Opposition Brief — At Home Corp. v. Cox Communications, Inc. (No. 06-147)
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No. 06-147
IN THE
Supreme Court of the Anited States
AT HOME CORPORATION,
; Petitioner,
Vv.
Cox COMMUNICATIONS, INC., COX @HOME, INC.,
COMCAST CORPORATION, COMCAST ONLINE
COMMUNICATIONS, INC., COMCAST PC INVESTMENTS, INC.,
BRIAN L. ROBERTS, AND DAVID M. WoopDROW,
Respondents.
- On Petition for a Writ of Certiorari to the
United States Court of Appeals
for the Second Circuit
RESPONDENTS COX COMMUNICATIONS, INC.
AND COX @HOME, INC.’S BRIEF IN OPPOSITION
MICHAEL D. HAYS *
MICHAEL D. ROTHBERG
DANIEL D. PRICHARD
Dow LOHNES PLLC
1200 New Hampshire Avenue
Washington, D.C. 20036
* Counsel of Record (202) 776-2000
August 30, 2006
WILSON-EPES PRINTING CO., INC. — (202) 789-0096 — WASHINGTON, D.C. 20001
ig Sean
Supreme Court, U.S.
7,“ FILED
(YD
AUG 30 2006
No. 06-147
OFFICE OF THE CLERK
IN THE ;
Supreme Court of the Anited States
AT HOME CORPORATION,
Petitioner,
Vv.
Cox COMMUNICATIONS, INC., COX @HOME, INC.,
COMCAST CORPORATION, COMCAST ONLINE
COMMUNICATIONS, INC., COMCAST PC INVESTMENTS, INC.,
BRIAN L. ROBERTS, AND DAVID M. WooprRow,
Respondents.
On Petition for 2 Writ of Certiorari to the
United States Court of Appeals
for the Second Circuit
RESPONDENTS COX COMMUNICATIONS, INC.
AND COX @HOME, INC.’S BRIEF IN OPPOSITION
MICHAEL D. HAYs *
MICHAEL D. ROTHBERG
DANIEL D. PRICHARD
Dow LOHNES PLLC
1200 New Hampshire Avenue
Washington, D.C. 20036
* Counsel of Record (202) 776-2000
August 30, 2006
PE DAMA LATED SE: BREMEN LE ILE EGLO DOIG LI ROE, IEEE LIL TI EI IA ERR RIES SO RE I TE
WILSON-EPES PRINTING Co., INC. — (202) 789-0096 -— WASHINGTON, D. C. 20001
——————————————— i i“
_
COUNTERSTATEMENT OF QUESTION PRESENTED
Did the United States Court of Appeals for the Second
Circuit properly hold that, under Section 16(b) of the Secu-
rities Exchange Act of 1934 (15 U.S.C. § 78p(b)), the Com-
plaint failed to plead the required “matching” purchase and
sale of At Home Corporation (“At Home”) stock within a
period of less than six months by Cox Communications, Inc.
and Cox @Home, Inc. (collectively, “C_x”) where: (a) the
relevant Securities and Exchange Commission (“SEC”) regu-
lations provide that a put option exercised solely at its fixed
price component (like the put option at issue here) can give
rise to a Section 16(b) “sale” only on the date that it is estab-
lished; and (b) the establishment date of the put was more
than thirteen months before the alleged matching purchase?
(1)
CC en
il
CORPORATE DISCLOSURE STATEMENT
Pursuant to Supreme Court Rule 29.6, respondents Cox
Communications, Inc. (“CCI”) and Cox @Home, Inc. (“Cox
@Home’) state that, through Cox Holdings, Inc. and Cox
DNS, Inc., CCI is an indirect wholly-owned subsidiary of
Cox Enterprises, Inc., which is a privately held corporation.
Cox @Home is a wholly-owned subsidiary of CCI.
TABLE OF CONTENTS
Page
~ COUNTERSTATEMENT OF QUESTION
ne et ae i
CORPORATE DISCLOSURE STATEMENT ....................... il
Ny re RIF EI TIE sess occh.cncc'oceccncsccensseodsiecpuesdeensesnannsiod iV
I ]
I. PERTINENT STATUTORY AND REGULA-
vio co Bl’): | IRE RCERREE Rtenee e: Pomona 4
Bee. ee Te CR vcividewisccneneccezastinnsevocsuens 5
A. Allegations Of The Complaint .......00...0 cece: 5
B. Transfer And Dismissal Of The Action................. 7
C. The SEC Determines That The District
Cee SPUN FOS PATE IIIIOE Savi svsscsininsivonivevdveecececevcces )
D. The Second Circuit Affirms The District
a 1]
Ill. REASONS THAT THE PETITION SHOULD
ks SEES OR ERIS eeS ie env RO ne 12
A. There Is No Circuit Split Or Issue Of
Widespread Application In This Case
Demanding The Court’s Attention .................00 13
B. The Second Circuit Correctly Determined
That The Only Section 16(b) Sale
Occurred On The March 2000 Put’s
RUNNIN CII csi sss ccscuienittdineiuodaisaah chuuibaevtaces 14
C. The Bondholders Present No Valid Basis
To Reverse The Second Circuit.................000..-.... 20
8 8 MTOR SOS RR RO OE NE TRMISRT Te NSO 26
IIT iii latae siplescribe ahi tantniadiclaeadliddeddueeon eaedooniod la
TE Feces Oe To OT RN a Ree 35a
iV
TABLE OF AUTHORITIES
CASES Page
At Home Corp. v. Cox Commc'ns, Inc., Civ. A.
No. 02-1486-JJF, 2003 WL 22350925 (D. Del.
SE Say rd te cnvsisiasnisiiclnieieithcibicbesishsseaunin aiatlpnaiibenMeiesadtakeas 8
At Home Corp. v. Cox Commc'ns, Inc., 340 F.
Supp. 2d 404 (S.D.N.Y. 2004) oo... eee passim
At Home Corp. v. Cox Commc’ns, Inc., 446 F.3d
ke Lt tae SRDMRSIRaNre rem hon eee aw ERRNO passim
Auer v. Robbins, 519 U.S. 452 (1997)... ccecceeeeeeeeeeeees 19
Chevron U.S.A. v. Natural Res. Def. Council, 467
SF A ET Cea chanacdnieisniedaabhaialieseavsdndiadonnidandaiaadcminidunts 1]
Cioffi v. Averill Park Central Sch. Dist. Bd. of
Educ., 444 F.3d 158 (2d Cir. 2006) .........ccscseeseeeeee: 22
City of Springfield, Mass. v. Kibbe, 480 U.S. 257
FI Beasisicsin icscusbesseniideraipciclaspiniedeenabenaniatetconies 20, 22
Davenport v. Harry N. Abrams, Inc., 249 F.3d
Ee Gee Gls SOE E DP citcsiseincsasnrsnstiaenin jasahcelidibebibicin 20, 22
Kern County Land Co. v. Occidental Petroleum
Conk S085 STS es 25
Lerner v. Millenco, L.P., 23 F. Supp. 2d 337
(S.D.N.Y.), recon. denied, 23 F. Supp. 2d 345
ER ty ae. SRRURRERTEN SW ONtle fateh arse eee emesatunn ape rAn-w mere 8
Levy v. Clearwater Fund IV, Ltd.., No. Civ. A.
99-004-SLR, 2000 WL 152128 (D. Del. Feb.
