Petition for Writ of Certiorari — Levy v. Sterling Holding Holding Co., LLC (No. 08-1165)

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& usrame Court, U.S

ae AN hl a

| 081165 MAR 1 8 2009

No. ___ GRFIGE OF THE CLERK

IN THE

Supreme Court of the Gnited States

MARK LEvy,

Petitioner,

STERLING HOLDING COMPANY, LLC;

NATIONAL SEMICONDUCTOR CORPORATION; AND

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.,

Respondents.

On Petition for a Writ of Certiorari

to the United States Court of Appeals

for the Third Circuit

PETITION FOR A WRIT OF CERTIORARI

MITCHELL M..Z. 'TWERSKY DAVID C. FREDERICK

JEFFREY S. ABRAHAM Counsel of Record

ABRAHAM FRUCHTER KELLY P. DUNBAR

& TWERSKY LLP KELLOGG, HUBER, HANSEN,

One Penn Plaza, Suite 2805 TODD, EVANS & FIGEL,

New York, New York 10119 P.L.L.C.

(212) 279-5050 1615 M Street, N.W.

Suite 400

Washington, D.C. 20036

March 18, 2009 (202) 326-7900

QUESTIONS PRESENTED

1. Whether the rule against retroactive agency

rulemaking of Bowen v. Georgetown University Hos-

pital, 488 U.S. 204 (1988), and the principles of retro-

activity analysis of Landgraf v. USI Film Products,

511 U.S. 244 (1994), are categorically inapplicable to

amended agency rules that purport to clarify agency

rules but that conflict with courts of appeals’ prior

interpretations of those rules.

2. Whether the Securities and Exchange Com-

mission’s new Rule 16b-3, 17 C.F.R. § 240.16b-3

(2005) — which exempts from disgorgement those

short-swing profits realized from an insider’s acquisi-

tion of securities from the insider’s own company —

is a lawful interpretation of Section 16(b) of the

Securities Exchange Act of 1934, 15 U.S.C. § 78p(b),

which provides for a broad, prophylactic right to

recover profits acquired by an insider as a result

of short-swing transactions in the insider’s own

company’s securities.

TABLE OF CONTENTS

Page

COU BS TEGIING Fe es cescccsscccccssccsccscccsscsscsssess i

TAREE Gee Fe aoa eca scence ccc ccs cece ccc ccccssceee Vv

EINE iach ese sccssccssceee er ee 1

‘OPIN ee .................................. 3

FF ei cssncscccssccccscccscees 3

STATUTORY AND REGULATORY

ee Ss 3

STAT a peceecerscscccccccessccsveees 3

A. Tie 0... 3

B. Facts and Proceedings Below ......................... 7

REASONS FOR GRANTING THE PETITION....... 12

I. THE THIRD CIRCUITS TEST FOR

DETERMINING WHEN AGENCY

CLARIFYING RULES HAVE RETRO-

ACTIVE EFFECT DEEPENS AC-

KNOWLEDGED CONFLICTS AMONG

THE CIRCUITS AND DEPARTS

FROM THIS COURT'S DECISIONG............ 12

A. The Courts Of Appeals Are Divided

With Respect To The Proper Legal!

Standard For Determining When

Agency Rules Are Impermissibly

en ceacacncsccees 13

1. The Third Circuit’s decision

deepens a sharp split among

courts of appeals on whether

agency rules inconsistent with

previous courts of appeals’ deci-

sions are necessarily retroactive

as applied to pending claims............ 13

2. The Third Circuit’s conclusion

that “clarifying” rules are not

subject to analysis under Land-

graf deepens confusion in and

adds to disagreement among

Cat I ei cee 16

3. The Third Circuit’s holding that

the status of the SEC’s rule

as legislative is irrelevant to

retroactivity analysis divides

CR ee cc crnditceyncounch nutceceecan teen sevicens 18

B. The Decision Below Conflicts With

This Court’s Retroactivity Juris-

SI di cise chactcsareate eae 20

C. This Case Is An Appropriate Vehi-

cle To Address These Important

RE I vit cs sieks nhs hes a Aas 24

Il. THE THIRD CIRCUITS HOLDING

THAT CONGRESS DELEGATED TO

THE SEC NEAR PLENARY AUTHOR-

ITY TO EXEMPT TRANSACTIONS

FROM SECTION 16(b) WARRANTS

REViEW BY THIS COURT.........0...s02s:cosess. 25

A. The SEC’s New Rule 16b-3 Conflicts

With The Purposes Of Section 16(b)...... 26

B. The Court Should Grant Certiorari

To Clarify The Scope Of An Impor-

tant Provision Of Securities Law........... 32

CE I OW evans skicockvcrncuepatio amends aera: 32

APPENDIX:

Opinion of the United States Court of Appeals

for the Third Circuit, Levy v. Sterling Holding

Ga. , BHO. TT BSS COG. 1 BBD vives desencsseccsecvesenssecess la

Opinion of the United States District Court

for the District of Delaware, Levy v. Sterling

Holding Co., No. 00-994 (Feb. 13, 2007) ................ 32a

Opinion of the United States Court of Appeals

for the Third Circuit, Levy v. Sterling Holding

Co. No. OS-1 GPS CIC. 1B BOE vccsiccscssccscesvcviccssces 63a

Order of the United States Court of Appeals

for the Third Circuit Denying Rehearing, Levy

v. Sterling Holding Co., No. 07-1849 (Nov. 18,

isa aaa dassracncta ted At adn tla suena warm ices 100a

Statutory and Regulatory Provisions Involved ....102a

Securities Exchange Act of 1934, § 16(b),

pi BOE SE Ue. ARI es NPE ET ee i02a

SEC Rule 16b-3, 17 C.F.R. § 240.16b-3

a a a eset aaetedebuuubaeSssichei ones 103a

SEC Rule 16b-3, 17 C.F.R. § 240.16b-3

I ee tee ot 107a

SEC Rule 16b-7, 17 C.F.R. § 240.16b-7

ee an sea chedebe 110a

SEC Rule 16b-7, 17 C.F.R. § 240.16b-7

Re Cee Une ees MRE ll2a

Letter from Supreme Court Clerk regarding

grant of extension of time for filing a petition

for a writ of certiorari (Feb. 10, 2009)................... ll4a

TABLE OF AUTHORITIES

Page

CASES

ABKCO Music, Inc. v. LaVere, 217 F.3d 684

ESET eaer ene rs trem 18

Affiliated Ute Citizens of Utah v. United

Be Oe ie ETD vnsccevevicvsccsnscncscneeniccssee 27

American Mining Cong. v. Mine Safety &

Health Admin., 995 F.2d 1106 (D.C. Cir.

