphatically and consistently disavowed) below. See,
e.g., City of Springfield, Mass. v. Kibbe, 480 U.S. 257, 258
’ The Bondholders’ only non-derisory reference to the notion that the
Put Option could present two Section 16(b) events appeared in sup-
plemental briefing solicited by the Second Circuit to comment on the
SEC’s amicus brief. Even there, however, the Bondholders did not
endorse a two-event approach to the Put Option, but simply noted that
“nothing in the SEC’s perfunctory discussion precludes a finding” that the
Put Option presented two opportunities for speculative abuse. Appellant’s
Supp. Br. at 4. In fact, this characterization of the SEC’s opinion is
incorrect: the SEC specifically noted that “[i]f inside information is
learned only after the fixed price is set [i.e., upon acquisition], the
information cannot be abused in later exercising at the fixed price.”
Comcast’s App. at 13a (emphasis added). In any event, even if the Bond-
holders’ change of heart could be viewed as genuine, it came too late.
The Bondholders could not raise an argument in the Second Circuit that
they failed to raise in the districi court. Davenport v. Harry N. Abrams,
Inc., 249 F.3d 130, 132 (2d Cir. 2001) (argument not raised in the district
court should not be considered on appeal); Mellon Bank N.A. v. United
Bank Corp., 3) F.3d 113, 116 (2d Cir. 1994) (same); Burnette v. Caroth-
ers, 192 F.3d 52, 58 (2d Cir. 1999) (appellants waived an argument not
raised in the district court). They certainly could not raise such an argu-
ment for the first time in a supplemental brief after oral argument. See,
e.g., Cioffi v. Averill Park Cent. Sch. Distr. Bd. of Ed., 444 F.3d 158, 169
(2d Cir. 2006) (new argument raised for the first time in reply brief was
untimely and deemed waived).
12
(1987) (dismissing writ as improvidently granted, where posi-
tion advocated by petitioner before the Supreme Court was
not pressed at the district or circuit level); U.S. v. Ortiz, 422
U.S. 891, 898 (1975) (declining to consider issue which was
first raised in certiorari petition).
2. The Bondholders’ Reliance On Rule I6a-
I(c)(6) Is Misplaced
Paradoxically, at the same time that they press their new
“two-event” theory, the Bondholders persist in arguing that
the Put Option was not a derivative security at all within the
meaning of Rule 16a-1(c)(6) because neither “the actual
number of shares to be sold [nor] the price per share to be
paid” were fixed at the time the instrument was established.
Cert. Pet. at 5. This argument is wrong for several reasons.
In the first place, as the lower courts recognized, the cited
rule requires only that an instrument’s exercise or conversion
price be fixed. Rule 16a-1(c)(6) excludes from the definition
of derivative security “rights with an exercise or conversion
privilege at a price that is not fixed.” 17 C.F.R. § 240.16a-
1(c)(6) (emphasis added). The rule does not require (or even
suggest) that the number of underlying shares subject to the
instrument be fixed in order for it to qualify as a “derivative
security.”
Next, it is plain here that the Put Option did contain a fixed
exercise price: $48 per share. As the Second Circuit correctly
noted, this reality cannot be ignored simply because the Put
Option also contained a floating price component:
As with many hybrid options . . . the [Put Option]
contained a possible fixed price ($48 per share) payable
depending on the market price at the time of exercise.
- The prospect of a higher exercise price does not mean
that there is no fixed-price component; the prospect of a
higher price is what makes the option a “hybrid” in the
first place.
Petitioner’s App. A at 5a n.2 (emphasis added).
13
In any event, as the Second Circuit and district court
rightly observed, the maximum number of shares subject to
the Put Option for Comcast (31,253,180) is easily calculated
by dividing the total consideration the option’s writer could
be required to pay Comcast—$1,500,152,640 (see Peti-
tioner’s App. H at 72a)—by the fixed price of $48 per share
(which was the minimum sale price possible under the Put
Option). See Petitioner’s App. A at 5a n.2.
Finally, there is no support in the SEC rules for the Bond-
holders’ newly-asserted argument that a hybrid like the Put
Option that was exercised at its fixed price component
presented two opportunities for abuse and thus gave rise to
Section 16(b) sales “on both dates.” Indeed, if the Put Option
did not contain a fixed price component ab initio, there would
be no conceivable reason—and the Bondholders have not
identified any basis in the rules—for treating its establishment
as a sale on March 28, 2000. To the extent that the Bond-
holders now agree that the Put Option did contain a fixed
price option, Rule 16b-6(a) requires that its establishment be
treated as a sale event, but the Bondholders cite no rule that
would require—much less permit—the subsequent fixed price
exercise to be treated as a second sale. To the contrary, Rule
16b-6(b) (which the Bondholders did not see fit to irfclude in
their appendix) requires that the Put Option’s exercise at its
fixed $48 price component be exempt from the statute.® See
Comcast’s App. B at 35a.
* To clarify, the Bondholders’ proposed two-step approach for a hybrid
put exercised at its fixed price component (such as the Put Option) must
be distinguished from the two-step calculation of short swing profits for
a hybrid option exercised at its floating price, a situation not presented
by the facts of this case. As stated in the text above, the Bondholders’
approach contravenes the SEC rules because Rule 16b-6(b) expressly
requires that the Put Option’s exercise at its fixed price component be
exempt. On the other hand, the SEC rules do not forbid—and, in addition
to the district court in this case, at least one other court has recognized—
14
3. The Bondholders’ Self-Defeating “Market
Reality” and “Increased Risk” Arguments
The Bondholders also fault the circuit court’s conclusion
that the exercise of the Put Option at its fixed price compo-
nent was a non-event by application of Rule 16b-6(b). In so
ruling, the Bondholders contend, the Second Circuit improp-
erly “refused” to consider “market realities” and “ignored
[that] the risk of speculative abuse with respect to the Put. . .
dramatically increased as . . . Comcast approach the point
when [it] could file a notice [of exercise] under the Put and
when the number of shares and the price per share would be
set for the first time.” Cert. Pet. at 10. This argument is
misplaced for several reasons. .
First, it is clear that what the Bondholders characterize as
“marketplace realities” (i.e., the fact that “all . . . Comcast
knew” on March 28, 2000 was that the Put Option entitled it
to sell up to 31,253,180 shares of At Home at a minimum
price of $48 per share, see Cert Pet. at 10) were simply the
terms of the Put Option itself. See supra at 1, 12-13..
Contrary to the Bondholders’ assertion, the Second Circuit —
took this reality into account when it rendered its decision.
See, e.g., Petitioner’s App. A at 4a—Sa (discussing operation
of hybrid pricing mechanism); see id. at 5a n.2 (noting that
the “maximum number of shares [subject to the Put Option] is
likewise fixed”). ,
Second, this “market reality” argument rings hollow given
that the Bondholders fault the lower courts for having
taken such realities into account. For example, the Bond-
holders criticized the district court for concluding that the Put
Option’s floating price component was “irrelevant” at the
the application of a two-step approach to calculate short-swing profits
from a hybrid option exercised at its floating price. See Schaffer v. CC
Invs., LDC, 280 F. Supp. 2d 128 (S.D.N.Y.), recon. granted in part, No.
99-2821, 2003 WL 22480052 (S.D.N.Y. Oct. 31, 2003).
15
time of exercise based on the “undisputed” reality (confirmed
in the Complaint, no less) that the market price for At Home
stock in the days preceding exercise was “far below the fixed
minimum of $48 per share.” Petitioner’s App. D at 26a.’
Equally spurious is the Bondholders’ assertion that the
circuit court failed to consider the “reality” that an insider
holding an instrument like the Put Option cannot engage in
“effective hedging” at the time it is established. Cert. Pet. at
10; see also id. at 11 (“Hedging . . . do[es] not work when a
party has no idea of the number of shares to be hedged.”).
This argument is a straw man, and makes no more sense now
than it did when the Bondholders presented it below.
Section 16(b) is not concerned with hedging; rather, its
purpose is to deter insiders from speculating based on inside
information by requiring the disgorgement of profits earned
by an insider from matching purchases and sales of issuer
securities occurring within a six month period. Any “hedg-
ing” an insider might try to engage in (be it “effective” or not)
with respect to the acquisition of an instrument like the Put
Option would itself be treated as a Section 16(b) event, and
the “loss” hedged against would be subject to immediate
disgorgement. Moreover, the very notion that an insider,
benefiting from access to non-public information and holding
a long derivative position, would need (or bother) to engage
in hedging is absurd: if the instrument’s exercise price were |
unfavorable relative to the prevailing market price (e.g., if the
exercise price for a call option is greater than market price),
all the holder would need do to avoid a “loss” would be to
refrain from exercising the option.
* See Oral Argument Transcript at 9 (“When Cox and Comcast [exer-
cised the Put Option], your Honor, they said, we assume the price will be
$48. Only the district court knew, said it was undisputed that he stock
price was going to be [$]48. Wrong; it was disputed, your Honors.
Nobody knew. . . .”.
16
Fourth, and more fundamentally, the Bondholders’ argu-
ment that the “risk” of speculative abuse with respect to the
Put Option “dramatically increased” as the “10-month wait-
ing period came to end” (i.e., when the Put Option first
became exercisable) makes no sense whatsoever. On page 11
of their petition, the Bondholders provide an example which
purportedly demonstrates why the exercise of a hybrid at its
fixed price component should not be an exempt event as
required by Rule 16b-6(b). In that example, the Bondholders
posit that, more than ten months after the option was estab-
lished, an insider could obtain non-public information indicat-
ing that At Home planned to release bad and then good news.
According to the Bondholders, the insider could (i) wait until
the release of bad news when the stock price drops to $24 per
share, (ii) exercise the Put Option at the fixed price of $48 per
share, and then (iii) immediately buy At Home stock in the
market at $24 per share before the good news is released and
the price rebounds. The Bondholders argue that, unless the
fixed price exercise is also treated as a Section 16(b) sale, this
$24 per share profit could not be recovered.