Fy BI cis tisiasisssidelplalaseebensvbnuaastuabaahepsthaceanniinbatseibeeoualiecds 8
Levy v. Oz Master Fund, Ltd., No. Civ. 7148,
2001 WL 767013 (S.D.N.Y. July 9, 2001)............ 8, 15
Press v. Quick & Reilly, Inc., 218 F.3d 121 (2d
i aa oicis cj ccdaspicio meat niecbaciahividcatvbemetiad laced 19
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, ‘
V
TABLE OF AUTHORITIES—Continued
_ STATUTES Page
15 U.S.C. § ,op(b) (Securities Exchange Act of
PSSA, BOCUG FOOD cciscsicsivvecssscerssisessesacornstecsacess passim
28 U.S.C. § 1367(c)
RULES AND REGULATIONS
17 C.F.R. § 240.16a-1(c) (SEC Rule 16a-1(c))........... 4,9
17 C.F.R. § 240.16a-1(h) (SEC Rule 16a-1(h))...4, 10, 14
17 C.F.R. § 240.16b-6(a) (SEC Rule 16b-6(a))..... passim
17 C.F.R. § 240.16b-6(b) (SEC Rule 16b-6(b)).... passim
RE AA. Ws PROD vivicccnseicdiinssiacssanidaeniastaceaa 12
OTHER AUTHORITIES
Brief Of The Securities And Exchange Com-
mission, Amicus Curiae, Submitted To The
Second Circuit Court of Appeals on February
Fy aE vehastciencdonveki as ciaiigiesbbaa osand webeepmeia teat passim
Ownership Reports and Trading By Officers,
Directors and Principal Security Holders,
Exchange Act Release No. 28,869, 56 Fed.
Reg. 7242 (Feb. 21, 1991)
POCO H THEE O EEE OH EHH HEE SESEEEES
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
COMMUNICATIONS, INC., COMCAST PC INVESTMENTS, INC.,
BRIAN L. ROBERTS, AND DAVID M. WooprRow,
Respondents.
On Petition for a Writ of Certiorari to the
United States Court of Appeals
for the Second Circuit
RESPONDENTS COX COMMUNICATIONS, INC.
AND COX @HOME, INC.’S BREEF IN OPPOSITION
This case involves an unfounded attempt by former At
Home bondholders (the “Bondholders”)}—to whom that de-
funct corporation’s claims were transferred—to manufacture
liability against Cox under the federal short-swing profits
statute, i.e., Section 16(b) of the Securities Exchange Act of
1934. Section 16(b) imposes liability against a corporate
insider only if the insider engages in a “matching” purchase
and sale of company securities within a period of less than six
months. The Second Circuit, the Southern District of New
York, and the SEC (in an amicus curiae brief requested by
the Second Circuit) each properly determined that the Bond-
2
holders’ Section !6(b) claims should be dismissed as a matter
of law because the Bondholders failed to plead that Cox
engaged in matching transactions in At Home stock within
the proscribed time period.
The “hybrid” put option in this case (i.e., an option to sell
with both a fixed and a floating price component!) granted
Cox the right to sell its shares of At Home stock to At
Home’s controlling stockholder, AT&T Corp. (“AT&T”), at
the greater of the fixed price of $48 a share or a floating
market price. This put option (the “March 2000 Put” or
“Put’”) was established on March 28, 2000, and its subsequent
exercise price was solely its $48 fixed price. The Second
Circuit, the Southern District of New York, and the SEC each
agreed that SEC rules require that the Put be treated as a
Section 16(b) sale solely on its establishment date (when the
primary potential for abuse of the option existed), and not, as
the Bondholders argued below, on or after the Put’s sub-
sequent exercise date. Because the only conceivable match-
ing “purchase” in this case occurred on May 18, 2001—vwell
over six months after the March 28, 2000 deemed sale date—
the courts below held that the Bondholders failed to state a
claim against Cox. .
As explained in more detail below, the Bondholders’
petition for certiorari should be denied. First, there is no
' A put option is an option that gives its holder the right, but not the
obligation, to sell shares of stock to the other party to the put at a price
determined by the option’s terms. In the case of a hybrid option, whether
the option is exercised at the fixed or the floating component depends
upon the market price of the underlying security. Where a hybrid put
option contains a provision (like the put in this case) specifying that the
exercise price will be the greater of the fixed price or the floating price,
the fixed price component necessarily sets a minimum price. If the
market price following exercise (at the time of the closing of the floating
component’s market pricing window) is below the price set in the fixed
component (as here), then the exercise price of the hybrid put option will
be the fixed price.
3
circuit split regarding the issues addressed in the Second
Circuit’s opinion; the Second Circuit is the only appellate
court to have addressed the Section 16(b) treatment of a
hybrid security. Further, there is no disagreement between
the SEC (the agency charged with administering Section 16)
and the Second Circuit, as the SEC also concluded in its
amicus brief that the District Court’s dismissal order should
be affirmed.
Second, the Second Circuit’s opinion was correct and,
indeed, was required by the relevant SEC regulations
governing the Section 16(b) treatment of derivative securities.
Those regulations were designed to serve Section 16(b)’s
statutory purpose of preventing corporate insiders from mak-
ing short-swing profits by using non-public information. The
SEC amended its regulations in 1991 to close an easily-
exploitable loophole, which the Bondholders’ position in the
courts below would have reopened.
Finally, the Bondhoiders’ remaining arguments for grant-
ing certiorari are meritless, including their newly raised “dual
sale” argument that is the focus of their petition. Before this
Court, the Bondholders have abandoned (and indeed do not
even mention) .the argument that they unsuccessfully pre-
sented to the Second Circuit, the District Court, and the SEC.
Specifically, the Bondholders argued (and pled in their Com-
plaint) that the March 2000 Put was a sale only after it was
exercised in January 2001, and that it could not be treated as a
sale on its March 28, 2000 establishment date. The Bond-
holders now concede that the Put’s establishment was a sale,
but also argue that a second sale should be recognized as a
result of the Put’s exercise. This new “dual sale” argument
was never properly raised below, and is directly contrary to
SEC regulations. In fact, the SEC explained in its amicus
brief that the exercise of a hybrid put at a fixed price is not a
Section 16(b) sale under its rules.
4 as
I, PERTINENT STATUTORY AND REGULA-
TORY PROVISIONS
* Section 16(b) of the Securities Exchange Act of 1934,
15 U.S.C. § 78p(b):
For the purpose of preventing the unfair use of
information which may have been obtained by such
beneficial owner, director, or officer by reason of his
relationship to the issuer, any profit realized by him
from any purchase and sale, or any sale and purchase,
of any equity security of such issuer (other than an
exempted security) ... within any period of less than
six months, ... shall inure to and be recoverable by
the issuer...
® SEC Rule 16a-1(c), 17 C.F.R. § 240.16a-1(c):
The term derivative securities shall mean any option
... With an exercise or conversion privilege at a price
related to an equity security ..., but shall not
include: . . .
(6) Rights with an exercise or conversion privilege at
a price that is not fixed....
® SEC Rule 16a-1(h), 17 C.F.R. § 240.16a-1(h):
The term put equivalent position shall 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.
® SEC Rule 16b-6(a), 17 C.F.R. § 240.16b-6(a):
(T]he establishment of or increase in a put equivalent
position ... shall be deemed a sale of the underlying
securities for purposes of section 16(b) of the Act....
5
=" 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 ... shall be exempt from the operation
of section 16(b) of the Act, and 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.
Il. STATEMENT OF THE CASE
The Bondholders have petitioned for a writ of certiorari
for review of the Second Circuit’s decision affirming the
Southern District of New York’s dismissal with prejudice of
the Bondholders’ Section 16(b) claims. The courts below
held that the sole Section 16(b) claim asserted against Cox
(the first cause of action) failed to plead that Cox engaged in
a “matching” purchase and sale of At Home stock within a
period of less than six months, and thus did not state a
Section 16(b) claim against Cox. See At Home Corp. v. Cox
Commc'ns., Inc., 340 F. Supp. 2d 404, 410 (S.D.N.Y. 2004)
(Pet. App. I7a-30a), aff'd, 446 F.3d 403 (2d Cir. 2006) (Pet.
App. 1a-13a).
A. Allegations Of The Complaint.
The sole Section 16(b) cause of action against Cox’ alleges
that Cox’s January 2001 exercise of the March 2000 Put
> The Bondholders omitted this rule from their appendix, and therefore
Cox has included it in its appendix. See Cox App. 35a.