Es 0) 2 i cashew Race aaa Sadeameaninan aden 19, 20

Bowen v. Georgetown Univ. Hosp., 488 U.S.

NE 55a cae dctavndannrisessamaaiones 1,3, ¥%.. 33, 14,

19, 20, 22, 24, 25

Brown v. Thompson, 374 F.3d 253 (4th Cir.

SELENE TOI 17

Burks v. Lasker, 441. U.S. 471 C1979) ........0cccccreecsse. 31

Chevron U.S.A. Inc. vu. Natural Res. Def.

Council, Inc., 467 U.S. 837 (1984)............ 11, 30, 31

Eastern Enters. v. Apfel, 524 U.S. 498 (1998).....12, 25

Ernst & Ernst v. Hochfelder, 425 U.S. 185

Sg REI ae oR Poe AT DIE ee PRT Senay RPS Cty eer ran mn 26

First Natl Bank of Chicago v. Standard Bank

& Trust, 172 F.3d 472 (7th Cir. 1999) ............0... 19

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

ee a I I icc si dccw chassened wisesicenskedteeneavecens 30

Gollust v. Mendell, 501 U.S. 115 (1991)...........0.0..... 28

Health Ins. Ass’n of Am., Inc. v. Shalala,

ee AS CER. Cit; RD. wo iicvicciiscccscedectcrsavecces 19

Heimmermann v. First Union Mortgage Corp.,

305 F.Sea 1257 (1 1th Cir. 2002) ................0.... 17-18

Hughes Aircraft Co. v. United States ex rel.

Schumer, 620 U.S. 938 (1907)..............0.sccosssevcsess 22

ING v. St. Cyr, $33 U.S. 2S. C2001)..........esecseoree 23, 25

Landgraf v. USI Film Prods., 511 U.S. 244

a 1.3; 32; 13, 26, 16.

17, 20, 21, 23, 24, 25

Lewis v. Varnes, 505 F.2d 785 (2d Cir. 1974).......... 28

Liquilux Gas Corp. v. Martin Gas Sales,

6 Bee a ee | Se 17

Marrie v. SEC, 374 F.3d 1196 (D.C. Cir. 2004)....... 15

Martin v. Hadix, 527 U.S. 343 (1999) ...................... 22

National Assn of Home Builders v. United

States Army Corps of Eng’rs, 417 F.3d 1272

as ca pubiababreadawendanhecaes 23

National Cable & Telecomms. Ass’n v. Brand X

Internet Servs., 545 U.S. 967 (2005) ..............000.. 22

National Mining Ass'n v. Department of Labor,

292 F.3d 849 (D.C. Cir. 2002) ............ 14, 15, 16, 17

Orr v. Hawk, 156 F.3d 651 (6th Cir. 1998).............. 18

Piamba Cortes v. American Airlines, Inc.,

EE tee Ee CONE, EDDY conccccecsccsccscsccscicces 18

Princess Cruises, Inc. v. United States,

997 F.3d 1358 (hed. Cir. ZO0B)........cccccscocccoscccees: 16

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

ee canavin din SuNdbubndnedacveaseasa 30

SEC vu. Capital Gains Research Bureau,

SO ous cncdappnvinancakadksbckecestenss 27

Sweet v. Sheahan, 235 F.3d 80 (2d Cir. 2000)......... 23

vil

Touche Ross & Co. v. Redington, 442 U.S. 560

UE ain sicaas sds canteen atau peioaannedea aiaedadeteeaabaes 27

United States v. Capers, 61 F.3d 1100 (4th Cir.

IRE ERE gee Fe A eae RR BI RRL COND OU OTT OTN ye CA 15

United States v. Fones, 51 F.3d 663 (7th Cir.

IRE ee IRE Bagh Rie Sa Oe ORR TE RE et te 9 Ca ORE 14

United States v. Saucedo, 950 F.2d 1508

I i a a 15

Vo v. Gonzales, 482 F.3d 363 (5th Cir. 2007)........... 17

Wagman v. Astle, 380 F. Supp. 497 (S.D.N.Y.

I dala tel cca pe tulad ache on since ee uatesasaaradusan 28

STATUTES AND REGULATIONS

Black Lung Benefits Act, 30 U.S.C. § 901 et

NE cincss ia desldehckh tied cencvatcapdtnacucnthsenianeinakeebeseakitakens 14

Securities Exchange Act of 1934, 15 U.S.C.

a i Scdueaesanwaante 2. 3, 27, 28, 20

B16, 15 U.S.C. § 8p. ..eccscececccseccecscosesecss. ee 3

Fee he BEE Rr aeeeily Oe FI odisascanavsennsinsiespiversecersntes 4

§ 16(b), 15 U.S.C. § 78p(b)............. Z; 3:4, 3, 6, 7. 3,

10, 11, 12, 21, 22, 23,

26, 27, 28, 29, 30, 31, 32

I is i vs cas cocnacauevce omiadeek cee el 3

17 C.F.R::

§ 240.16b-3 (2005) (Rule 16b-3) ....2, 3, 6, 7, 10, 11,

13, 15, 18, 19, 20, 21,

22, 23, 25, 26, 28, 31, 32

§ 240.16b-3 (1996) (Rule 16b-3) .......cecceceeeeees 3, G, 9,

10, 20, 30

vill

§ 240.16b-3(d) (1996) (Rule 16b-3(d))............ 5, 6, 9

§ 240.16b-7 (2005) (Rule 16b-7) ................... 3, 7, 10

§ 240.16b-7 (1996) (Rule 16b-7) .............00.... 3, 9,10

LEGISLATIVE MATERIALS

Fe Be FED crcniscessicecnsssecnscecesesavoreniecee 29

Fe te BS i cchisinssivrasciackesnincsanatoenscenses 5

Stock Exchange Practices: Hearings on S. Res.