What the Bondholders fail to mention (or, apparently, to
even realize) is that the “risk” which they deem intolerable in
the foregoing example is no different than the “risk” pre-
sented by a pure fixed price option (i.e., one exerciseable at
$48 per share only). As in the Bondholders’ scenario, the
holder of such an option could profit in exactly the same
manner as in the prior example by (i) waiting until the stock
dropped to $24, (ii) exercising the put at its $48 per share price,
and then (iii) immediately buying back shares in the market at
$24. The profit realized here, of course, would plainly not be
subject to disgorgement because the closing of the option and
sale of underlying securities would undeniably be exempt by
operation of Rule 16b-6(b) See 17 C.F.R. § 240.16b-6(b).
In short, if the “risk” described by the Bondholders can
possibly be viewed as “unacceptable,” the fault lies in the
17
Section 16(b) rules themselves, not in their faithful appli
cation by the Second Circuit and the district court. Indeed,
what the Bondholders complain about is the reality that
Section 16(b), a strict liability statute, “‘is simply not an
antidote to all the ills that may plague the securities market.’”
Petitioner’s App. A at 12a (quoting Heublein, Inc. v. Gen.
Cinema Corp., 722 F.2d 29, 31 (2d Cir. 1983)).
4. The Bondholders’ Spurious “Hindsight”
Argument
Finally, the Bondholders condemn the Second Circuit for
establishing a “hindsight” test for applying Section 16(b) to
“complex hybrid instruments.” Cert. Pet. at 12. This criti-
cism is both unpersuasive and misplaced.
As an initial matter, the Bondholders provide no expla-
nation as to why a “hindsight” application would be problem-
atic, much less inconsonant with the broader statutory regime.
Indeed, they would be hard pressed to do so, given that
Section 16(b) expressly exhorts courts to look both forward
and backward from a purchase of issuer securities to find a
profit-making sale. See 15 U.S.C. § 78p(b) (“[A]ny profit
realized by [an insider] from any purchase and sale, or any
sale and purchase, of any equity security of [the] issuer
. .. Within any period of less than six months . . . shall inure
to and be recoverable by the issuer.”).
In any event, the Second Circuit’s decision did not estab-
lish a “hindsight” test. Strictly applying Rules 16b-6(a)
and (b), the court held: (i) that the establishment of the Put
Option on March 28, 2000 constituted a matchable sale of the
“maximum number” of At Home stock at $48 per share; and
(ii) that the closing of the Put Option approximately 11
months later as a result of its fixed price exercise was a
statutorily exempt event. See Petitioner’s App. A at 8a. This
result required no “hindsight” whatsoever.
18
With respect to the hypothetical exercise of the Put Option
at its floating price component (an event which the Bond-
holders concede did not occur), the Second Circuit exhibited
restraint and expressly declined to formulate a legal rule
concerning facts not presented in this case. However a
floating price exercise might or should be treated, because the
Put Option was exercised at its fixed price component here
(an exempt event under Rule 16b-6(b)), the court’s determi-
nation that a Section 16(b) sale event “occurred only with the
acquisition of the . . . options” was indisputably correct. Jd.
Il. ON COUNT Il, THE LOWER COURTS COR-
RECTLY DETERMINED THAT -COMCAST’S
PURCHASES OF CABLE COMPANY SECUR-
ITIES COULD NOT BE MATCHED TO ITS
DEEMED SALE OF AT HOME SECURITIES
A. The Lower Courts Correctly Ruled That The
Challenged Transactions Fall Outside The .
Scope Of Section 16(b) As Determined By The
Statute’s Plain Language
In Count II of their Complaint, the Bondholders concede
that the establishment of the Put Option was a Section 16(b)
sale event, but improperly seek to match that sale, not to any
purchase of At Home securities, but rather to Comcast’s
acquisition of the shares of three cable companies—unrelated
to At Home—for nearly $10 billion. In advancing this claim,
the Bondholders seek to equate the purchase of cable com-
pany shares with Section 16(b) purchases of the securities
held by those companies in their investment portfolios, which
in this case happened to include At Home warrants.'” The
Second Circuit (as well as the district court and the SEC)
'° As the district court noted, the maximum potential value of the
warrants was less than 3% of the $10 billion Comcast spend to acquire the
cable companies. See Petitioner’s App. D at 29a n.12.
19
correctly determined that the transactions alleged in Count !I
do not fall within the short-swing statute.
On its face, Section 16(b) is geared toward preventing an
issuer’s insiders from profiting from non-public information
by engaging in transactions in “any equity security” of “such
issuer.” 15 U.S.C. § 78p(b). As the Second Circuit has
rightly recognized, the statutory “(u]se of the singular (‘any
equity security’ and ‘such issuer’) supports an inference that a
transaction in the equity securities of one company cannot be
matched with a transaction in the equity securities of
another.” Petitioner’s App. A at 10a. In other words, by its
express terms, Section 16(b) applies only to matching trans-
actions involving the securities of the same issuer.
Because Count II of the Complaint sought to match trans-
actions in the securities of different issuers (i.e., purchases of
cable companies’ securities with a deemed sale of At Home
securities), the circuit court correctly concluded that the
Bondholders had not pled a viable Section 16(b) claim. In so
ruling, the court was not blazing new ground. To the
contrary, the decision below marked the third time that the
Second Circuit has refused to expand the statute to embrace
situations where the securities actually bought and sold (or
deemed bought and sold, in the case of derivative instru-
ments) were of different issuers.
In American Standard Co. v. Crane Co., the Second Circuit
addressed the fundamental question presented by the Bond-
holders’ Count II: “whether Section 16(b) permits a statutory
liability to attach by matching the purchase[] of the shares of
one ‘issuer’ against the sale of shares of another ‘issuer.’”
510 F.2d at 1057. After extensive analysis of the statute’s
text and legislative history, the court squarely ruled that “the
style and substance [of the statute] lead to the conclusion that
Congress was concerned with a single issuer.” Jd. at 1059
(emphasis added); see also id. at 1058 (“The statute speaks of
‘such issuer’ in the singular. There is no room for a
20
grammatical construction that would convert the singular into
a plural.”) {emphasis added). Based on this plain reading of
the statute, the court held that a purchase of a pre-merger
company’s securities could not be matched for Section 16(b)
purposes to a sale of the post-merger company’s securities.
This Court denied petitioner’s subsequent certiorari petition.
421 U.S. 1000.
The Second Circuit reached the same result more recently in
Strauss v. Comcast Corp., 149 Fed. Appx. 15 (2d Cir. 2005).
There, plaintiff sought to match (i) Comcast’s sale of its shares
in QVC, with (ii) third-party ITH’s purchase of GSI shares.
See id. at *16. Notwithstanding plaintiff's allegation that QVC
owned a sizeable stake in ITH, and that ITH was a 10%
beneficial owner of GSI stock, the court held that the case did
“not fall within the purview of Section 16(b) because the issuer
of the securities purchased [i.e., GSI] is substantially separate
from the issuer of the securities sold [i.e., QVC].” Jd.
As such, the Second Circuit’s ruling that the Bondholders’
allegations of purchases and sales of different issuers’
securities failed to state a cognizable Section 16(b) claim was
correct and consistent with its prior holdings in American
Siandard and Strauss. Alternatively, Count II was properly
dismissed, as stated by the district court, on the basis of the
“unorthodox transaction” doctrine. See Petitioner’s App. D.
at 28a-29a. To the extent that Comcast’s purchase of the
cable companies’ shares can be viewed at all as “trans-
actions” in the issuer securities held by those companies in
their portfolios, they were manifestly not the type of “garden-
variety” transactions to which Section 16(b) presumptively
applies. Rather, the “indirect” acquisition via change-of-
control transactions alleged in Count II are, on their face,
borderline or unorthodox—a fact borne out by the total
21
absence of decisional authority showing that Section 16(b)
has ever been applied in such circumstances."
In Kern County, this Court endorsed a “pragmatic ap-
proach” to analyzing such borderline transactions, which en-
tails an assessment of “whether the transaction may serve as a
vehicle for the evil which Congress sought to prevent. . . .”
Kern County Land Co. v. Occidental Petroleum Corp., 411
U.S. 582, 594 (1973). Here, the determination by both the
Second Circuit and the SEC that change-of-control trans-
actions such as those alleged in Count II do not present
plausible opportunities for speculative abuse amply supports
the district court’s application of the unorthodox transaction
in this case. See Petitioner’s App. A at lla (“The SEC
convincingly argues that a typical change-of-control transac-
tion does not present an intolerable risk of abuse.”), id. at 12a
(“We conclude that section 16(b) generally does not take
account of transactions in which an insider’s acquisition of an
enterprise holding the issuer’s stock entails appreciable risks
and opportunities independent of the risks and opportunities
that inhere in the stock of the issuer.”); see also Comcast’s
App. A at 18a (“While it is not beyond possibility that an
acquiror would tailor a change of control transaction to obtain
short-swing profits from insider trading, it is certainly not
going to be a common scenario. Good faith change in con-
trol transactions are not ones ‘in which the possibility of
abuse [is] intolerably great.’”) (quoting Kern County, 411
U.S. at 592).
'' Given the frequency with which companies buy and sell stakes in
one another, indirect or incidental “transactions” in the issuer securities
held by the bought and sold companies are inevitable; if such transactions
fall within the scope of Section 16(b), claims such as the Bondholders’
should be commonplace. They are not. As the district court correctly
noted, this “absence of precedent” strongly supports the view that such
change-of-control transactions are “unorthodox” to the extent that they
concern the portfolio securities held by the subject companies. Peti-
tioner’s App. D at 28a.
22
B. The Countertextual Reading Of Section 16(b)
Advocated By The Bondholders Would Create
An Unprecedented Expansion Of The Statute
Far Beyond Its Literal And Intended Scope
In a transparent attempt to manufacture a “circuit split”
meriting grant of certiorari with respect to Count Il, the
Bondholders claim that the Second Circuit “bypassed clear
statutory language in favor of crafting its own definition of
‘purchase’” and thereby parted company with “other Circuit
courts [which] have continued to interpret definitional terms
[in the securities laws] based on their plain meaning.” Cert.
Pet. at 12, 14. This characterization of the lower court’s
decision is grossly inaccurate.