> The Bondholders also named as defendants Comcast Corporation,
Comcast Online Communications, Inc. and Comcast PC Investments, Inc.
(collectively “Comcast”) and Brian L. Roberts, as well as David M.
Woodrow, a former Cox executive and former At Home director. In addi-
tion to the Section 16(b) claims against Cox and Comcast, the Bond-
holders also asserted a state law fiduciary duty claim against all defen-
dants, which the District Court dismissed without prejudice on December
3, 2004 pursuant to 28 U.S.C. § 1367(c).
6
constitutes a “sale” of At Home stock that can be matched
with an alleged purchase, i.e., Cox’s subsequent entry into a
Share Issuance Agreement with AT&T on May 18, 2001, to
create liability under Section 16(b). Although Cox owned
only approximately 8.3% of At Home’s Series A common
stock when the Put was established on March 28, 2000, the
Complaint alleges that Cox is nevertheless subject to Section
16(b) as a statutory insider because Cox and Comcast to-
gether purportedly held a greater than 10% stock ownership
stake as a “group.” Compl. §f| 11-12, Pet. App. 39a.
As the Complaint concedes, the Put contained a “hybrid
pricing mechanism” (Compl. 4 54, Pet App. 53a) that, at any
time from January |, 200-1 through June 4, 2002, allowed Cox
to require AT&T to purchase up to approximately $1.4 billion
of At Home stock from Cox at the greater of:
= the fixed price of “$48 per share” (Compl. 4 45,
Pet. App. 49a); or
=" “the average per share trading price of At Home
common stock” over a specified period before and
after the exercise date (the “floating component’s
market pricing window’) (id.).
The March 2000 Put capped the maximum consideration
that Cox could receive from AT&T at approximately $1.4
billion, which was the amount payable to Cox if it sold all its
At Home shares to AT&T at the fixed price of $48 a share.
Compl. ff 11, 44, Pet. App. 39a, 49a. Thus, the Put’s fixed
price component allowed Cox to sell a fixed number of shares
to AT&T at $48 per share. Jd. § 45, Pet. App. 49a. Even if
the Put’s exercise price were a higher floating price, Cox
would still receive the same amount of total consideration,
but would be able to sell fewer shares to AT&T than under
the fixed price component. Jd.“
* The March 2000 Agreements provided Comcast with essentially the
same put right, although the Comcast put had a higher tota! consideration
7
On January 11, 2001, CCI exercised the Put and notified
AT&T of its election to sell all the At Home common stock,
owned directly or indirectly by it or Cox @Home, to AT&T.
Compl. 452, Pet. App. 52a. Because the average market
price during the relevant period was less than $48 per share,
the exercise price for Cox’s At Home stock was solely the
fixed price of “$48 per share pursuant to the [Put’s] hybrid
pricing mechanism.” /d. 4 54, Pet. App. 53a.
The Complaint alleges that the purported matching “pur-
chase” occurred on or about May 18, 2001, when AT&T and
Cox entered into an agreement (the “Share Issuance Agree-
ment’), pursuant to which Cox would retain its At Home
stock and AT&T would be deemed to have satisfied the
March 2000 Put in full. Compl. 456, Pet. App. 53a.° Cox
entered into this Share Issuance Agreement over thirteen
months after the establishment of the March 2000 Put on
March 28, 2000. Jd. 4] 43, 56, Pet. App. 49a, 53a.
B. Transfer And Dismissal Of The Action.
The Bondholders originally filed this action in the United
States District Court for the District of Delaware. On
September 24, 2002, that court held that the Bondholders had
“engage[d] in forum shopping [by] attempting to force this
limit (and therefore under the fixed price component a higher number of
shares).
> At Home stock closed at ‘$7.72 per share” on January 11, 2001, and
at “$6.00 per share” on February 2, 2001. Compl. 44 53, 54, Pet. App.
53a.
° The Bondholders contended that the Share Issuance Agreement con-
stituted a cancellation of the March 2000 Put (Compl. 4] 55, 56, Pet. App.
53a), which they claimed was a deemed purchase pursuant to Rule 16b-
6(a). The defendants disputed that the Put was cancelled, asserting
that after its exercise, the Put ceased to be a unilateral option contract
within the scope of Rule 16b-6(a), and instead became a bilateral contract.
Neither court below ruled on this issue.
8
case into the District of Delaware,” and transferred the action
to the Southern District of New York. At Home Corp. v. Cox
Commc’ns Inc., Civ. A. No. 02-1486-JJF, 2003 WL
22350925, at *2 (D. Del. Oct. 8, 2003).
Following the transfer, Cox and Comcast moved to dismiss
the Section 16(b) causes of action against them. On August
12, 2004, the District Court granted defendants’ motions.
Relying upon three prior Southern District of New York cases
that had decided the Section 16(b) issue presented in the first
cause of action in a manner favorable to defendants,*® the
District Court dismissed that claim. It held that the March 28,
2000 establishment of the Put was “the only sale-equivalent
event” pled in the Bondholders’ Complaint. Recognizing that
this event “occurred more than six months before the only
conceivable purchase” on May 18, 200], the District Court
ruled that the Bondholders’ first cause of action failed to
state a Section 16(b) claim against Cox and Comcast. Pet.
App. 27a.’
’ The Bondholders originally filed in Delaware in hopes of availing
themselves of a District of Delaware case, Levy v. Clearwater Fund IV,
Ltd., No. Civ. A. 99-004-SLR, 2000 WL 152128 (D. Del. Feb. 2, 2000).
That case ignored the importance of the fixed price component of a hybrid
put and has now been thoroughly discredited by the SEC in its amicus
brief, the Second Circuit, and multiple cases in the Southern District of
New York. See cases cited n.8 supra. The Bondholders have now aban-
doned their reliance on this inapposite decision, which dealt with the
exercise of a hybrid option at a floating price (unlike here) and, in any
_ event, does not support the Bondholders’ new “dual sale” argument.
* See Lerner v. Millenco, L.P., 23 F. Supp. 2d 337 (S.D.N.Y.), recon.
denied, 23 F. Supp. 2d 345 (S.D.N.Y. 1998); Lévy v. Oz Master Fund,
Lid., No. Civ. 7148, 2001 WL 767013 (S.D.N.Y. July 9, 2001); 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).
® The District Court also dismissed a separate alternative Section 16(b)
claim (the second cause of action) that the Bondholders asserted against
Comcast only.
9
C. The SEC Determines That The District
Court Should Be Affirmed.
On appeal, prior to the Second Circuit’s affirmance of the
District Court’s dismissal of the Bondholders’ Complaint, the
Second Circuit requested the SEC to submit an amicus curiae
brief. After soliciting the parties’ views and meeting with
their counsel, the SEC filed its amicus brief on February 9,
2006 (“SEC Amicus Brief’). See Cox App. la-34a. The SEC
rejected the Bondholders’ claim that the Put’s exercise date,
rather than its establishment date, should be deemed a Section
16(b) sale (Cox App. 13a-14a) and recommended that the
District Court’s ruling be affirmed (Cox App. 9a, 30a).
In reaching this conclusion, the SEC relied on the 1991
amendments to its Section 16(b) rules. Cox App. 10a-13a.
The SEC explained that these amendments were specifically
_ designed to eliminate the potential for an insider to easily
circumvent Section 16(b) through the use of derivative
securities:
Before 1991, the purchase or sale of securities
underlying a derivative security [such as a fixed
price option]’® 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 derivative securities.”
Cox App. 10a (quoting Ownership Reports and Trading By
Officers, Directors and Principal Security Holders, Exchange
Act Release No. 28,869, 56 Fed. Reg. 7242, 7250 (Feb. 21,
1991) (“i991 Release”)).