84 (72d Congress) and S. Res. 56 and S.

Res. 97 (73d Congress) Before the S. Comm.

on Banking and Currency, 73d Cong. (1934) ..... 29

OTHER MATERIALS

Ownership Reports and Trading by Officers,

Directors and Principal Security Holders,

Release Nos. 33-8600, 34-52202, 35-28013,

70 Fed. Reg. 46,080 (Aug. 9, 2005) ................ 20, 31

Ownership Reports and Trading by Officers,

Directors and Principal Security Holders,

Release Nos. 34-37260, 35-26524, 61 Fed.

Re, ee Fe PR Fy BE ons iaiisincéss vvcvessnccscrssesess 6

Karl Shumpei Okamoto, Rereading Section

16(b) of the Securities Exchange Act, 27 Ga.

ig Be I EB oa cevasaccrsiacersanesnanccenstvenes 27, 28, 29

Steve Thel, The Cenius of Section 16: Regu-

lating the Management of Publicly Held

Companies, 42 Hastings L.J. 391 (1991)....... 5, 27,

Mark Levy respectfully petitions for a writ of

certiorari to review the judgment of the United

States Court of Appeals for the Third Circuit in this

case.

INTRODUCTION

This case presents an acknowledged conflict among

the circuits regarding the proper application of this

Court’s decisions in Bowen v. Georgetown University

Hospital, 488 U.S. 204 (1988), and Landgraf v. USI

Film Products, 511 U.S. 244 (1994), with respect to

agency rules. This Court held in Bowen that agen-

cies, such as the Securities and Exchange Commission

(“SEC”), presumptively lack the authority to adopt

retroactive rules. In Landgraf, this Court explained

how to identify those statutes and rules that have

retroactive effect. | Notwithstanding this Court’s

guidance, at least three pervasive and deep splits

exist among the courts of appeals regarding the

circumstances in which agency rules fit within the

ambit of Bowen and Landgraf. This case implicates

all three conflicts, each of which could be outcome-

determinative in petitioner's favor.

First, the Third Circuit held that, in determining

whether an agency’s purported clarification of a rule

has a retroactive effect. it is of no moment whether

the amending rule is substantially inconsistent with

a prior interpretation of the existing rule by a court

of appeals. That decision creates an acknowledged

conflict among the Fourth, Tenth, and D.C. Circuits

on one side, and the Third and Seventh Circuits on

the other. That difference in legal standard, more-

over, 1s outcome-determinative because the SEC’s

“clarifying” rule conflicts with a prior Third Circuit

decision. Second, the Third Circuit concluded that

so-called clarifying agency rules are excluded auto-

matically and categorically from the prohibition of

Bowen and the principles of Landgraf. That holding

adds to a mature circuit split that now involves nine

courts of appeals. Third, the Third Circuit held that

a rule’s status as legislative or interpretive has no

bearing on retroactivity analysis. That squarely con-

flicts with decisions of the D.C. and Seventh Circuits;

the conflict is likely outcome-determinative in this

case because the SEC’s new Rule 16b-3, 17 C.F.R.

§ 240.16b-3 (2005), is legislative in nature. This

Court should grant the petition and resolve those

conflicts.

Certiorari is also warranted on the second question

presented. The Third Circuit below held that

Congress has delegated to the SEC near plenary

authority to create exemptions to Section 16(b) of

the Securities Exchange Act of 1934 (“Exchange Act”),

15 U.S.C. § 78p(b). In fact, Congress provided the

SEC with lhmited authority to create exemptions for

transactions not contemplated by the “purpose” of

Section 16(b), which implements the Exchange Act’s

objective of containing manipulation and unreason-

able fluctuations in share prices that had contributed

to the Great Depression. Traditional tools of statu-

tory construction compel the conclusion that Section

16(b)’s “purpose” is broadly to prevent insiders from

profiting from short-swing transactions regardless of

whether those transactions were founded on insider

information or informational asymmetries. The

Third Circuit therefore erred in granting deference to

the SEC’s blinkered interpretation of Section 16(b)’s

“purpose.” .

Because Section 16(b) is critical to fulfilling the

Exchange Act's objectives, the petition should be

granted.

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. 1la-

3la) is reported at 544 F.3d 493. The opinion of

the district court (Pet. App. 32a-62a) is reported at

475 F. Supp. 2d 463. A prior opinion of the court of

appeals (Pet. App. 63a-99a) is reported at 314 F.3d

106.

JURISDICTION

‘The court of appeals entered its judgment on Octo-

ber 1, 2008, and denied a petition for rehearing on

November 18, 2008 (Pet. App. 100a). On February

10, 2009, Justice Souter extended the time within

which to file a petition for a writ of certiorari to and

including March 18, 2009. Jd. at 114a. This Court’s

jurisdiction is invoked under 28 U.S.C. § 1254(1).