In the first place, the Bondholders’ contention that the
circuit court “judicially legislated a new definition” for the
term “purchase” cannot be squared with the decision itself.
Id. at 2. Nowhere in the court’s discussion of Count II did it
purport to define that term. To the contrary, as even a cursory
review of the decision confirms, the Second Circuit’s dis-
missal of that Count was based upon a strict, plain-language
reading of the term “issuer” in Section 16(b).
Moreover, even if the circuit court’s decision could be
viewed as implicitly propounding a definition of the term
“purchase” that departs from 15 U.S.C. § 78c(a)(13), it would
not have erred in doing so. Indeed, as this Court has repeat-
edly recognized, whether a specific transaction constitutes a
Section 16(b) event in a given case depends upon whether it
gives rise to the type of risk Congress enacted the statute to
combat. See, e.g., Reliance Elec. Co. v. Emerson Ele. Co.,
404 U.S. 418, 424 n.6 (1972) (“Thus, in interpreting the terms
‘purchase’ and ‘sale,’ courts have properly asked whether the
particular type of transaction involved is one that gives rise
to reculative abuse.”); see also Kern County, 411 U.S. at
595 (same).
23
The Bondholders’ next argument—that Section 16(b)
should be read broadly enough to cover transactions in the
securities of multiple issuers because the Second Circuit’s
strict reading creates a “sizeable loophole in § 16(b) enforce-
ment,” Cert. Pet. at 15—fares no better. In its decision, the
Second Circuit acknowledged that applying Section 16(b)
according to its plain terms would, in certain circumstances,
potentially permit insiders to circumvent the statute. As the
court expressly recognized, however, Section 16(b) does not
(and is not designed to) capture all conceivable forms of
insider profiteering. In fact, an insider with non-public
information need do nothing more complex to avoid the
statute than allow six months and a day to elapse before
engaging in a matching transaction. Similarly, a large share-
holder could escape Section 16(b) simply by maintaining its
beneficial shareholding in the issuer at 9.9%, just below the
statutory threshold. Other possibilities abound, all of them
more plausible than buying and selling third party companies
which happen to hold the subject issuer’s securities in their
investment portfolios—a tactic that the Second Circuit aptly
analogized to “speculating in tractors by buying a farm.”
Petitioner’s App. A at Ila.
Nevertheless, the possibility that Section 16(b) can be
“evaded” by insiders using various strategies (be they simple
or convoluted) does not warrant the expansion of the statute
beyond its strict terms. As the circuit court rightly noted,
Section 16(b) “is simply not an antidote to all the ills that may
plague the securities market.” Jd. at 12a (internal quotations
omitted). Rather, the short-swing statute exists alongside
other statutory regimes for combating insider trading: “{t}he
more a transaction is crafted to evade section 16(b), the
stronger the case [will be] for holding an insider liable under
section 10(b).” Jd. Accordingly, the fact that transactions
such as those challenged in Count II do not fall within the
scope of Section 16(b) is not a reason to expand the statute
beyond its plain terms.
24
As such, the Bondholders’ appeal to policy to expand the
statute’s scope to reach transactions not covered by its plain
terms is misplaced. Indeed, as the Second Circuit has pre-
viously recognized, because Section 16(b) establishes strict
liability within somewhat arbitrary parameters, policy consid-
erations weigh in favor of limiting, rather than extending, the
statute’s reach. See Gwozdzinsky v. Zell/Chillmark Fund,
L.P., 156 F.3d 305, 310 (2d Cir. 1998) (“The statute, as
written, establishes strict liability for all transactions that
meet its mechanical requirements. When courts have looked
to policy, it [has been] to avoid the sometimes harsh results of
this inflexible rule.”’).
Finally, the countertextual and open-ended view of Section
16(b) advocated by the Bondholders (and correctly rejected
by the Second Circuit) would lead a host of absurd and unrea-
sonable results. Assume, for example, that Company A (a
statutory insider with respect to Issuer X) owns a major stake
in Company B, which holds a small number of Issuer X
shares in its securities portfolio. Under the Bondholders’
theory, if Company A simply bought additional shares of
Company B, and then sold those shares within six months,
those transactions would generate disgorgeable short-swing
profits not only with respect to Company B stock, but also
with respect to Issuer X shares. Moreover, these profits
would be based on the difference in Issuer X share prices
notwithstanding that there was never any actual transaction in
Issuer X securities. The same holds true for any other issuer
securities which Company B happened to hold in its portfolio,
resulting in an endless sequence of Section 16(b) events
relating to securities not actually traded.
In short, far from creating an “expandable loophole,” the
Second Circuit’s adherence to the plain language of Section
16(b) ensures that the threat of its draconian penalties will not
curtail legitimate business transactions about which Congress
was plainly not concerned when it enacted the short-swing
Statute.
25
CONCLUSION
For the foregoing reasons, the Bondholders’ petition for a
writ of certiorari should be denied.
Respectfully submitted,
MICHAEL S. SHUSTER *
SHERON KORPUS
JAMES T. CAIN
KASOWITZ, BENSON, TORRES
& FRIEDMAN LLP
1633 Broadway
New York, New York 10019
(212) 506-1700
* Counsel of Record Counsel for Comcast
- Respondents
August 30, 2006
APPENDIX
la
APPENDIX A
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
No. 05-0115-CV %
AT HOME CORPORATION,
Plaintiff-Appellant,
Ve
Cox COMMUNICATIONS, INC., COX@HOME, INC.,
COMCAST CORPORATION, COMCAST ONLINE
COMMUNICATIONS, INC., COMCAST PC INVESTMENTS, INC.,
BRIAN L. ROBERTS AND DAVID M. WooDROw,
Defendants-Appellees.
On Appeal from the United States District Court
for the Southern District of New York
BRIEF OF THE SECURITIES AND
EXCHANGE COMMISSION, AMICUS CURIAE,
SUBMITTED AT THE REQUEST OF THE COURT
BRIAN G. CARTWRIGHT
General Counsel
JACOB H. STILLMAN
Solicitor
ERIC SUMMERGRAD
Deputy Solicitor
ALLAN A. CAPUTE
Special Counsel to the Solicitor
Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549-8010
(202) 551-5122 (Capute)
2a
TABLE OF CONTENTS
Page
SEE GY MERE ERUCIECE BRED seccsnsserccococscsccersevcsscessecesereesoovess iil
aise ccd cebeecereonieitebesrivoveeteertersevevereves l
isd aticeliceuasincerneprtorseeeiocverssceueeseosors 2
Ela. snsccninegncnversessioesccseventoseres 4
I. THE ESTABLISHMENT OF THE PUTS IN
MARCH 2000 CONSTITUTED A SALE OF
AT HOME STOCK FOR PURPOSES OF
ashen iettinidestopeirosvecereseesortesrovetrecevenees 4
Il. THE MAY 2001 AGREEMENT TO
CANCEL THE FIXED PRICE PUTS WAS A
PURCHASE FOR SECTION _ 16(b)
EID scaled notceiahieendsetvevdcaeadersencoreedecestonsccocees 9
Ill. COMCAST’S ACQUISITION OF THREE
CABLE COMPANIES THAT OWNED AT
HOME WARRANTS WAS NOT A
PURCHASE OF THE WARRANTS FOR
PURPOSES OF SECTION 16(D)..........::.ccccsessssssseess 10
IV. THE “UNORTHODOX TRANSACTION
DOCTRINE” IS INAPPLICABLE TO THE
TRANSACTIONS IN THIS CASE ...........:cccceceeeseees 15
V. CONTROLLING DEFERENCE IS OWED
BY THE COURT TO THE COMMISSION’S
REASONABLE INTERPRETATIONS OF
SECTION 16(b) AND RELATED COMMIS-
i Se 16
A. This Court and the Supreme Court Have
Repeatedly Held that a Court Is Bound
by an Agency’s Reasonable Interpretations
of Its Own Regulations Provided in an
REE LE Re 16
3a
TABLE OF CONTENTS—Continued
Page
B. This Court Should Accord Chevron Def-
erence to Interpretations of the Federal
Securities Statutes Provided in Commis-
SESE RNASE Pec DR eet A BPE ea 18
ot RR RU ESR as teat oie Wan re RRO ee 27
CERTIFICATE OF COMPLIANCE WITH F.R.A.P.
32(A)
CERTIFICATE OF COMPLIANCE WITH LOCAL
RULE 32(a)(1): BRIEFS IN DIGITAL FORMAT
CERTIFICATE OF SERVICE
4a
TABLE OF AUTHORITIES
CASES Page
Alaska Dept. of Environmental Conservation v.
es FR Cs I GEE vonisersiaieieslcinanisaiegtantiecnalin 22
American Standard, Inc. v. Crane Co., 510 F.2d
as Be Wacdecidiptiesncavnicheeniciienisibinsiatnintaiients 12
At Home Corporation v. Cox Communications, et
al., 340 F. Supp. 2d 404 (S.D.N.Y. 2004)... 2
Auer v. Robbins, 519 U.S. 452 (1997) ......ccccceeeeeeees 17, 18
Barnhart v. Walton, 535 U.S. 212 (2002) ......... 17, 21, 23
Bowen v. Georgetown Univ. Hospital, 488 US.
iaiilicleisinshsedisdisb cain avteicniniilgaseatinnnentiaaipainiciereiaaete 17
Bowles v. Seminole Rock & Sand Co., 325 U.S.
en aisthcdaubicidtalnticaitaacstiadipikciniidesaeiians 17, 18
Chevron, U.S.A., Inc. v. Natural Resources
Defense Council, Inc., 467 US. 837
(ITER kchicctiicendebiidaistemiibieicaliaintsaiiepdein 18, 19, 20, passim
Christensen v. Harris County, 529 U.S. 576
(aa sissies iiesGichitestihisialadactasliounadaiiniticeiildaainsaebt 20, 22
Community Health Center v. Wilson-Coker, 311
Se Fae te Geils EE ephndcninnetetetcinidainventdecianiacenen 23
Dabit v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., 395 F.3d 25 (2d Cir.), cert. granted, 126
Bs es ae te scaessosclusisahinieesinetciodhiebiiasistceanisiioncootetil 20, 23
DeMaria v. Andersen, 318 F.3d 170 (2d Cir.