'° As the SEC explained in its Amicus Tirief, the term “derivative
security” includes “‘any option’” with an ““e..ccise or conversion priv-
ilege at a price related to any equity secu or similar securities with a
value derived from the value of an equity security,” and includes a “put
equivalent position” such as a fixed price put option. Cox App. at | la-
12a (quoting 17 C.F.R. § 240.16a-1(c)).
10
The SEC then offered the following example of how an
insider could use a fixed price put to profit under the pre-
1991 rules:
[A]n insider who knows of impending negative
information can negotiate a fixed price put, en-
abling 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.
Cox App. lla. Thus, by acquiring a put with a fixed price, an
insider can obtain the same short-swing profit that it could by
selling stock. Although these two events are equivalent, one
event (the traditional sale) was a Section 16(b) sale under pre-
1991 law and the other (the acquisition of the fixed price put)
was not.
The SEC amended its rules in 1991 to address this dis-
parity. Cox App. at lla. Specifically, the amended rules
provide that the establishment of a put equivalent position
(such as a put with a fixed exercise price)'' “‘shall be deemed
a sale of the underlying securities for purposes of section
16(b).’” Cox App. at 1la-12a (quoting 17 C.F.R. § 240.16b-
6(a)). In contrast, under SEC Rule 16b-6(b), the exercise of
an option at its fixed price is not a Section 16(b) sale, since its
establishment has already been recognized as a sale. 17
C.F.R. § 240.16b-6(b).
The SEC applied these rules and their underlying policy
rationale to the March 2000 Put to determine that its March
'' Rule 16a-1(h) defines a “put equivalent position” as “a derivative
position that increases in value as the value of the underlying equity
decreases... .” 17 C.F.R. 240.16a-1(h). As the SEC noted, a put with a
fixed exercise price comes within this definition because it “increases in
value as the price of the underlying stock decreases because the spread
between the market price and the fixed exercise price increases.” Cox
App. 12a.
11
28, 2000 establishment was the only Section 16(b) sale attrib-
utable to the Put. The SEC first explained that, under its
rules, a hybrid put instrument such as the March 2000 Put
was equivalent to two puts: a fixed put and a separate
floating put:
In this case, the March 2000 [Put] presented [Cox]
with [a] put[] with a fixed price of $48 paired with
[a] put[] with a floating price based on a specified
market average.
Cox App. at 13a (emphasis added).
The SEC then determined that because the hybrid Put’s
exercise price was solely its $48 fixed price, the Put’s estab-
lishment constituted the sole deemed Section 16(b) “sale”
under Rules 16b-6(a) and (b):
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. . . . Because the fixed price
was used in this case, the establishment of the puts
is when the six month trading period should begin.
Cox App. 13a (emphasis added).
D. The Second Circuit Affirms The District Court.
Consistent with the SEC Amicus Brief and the deference to
be accorded to the agency that administers a statutory
provision,’~ the Second Circuit likewise determined that the
March 2000 Put was a “‘hybrid option,’ because [its] pricing
formula ha[d] both fixed and floating components” (Pet. App.
4a), and was cognizable as a Section 16(b) sale solely on
March 28, 2000 (Pet. App. 8a).
'2 See generally Chevron U.S.A. v. Natural Res. Def. Council, 467 U.S.
837 (1984).
12
The Second Circuit explained that two regulations com-
pelled this result, Pet. App. 8a. First, 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) ....” 17 C.F.R. § 240.16b-6(a) (emphasis
added). Second, Rule 16b-6(b) provides that “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) ....” 17 C.F.R. § 240.16b-6(b)
(emphasis added).
The Second Circuit concluded that, “[rjead together, the
two rules treat the acquisition date of a put as the only sale
date if the option is ultimately exercised according to a fixed
price mechanism.” Pet. App. 8a (italics in original; underline
added). Therefore, the Second Circuit ruled that because the
March 2000 Put was exercised solely at its $48 per share
fixed price, the deemed sale occurred only on March 28,
2000, when the Put was established, and not on the later
exercise date. Accordingly, the Second Circuit affirmed the
District Court’s decision that the Bondholders failed to plead
matching Section 16(b) transactions by Cox. Pet. App. 8a-9a.
Ill. REASONS THAT THE PETITION SHOULD
BE DENIED
There is no reason for the Court to grant certiorari in this
case. Rule 10(c), on which the Bondholders rely in their
petition (Pet. at 2), provides that this Court may grant a writ
of certiorari to address an “important question of federal law
that has not been, but should be, settled by this Court.” Sup.
CT. R. 10(c) (emphasis added). For the multiple independent
reasons set forth below, there is no such question of federal
law present in this case.
13
A. There Is No Circuit Split Or Issue Of
Widespread Application In This Case
Demanding The Court’s Attention.
First, the Court need not grant certiorari because there is
no circuit split involving any issue presented in this case; the
Second Circuit is the only Court of Appeals to have addressed
these issues.'* Moreover, the District Court (citing three
prior district court decisions) and the SEC (in its Amicus
Brief) agreed with the Second Circuit that the Bondholders’
Section 16(b) claims should be dismissed. In contrast, the
Bondholders fail to cite a single case tit supports reversing
the Second Circuit’s ruling, and there is none.
Second, by the Bondholders’ own admission, this case does
not involve issues of widespread application to which this
Court should devote its scarce judicial resources. Throughout
the course of this litigation the Bondholders have taken great
pains to argue that the March 2000 Put was entirely different
from any other instrument, and that rules applicable to other
hybrid derivatives thus could not be applied to it:
= “{T]his was no run of the mill put.” Compl. § 44,
Pet. App. at 49a.
=" “[P]recedent ... simply does not ‘work’ when
applied to the unique instrument at issue here
....” Appellant’s Br. at 24 (emphasis added).
"= The March 2000 Put is different from “any
instrument in any other reported case of which we
are aware....” Appellant’s Br. at 37.
' In fact, as explained in Section C below, the principal disagreement
at this point seems to be between the position that the Bondholders
adopted in their Complaint and argued below (i.e., that there was one
Section 16(b) sale occurring after exercise of the Put), and the belatedly
devised and inconsistent position that they now scek to press before this
Court (i.e., that there were two Section 16(b) sales).
14
* “This is not a typical put.” Transcript of October
17, 2005 Oral Argument Before The Second
Circuit (“Tr.”) at 10. See also id. at 4 (the Put was
“a unique instrument’).
Although respondents believe the Bondholders’ assertions
regarding the uniqueness of the March 2000 Put are exagger-
ated, it is clear that the resolution of the issues in this case
will hardly have “widespread application.” In fact, there have
been only a handful of published opinions dealing with
hybrid derivative securities under Section 16(b) in the history
of the statute. For these reasons and on the additional
grounds set forth below, this Court should deny the petition.
B. The Second Circuit Correctly Determined
That The Only Section 16(b)-Sale Oc-
curred On The March 2000 Put’s Estab-
lishment Date.
This. Court also need not grant certiorari because the
decisions of the courts below were correct. Specifically, in
affirming the dismissal with prejudice of petitioner’s Section
16(b) claim against Cox, the Second Circuit reached a con-
clusion that is fully consistent with (i) the controlling stat-
ute and regulations, (ii) the relevant regulatory policy, and
(iii) the SEC’s Amicus Brief submitted to the Second Circuit
supporting the dismissal of the Bondholders’ Complaint.
First, the Second Circuit’s decision to affirm the District
Court is mandated by the relevant SEC regulations. At the
outset, the Second Circuit properly concluded that the March
2000 Put was a hybrid option with both a $48 per share fixed
component and a separate floating market price component.
Pet. App. 4a. Below, the Bondholders essentially argued that
the Put contained “no real fixed-price component” because, if
market conditions had been different, the Put might have been
exercised at a higher floating price for a lower number of
shares due to its consideration cap. In properly rejecting
15
this argument as “erroneous” (Pet. App. 4a-5a), the Second
Circuit stated:
The prospect of a higher exercise price does not
mean that there is no fixed-price component; the
prospect of a higher exercise price [through the
floating component] is what makes the option a
“hybrid” in the first place.