STATUTORY AND REGULATORY

PROVISIONS INVOLVED

Section 16(b) of the Securities Exchange Act of 1934,

15 U.S.C. § 78p(b), and the 1996 and 2005 versions of

SEC Rules 16b-3 and 16b-7, 17 C.F.R. §§ 240.16b-3

and 240.16b-7, are reproduced at Pet. App. 102a-

1138a.

STATEMENT

A. Legal Background

This case involves the provision of the Securities

Exchange Act of 1934 (“Exchange Act”) that provides

for disgorgement of profits when insiders engage

in short-swing trading. See 15 U.S.C. § 78p(b). Dis-

gorgement is designed to remove any incentive that

insiders may have to engage in speculative abuse

through such trades. Specifically, Section 16 allows

corporations and their shareholders the right to

recover any profits from officers, directors, and bene-

ficial owners (that is, owners of more than 10% of

any given class of stock) who bought and sold (or sold

and bought) a security within six months. See td.

§ 78p(a), (b).

At the heart of this litigation is an exchange of

Fairchild Semiconductor International, Inc. (“Fair-

child”) preferred stock, owned by National Semicon-

ductor Corporation (“National”) and Sterling Holding

Company, LLC (“Sterling”), for Fairchild Class A

common stock. National and Sterling claim that

SEC rules have exempted from recovery the profits

realized from National's and Sterling’s acquisition of

Class A common stock through the exchange, and

National’s and Sterling’s subsequent short-swing

sales of Class A common stock.

Section 16(b) calls for the disgorgement of profits

by insiders who have engaged in short-swing trading.

Liability under the section has four elements: (1) the

purchase (or sale) of a security; (2) the sale (or pur-

chase) of a security; (3) within a period of six months;

(4) by an officer, director, or beneficial owner of more

than 10% of any class of the issuer’s securities. See

id. § 78p(b).

At issue here is whether National’s and Sterling’s

exchange of Fairchild preferred stock for Class A

common stock in August 1999 qualifies as a purchase

under Section 16(b). If it does, National and Sterling

are subject to disgorgement pursuant to Section 16(b)

because the other three elements are indisputably

satisfied here: National and Sterling sold the securi-

ties in January 2000; the sale was within six months

of the exchange; and National and Sterling were

statutory insiders, as they both appointed senior ex-

ecutive officers to Fairchild’s board of directors and

were also beneficial owners of more than 10% of both

classes of common stock. See Pet. App. 4a.

Section 16(b) exempts those short-swing transac-

tions that “the [SEC] by rules and regulations may

exempt as not comprehended within the purpose of

this subsection.” 15 U.S.C. § 78p(b). The statute it-

self partially elucidates the purpose, which the SEC

is tasked with implementing: “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.” Jd. Although the

statute makes reference to insider trading, scholars

have noted that other statutes also address insider

trading, often more directly and concretely than does

Section 16(b). See Steve Thel, The Genius of Section

16: Regulating the Management of Publicly Held

Companies, 42 Hastings L.J. 391, 394-95 (1991).

Thus, beyond a general concern with insider trading,

Section 16(b)’s purpose is a concern with short-swing

trading as an evil in itself, regardless of whether

such trading is the product of insider information.

The statute’s drafters sought to prevent speculation,

not just trading on inside information, by officers, di-

rectors, and substantial bencficial owners of company

stock. See S. Rep. No. 73-1455, at 186-87 (1934).

The SEC has promulgated exemptive rules to

Section 16(b), one of which is relevant here. Rule

16b-3(d) exempts certain grants and awards from

Section 16(b)’s ambit. The version of Rule 16b-3(d) in

effect from 1996 to 2005 — the time period pertinent

to this case — provided, in relevant part:

Any transaction involving a grant, award or

other acquisition from the issuer (other than a

Discretionary Transaction) shall be exempt if:

(1) The transaction is approved by the board

of directors of the issuer, or a committee of the

board of directors that is composed solely of two

or more Non-Employee Directors;

(2) The transaction is approved or ratified, in

compliance with section 14 of the Act, by either:

the affirmative votes of the holders of a majority

of the securities of the issuer present, or repre-

sented, and entitled to vote at a meeting duly

held in accordance with the applicable laws of the

state or other jurisdiction in which the issuer is

incorporated ...;o0r

(3) The issuer of equity securities so acquired

are held by the officer or director for a period of

six months following the date of such acquisition,

provided that this condition shall be satisfied

with respect to a derivative security if at least six

months elapse from the date of acquisition of the

derivative security to the date of disposition of

the derivative security (other than upon exercise

or conversion) or its underlying equity security.

17 C.F.R. § 240.16b-3(d) (1996).

When it promulgated Rule 16b-3, the SEC stated

the rule’s purpose as exempting transactions associ-

ated with employee benefit plans from Section 16(b).

See Ownership Reports and Trading by Officers,

Directors and Principal Security Holders, Release

Nos. 34-37260, 35-26524, 61 Fed. Reg. 30,376, 30,378-

79 (June 14, 1996). In Levy v. Sterling Holding Co..,

314 F.3d 106 (3d Cir. 2002) (“Levy J”), the precursor

appeal in this case, the Third Circuit held that

transactions must have a “compensatory nexus” to

qualify for the exemption embodied in Rule 16b-3.

Pet. App. 97a-98a.

Responding to Levy 7, the SEC in 2005 promul-

gated a new rule expanding the scope of the exemp-

tion. New Rule 16b-3 provides:

Any transaction, other than a _ Discretionary

Transaction, involving an acquisition from the

issuer (including without limitation a grant or

award), whether or not intended for a compensa-

tory or other particular purpose, shall be exempt

if [one of the same three conditions is met].

17 C.F.R. § 240.16b-3(d) (2005) (relevant changes

italicized).!