Te wxisistieiiuseinenceiscileghninsstbichaibbeguaibiiiatanbaesnapncaiaseaiaateienhte 17
Drake v. FAA, 291 F.3d 59 (D.C. Cir. 2002)........:.00000 18
Ecarnacion v. Barnhart, 331 F.3d 78 (2d Cir.
POs cccesheshocuithciseueleiseadsasihaintaedaaitaaeseisdecounrhibieaeienet 18
In re Enterprise Mortgage Acceptance Co., LLC,
Securities Litigation, 391 F.3d 401 (2d Cir.
y | REARS NaS alts nN OD 20, 23
Foremost-McKesson, Inc. v. Provident Securities
kg Ae ay ey ee ic cnrctindieptiscccinaysninnineninintie 13
Gollust v. Mendell, 501 U.S. 115 (1991)... ccccceseeeeeees 13
Sa
TABLE OF AUTHORITIES—Continued
Page
Gryl v. Shire Pharmaceuticals Group PLC., 298
a Ee Ge Geile ED ss scevincespaicdidokccsanapeloceevesenseeecns 25
Kern County Land Co. v. Occidental Petroleum
Corp., 411 U.S. 582 (1973).............. 11, 12, 14, passim
LaFleur v. Whitman, 300 F.3d 256 (2d Cir. 2002)........ 18
Levy v. Southbrook International Investments,
BE y Ee Be OO GEE GE. DOOD ivesinnsovicsssercsevesies 17, 25
Martin v. Occupational Safety & Health Rev.
Cote 00. 499 U.S. 144 C1991). .cccecescssevcssscssosevecsssceses 18
National Cable & Telecommunications Assoc. v.
Brand X Internet Services, _U.S. __, 125 S.
ee SD cinivunssivisbabiianinncsbictecisnniceledieiniateiaedens 19
In re New Times Securities Services, Inc., 371
ce ey PD scrvhsc esc veusadtesceqenthinvetaeabeien 24, 26
Press v. Quick & Reilly, Inc., 218 F.3d 121 (2d
1 SS REET NPR RN Bence Mets tao RE er OCD ORE 17
Reliance Electric Co. v. Emerson Electric Co.,
Pe OE UE PEED scanrcicsgnscinehcncokosiibneniasanveoniine | aS
SEC v. American Board of Trade, Inc., 751 F.2d 3
IS, ROE cide sic plianpetigdi ne siceipneiieinssiviasagiecticiasties 14
Skidmore v. Swift & Co., 323 U.S. 134 (1944).............. 19
Taylor v. Vt. Dep. of Educ., 313 F.3d 768 (2d
aan UNIED hccesauoriesadindhnoiakceeanteb wuascontin todliniteiin hdsiaaiuesdandie 18
United States v. Mead Corp., 533 U.S. 218
ICI Abs icksSibiienteivacdles doscannnosbishias saeidealanesiuicobisohicpigieiana 20, 22
Washington State Dept. of Social and Health
Servs. v. Guardianship Estate of — 537
ie See ITED Aieibiins dina asa sceoebbanibcvarehicecsvebeaicesmsotpaidic 22
Yoder v. Orthomolecular Nutrition Institute, Inc.,
(poh ee Be AR. | eRe enna ener 14
Yourman v. Giuliani, 229 F.3d 124 (2d Cir.
6a
TABLE OF AUTHORITIES—Continued
COMMISSION RELEASES Page
Notice of Proposal to Adopt a Rule Exempting
from the Operation of Section 16(b) Certain
Acquisitions and Dispositions of Securities
Pursuant to Mergers or Consolidations,
Exchange Act Rel. No. 4696, 17 Fed. Reg.
3177, 1952 SEC LEXIS 63 (April 9, 1952) .............. 13
Ownership Reports and Trading By Officers,
Directors and Principal Securities Holders,
Exchange Act Rel. No. 28869, 56 Fed. Reg.
Fee Cs Bs CE Wi evihisstniteideininstiaiibdecniie 4,5, 18
STATUTES AND RULES
Securities Exchange Act of 1934, 15 U.S.C. 78a,
et seq.
BOON DEGD, 3S VIG, FED iaintscscaceinenvivisrciseceninecs 15
Section 3(a)(10), 15 U.S.C. 78c(a)(10) 0... 14
Section 3(a)(13), 15 U.S.C. 78c(a)(13) ............... 10, 14
Section 16(b), 15 U.S.C. 78p(b)............. 1, 2, 3, passim
Rules Under the Securities Exchange Act of
1934, 17 C.F.R. 240.01, et seg.
Rule 16a-1(c), 17 C.F.R. 240.16a-1(C) ....... eee eee 5
Rule 16a-1(c) (6), 17 C.F.R. 240.16a-1(c) (6)............. 7
Rule 16a-1(h), 17 C.F.R. 240.16a-1(h)........... ce eeeeeeees 5
Rule 16a-9, 17 C.F.R. 240. 16a-9............cccseccccsereceeeee 25
Ruie 16a-10, 17 C.F.R. 240.16a-10..............ccccceerseees 25
Rule 16a-11, 17 C.F.R. 240.16a-11 .0..... eee 25
Rule 16e-12, 17 C.F.R. 240. 1Ge-12 ..........secccceccccceeees 25
Rule 16a-13, 17 C.F.R. 240. 16a-13..............cccccsccecees 25
Rule 16b-1, 17 C.F.R. 240.16b-1 .0.0... eee e eee eee 25
Rule 166-2, 17 C.F. 240. 1G? ..20ccecececcvsecenesesceseese 25
Pain 16-5, FF CB. et BS cecrewcictcneicerscevntoncees 25
Rule 16b-4, 17 C.F.R. 240.16b-4 oo. eee eeeeee 25
Rute 160-5, 17 CFR. 240. 1GB-5S ..0...ciccccrscceseccevsseeees 25
7a
TABLE OF AUTHORITIES—Continued
STATUTES AND RULES (Continued) Page
Rule 16b-6, 17 C.F.R. 240.16D-6 ...cccccccssesssssseesesseeee 25
Rule 16b-6(a), 17 C.F.R. 240.61b-6(a)...ccccscseecccevees 5,9
Rule 16b-6(b), 17 C.F.R. 240.61b-6(b) ....scccecccssseeeeoee 6
Rule 16b-6(d), 17 C.F.R. 240.16b-6(d) ......scccssssoeee- 8,9
Rule 16b-7, 17 C.F.R. 240.16D-7 o..ccecccsssessssssessssseeee 25
Rule 166-8, 17 CF.R. 240.16D-8 ..ccccsccsscsccssececssseeeee 25
MISCELLANEOUS
David S. Ruder, Address: The Development of
Legal Doctrine Through Amicus Participation:
The SEC Experience, 1989 Wis. L. Rev. 1167
eee ae Oh en Ana tee OR Oe 26
H.R. Rep. No. 1383, 73¢ Cong., 2d Sess. 13
SSRN LE ones eae Soe CUMS 13
Request for Commission Amicus Participation in
a Pending Case, http://www.sec.gov/litigation/
DCbCES/ MTNCURT ORIOL TIIN 2.0001 eccenesvecceenvsercereceesesseorseees 26
8a
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
No. 05-0115-cv
AT HOME CORPORATION,
Plaintiff-Appellani,
V.
Cox COMMUNICATIONS, INC., COX@HOmME, INC.,
COMCAST CORPORATION, COMCAST ONLINE
COMMUNICATIONS, INC., COMCAST PC INVESTMENTS, INC.,
BRIAN L. ROBERTS AND DAVID M. WooprRow,
Defendants-Appellees.
On Appeal from the United States District Court
for the Southern District of New York
BRIEF OF THE SECURITIES AND
EXCHANGE COMMISSION, AMICUS CURIAE,
SUBMITTED AT THE REQUEST OF THE COURT
INTRODUCTION
The Securities and Exchange Commission submits this
brief as amicus curiae in response to a request by the Court.
This action was brought by At Home Corporation (“At
Home,” “issuer,” or “plaintiff’) under Section 16(b) of the
Securities Exchange Act of 1934, 15 U.S.C. 78p(b), to
recover alleged short-swing profits obtained by insiders of At
Home. The complaint alleges that defendants—Cox Commu-
nications, Inc., Comcast Corporation and their affiliates—
sold and then purchased, or purchased and sold, At Home
9a
equity securities within six months. The defendants are
alleged to have acted as a group that owned more than 10
percent of At Home securities, and thus to be statutory
insiders of At Home. The suit seeks recovery of profits the
defendants allegedly realized on these short-swing trades. The
district court dismissed plaintiff's Section 16(b) claims. See
At Home Corporation v. Cox Communications, et al., 340 F.
Supp. 2d 404 (S.D.N.Y. 2004). The Commission agrees with
the district court that defendants are not liable under Sec-
tion 16(b).
BACKGROUND
At Home was founded by a number of cable companies in
March 1995 to provide cable-based internet access to
customers (Compl. 418). On March 28, 2000, the defendants,
Cox and Comcast, entered into a letter agreement with AT&T
(“agreement”) in which Cox and Comcast acquired, re-
spectively, a put to sell to AT&T up to $1.4 billion and $1.5
billion in At Home shares. Under the terms of the agree-
ment, Cox and Comcast could sell each share for the higher
of (1) $48 or (2) a floating average market price at the time of
exercise (A-133; Compl. 4/45).
Defendants notified AT&T of their intention to exercise
their puts on January 11, 2001. At that time, At Home’s
shares were selling for an average $7.72 per share (Compl.
53). Accordingly, defendants’ notices to AT&T stated that
the defendants “assumed” that the purchase price would be
$48 per share (A-165, 168). AT&T did not want the shares.
AT&T and the defendants entered into a new agreement on
May 18, 2001 whereby the defendants canceled their puts in
exchange for 155.3 million shares of AT&T stock worth
$3.43 billion (Compl. 956).