Pet. App. 5a, n.2 (emphasis added).
Based on this determination, the Second Circuit then cor-
rectly applied the SEC’s regulations to the fixed and floating
components of the hybrid as, in effect, separate instruments
contained within the March 2000 Put. Because the March
2000 Put contained a fixed price component, the Second
Circuit necessarily concluded that it was a “put equtvalent
position,”’* which is a form of “derivative security.”’” Pet.
App. 8a & n.3.
The Second Circuit then examined the SEC rules per-
taining to derivative securities. SEC Rule 16b-6(a) provides
that, in light of the recognized equivalence between deriv-
'* As the Second Circuit noted, the SEC’s definition of put equivalent
position (Rule |16a-1(h)) “specifically covers put options such as those
involved in this case” because through the “locked-in sale price” provided
by the March 2000 Put’s fixed price component, Cox “realized profit
as At Home [stock] declined in price.” Pet. App. 8a, n.3; 17 C.F.R.
§ 240.16a-1(h) (“put equivalent position” includes “derivative security
position that increases in value as the value of the underlying equity
decreases”).
' The Bondholders argued below that the March 2000 Put was ex-
cluded from the definition of “derivative security” because it had an unex-
ercised floating price component. This contention is meritless. “Rule
16b-6(a)(6) only ‘excludes those securities without a fixed exercise
price.’” Oz Masterfund, 2001 WL 7670i3 at *9 n.14 (quoting 1991
Release) (emphasis added). Thus, a hybrid (like the March 2000 Put),
“which contains a fixed exercise price, would fall within the definition of
‘derivative security.’” Jd.
16
ative positions and their underlying equity securities (see
1991 Release, 56 Fed. Reg. at 7250), “the establishment of or
increase in a put equivalent position ... shall be deemed a
sale of the underlying securities for purposes of section 16(b)
of the Act.” 17 C.F.R. § 240.16b-6(a). In contrast, Rule 16b-
6(b) provides that, to avoid double liability:
the disposition of underlying securities at a fixed
price due to the exercise of a put equivalent
position [such as a fixed put option] shall be exempt
from the operation of section 16(b)....
17 C.F.R. § 240.16b-6(b) (emphasis added).
The Second Circuit correctly determined that these rules
“decide the case”: (i) the establishment of the Put’s fixed
price component on March 28, 2000 was a sale under Rule
16b-6(a); (ii) the exercise of the fixed price component in
January 2001 was a non-event under Rule 16b-6(b); and
(i11) the mere existence of the floating price component did
not lead to any Section 16(b) event because it was never exer-
cised. See Pet. App. at 8a. See also 1991 Release, 56 Fed.
Reg. at 7253 (rules require “the floating price derivative
security” to be exercised to constitute a Section 16(b) event).
Thus, the Second Circuit properly determined that, because
the Put’s “floating price [component] did not affect the
calculation of the exercise price, the section 16(b) sale in this
case occurred only with the acquisition of the [Put] ... [on]
March 28, 2000.” Pet. App. 8a (emphasis added).
Second, the Second Circuit’s decision is fully consistent
with the policy rationale underlying the SEC’s regulations.
The Bondholders’ proposed approach below of treating the
exercise (rather than the establishment) of the fixed price
component of the March 2000 Put as the relevant Section
16(b) event would reopen a loophole that the SEC closed with
its 1991 revisions to its Section 16(b) rules. Under the
Bondholders’ approach (and the law prior to 1991), an insider
with knowledge of an impending release of negative in-
17
formation could avoid Section 16(b) liability entirely by:
~ (i) acquiring a hybrid put with a fixed component on Day |
(a non-event under the Bondholders’ approach); (ii) pur-
chasing stock on Day 2 after the stock price had fallen (a non-
matchable purchase under the Bondholders’ approach); and
(iii) waiting six months to exercise the fixed component of
the hybrid put at the higher price (a non-matchable sale under
the Bondholders’ approach). Although the insider would wait
six months to exercise the put at its fixed price, the insider
could be certain of the put’s fixed exercise price (and the
existence of a locked-in profit) as of Day 1. Prior law,
however, treated the exercise of the put as the relevant sale.
Current law—Rules 16b-6(a) and (b)}—dictates that only
the put’s establishment is deemed a sale. These rules reflect
the SEC’s 1991 determination that the primary potential for
abuse of an option with a fixed price component occurs at its
establishment. Pet. App. 7a (“As to options with fixed price
components, the SEC is of the view that the greatest risk of
short-swing profiteering arises at the point in time nearest the
establishment of the option.”’).
This is in contrast to a purely floating price option, which
as the District Court explained, does not allow its holder to
lock-in a profit until it is exercised, and accordingly is not
treated as a Section 16(b) event until it is exercised. See Pet.
App. 22a (“This type of option does not pose a risk of insider
trading at the time of its creation because it does not lock in a
price that may profitably diverge from the market price (i.e.,
once the inside information reaches the market).”).
The below chart illustrates an insider’s ability to insulate a
short-swing profit from Section 16(b) liability under the
approach that the Bondholders advocated in the courts below.
The chart’s shaded cells indicate the matching transactions
that are present under the SEC rules and the Second Circuit’s
18
holding, but are absent under the Bondholders’ proposed
treatment of hybrid options below.'®
Opportunity For Abuse Created By Bondholders’ Position
Date Event Bondholders’ | Second
Position Circuit
Below Classification
Day Insider learns | Non-event. Matchable
one of an Th Sale at $100 a
; e
el ht: Bondholders share.
price decrease | i snorethe _'| Rule 16b-6(a)
from existing ces
$100 market acquisition of | treats the
; the fixed establishment
so ond component. of the put as a
enters into allt
hybrid
fixed/floating
put at the
greater of
$100 a share
or a floating
market price.
The Stock price Non- Matchable
next drops to $50.a | Matchable Purchase at
day share, and the | Purchase at $50 a share.
insider buys $50 a share. The insider is
stock at that liable for a $50
price. per share
profit.
'® Because the insider in the above scenario exercises the hybrid put
solely at its fixed price component, the same result occurs regardless of
whether the put contains a restriction (as the March 2000 Put did) on total
consideration that would limit the number of shares that could be sold at
the (irrelevant) floating price.
19
Date Event Bondholders’ | Second
Position Circuit
Below Classification
Six Insider Non- Non-event.
months | exercises put | Matchable As noted
and right and sells | Sale at $100 above, a short-
one the stock a share. swing profit
da originally rae already is
hae bought at $50 _ — recoverable.
evades Section
for the $1002 | 1604) liability | The fixed
mare mae because the price exercise
price, making purchase and _ | is a non-event
a $50 per sale are over under Rule
share profit. six months 16b-6(b).
apart.
Because the Bondholders have no answer for the loophole
that would be created by the position that they took in the
courts below, they now simply have abandoned that position
and replaced it with their new “dual sale” argument. That
argument asserts that the March 2000 Put should be treated as -
a sale both on its establishment date and on the last day of the
irrelevant floating component’s market pricing window. See
Pet. at 9, 11 n.4. As established in Section C, however, the
Bondholders’ new “dual sale” argument was not properly
raised below (and thus cannot be considered) and, in any
event, is directly contrary to SEC rules.
Third, the Second Circuit’s decision is in accord with the
SEC’s interpretation of its regulations in its Amicus Brief.
Courts are “bound by the SEC’s interpretations of its
regulations in its amicus brieffs], unless they are ‘plainly
erroneous Or inconsistent with the regulations.’” Press v.
Quick & Reilly, Inc., 218 F.3d 121, 128 (2d Cir. 2000) (citing
Auer v. Robbins, 519 U.S. 452, 461-63 (1997).). Thus,
20
because the SEC reached the correct result consistent with its
regulations, the Bondholders’ petition should be denied.