B. Facts and Proceedings Below

1. In 1997, Fairchild was created as a spinoff

of National, a Delaware corporation, pursuant to

an Agreement and Plan of Recapitalization. Under

the agreement, National and Sterling were permitted

to appoint three of the seven members of Fairchild’s

board of directors. The agreement also provided that

National and Sterling would receive a mix of the

three classes of Fairchild stock that were created:

(1) Class A common stock, which included voting

rights; (2) Class B common stock, which did not

include voting rights; and (3) preferred stock, which

provided for a cumulative dividend. Both National

and Sterling are undisputedly insiders covered by

Section 16(b): National owned 14.8% of the Class A

common stock, Sterling held 48% of the Class A

common stock, and they each appointed their senior

executive officers as members of Fairchild’s board

of directors (National appointed its CEO; Sterling

appointed two of its senior executive officers). By

virtue of that insider status, National and Sterling

were at all relevant times subject to Section 16(b).

1 Although National and Sterling argued that both new Rules

16b-3 and 16b-7 exempted their exchange of preferred stock for

Class A common stock from the ambit of Section 16(b), the

Third Circuit in Levy I] resolved the case based on the applica-

tion of new Rule 16b-3 alone.

In 1999, upon the unanimous consent of its board

of directors, Fairchild prepared to undertake an

initial public offering (“IPO”). As part of a recapitali-

zation effort that preceded the IPO, Fairchild’s board

of directors, on the advice of the underwriter, an

affiliate of Sterling, voted unanimously to recom-

mend that all preferred stock be converted into Class

A common stock. On July 1, 1999, with National and

Sterling together controlling 62.8% of the Class A

common stock, a majority of the Class A common

stockholders voted to approve the exchange of Fair-

child preferred stock for Fairchild Class A common

stock. The exchange required an amendment of

Fairchild’s Certificate of Incorporation, which in turn

required Sterling’s consent. Both National and Ster-

ling consented to the amendment. The IPO was

completed on August 9, 1999. In accordance with the

proposed conversion formula, National's preferred

stock was converted into 888,362 shares of Class A

common stock and Sterling’s preferred stock was

converted into 4,021,428 shares of Class A common

stock.

On January 19, 2000, barely five months after the

IPO and the exchange of the preferred stock for Class

A common stock had taken place, National sold

7,234,360 shares of its Class A common stock and

Sterling sold 11,115,000 shares of its Class A

common stock in Fairchild’s secondary offering. Asa

consequence of these transactions, National and Ster-

ling realized short-swing profits of $12.850,679.60

and $58,501,592.90, respectively.

In November 2000, petitioner, a shareholder in

Fairchild, brought a suit on behalf of Fairchild

against National and Sterling for the disgorgement

of National’s and Sterling’s short-swing profits. In

the district court, National and Sterling argued

that the then-applicable exemptions embodied in

Rules 16b-3 and 16b-7 precluded lability and that

the action should be dismissed. Based upon those

exemptions, the court dismissed the action.

2. In Levy J, the Third Circuit reversed. The

Third Circuit reviewed the release that accompanied

the 1996 version of the rule and concluded that “Rule

16b-3 primarily is concerned with employee benefit

plans.” Pet. App. 94a. The court interpreted the

“other acquisition” prong of the exemption to apply

only to plans that provided for “participant-directed

transactions,” such as deferrals of bonuses into phan-

tom stock and other deferred compensation pro-

grams, and held that the weight of the SEC’s pro-

nouncements on Rule 16b-3(d) suggested that a

transaction would qualify for the exemption only if

it has “some connection to a compensation-related

function.” Jd. at 96a-97a, 98a. Although the Third

Circuit acknowledged language in the SEC’s release

indicating that the transaction need not have a

compensatory element, the court found that that

language did not undercut its ultimate conclusion.

Instead, such language simply indicated that “the

form of a transaction is not what matters.” Jd. at 98a.

The Third Circuit emphasized that its reading was

the soundest interpretation of Section 16(b)’s language

and the most logical in advancing its purposes:

The result we reach is sensible. We think that

adopting National's and Sterling’s view would re-

sult in any transaction between the issuer com-

pany and an officer or director that meets the

remaining requirements of Rule 16b-3(d) — ap-

proval of the transaction by the board of directors

or a majority of shareholders, or holding of the

securities by the officer or director for more than

six months — being immunized from section 16(b)

liability. The potential for self-dealing could be

great: in a closely held corporation, directors or

a majority of shareholders could arrange for the

acquisition of stock in advance of an IPO, and

turn around and sell shares shortly after the

IPO. Because of their insider status, there would

be a concern about speculative abuse injurious to

other market participants.

Id. at 98a (footnote omitted).2 Levy J thus remanded

the case to the district court for further proceedings.

3. After Levy I, the SEC in 2005 initiated a

rulemaking for the express purpose of reversing

the Third Circuit’s holdings in this case with respect

to the scope of Rules 16b-3 and 16b-7. The SEC

indicated that, in expressing its disagreement with

the Third Circuit, it was merely “clarifying” the scope

of the exemptions. Pet. App. 12a (internal quotation

marks omitted).

Following promulgation of the new exemptive

rules, the district court ruled on the prior-filed cross-

motions for summary judgment. The district court

determined that the new cules promulgated in 2005

should apply to the conduct at issue — from 1999

and 2000 — and granted summary judgment to

National and Sterling. See id. at 14a-15a.

4. This time on appeal, the Third Circuit affirmed

the district court. In so doing, it rejected Levy's

arguments that new Rule 16b-3 should not apply to

“ Levy I also rejected claims that Rule 16b-7 exempted the

exchange of preferred stock for Class A common stock from

Section 16(b). See Pet. App. 77a-84a. As noted above, though,

the court in Levy // did not reach the issue of the applicability of

new Rule 16b-7 to the present case.

conduct that predated the rule’s promulgation. The

court also disagreed with Levy’s submission that the

new rules exceed the scope of the SEC’s rulemaking

authority under Section 16(b).