The plaintiff alleged that Cox and Comcast sold At Home
shares for purposes of Section 16(b) on January 11, 2001,
when they provided notice of their intent to exercise the
10a
puts. This was within six months of the May 18, 2001
agreement to rescind the puts, which plaintiff contended was
a purchase of At Home securities. The district court agreed
that the rescission was a purchase, but held that the earlier
sale occurred on March 28, 2000, when the puts were
established, so that the sale and purchase took place more
than six months apart, and were thus not subject to Section
16(b).
The plaintiff alternatively claimed that if the sale occurred
on March 28, 2000, Comcast made matching purchases when,
between January and August 2000, it acquired three cable
companies that held At Home securities. The district court
dismissed this claim, holding that these indirect acquisitions
were not cognizable transactions under Section 16(b).
The plaintiff appealed, and this Court has sent a letter to
the Commission inviting it to answer five questions. We
address those questions in order.
ARGUMENT
I. THE ESTABLISHMENT OF THE PUTS IN
MARCH 2000 CONSTITUTED A SALE OF AT
HOME STOCK FOR PURPOSES OF SECTION
16(b).
The Court asks “[w]hether the establishment of the puts on
March 28, 2000 constituted a sale of At Home securities for
purposes of section 16(b) * * *.” It did. Before 1991, the
purchase or sale of securities underlying a derivative security
occurred on the exercise of the derivative, rather than upon its
creation. In 1991, the Commission noted that this left “open a
significant potential for short-swing abuse in trading de-
rivative securities.” Ownership Reports and Trading By
' Alternatively, the plaintiffs contended that the sales occurred on Feb-
ruary 2, 2001, at the end of the 30 day period for determining if the fixed
rate or the floating rate was higher.
lla
Officers, Directors and Principal Securities Holders, Ex-
change Act Rel. No. 28869, 56 Fed. Reg. 7242, 7250 (Feb.
21, 1991). In that release, the Commission offered the fol-
lowing example:
[A]n insider with knowledge of a positive material
development, to be announced shortly, determines
that while he wants to retain his existing equity
position, he wants to take advantage of the infor-
mation, so he purchases issuer warrants. After the
public announcement and rise in the stock price the
insider sells his common stock, obtaining a short-
swing profit, knowing that he can replace the shares
at a predetermined price since he holds the war-
rants. Under the former rules, he could simply wait
six months and a day to exercise the warrants so the
profit would not be subject to section 16(b) and not
recoverable by the company.
Id. at 7250. Likewise, an insider who knows of impending
negative information can negotiate a fixed price put, enabling
it to sell, after the negative information is released and the
price falls, at the higher price. The insider unfairly uses the
inside information by fixing the price when the derivative is
created, not when it is exercised.
In 1991, the Commission amended the rules so that the
acquisition of a “derivative security” is also considered the
acquisition of the underlying securities for purposes of
Section 16(b). “[D]erivative security” was defined to mean
“any option, warrant, convertible security, stock appreciation
right, or similar right with an exercise or conversion privilege
at a price related to an equity security, or similar securities
with a value derived from the value of an equity security
** *” Rule 16a-1(c), 17 C.F.R. 240.16a-1(c). Rule 16b-6(a),
17 C.F.R. 240.16b-6(a), provides:
The * * * establishment of or increase in a put
equivalent position or liquidation of or decrease in a
12a
call equivalent position shall be deemed a sale of
the underlying securities for purposes of section
16(b) of the Act * * *.
A “put equivalent position” is defined by Rule 16a-1(h), 17
C.F.R. 240.16a-1(h), to mean “a derivative security position
.that increases in value as the value of the underlying equity
decreases, including, but not limited to, a long put option and
a short call option position.” A put with a fixed exercise price
increases in value as the price of the underlying stock
decreases because the spread between the market price and
the fixed exercise price increases.
On the other hand, a floating price linked to the market
price does not have that attribute. The 1991 rules draw a
sharp distinction between fixed and floating prices. The
Commission explained that “[r]ights without a fixed exercise
price do not provide an insider the same kind of opportunity
for short-swing profit since the purchase price is not known in
advance.” Ownership Reports, Exchange Act Rel. No. 28869,
56 Fed. Reg. at 7252. The Commission stressed that “[t}he
opportunity to lock in a profit begins when the exercise price
is fixed; at that time, the right becomes a derivative security
subject to section 16.” /d. Conversely, the later exercise of a
derivative at its previously fixed price is exempt from Section
16(b) and has no Section 16(b) consequences. See Rule 16b-
6(b), 17 C.F.R. 240.16b-6(b).
On the other hand, the Commission explained that:
[A] right with a floating exercise price is not
required to be reported and will not be deemed to
be acquired or purchased, for section 16 purposes,
until the purchase price of the underlying security
becomes fixed or established, which commonly
occurs at exercise. Thus, a right to purchase an
equity security is deemed acquired as of the date
the exercise or conversion price becomes fixed, and
the acquisition, absent an exemption, would be
13a
matchable for section 16(b) purposes with a dispo-
sition within six months of the fixing of the price.
56 Fed. Reg. at 7253. “The primary potential for abuse [of
inside information] arises at the time of exercise for a floating
price derivative security because only at exercise is the price
fixed and, therefore, the extent of the profit opportunity
defined.” Thus, “[b]y treating the exercise of the floating
price derivative security as the ‘acquisition’ of the underlying
security, the rules mitigate the incentives for insiders to abuse
their informational advantage.”
In this case, the March 2000 agreement presented the
defendants with puts with a fixed price of $48 paired with
puts with a floating price based on a specified market
average. In January 2001, with the market price far below
$48, the defendants chose to exercise their puts at the fixed
price. The opportunity to abuse inside information existed
only at the time the fixed exercise price was set. If inside
information is learned only after the fixed price is set, the
information cannot be abused in later exercising at the fixed
price. Because the fixed price was used in this case, the
establishment of the puts is when the six month trading period
should begin. The district court correctly concluded that the
establishment of the puts in March 2000 constituted a saie of
At Home stock under Section 16(b).
Plaintiff nevertheless argues that the hybrid security should
be treated as a floating price derivative security, as though
there were no fixed component. The cornerstone of plaintiff's
contention is that, “in contrast to any other instrument in any
other reported case of which we are aware, the only fixed
component at issuance was not the number of shares or price
per share, but the total consideration to be paid by the
? This is reflected in Rule l6a-1(c)6), 17 C.F.R. 240. 16a-1(c)(6),
which excludes from the definition of a “derivative security” “[r]ights
with an exercise or conversion privilege at a price that is not fixed.”
l4a
grantor of the option (AT&T).” (Appellant’s Brief p. 37
(emphases in original)). Thus, “[t]he only fact that all the
parties to the Put knew on March 28, 2000 was that AT&T
would pay a total of approximately $2.9 billion, but the
number of shares and the price per share could not be known
until after notice was given and the stock market determined
the final price”(Appellant’s Brief p. 37-38).
The district court correctly rejected this argument, pointing
out that “[t]he specified maximum overall price of $2.9
million, when combined with the specified minimum per-
share price of $48, dictated that defendants could sell, at
most, 60.4 million shares.’ Thus the initial agreement did
limit the number of shares which AT&T would be required to
buy.” 340 F. Supp. 2d at 410 (emphasis in original).*
Il. THE MAY 2001 AGREEMENT TO CANCEL
THE FIXED PRICE PUTS WAS A PURCHASE
FOR SECTION 16(b) PURPOSES.
The Court next asks whether the May 18, 2001 agree-
ment—in which the defendants agreed not to exercise their
puts—was a purchase for purposes of Section 16(b). The
district court held that it was a purchase but that, since it
occurred more than six months after the sale on March 28,
2000, the plaintiffs first claim should be dismissed. That is
correct.
> Since both the total and per share prices were fixed, the number of
shares with respect to the fixed price component was fixed.
* Plaintiff also argues that the holding of the district court is unwork-
able in cases when the insider exercises a hybrid put at the floating rate
because it would require there to be a second sale of the same underlying
securities: “There could not be a ‘second’ sale, because according to the
district court, all of the shares were deemed sold on March 28, 2000 at
$48 per share * * *” (Appellant’s Brief p. 37). This is incorrect. Where an
insider exercises a hybrid put at the floating price, the fixed price put
expires on an exempt basis by virtue of Rule 16b-6(d). The underlying
shares become available for a different sale.
lSa
Under Rule 16b-6(a) the “liquidation of or decrease in a
put equivalent position shall be deemed a purchase of the
underlying security for purposes of section 16(b) * * *.” The
May 2001 agreement explicitly cancelled what had been the
defendants’ put equivalent position. Rule 16b-6(d), 17 C.F.R.
240.16b-6(d), provides that “[t}he disposition or closing of a
long derivative security position, as a result of cancellation or
expiration, shall be exempt from section 16(b) of the Act
where no value is received from the cancellation or expira-
tion” (emphasis added). This agreement does not qualify for
that exemption since Cox and Comcast did receive value in
exchange for agreeing to forgo the right to exercise their puts.
Defendants nonetheless contend that “[a]fter the March
2000 Put was exercised on January 11, 2002, there was no
put to ‘cancel’” and that the “[c]ourts uniformly have held
that ‘once an option is exercised, the option itself ceases to
exist and an enforceable bilateral contract is formed.’” (Brief
of Appellee Cox p. 45 (emphases in original); see also Brief
of Appellee Comcast pp. 38-39). Defendants’ argument
places semantics over substance: while the defendants gave
notice of their intent to exercise the puts, they never, in fact,
followed through and transferred any shares to AT&T.
fil. COMCAST’S ACQUISITION OF THREE
CABLE COMPANIES THAT OWNED AT
HOME WARRANTS WAS NOT A PURCHASE
OF THE WARRANTS FOR PURPOSES OF
SECTION 16(b).
This Court’s third. question is “[w]hether Comcast’s
acquisition of three cable companies that owned warrants to
purchase shares of At Home stock in January, March and
August 2000 should be characterized as a § 16(b) purchase of
At Home securities.” Under Count II of their complaint,
plaintiff urges that if, arguendo, as Comcast contends, the
creation of the put in March 28, 2000 constituted a ‘sale’ for
purposes of Section 16(b), then that sale can be matched with
l6a
Comcast’s acquisition of the warrants, which took place
within six months of March 28, 2000 (Appellant’s Brief pp.