C. The Bondholders Present No Valid Basis
To Reverse The Second Circuit.
Certiorari should also be denied because the Bondholders
have failed to present any basis for reversal of the Second
Circuit and District Court’s opinions.
First, as this Court has repeatedly held, a petition for
certiorari should not be granted where a petitioner bases its
argument on a contention not raised below. See, e.g., City of
Springfield, Mass. v. Kibbe, 480 U.S. 257, 258 (1987) (dis-
missing writ as impgovidently granted, where petitioner advo-
cated position before the Supreme Court it did not press
below); see also Davenport v. Harry N. Abrams, Inc., 249
F.3d 130, 132 (2d Cir. 2001) (party cannot assert on appeal an
argument that it failed to raise in the district court).
Here, the lynchpin of the Bondholders’ request for certio-
rari is their new “dual_sale” approach, whereby they claim
the Put should be treated as a Section 16(b) “sale” both on its
establishment date (March 28, 2000) and fifteen days after its
exercise when the irrelevant floating component’s market
pricing window closed (February 2, 2001). Pet. at 9, 11 n.4.
Ignoring their own Complaint and their arguments below, the
Bondholders now assert that they “argued [this dual ap-
proach] to the Second Circuit.” Pet. at 9.
To the contrary, the position that the Bondholders took in
their Complaint'’ and consistently argued in their briefs
'” See Compl. §j 69, Pet. App. 58a (February 2, 2001 end of the floating
component’s market pricing window “was equivalent to a ‘sale’ by Cox”
of At Home common stock).
21
before the District Court'® and Second Circuit’? was that the
March 2000 Put was a Section 16(b) sale solely on or after its
exercise. For example, in their reply brief before the Second
Circuit, the Bondholders contended:
Only fifteen days after Cox ... gave notice to
AT&T of [its] intent to exercise the option did this
instrument become a derivative security and a ‘sale’
occur under Section 16(b).
Appellant’s Reply Br. at 9 (emphasis added); see also id. at
12 (“[{T]he Court should hold that ... the ‘sale’ occurs . . . in
this case [on] February 2, 2001.”) (emphasis added). Indeed,
at oral argument before the Second Circuit, the Bondholders
expressly disavowed that the establishment of the March
2000 Put could be a sale:
If your Honors go back and look at our complaint,
the one thing that is crystal clear is we said |the
Put’s establishment] was not a sale. There was no
event under 16(b) until after [Cox] gave notice [of
exercise].
Tr. at 36 (emphasis added).
Consistent with these representations, the Second Circuit’s
opinion recounts that the Bondholders “argue[d] that, for the
purposes of section 16(b), the sale date was the exercise
date” of the March 2000 Put. Pet. App. 5a (emphasis
'® See Pet. App. 26a (reflecting that the Bondholders “argue[d] that [the
district court] should ... treat the [Put] as a purely floating derivative”
cognizable as a sale only on its exercise date).
' See Appellant’s Br. at 2 (asserting that “the district court erred . . . in
holding that a Section 16(b) sale ‘first’ occurred when the Put ... was
created”); see also Appellant’s Br. at 21 (second cause of action is rele-
vant only “[i]f contrary to the facts and logic, this Court finds that a
Section 16(b) sale occurred in March 2000, and not in February 2001”).
22
added).”° In their certiorari petition, however, the Bond-
holders do not even acknowledge that they made this
argument below, and instead claim that they argued the dual
sale approach “to the Second Circuit.” Pet. at 9.
In any event, even if the Bondholders were somehow
deemed to have raised the “dual sale” argument before the
Second Circuit, that_argument—only hinted at for the first
time on appeal months after full briefing and oral argument in
a supplemental reply letter brief’'—would still have come far
too late to be considered by this Court. See Davenport, 249
F.3d 132-33 (“argument [wa]s not properly asserted” because
litigant “never argued [it] in district court”); Cioffi v. Averill
Park Cent. Sch. Dist. Bd. of Educ., 444 F.3d 158, 169 (2d Cir.
2006) (new argument raised for the first time in reply brief
was untimely and deemed waived). Accordingly, certiorari
should be denied. City of Springfield, Mass. v. Kibbe, 480
USS. at 258.
Second, even if it had been properly raised (which it was
not), the Bondholders’ new “dual sale” argument fails on the
20 Because the Bondholders asserted that there was only one sale, the
Second Circuit noted that “[i]f the section 16(b) sale occurred as of the
granting of the [March 2000 Put], it is undisputed that At Home’s short-
swing [profit] claim fails as to Cox.” Pet. App. 5a (emphasis added).
*! Specifically, the Bondholders mentioned a “dual sale” only in a
single passage in a letter to the Second Circuit replying to the SEC Amicus
Brief. See Bondholders’ Letter dated March 3, 2006 (“Reply Letter Br.”).
That letter never argued that the Second Circuit should adopt a “dual sale”
position, but simply noted—incorrectly—that “[njothing in the SEC’s
[brief] precludes a finding here” that two sales might be recognized. See
id. at 4. Rather, the Bondholders’ letter unequivocally took the position
that “the sale occurred on February 2, 2001, when the price and number of
shares subject to the [Put] were set for the first time.” /d. at 2 (emphasis
added). Given the Bondholders’ failure to properly raise their new “dual
sale” argument, the Second Circuit correctly elected not to address that
argument in its decision. See Pet. App. 5a (recounting that the Bond-
holders argued that “the sale date was the exercise date”).
23
merits. As explained in Section B above, the fixed price
exercise of the Put did not lead to a “sale” under the SEC’s
regulations. See 17 C.F.R. § 240.16b-6(b). Moreover, the
SEC itself has twice rejected the dual sale approach the
Bondholders now propose: first in its 1991 regulations,
which treat a fixed price exercise as a non-event (i.e., Rules
16b-6(a) and (b)), and second in its Amicus Brief to the
Second Circuit that concluded that the March 2000 Put can
only be recognized as a sale on its March 28, 2000
establishment date (Cox App. 13a-14a).”
Third, the Bondholders are flatly wrong in asserting that
the March 2000 Put should be treated as a sale on its exercise
date because supposedly “the risk of speculative abuse with
respect to the Put .. . dramatically increased” over time. Pet.
at 11. As the Second Circuit and SEC found (and as demon-
strated above in Section B), for. options with fixed price
components (such as the Put), “the greatest risk of short-
swing profiteering arises at the point in time nearest the
establishment of the option,” at which time corporate insiders
with non-public information can use the hybrids to lock-in
guaranteed profits. See Pet. App. 7a. This locked-in profit is
not dependent upon the passage of time, but rather exists
regardless of the option’s exercise date.
” The Bondholders’ “dual sale” approach to the fixed price exercise of
the March 2000 Put must be distinguished from the issue of a two-step
profit calculation for a hybrid exercised at a floating price (an issue not
present here). As noted above, the Bondholders’ “dual sale” approach,
which would treat both the establishment and exercise of the fixed price
component of a hybrid put as a Section 16(b) sale, violates Rule 16b-6(b).
That rule mandates that the “the closing of a derivative security position
as a result of its exercise ... shall be exempt from the operation of”
Section 16(b). 17 C.F.R. § 240.16b-6(b). On the other hand, the SEC
rules do not forbid a two-step profit calculation for the exercise of a
hybrid’s floating component, and in addition to the District Court in this
case, at least one other court has suggested that a two-step approach may
be applied in such circumstances. See Schaffer, 280 F. Supp. 2d at 140.
24
The Bondholders ignore this locked-in profit and instead
present a complicated Rube Goldberg scenario that purport-
edly demonstrates this “increased potential for speculative
abuse.” Specifically, the Bondholders posit that an insider
might: (1) enter into a hybrid put at a $48 fixed price or a
floating market price; (2) wait ten months for the put to be
exercisable under its terms; (3) receive information that a
company will (a) announce news that will make its stock
price drop to $24 a share, and then (b) announce additional
news that will make its stock price rise above $24 a share;
(4) exercise the put at the $48 per share price after the release
of the bad information; (5) buy back the stock sold through
the put at a lower market price; and (6) benefit from an in-
crease in the price of stock from the anticipated appre-
ciation of the stock. See Pet. at 11.