The court below held that applying new Rule 16b-3

to conduct that predated its adoption did not present

a retroactivity problem. The court reasoned that a

rule that merely clarifies an earlier regulation may

apply to prior conduct without being impermissibly

retroactive. The Third Circuit articulated four

factors that determine whether a rule is simply a

clarification that can apply to earlier conduct:

“(1) whether the text of the old regulation was

ambiguous; (2) whether the new regulation resolved,

or at least attempted to resolve, that ambiguity;

(3) whether the new regulation’s resolution of the

ambiguity is consistent with the text of the old regu-

lation; and (4) whether the new regulation’s resolu-

tion of the ambiguity is consistent with the agency’s

prior treatment of the issue.” Pet. App. 27a (citations

omitted). In crafting that test, the court acknowl-

edged the omission of one element that other circuits

have found dispositive as to retroactivity analysis:

whether the new rule conflicts with a judicial inter-

pretation of the old rule. Thus, the Third Circuit

expressly parted ways with the Fourth and D.C. Cir-

cuits on this issue. See id. at 28a.

The Third Circuit also rejected Levy’s claim that

the SEC’s new rules are improper exercises of its

authority under Section 16(b). The court held that

the new rules pass muster under Chevron U.S.A. Inc.

v. Natural Resources Defense Council, Inc., 467 U.S.

837 (1984). In effect, the court held that Congress

had given the SEC virtually plenary power to decide

which transactions should be exempt from the ambit

of Section 16(b) liability. See Pet. App. 20a-21a.

REASONS FOR GRANTING THE PETITION

I. THE THIRD CIRCUIT’S TEST FOR DETER-

MINING WHEN AGENCY CLARIFYING

RULES HAVE RETROACTIVE EFFECT

DEEPENS ACKNOWLEDGED CONFLICTS

AMONG THE CIRCUITS AND DEPARTS

FROM THIS COURT'S DECISIONS

This Court’s precedents establish two concordant

principles relating to retroactive agency decision-

making. First, “[rjetroactivity is generally disfavored

in the law in accordance with fundamental notions

of justice that have been recognized throughout

history.” Eastern Enters. v. Apfel, 524 U.S. 498, 532

(1998) (plurality) (citation omitted; internal quota-

tion marks omitted). A strong presumption against

“retroactiv[ity}” exists that “is deeply rooted in our

jurisprudence, and embodies a legal doctrine centu-

ries older than our Republic.” Landgraf v. USI Film

Prods., 511 U.S. 244, 265 (1994). Given the dis-

favored nature of retroactivity, federal courts are

obligated to analyze carefully whether application of

a law or regulation would have a retroactive effect.

See id. at 269-70.

Second, because “retroactivity is not favored in the

law,” and because “an administrative agency’s power

to promulgate legislative regulations is limited to the

authority delegated by Congress,” agencies lack the

authority to promulgate rules with retroactive effect

unless their organic statute “requires this result.”

Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 208

(1988); see also id. at 223-24 (Scalia, J., concurring)

(“[rjetroactive legislation has always been looked

upon with disfavor,” and it is therefore “unsurprising”

that Congress “has been unwilling to confer” retro-

active rulemaking authority on agencies). The SEC

has no such authority.

This case presents several acknowledged conflicts

regarding application of these retroactivity principles.

In determining whether the SEC’s new Rule 16b-3

could be applied to pending claims and, in fact, to

conduct predating promulgation of the rule, the

Third Circuit created a sharp split with other courts

of appeals’ decisions on multiple issues concerning

agency retroactivity. This Court’s review is needed

to resolve these conflicts and to secure uniformity on

the proper standards for assessing the retroactivity

of agency rules. Certiorari is independently warranted

because the decision below conflicts with the force of

Bowen and Landgraf by allowing agencies to engage

in retroactive rulemaking and to insinuate new rules

into pending lawsuits.

A. The Courts Of Appeals Are Divided With

Respect To The Proper Legal Standard

For Determining When Agency Rules Are

Impermissibly Retroactive

The Third Circuit’s test for identifying retroactive

agency rules — which it applied in determining that

the SEC’s new Rule 16b-3 does not implicate Bowen

or Landgraf — conflicts with other courts of appeals’

judgments in three important respects.

1. The Third Circuit’s decision deepens a sharp

split among courts of appeals on whether

agency rules inconsistent with previous courts

of appeals’ decisions are necessarily retroactive

as applied to pending claims

The Third Circuit held that it is irrelevant whether

“Congress has delegated retroactive rulemaking power

to [an] agency” where a new rule that is applied to

conduct predating its promulgation “constitutes a

clarification ... of the law as it existed beforehand.”

Pet. App. 26a. In applying that standard, the Third

Circuit deemed it immaterial whether an agency

amendment “conflicts with a judicial interpretation

of the pre-amendment law.” Jd. at 28a.

The Seventh Circuit follows a legal approach sub-

stantially similar to the Third Circuit’s. In United

States v. Fones, 51 F.3d 663 (7th Cir. 1995), the

Seventh Circuit held that, although a new comment

to the Sentencing Guidelines “effectively nullifie[d]

the law of the Seventh Circuit,” the comment must

be treated “as a clarifying rather than substantive

change.” Jd. at 669. The court of appeals thus held

that the new interpretation could be applied to prior

conduct. See id.

The Third and Seventh Circuits’ approach conflicts

with other courts of appeals’ decisions, as the court

below acknowledged. See Pet. App. 28a-29a (citing

Fourth and D.C. Circuit precedent as contrary

authority). The D.C. Circuit, for example, has held

that, if an agency rule conflicts with an earlier court

of appeals’ decision, applying that rule to prior con-

duct would have a retroactive effect. In National

Mining Association v. Department of Labor, 292 F.3d

849 (D.C. Cir. 2002), the D.C. Circuit applied Bowen

and Landgraf to rules promulgated under the Black

Lung Benefits Act. The government had posited that

all of the rules were procedural and thus could be

applied to prior conduct. The D.C. Circuit noted that

an agency rule that “changes the legal landscape” of

norms affecting primary conduct, if applied to prior

conduct, would be impermissibly retroactive. Jd. at

859 (internal quotation marks omitted). In determin-

ing whether a rule would change the legal landscape,

the court applied the following legal standard:

If a new regulation is substantively inconsistent

with a prior regulation, prior agency practice, or

any Court of Appeals decision rejecting a prior

regulation or agency practice, it is retroactive as

applied to pending claims.