44-46; See also Compl. 4 74).° The plaintiff argues that
“purchase,” as defined by Section 3(a)(13) of the Exchange
Act, 15 U.S.C. 78c(a)(13), includes “any contract to buy,
purchase, or otherwise acquire” and that this definition is
broad enough to include the purchase of another company
that, in turn, owns securities of the issuer (Appellant’s Brief
pp. 44-46).
The district court held that these transactions are not within
the scope of Section 16(b) because the acquisition of the
warrants was an incidental part of acquisitions of the three
companies. Without deciding whether this amounted to a
“purchase” of securities for purposes of Section 16(b), the
court held (340 F. Supp. 2d at 411):
‘In deciding whether borderline transactions are
within the reach of the statute, the courts have come
to inquire whether the transaction may serve as a
vehicle for the evil which Congress sought to pre-
vent—the realization of short-swing profits based
upon access to inside information.’ Kern County
Land Co. v. Occidental Petroleum Corp., 411 U.S.
582, 594 [ ] (1973). We can conceive of situations
where an insider could acquire one company simply
(or mainly) to obtain its interests in the subject
company, as when the acquired company has few
other assets or exists for the sole purpose of trading
in shares of the subject company. However,
plaintiff has failed to plead any facts giving rise to
such a possibility here.
The district court was correct to find that this sort of
indirect acquisition in a change-in-control transaction typic-
ally does not fall within the scope of Section 16(b). The
> There are no allegations against Cox in Count II.
17a
district court, however, incorrectly resolved the issue by use
of Kern. The Kern Court held that a transaction that literally
falls within the scope of Section 16(b) may, nevertheless, be
excluded from the section if, on the facts of the case, it does
not present a risk of speculative abuse. While the defendant in
Kern was a greater than 10% owner of stock in the issuer, it
also was an unsuccessful hostile tender offeror. To the Court,
the critical factors in excluding the defendant from liability
under Section 16(b) were that the defendant was forced to sell
pursuant to a merger agreement, whose terms it did not
negotiate, and, as a hostile tender offeror, the defendant did
not have access to inside information. See Kern, 411 U.S. at
597-98. This Court has read Kern to require that the insider
not have access to inside information and/or have no control
over the terms of the transaction or its occurrence. See
American Standard, Inc. v. Crane Co., 510 F.2d 1043, 1054
(2d Cir. 1974). Here, defendant Comcast does not meet either
of those criteria, and we believe Kern does not apply.
This case calls for a different approach. The acquisition of
At Home warrants here was an indirect consequence of a
change-in-control transaction. In general (although there can
be exceptions, as we discuss below), this sort of indirect and
incidental acquisition should be presumed not to be a
“purchase” for purposes of Section 16(b), since it is not the
sort of transaction Congress was concerned about. The
Supreme Court has stated that “‘the only method Congress
deemed effective to curb the evils of insider trading was a flat
rule taking the profits out of a class of transactions in which
the possibility of abuse was believed to be intolerably great.’”
Kern, 411 U.S. at 592 (quoting Reliance Electric Co. v.
Emerson Electric Co., 404 U.S. 418, 422 (1972)). As the
Commission explained long ago, a six-month period was
chosen because that “arbitrary period” was thought “as
roughly marking the distinction between short swing spec-
ulation and long term investment.” Notice of Proposal io
Adopt a Rule Exempting from the Operation of Section 16(b)
18a
Certain Acquisitions and Dispositions of Securities Pursuant
to Mergers or Consolidations, Exchange Act Rel. No. 4696,
17 Fed. Reg. 3177, 1952 SEC LEXIS 63 (April 9, 1952).
Because Section 16(b) can be harsh in imposing strict
liability, “Congress itself limited carefully the liability
imposed by §16(b).” Foremost-McKesson, Inc. v. Provident
Securities Co., 423 U.S. 232, 252 (1976).° “When Congress
has so recognized the need to limit carefully the ‘arbitrary and
sweeping coverage’ of §16(b) * * * courts should not be
quick to determine that * * * Congress intended the section to
cover a particular transaction.” Jd. at 252 (citations omitted).
See also Gollust v. Mendell, 501 U.S. 115, 122 (1991); H.R.
Rep. No. 1383, 73d Cong., 2d Sess. 13 (1934).
An insider who seeks to profit from inside information
typically will engage in a purchase or sale in the issuer’s
securities, and then engage in an opposite-way transaction
when the information becomes public, and the securities’
price is affected. A change in control, however, is typically
motivated by a desire to acquire contro] of a company. It also
involves complex negotiations, and many strategic corporate
considerations, and often involves regulatory review and
approval. While it is not beyond possibility that an acquiror
would tailor a change in control transaction to obtain short-
swing profits from insider trading, it is certainly not going to
be a common scenario. Good faith change in control trans-
actions are not ones “in which the possibility of abuse [is]
intolerably great,” Kern, 411 U.S. at 592.
The plaintiff nonetheless argues that these acquisitions
literally meet the words of the definition of “purchase” in
Section 3(a)(13) of the Exchange Act. However, the prefatory
language to the Exchange Act definitions states that they
apply “[w]hen used in this title, unless the context otherwise
® See also Gollust v. Mendell, 501 U.S. 115, 122 (1991); Reliance
Electric Co. v. Emerson Electric Co., 404 U.S. at 422-25.
_
19a
requires.” Section 3(a), 15 U.S.C. 78c(a) (emphasis added).
This Court has “recognized the importance of this introduc-
tory phrase in certain situations.” Yoder v. Orthomolecular
Nutrition Institute, Inc., 751 F.2d 555, 559 (2d. Cir. 1985).
For example, Section 3(a)(10) of the Exchange Act, 15
U.S.C. 78c(a)(10), excludes from the definition of “security”
“any note * * * which has a maturity at the time of issuance
of not exceeding nine months, exclusive of days of grace, or
any renewal thereof the maturity of which is likewise lim-
ited.” In spite of this language, which would seem to exempt
all notes of any quality, so long as of proper duration, this
Court has long held, citing the context clause, that the exemp-
tion does not apply “literally,” but only applies to notes that
are the equivalent of commercial paper. See, e.g., SEC v.
American Board of Trade, Inc., 75\ F.2d 529, 538 (2d Cir.
1984) (Friendly, J.).
Employment of the context clause is likewise appropriate
here. As discussed above, Section 16(b) is a strict liability
statute. The purpose of the provision must be taken into
account when construing the Section 3(a) definitions of
“purchase” and “sale” with respect to Section 16(b). Since a
change in control transaction will rarely be used to engage in
insider trading in securities held as an asset by the acquired
company, this sort of indirect acquisition should presump-
tively be deemed not to be a purchase for purposes of Section
16(b) (or a sale by the prior owners of the company). We say
“presumptively” because, as the district court noted, there
may be circumstances where an insider uses the acquisition of
another entity as a subterfuge in order to acquire underlying
securities. The plaintiff, however, should bear the burden of
pleading and proving that this indirect acquisition was such
an exception, something the plaintiff has not done here.’
’ This does not mean, as might be thought, that Section 16(b) would
cease to be a strict liability statute. It is a strict liability statute with respect
to short-term transactions that are properly deemed purchases and sales
20a
IV. THE “UNORTHODOX TRANSACTION DOC-
TRINE” IS INAPPLICABLE TO THE TRANS-
ACTIONS IN THIS CASE.
This Court next asks “[w]hether the Kern ‘unorthodox
transaction’ doctrine supports the District Court’s dismissal
of either of the relevant claims.” As discussed in the prior
section, we do not believe that the doctrine should be
expanded to apply, as the district court did, to the claim based
on indirect acquisition of At Home warrants in three change
of control transactions.
Separately, Cox argues that dismissal of plaintiff's first
cause of action should be affirmed because “[a]s in Kern
County, AT&T ‘undoubtedly knew more about’ At Home
than Cox at the time of the alleged ‘purchase’ and ‘sale’”
(Brief of Appellee Cox pp. 54-55, citing Kern County, 411
U.S. at 602). While this might be true, it is not a basis for
applying Kern, which this Court has read to require lack of
access to inside irformation and/or a forced transaction,
neither of which existed here.
V. CONTROLLING DEFERENCE IS OWED BY
THE COURT TO THE COMMISSION’S REA-
SONABLE INTERPRETATIONS OF SECTION
16(b) AND RELATED COMMISSION RULES.
The Court asks “[w]hat deference, if any, this Court owes
the positions the SEC adopts in its amicus curiae brief.” This
actually presents two questions: (1) what deference is owed to
the Commission’s construction of its own rules in an amicus
brief; and (2) what deference is owed to the Commission’s
construction of the federal securities statutes provided in an
amicus brief.
for purposes of the statute. The inquiry here is whether a purchase was
involved.
2la
A. This Court and the Supreme Court Have
Repeatedly Held that a Court Is Bound by an
Agency’s Reasonable Interpretations of Its
Own Regulations Provided in an Amicus Brief.
The deference accorded by the courts to the Commission’s
interpretations of its own rules in an amicus brief is settled
law. This Court has repeatedly held that it is “‘bound by the
SEC’s interpretations of its regulations in its amicus brief,
unless they are ‘plainly erroneous or inconsistent with the
regulation{s].’” DeMaria v. Andersen, 318 F.3d 170, 175 (2d
Cir. 2003) and Levy v Southbrook International Investments,
Lid., 263 F.3d 10, 14 (2d Cir. 2001) (both cases quoting Press
v. Quick & Reilly, Inc., 218 F.3d 121, 128 (2d Cir. 2000)).
Accord Yourman v. Giuliani, °29 F.3d 124, 128 (2d Cir.
2000) (deferring to an interpretation of regulations submitted
in an amicus brief by the Secretary of Labor). In Bowles v.
Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945), the
Supreme Court first established the principle that an agency’s
interpretation of one of its own regulations commands sub-
stantial judicial deference such that the agency’s interpre-
tation “becomes of controlling weight unless it is plainly
erroneous or inconsistent with the regulation.”
More recently, the principle was reinforced in Auer v.