In fact, this hypothetical does not demonstrate any
increased potential for speculative abuse between the Put’s
establishment and its exercise. Rather, the SEC regulations
that dictate how derivatives are treated reflect the SEC’s
careful balancing of the risks posed by these instruments.
Because the hybrid put in the example is exercised at its fixed
price, and its floating component never comes into play, an
insider could accomplish the same effect as in the scenario
above through a purely fixed price put. By design, as
explained above in Section B, SEC Rules 16b-6(a) and (b)
treat the establishment of such a fixed price put as a sale and
its exercise as a non-event. See 17 C.F.R. § 240.16b-6(a) &
(b). Because a hybrid put exercised at its fixed price presents
the same potential for abuse as a purely fixed price put, it
makes perfect sense that such a hybrid should be treated the
same way as a purely fixed price put."
3 In addition, this convoluted scenario would not allow an insider to
circumvent Section 16(b). Section 16(b) by design only covers “short
swing” profits, i.e. those obtained from a matching purchase and sale
within a period of less than six months. Because the establishment of a
25
Fourth, the Bondholders’ assertion that the March 2000
Put should be treated as a sale in 2001 because its hybrid
pricing mechanism purportedly did not allow Cox to “hedg[e]
and speculat[e]” until close to the Put’s exercise date (Pet. at
10-11) is nonsensical and entirely misapprehends the purpose
of Section 16(b). Section 16(b) is aimed at preventing insid-
ers from making profits from the misuse of inside information
regarding known future price movements. See 15 U.S.C.
§ 78p(b) (statute is “[flor the purpose of preventing the unfair
use of information which may have been obtained” by insid-
ers); Kern County Land Co. v. Occidental Petroleum Corp.,
411 U.S. 582, 591 (1973) (prior to enactment of Section
16(b), “[i]nsiders could exploit information not generally
available to others to secure quick profits”).
Section 16(b) is not aimed at preventing insiders from
hedging against unknown risks, or from protecting themselves
from price swings that a stock price might take (i.e., situations
where an insider has no inside information), as the Bond-
holders imply. Because any locked-in profit from inside
information is known when a hybrid derivative (such as the
Put) is established, SEC rules treat derivatives with fixed
exercise prices as Section 16(b) events on the date of their
establishment, and not later based on their alleged potential to
“hedge” against unknown market developments. See 17
C.F.R. § 240.16b-6(a) & (b).
fixed price put — equivalent to a simple sale, Rule 16b-6(a) treats that
establishment as a sale. The Bondholders’ hypothetical posits a 10 month
waiting period from the establishment of the fixed price option (step one)
until the alleged matching purchase (step five), and thus by definition
does not involve a matching purchase and sale within a period of less than
six months. Moreover, the profit from the difference between the reduced
purchase price (in step five) and the anticipated higher price (in step six)
would be captured by Section 16(b) if the insider realized that profit by
selling at the higher price within six months of the purchase.
26
Finally, the Bondholders’ contention that the Second Cir-
cuit employed a “hindsight” approach when it held that the
March 2000 Put was a sale as of March 28, 2000 (Pet. at 12)
is wholly misguided.” In fact, the Second Circuit applied
Rule 16b-6(a) to the establishment of the Put (to conclude
that it was a sale), and separately applied Rule 16b-6(b) to the
subsequent fixed price exercise of the Put (to conclude that it
was an exempt non-event under Section 16(b)). See Pet. App.
8a. No “hindsight” at all was involved in this analysis. The
Second Circuit did not hold that the March 2000 Put only
became a sale in March 2000 when it was exercised at a fixed
price in January 2001 (as the Bondholders suggest). Rather,
it concluded that it was a sale on the date of its establishment
because that is when the profit opportunity was locked-in.
CONCLUSION
WHEREFORE, respondents Cox Communications, Inc.
and Cox @Home, Inc. respectfully request that the Bond-
holders’ petition for a writ of certiorari be denied.
Respectfully submitted,
MICHAEL D. HAYS *
MICHAEL D. ROTHBERG
DANIEL D. PRICHARD
Dow LOHNES PLLC
1200 New Hampshire Avenue
Washington, D.C. 20036
* Counsel of Record (202) 776-2000
August 30, 2006
*4 The Second Circuit’s holding is also correct for a number of inde-
pendent reasons not reached by the Second Circuit’s opinion. Among
other things, there was no matching Section 16(b) “purchase” of At Home
stock and no purchase or sale of At Home securities would be cognizable
under the unorthodox transaction doctrine. See Cox Appellate Brief at
45-55.
APPENDIX
la
APPENDIX A
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
ee
No. 05-0115-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.
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
TABLE OF AUTHORITIES. ....sssesssssssssnsseseeees nennigcas al
a os l
0 EI TT ROE SCO CE em RR 2
SETS RA a eon Se Rt ae 4
I. THE ESTABLISHMENT OF THE PUTS IN
MARCH 2000 CONSTITUTED A SALE OF
AT HOME STOCK FOR PURPOSES OF
a 4
Il. THE MAY 2001 AGREEMENT TO
CANCEL THE FIXED PRICE PUTS WAS A
PURCHASE FOR SECTION 16(b)
I I sipbasicitadhish sacalesheneshbstcaginesnalenhall Vadathah sai gh iu 9
Ilt} COMCAST’S ACQUISITION OF THREE
CABLE COMPANIES THAT OWNED AT
HOME WARRANTS WAS NOT A
PURCHASE OF THE WARRANTS FOR
PURPOSES OF SECTION 1600) ...2..<cccooseosesoneseevones 10
IV. THE “UNORTHODOX TRANSACTION
DOCTRINE” IS INAPPLICABLE TO THE—
TRANSACTIONS IN THIS CASE ...... eee 15
V. CONTROLLING DEFERENCE IS OWED
BY THE COURT TO THE COMMISSION’S
REASONABLE INTERPRETATIONS OF
SECTION 16(b) AND RELATED COMMIS-
NE wiitcbiasulaiidiniconnahsesabilianminauanssnaliiiiglcetnee 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
DTI ssintnbscinsnttissiuciasesstenatecketatastailas 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-
BI I 18
EBL rae NTE ee ear RTD SRL NNO FOS 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.
py BR Bk | RR eens een 22
American Standard, Inc. v. Crane Co., 510 F.2d
ee Ie cheiniieithsntcensbitneessanabiniinianteiibutininrabinins 12
At Home Corporation v. Cox Communications, et
al., 340 F. Supp. 2d 404 (S.D.N.Y. 2004) .....00 ee. 2
Auer v. Robbins, 519 U.S. 452 (1997).......ccccceeeeeees 17, 18
Barnhart v. Walton, 535 U.S. 212 (2002) ......... yp ee
Bowen v. Georgetown Univ. Hospital, 488 U.S.
Fe EE Bicciicidiscincvibntnccediciamtadeaedibictiiiacencemieabitaitedeiniainads 17
Bowles v. Seminole Rock & Sand Co., 325 U.S.
410 (1945)............... nckaitinatninbieidsiiameatieaniisaiieneis 17,18
Chevron, U.S.A., Inc. v. Natural Resources
Defense Council, Inc., 467 U.S. 837 .
SID cistern secebaiesiiesesileisicaiiiadiiiamiansnaales 18, 19, 20, passim
Christensen v. Harris County, 529 U.S. 576
i aieiccsiistedeiisoueihbaneiiesieanmisendeetsadjabidadstememeinicibemaiees 20, 22
Community Health Center v. Wilson-Coker, 311
2 gerd Le Te. . SORE ei erie aeweee 23
Dabit v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., 395 F.3d 25 (2d Cir.), cert. granted, 126
ee Ts | ARR ers ee ere 20, 23
DeMaria v. Andersen, 3\8 F.3d 170 (2d Cir.