Id. at 860 (emphasis added); accord Marrie v. SEC,

374 F.3d 1196, 1208 (D.C. Cir. 2004).

The Fourth and Tenth Circuits’ approach accords

with the D.C. Circuit’s. In United States v. Capers,

61 F.3d 1100 (4th Cir. 1995), the Fourth Circuit held

that “an amendment should be classified as substan-

tive, not clarifying, when it cannot be reconciled with

circuit precedent.” Jd. at 1110. Similarly, the Tenth

Circuit, in United States v. Saucedo, 950 F.2d 1508

(10th Cir. 1991), held that, when an amendment

requires a court to overrule precedent, such an

amendment cannot be a mere clarification; rather,

the change is a substantive one. See id. at 1514-15.

In each case, the Fourth and Tenth Circuits aligned

themselves with the National Mining Association

principle that a rule contradicting a prior court of

appeals’ decision is impermissibly retroactive if

applhed to prior conduct.

This conflict among the courts of appeals is both

acknowledged, see Pet. App. 28a-29a, and outcome-

determinative. New Rule 16b-3 unquestionably is

substantively inconsistent with the Third Circuit's

decision in Levy I -- it was promulgated for that

purpose. If this case had been brought in the D.C.,

Fourth, or Tenth Circuit, that fact alone would have

compelled the conclusion that new Rule 16b-3 is sub-

stantive and may not be applied to pending claims

or to conduct predating the rule’s promulgation. In

those three circuits, the SEC could not have dictated

the outcome of pending litigation involving under-

lying conduct predating the rule by several years, as

it attempts to do here.

2. The Third Circuit’s conclusion that “clarifying”

rules are not subject to analysis under Landgraf

deepens confusion in and adds to disagreement

among the circuits

The Third Circuit’s holding that an agency rule

that “constitutes a clarification ... of the law as it

existed beforehand” (Pet. App. 26a) is not retroactive

was unqualified: the court stated that, “where a new

rule constitutes a clarification ..., the application of

that new rule to pre-promulgation conduct necessar-

ily does not have an impermissible retroactive effect.”

Id. (first emphasis added). The court’s conclusion

that clarifying rules are categorically exempt from

the Landgraf retroactivity analysis conflicts with the

decisions of two circuits.

First, the decision below acknowledged that the

standard it applied conflicts with the Federal Cir-

cuit’s decision in Princess Cruises, Inc. v. United

States, 397 F.3d 1358 (Fed. Cir. 2005). See Pet. App.

26a-27a (citing Princess Cruises as contrary author-

ity). In that case, the Federal Circuit firmly rejected

the principle applied by the Third Circuit here that

clarifications can necessarily be given retroactive

effect, explaining that “the binary analysis — change

or clarification — [is] largely unhelpful.” 397 F.3d at

1363. The Federal Circuit held that such analysis

did not absolve courts of their “obligation to weigh

the various factors described in Landgraf.” Id.

Second, in National Mining Association, the D.C.

Circuit held that labeling a rule as “procedural” or

“substantive” is not dispositive of the retroactivity

question. Relying on Landgraf, the D.C. Circuit held

that a retroactivity analysis requires “commonsense,

functional judgment.” 292 F.3d at 859-60 (internal

quotation marks omitted). The D.C. Circuit also

made clear that, regardless of the label that attaches

to a rule, courts must undertake the Landgraf analy-

sis and assess whether the rule, in actuality, sub-

stantively changes the legal landscape and thus has

retroactive effect. See id. at 859.

The D.C. and Federal Circuits’ approach conflicts

with that of at least six circuits, which hold that

there is an automatic and categorical exemption

of clarifying laws from the Landgraf retroactivity

analysis. The Fifth Circuit has held that, upon a

determination that a new rule is a mere clarification,

it “need not determine whether, under the rule set

forth in Landgraf..., the [agency] intended the rule

to have retroactive effect.” Vo v. Gonzales, 482 F.3d

363, 370 (5th Cir. 2007). The Fourth Circuit simi-

larly holds that a statutory amendment that “merely

clarified the meaning” of a statute did not constitute

a “retroactive[]” application and therefore is not sub-

ject to analysis under Landgraf. Brown v. Thomp-

son, 374 F.3d 253, 258-61 & n.6 (4th Cir. 2004). The

First Circuit has concluded that an “amendment”

that “was not a change at all, but a clarification that

did not alter the law,” is not subject to retroactivity

analysis. Liquilux Gas Corp. v. Martin Gas Sales,

979 F.2d 887, 890 (1st Cir. 1992).

The Eleventh Circuit likewise has held that, once

a court determines a rule is a clarification — even

when that determination rests on little more than an

agency's assurance that the rule is such — no retro-

activity concerns are implicated. See Hetmmermann

v. First Union Mortgage Corp., 305 F.3d 1257, 1260

(11th Cir. 2002); Piamba Cortes v. American Airlines,

Inc., 177 F.3d 1272, 1283 (11th Cir. 1999). The Ninth

Circuit had adopted a similar categorical rule with

respect to legislation, see ABKCO Music, Inc. v. La-

Vere, 217 F.3d 684, 689 (9th Cir. 2000) (“clarifying

legislation is not subject to any presumption against

retroactivity and is applied to all cases pending as of

the date of its enactment”), and the Sixth Circuit has

suggested it would do the same, see Orr v. Hawk, 156

F.3d 651, 654 (6th Cir. 1998) (“So long as a change

in a regulation does not announce a new rule, but

rather merely clarifies or codifies an existing policy,

that regulation can apply retroactively.”).