Robbins, 519 U.S. 452 (1997), where petitioner complained
that an agency’s interpretation of a regulation came in the
form of an amicus brief. The Supreme Court declared, “[t]hat
does not, in the circumstances of this case, make it any less
worthy of deference” because the agency’s “position is in no
sense a ‘post hoc rationalizatio[n]’ advanced by [the] agency
seeking to defend past agency action against attack” 519 U.S.
at 462 (quoting Bowen yv. Georgetown Univ. Hospital, 488
U.S. 204, 212 (1988)). “There is simply no reason to suspect
that the interpretation does not reflect the agency’s fair and
considered judginent on the matter in question.” Jd. See also
22a
Barnhart v. Walton, 535 U.S. 212, 217 (2002) (reaffirming
Auer). As this Court has explained:
[W]e recognized that an agency’s irserpretation of
its own regulations is entitled to considerable defer-
ence, irrespective of the formality of the procedures
used in formulating the interpretations. See Taylor
v. Vt. Dep. of Educ., 313 F.3d 768, 779-80 (2d Cir.
2002) (citing Auer v. Robbins [,supra, at 461]);
LaFleur v. Whitman, 300 F.3d 256, 277 (2d Cir.
2002)). We defer to an agency’s interpretation of
its own regulations because we ‘presume that the
power authoritatively to interpret [the agency’s]
own regulations is a component of the agency’s
delegated lawmaking powers.’ Martin v. Occu-
pational Safety & Health Rev. Com’n., 499 US.
144, 151 [] (1991).
Ecarnacion v. Barnhart, 331 F.3d 78, 86 (2d Cir. 2003).® In
light of the well established law in the Supreme Court and
this Court, the Commission’s interpretations of its rules
expressed in this brief are binding, unless they are plainly
erroneous or inconsistent with the regulations.
B. This Court Should Accord Chevron Deference to
Interpretations of the Federal Securities Stat-
utes Provided in Commission Amicus Briefs.
The Court also owes controlling deference to the Com-
mission’s interpretation of the statute—Section 16(b)—pro-
vided in this amicus brief. The analysis of this question
* There are three preconditions for applying Bowles or Auer deference:
the language of the regulation in question must be ambiguous; there must
be no reason to suspect that the interpretation does not reflect the agency’s
fair and considered judgment on the matter in question; and the agency’s
reading of its regulation must be fairly supported by the text of the
regulation itself. Drake v. FAA, 291 F.3d 59, 68 (D.C, Cir. 2002)
(citations omitted).
23a
begins with Chevron, U.S.A., Inc. v. Natural Resources De-
fense Council, Inc., 467 U.S: 837 (1984). As the Supreme
Court has recently summarized:
In Chevron, this Court held that ambiguities in stat-
utes within an agency’s jurisdiction to administer
are delegations of authority to the agency to fill the
statutory gap in reasonable fashion. Filling these
gaps, the Court explained, involves difficult policy
choices that agencies are better equipped to make
than courts. 467 U.S., at 865-866, 81 L. Ed. 2d 694,
104 S. Ct. 2778. If a statute is ambiguous, and if
the implementing agency’s construction is reason-
able, Chevron requires a federal court to accept the
agency’s construction of the statute, even if the
agency’s reading differs from what the court be-
lieves is the best statutory interpretation. /d. at 843-
844, and n. 11, 104 S. Ct. 2778.
National Cable & Telecommunications Assoc., v. Brand X
Internet Services, U.S. _, 125 S.Ct. 2688, 2699 (2005).’
For an agency interpretation to receive Chevron deference,
the agency must have been entrusted by Congress with
authority to interpret the statute, the statute must be am-
biguous and subject to interpretation, and the agency’s inter-
pretation must be a reasonable one. The term “purchase” as
applied to Section 16(b) is ambiguous. Congress has en-
trusted the Commission with responsibility for resolving
ambiguities in light of the purpose of the statute. Section
16(b) provides that “[t]his subsection shall not be construed
* Prior to Chevron, the Court held in Skidmore v. Swift & Co., 323 U.S.
134 (1944), that the “rulings, interpretations and opinions of” an agency
that do not constitute an exercise of lawmaking authority, “while not
controlling upon the courts by reason of their authority, do constitute a
body of experience and informed judgment” which are “entitled to
respect” to the extent they are persuasive. /d. at 140.
24a
to cover * * * any transaction or transactions which the
Commission by rules and regulations may exempt as not
comprehended within the purpose of this subsection.” As this
shows, Congress did not believe Section 16(b) was self-
explanatory and vested the Commission with authority to
identify the purpose of the statute and identify transactions
which do not contravene the section’s purpose.
The Commission has generally done that through rule-
making. However, rulemaking is not a prerequisite for the
Commission’s views to be accorded Chevron deference.
While earlier cases focused on the formality of an agency
decision, such as whether it was the product of notice and
comment rulemaking or of an adjudication, see Christensen v.
Harris County, 529 U.S. 576, 587 (2000), more recent cases
have focused on whether the interpretation is the product of
authoritative agency consideration. In United States v. Mead
Corp., 533 U.S. 218 (2001), the Court addressed the level of
deference to be accorded to Customs Service tariff classi-
fications contained in “letter rulings.” The court held that
“administrative implementation of a particular statutory pro-
vision qualifies for Chevron deference when it appears that
Congress delegated authority to the agency generally to make
rules carrying the force of law, and that the agency inter-
pretation claiming deference was promulgated in the exercise
° In two recent cases, this Court declined to give Chevron deference to
Commission amicus briefs because the statutes at issue did not explicitly
look to the Commission t fil} in interstices in the statutes. See Dabit v.
Merrill Lynch, Pierce, Fenaer & Smith, Inc., 395 F.3d 25, 34 n.6 (2d Cir.),
cert. granted., 126 S. Ct. 34 (2005) (Mem.) (construing provision of Secu-
rities Litigation Uniform Standards Act preempting state law securities
fraud actions); /n re Enterprise Mortgage Acceptance Co., LLC, Secu-
rities Litigation, 39\ F.3d 401, 410 n.8 (2d Cir. 2005) (construing provi-
sion in Sarbanes-Oxley Act modifying statutes of limitation in private
securities lawsuits). Whatever the merit of those decisions as to those
statutes, this case involves a statute, Section 16(6), in which Congress
expressly delegated to the Commission that responsibility.
25a
of that authority.” Jd. at 226-27. While the Court noted that
“the overwhelming number of our cases applying Chevron
deference have reviewed the fruits of noticeand-comment
rulemaking or formal adjudication,” the Court added:
That said, and as significant as notice-and-comment
is in pointing to Chevron authority, the want of that
procedure here does not decide the case, for we
have sometimes found reasons for Chevron defer-
ence even when no such administrative formality
was required and none was afforded.
Id. at 230-31. The Court held that “{t}he fact that the tariff
classification here was not a product of such formal process
does not alone, therefore, bar the application of Chevron,” Id.
at 231. The opinion, however, gives little conclusive guidance
as to what must be shown, since the Court held that the
authorities cited to it—letter rulings issued by 46 different
scattered Customs offices—were obviously not authoritative
agency positions. See id. 233.
The next year, however, in Barnhart v. Walton, 535 U.S.
212 (2002), the Court achieved some clarity by stating flatly
that an agency interpretation may be entitled to Chevron
deference even when it is neither the product of notice-and-
_ comment rulemaking nor has the force of law. The major
factor the Court looked to is the level of careful consideration
an agency has given the question. See 535 U.S. at 222. In
Barnhart the petitioner, whose application for benefits was
denied by the Social Security Administration, asked the Court
to disregard the agency’s interpretation found in recently
promulgated regulations. The Court noted that the interpre-
tation in fact was a “long standing” one and “the fact the
Agency previously reached its interpretation through means
less formal than ‘notice and comment’ rulemaking * * * does
not automatically deprive that interpretation of the judicial
deference otherwise due” under Chevron. 535 U.S. at 221
26a
(citations omitted). Then, turning its attention to the con-
fusion caused by Christensen and Mead, the Court stated:
If this Court’s opinion in Christensen * * * sug-
gested an absolute rule to the contrary, our later
opinion in United States v. Mead * * * denied the
suggestion. * * * Indeed, Mead pointed to instances
in which the Court has applied Chevron deference
to agency interpretations that did not emerge out of
notice-and-comment rulemaking. * * * It indicated
that whether a court should give such deference
depends in significant part upon the interpretative
method used and the nature of the question at issue.
535 U.S. at 221-222 (citations omitted).'' The Court went on
to conclude (id. at 222):
In this case the interstitial nature of the legal
question, the related expertise of the Agency, the
importance of the question to administration of the
statute, the complexity of that administration, and
the careful consideration the Agency has given the
question over a long period of time all indicate that
Chevron provides the appropriate legal lens through
which to view the legality of the Agency interpre-
tation here at issuc. * * *
'' As this makes clear, not every informal statement of agency position
is to be accorded Chevron deference. The Supreme Court has since
declined to accord such deference to internal agency guidance, such as
that “presented in internal guidance memoranda,” Alaska Dept. of Enviro-
nmental Conservation v. EPA, 540 U.S. 461, 487 (2004), and an internal
operating manual, Washington State Dept. of Social and Heaith Servs. v.
Guardianship Estate of Xeffeler, 537 U.S. 371, 385 (2003). We believe
that the public position articulated here by the Commission itself, with the
deliberative process undertaken to reach its position and the explanation
of the reasons for that position, is more akin to the sort of articulations
contained in rulemaking than it is to internal guidelines.
27a
Later that year, this Court construed Barnhart to mean:
Less formal interpretations may also be entitled to
mandatory deference, depending upon to what ex-
tent the underlying statute suffers from exposed
gaps in its policies, especially if the statute itself is
very complex, as well as on the agency’s expertise
in making such policy decisions, the importance of
the agency’s decisions to the administration of the
statute, and the degree of consideration the agency
has given the relevant issues over time. See
Barnhart v. Walton, 535 U.S. 212, 122 S. Ct. 1265,
1272, 152 L. Ed. 2d 330 (2002).
Community Health Center v. Wilson-Coker, 311 F.3d 132,
138 (2d Cir. 2002).'?