Se ciesesiciinotindeticinssveiceinlaleachiddiidik meta litacabelactaeiaia alg 17
Drake v. FAA, 291 F.3d 59 (D.C. Cir. 2002).............0+ 18
Ecarnacion v. Barnhart, 331 F.3d 78 (2d Cir.
PIA ccladasinitcciaiicthiedaailsctneiicdieddaataaaiicdidaiiidimmesidiaie 18
In re Enterprise Mortgage Acceptance Co., LLC,
Securities Litigation, 391 F.3d 401 (2d Cir.
SITE Ph ssiccciarcesbhcied-cicshndiliechedaibensibeshiphiteidalaiotabeiotshaididalaman 20, 23
Foremost-McKesson, Inc. v. Provident Securities
eis ee i hccitictnsnsinaadeindiicdecipieteniagaaal 13
Gollust v. Mendell, 501 U.S. 115 (1991).............0...cee0e 13
Sa
TABLE OF AUTHORITIES—Continued
Gryl v. Shire Pharmaceuticals Group PLC., 298
ge Te oe me | RE es seen wean: 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,
Lid., 263 F.3d 10 (2d Cir. 2001)..........ceeeeeeseeeees 17, 25
Martin v. Occupational Safety & Health Rev.
ae a, Be ie Baile eterierctensnicncesnnenionions 18
National Cable & Telecommunications Assoc. v.
Brand X Internet Services, U.S. _, 125%.
te a i dinctdtacncetisdiastakccicitecnicbemedeindeipeeeancesncsnetneint 19
In re New Times Securities Services, Inc., 37}
Fe Cc eT ahinicicdnccidecsktntnendaiisenuvetpsniesin 24, 26
Press v. Quick & Reilly, Inc., 218 F.3d 121 (2d
I hisisditlenhicaibstinmeutuciiaesimmichipketab tigen cipal 17
Reliance Electric Co. v. Emerson Electric Co..,
We I I i 12, 13
SEC v. American Board of Trade, Inc., 751 F.2d
See Tic SIE seeosisesennsonksciasemnsbonhauicuibeihaaseintenbdinmes 14
Skidmore v. Swift & Co., 323 U.S. 134 (1944)......000.... 19
Taylor v. Vt. Dep. of Educ., 313 F.3d 768 (2d
8 RSE Artie ero oe ay Pe AsO el DOERR IP 18
United States v. Mead Corp., 533 U.S. 218
a ae 20, 22
Washington State Dept. of Social and Health
Servs. v. Guardianship Estate of Keffeler, 537
RE 8 er _ | ERRaRa, HUN ALOU OE eek CON eee 22
Yoder v. Orthomolecular Nutrition Institute, Inc..,
Fe ae ree Ce Gs WD cccnecsvcnsdeccisinioesbicsiteiaiaaoiunic 14
Yourman vy. 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) ............. i3,
Ownership Reports and Trading By Officers,
Directors and Principal Securities Holders,
Exchange Act Rel. No. 28869, 56 Fed. Reg.
FONE ecg SO nviietitcientioimnana 4,5, 18
STATUTES AND RULES
Securities Exchange Act of 1934, 15 U.S.C. 78a,
et seq.
Octet HA), 15 CBA. FR ccvtencessctetinsenensctenkecabenon 15
Section 3(a)(10), 15 U.S.C. 78c(a)(10) ...... eee 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 seq.
Rule 16a-1(c), 17 C.F.R. 240.16a-1(C) 00... ceeeeeesreeees 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()....... ce eeeeeeees 5
Rule 16a-9, 17 C.F.R. 240.16a-9..................cccccssseeees 25
Rule 160-10, 17 C.F.R. 240. 16m 1G .....cccccccsveseceseacsess 25
Rule 16a-11, 17 C.F.R. 240. 16a-11 ...........ccccesseserceres 25
Rule 16a-12, 17 C.F.R. 240. 160-12...........ccccccccccesseees 25
Rule 160-13, 17 C.F.R. 240. 16a-13 ....cscsccccccsescscccessss 25
Rule 166-1, 17 C.F.R. 240. 16D-1 ........csccccorscsessvesenees 25
Rule 160-2, 17 C.F RR. SOO Te sevssvesesessstestcnsteneeins 25
Rule 160-3, 17 CPR. DOG AGS ccccccscstiscrenisivgniin 25
Rule 16b-4, 17 C.F.R. 240. 16b-4 oo. eeceeeeeeeee 25
Rule 160-5, 17 C.F. ZAG TGS cscsscccecscsetecssnsioonsoces 25
Ta
TABLE OF AUTHORITIES—Continued
STATUTES AND RULES (Continued) Page
Rule 16b-6, 17 C.F.R. 240. 166-6 ...........cccccseeseeseeeee 25
Rule 16b-6(a), 17 C.F.R. 240.61 b-6(4)............cc0ee0ee 5,9
Rule 16b-6(b), 17 C.F.R. 240.61b-6(b) ......... cc eeeeceeees 6
Rule 16b-6(d), 17 C.F.R. 240.16b-6(d) ..............000. 8,9
Rule 16b-7, 17 C.F.R. 240.16b-7 ............ccceccececeeeeeee 25
Rule 160-6, 17 CFR. 240. 1GB-B oo. ..ccccscoscsccceveececeeeee 25
MISCELLANEOUS
David S. Ruder, Address: The Development of
Legal Doctrine Through Amicus Participation:
The SEC Experience, 1989 Wis. L. Rev. 1167 —
RAE RE Cid osuusonubororphoevesseveotonté 26
H.R. Rep. No. 1383, 73d Cong., 2d Sess. 13
ns cnesionentoorsornvenerveds 13
Request for Commission Amicus Participation in
a Pending Case, http://www.sec.gov/litigation/
DLISTS/ AMNICUSTEDUCSE. NAIM .......0cecrcerervererrsesecescoseseerooees 26
8a
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
a
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.
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. 445).
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.
453). 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 1 6(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:
Tne * * * 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 “[rlights 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 dcquisition, 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 sale 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 1s 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 16a-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).*
ll, 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 plaintiff's 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 cxempt basis by virtue of Rule 16b-6(d). The underlying
shares become available for a different sale.
Ry: |
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.
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(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. § 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 to
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.” /d. 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 control 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 g eat,” 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 conteat 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., 751 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 information 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,
Ltd., 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, 229 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 v. 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 judgment 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 interpretation 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 docs 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 thé 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 to fill in interstices in the statutes. See Dabit v.
Merrill Lynch, Pierce, Fenner & 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); Jn re Enterprise Mortgage Acceptance Co., LLC, Secu-
rities Litigation, 391 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(b), in which Congress
expressly delegated to the Commission that responsibility.
25a
of that authority.” /d. 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 Cizevron 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 carefui 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 issue. * * *
'! 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 Health Servs. v.
Guardianship Estate of Keffeler, 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
'6(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., 371 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.
'4 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.3d at 82.
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. 05-0115-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 certify 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) because
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,
Vv.
Cox COMMUNICATIONS, INC., COX@HOME, INC.,
COMCAST CORPORATION, COMCAST ONLINE
COMMUNICATIONS, INC., COMCAST PC INVESTMENTS, INC.,
BRIAN L. ROBERTS AND DAVID M. WoopDRow,
Defendants-Appellees.
CERTIFICATE OF COMPLIANCE WITH LOCAL
RULE 2 °?(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,
V.
Cox COMMUNICATIONS, INC., COX@HOME, INC.,
COMCAST CORPORATION, COMCAST ONLINE
COMMUNICATIONS, INC., COMCAST PC INVESTMENTS, INC.,
BRIAN L. ROBERTs AND DAVID M. WoopRow,
Defendants-Appellees.
aa
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.