The only statutory interpretation in this brief is whether
Section 16(b) applies to a transaction where an insider
acquires securities of an issuer indirectly by acquiring
ownership of a third party company which, in turn, owns
securities of the issuer. This is precisely the sort of question
that Congress directed the Commission to deal with. Section
16(b) states that it will not apply to transactions which the
Commission exempts as not within the purpose of the statute.
Because the statute imposes strict liability, the Commission’s
role in determining when to exempt transactions is of critical
importance to application of the statute. Congress and the
Supreme Court have been clear that this is a statute which the
Commission should assure is not unduly broad. This is, in -
short, precisely the sort of interstitial issue where Chevron
deference is due the Commission’s informal conclusions; “the
2 In Dabit and Enterprise Mortgage, this Court later cited Mead for
the proposition that Commission views expressed in an amicus brief,
rather than a rule or regulation, cannot receive Chevron deference. That
position appears contrary to the Supreme Court’s decision in Barnhart
and this Court’s decision in Community Health Center.
28a
statute itself is very complex”, the Commission has long and
broad “expertise in making such policy decisions,” and “the
importance of the agency’s decisions to the administration of
the statute” is critical.
The only reason to consider not according conclusive
deference to the Commission’s position might be that it is not
a “long-standing” one. That, however, is only true in the
limited sense that the claim that the indirect acquisitions are
within the scope of Section 16(b) is itself an apparently novel
claim. The Commission should not have to envision every
novel claim that might be made under Section 16(b) and
analyze these hypothetical claims, before its views will be
deemed authoritative. '?
In a broader sense, moreover, the analysis here is closely
similar to the sort of analysis the Commission has repeatedly
engaged in for many years. The Commission has over the
decades analyzed which transactions do not present risk
within the purposes of Section 16(b).'* Consistent with its
rulemaking authority, the Commission has emphasized in
both rules and amicus briefs that liability should exist only in
situations where there is a real risk of insider trading. '°
'3 In In re New Times Securities Services, Inc., 37\ F.3d 68, 80-83 (2d
Cir. 2004), this Court appeared to recognize that a Commission amicus
brief might be entitled to Chevron deference, but declined to give it such
deference because of the Commission’s failure to previously address an
issue even though it was longstanding. The Court also noted the presence
of a competing view by an entity that administers the provision on a day
to day basis, and the relation of the Commission to that entity. None of
those facts exist in this case.
* See, e.g. Rules 16a-9 through 13 and 16b-1 through 16b-8, 17
C.F.R. 240.16a-9 to 16a-13 and 16b-1 to 16b-8.
'S See, e.g., Ownership Reports and Trading By Officers, Directors and
Principal Securities Holders, Exchange Act Rel. No. 28869, 56 Fed. Reg.
7242, 7252 (Feb. 21, 1991); Brief of the Securities and Exchange Com-
mission, Amicus Curiae, in Support of the Appellee on Issues Addressed,
at 23-24; Levy v. Southbrook International Investments, Ltd, 263 F.3d 10
29a
The Commission’s amicus position here satisfies the other
requirements for Chevron deference. It is the product of
careful consideration, and is the authoritative view of the
Commission itself, not merely staff views. The Commission’s
Office of the General Counsel posted to the Commission’s
Web site a statement regarding consideration of amicus
briefs. In relevant part, it states that after a request is made:
The Office of the General Counsel will review the
materials submitted and seek input from Divisions
and Offices of the Commission that may have an
interest in the case. In cases where further review is
appropriate, the staff generally will contact both
sides and offer them the opportunity to make fur-_
ther submissions in writing, in person, or by tele-
phone. If the staff determines that amicus partici-
pation is merited in a particular case, the Office of
the General Counsel will make a recommendation,
together with interested Divisions and Offices, to
the Commission. The Commission then considers
and votes on whether to accept the recommendation
and file a brief. This process can take a significant
amount of time.
Request for Commission Amicus Participation in a Pending
Case, posted at http://www.sec.gov/litigation/briefs/amicus
request.htm. Amicus briefs submitted by the Commission thus
represent the views of the Commission. See e.g., David S.
Ruder, Address: The Development of Legal Doctrine Through
Amicus Participation: The SEC Experience, 1989 Wis. L.
Rev. 1167 (1989). All of these steps were taken in this case. '®
(2d Cir. 2001); Brief of the Securities and Exchange Commission, Amicus
Curiae at 13-14, Gryl v. Shire Pharmaceuticals Group PLC., 298 F.3d
136 (2d Cir. 2002).
'® The Commission’s staff had detailed meetings with both sides’ coun-
sel, made further inquiries of them and received responses, and prepared a
detailed written analysis and recommendation. The Commission reviewed
30a
Even when denying deference to a Commission amicus brief
on other grounds, this Court has said it had “no reason to
doubt that the SEC’s interpretation was the product of careful
consideration.” Jn re New Times Securities Services, Inc., 371
F.3dat82.
The statutory interpretation in this brief is an authoritative
and fully considered position by the Commission, which
reasonably construes an ambiguous statutory provision whose
interpretation was explicitly entrusted by Congress to the
Commission. We believe that the views expressed in this
brief are entitled to Chevron deference.
CONCLUSION
The judgment of the district court should be affirmed and
the positions of the Commission urged above should be
adopted by the Court.
Respectfully submitted,
BRIAN G. CARTWRIGHT
General Counsel
JACOB H. STILLMAN
Solicitor
ERIC SUMMERGRAD
Deputy Solicitor
ALLAN A. CAPUTE
Special Counsel to the Solicitor
Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549-8010
February, 2006 (202) 551-5122 (Capute)
the recommendation for three weeks, met and discussed it, and then voted
to authorize the brief. It also reviewed the brief itself.
3la
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
No. 05-01 15-cv
AT HOME CORPORATION,
Plaintiff-Appellant,
Vv.
Cox COMMUNICATIONS, INC., COX@HOME, INC.,
COMCAST CORPORATION, COMCAST ONLINE
COMMUNICATIONS, INC., COMCAST PC INVESTMENTS, INC.,
BRIAN L. ROBERTS AND DAVID M. WooprRow,
Defendants-Appellees.
CERTIFICATE OF COMPLIANCE WITH F.R.A.P. 32(a)
I cerufy that THE BRIEF OF THE SECURITIES AND
EXCHANGE COMMISSION, AMICUS CURIAE, SUB-
MITTED AT THE REQUEST OF THE COURT complies
with the type-volume requirements of Rules 32(a)(7)(B) and
29(d) of the Federal Rules of Appellate Procedure (F.R.A.P.)
because it contains 6988 words. I further certify that this brief
complies with the typeface requirements of F.R.A.P. 32(a)(5)
and the type style requirements of F.R.A.P. 32(a)(6) becatise
it has been prepared in proportionally-spaced typeface using
WordPerfect (version 11) in garamond 14-point font size.
Allan A. Capute
Special Counsel to the Solicitor
Securities and Exchange Commission
100 F. Street, N.E.
Washington, D.C. 20549-8010
(202) 551-5122
32a
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT .
No. 05-01 15-cv
AT HOME CORPORATION,
Plaintiff-Appellant,
v.
Cox COMMUNICATIONS, INC., COX@HOME, INC.,
COMCAST CORPORATION, COMCAST ONLINE
COMMUNICATIONS, INC., COMCAST PC INVESTMENTS, INC.,
BRIAN L. ROBERTS AND DAVID M. WOODROW,
Defendants-Appellees.
CERTIFICATE OF COMPLIANCE WITH LOCAL
RULE 32(a)(1): BRIEFS IN DIGITAL FORMAT
I certify that THE BRIEF OF THE SECURITIES AND
EXCHANGE COMMISSION, AMICUS CURIAE, SUB-
MITTED AT THE REQUEST OF THE COURT, as
submitted in digital format, has been scanned for viruses
using McAfee VirusScan version 8.0 with signature 4692 of
February 8, 2006 and that no viruses have been detected as
required by Local Rule 32(a)(1).
Allan A. Capute
Special Counsel to the Solicitor
Securities and Exchange Commission
100 F. Street, N.E.
Washington, D.C. 20549-8010
(202) 551-5122
33a
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
No. 05-01 15-cv
AT HOME CORPORATION,
Plaintiff-Appellant,
Vv.
Cox COMMUNICATIONS, INC., COX@HOME, INC.,
COMCAST CORPORATION, COMCAST ONLINE
COMMUNICATIONS, INC., COMCAST PC INVESTMENTS, INC.,
BRIAN L. ROBERTS AND DAVID M. WooprRow,
Defendants-Appellees.
CERTIFICATE OF SERVICE
I, Allan A. Capute, am a member of the bars of Maryland
and the District of Columbia, and I hereby certify that on 9th
day of February, 2006, i caused to be served two copies of the
BRIEF OF THE SECURITIES AND EXCHANGE COM-
MISSION, AMICUS CURIAE, SUBMITTED AT THE
REQUEST OF THE COURT, to counsel for the parties of
record at the address below, by overnight Federal Express:
Allan A. Capute
Counsel for the Plaintiff
Joseph S. Allerhand, Esq.
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
34a
Counsel for Defandant Comcast Corporation
Sheron Korpus, Esq.
James T. Cain, Esq.
White & Case LLP
1155 Avenue of the Americas
New York, New York 10036
Counsel for Defendant Cox Communications, Inc.
Michael D. Hays, Esq.
Daniel D. Prichard, Esq.
Dow, Lohnes & Albertson
1200 New Hampshire Avenue, N.W.
Washington, D.C. 20036
35a
APPENDIX B
SEC Rule 16b-6(b) (17 C.F.R. § 240.16b—6(b))
The closing of a derivative security position as a result of
its exercise or conversion shall be exempt from the operation
of section 16(b) of the Act, and the acquisition of underlying
securities at a fixed exercise price due to the exercise or
conversion of a call equivalent position or the disposition of
underlying securities at a fixed exercise price due to the
exercise of a put equivalent position shall be exempt from the
operation of section 16(b) of the Act: Provided, however,
That the acquisition of underlying securities from the exercise
of an out-of-the-money option, warrant, or right shall not be
exempt unless the exercise is necessary to comport with the
sequential exercise provisions of the Internal Revenue Code
(26 U.S.C. 422A).
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.