In sum, disagreement over whether a clarifying

law is categorically exempt from retroactivity analy-

sis involves nine circuits and is longstanding. No

purpose is served by greater percolation, and this

case presents an ideal vehicle for this Court's resolu-

tion.

3. The Third Circuit’s holding that the status

of the SEC’s rule as legislative is irrelevant to

retroactivity analysis divides the circuits

The Third Circuit below rejected petitioner's argu-

ment that the SEC’s new Rule 16b-3 is a legislative

rule and therefore that its retroactive application

would impermissibly alter the substantive rights and

liabilities of the parties. The court reasoned that the

“legislative-interpretive dichotomy has no bearing

on whether a rule has an impermissible retroactive

effect.” Pet. App. 28a n.10 (emphasis added). The

court explained that the only “significance” of a

legislative classification of a rule is that an agency

must promulgate it through “notice-and-comment

rulemaking procedures.” dd.

The Third Circuit’s unqualified holding that the

difference between legislative and interpretive rules

“has no bearing” on retroactivity analysis conflicts

with decisions of the Seventh and D.C. Circuits.

In Health Insurance Association of America, Inc. v.

Shalala, 23 F.3d 412 (D.C. Cir. 1994), for example,

the D.C. Circuit cited Bowen for the proposition that

“agencies lack the power to promulgate retroactive

legislative rules ‘unless that power is conveyed by

Congress in express terms.” Jd. at 422 (quoting

Bowen, 488 U.S. at 208). Contrary to the Third

Circuit’s approach, the D.C. Circuit explicitly applied

the rubric of American Mining Congress v. Mine

Safety & Health Administration, 995 F.2d 1106,

1109-10 (D.C. Cir. 1993), to determine whether the

underlying rule was in fact legislative or interpre-

tive. See 23 F.3d at 422-23.

The Seventh Circuit has sided with the D.C. Cir-

cuit on this issue. In First National Bank of Chicago

v. Standard Bank & Trust, 172 F.3d 472 (7th Cir.

1999), the Seventh Circuit reasoned that the frame-

work for assessing whether a rule is legislative or

interpretive is coterminous with the issue of whether

an agency rule may apply to prior conduct. The Sev-

enth Circuit thus has explained that, “[i]f the Clarify-

ing Amendment is a legislative rule, [the appellant]

wins. Under Bowen, an administrative rule only has

retroactive effect if Congress expressly authorizes the

agency to issue retroactive rules.” Jd. at 478 n.6.

This difference in legal standard, moreover, is not

academic; it is likely outcome-determinative here.

The test for determining the legislative or interpre-

tive nature of a rule in Health Insurance Association

and American Mining Congress compels the conclu-

sion that new Rule 16b-3 is legislative. Furst, absent

the new rule, “the legislative basis” for application of

the SEC’s exemptive rule “would be inadequate.”

American Mining Congress, 995 F.2d at 1109. Levy J

was a binding interpretation of Rule 16b-3; the SEC’s

new rule is necessary to expand the scope of the

exemption. Second, “an agency seems likely to have

intended a rule to be legislative if it has the rule pub-

lished in the Code of Federal Regulations,” id., and

here new Rule 16b-3 was so published, see 17 C.F.R.

§ 240.16b-3 (2005). Third, “the [SEC] has explicitly

invoked” its rulemaking authority under Section

16(b), 995 F.2d at 1112, in promulgating new

Rule 16b-3, see Ownership Reports and Trading bv

Officers, Directors and Principal Security Holders,

Release Nos. 33-8600, 34-52202, 35-28013, 70 Fed.

Reg. 46,080, 46,088 (Aug. 9, 2005). Finally, new Rule

16b-3 explicitly amended an earlier legislative rule.

See 995 F.2d at 1112.

B. The Decision Below Conflicts With This

Court’s Retroactivity Jurisprudence

The substantial and acknowledged conflicts among

the courts of appeals discussed above are more than

sufficient to warrant this Court’s review. Plenary

review in this case is particularly appropriate, how-

ever, because the Third Circuit’s decision affirming

the SEC’s obvious efforts to dictate the outcome of

pending litigation and to alter the legal consequences

of past conduct is deeply flawed: it conflicts with this

Court’s decisions and undermines the purposes ani-

mating Bowen and Landgraf.

In holding that new Rule 16b-3 could apply retro-

actively — both in exempting respondents’ past

short-swing trading from hability and in unsettling

petitioner’s expectations based on the Third Circuit's

holding in Levy J — the court of appeals erred in at

least three respects.

First, the Third Circuit erred in holding that the

contradiction between a rule and an earlier court

of appeals’ decision does not implicate problems of

retroactivity. See Pet. App. 18a-19a. Landgraf

held that “settled expectations should not be lhghtly

disrupted,” 511 U.S. at 265, and that the heart of the

anti-retroactivity norm is that a new rule must not

“attach[} new legal consequences to events completed

before its enactment,” td. at 270. A conflict between

a court of appeals’ decision and a clarifying agency

rule implicates all of those concerns.

This case is directly on point. In Levy J, there

was “no dispute” with respect to three of the four

elements of liability under Section 16(b) — namely,

that respondents were insiders that engaged in

“sales” within six months of alleged “purchases.”

Pet. App. 70a. The issue, the Third Circuit said,

was whether the purchases were exempt under the

SEC’s rules. See id. The court held that Rule 16b-3

required “some compensatory nexus” for the exemp-

tion to apply and that, because the short-swing

transactions of respondents (which occurred in 2000)

did not have a compensatory nexus, “the rule is

inapplicable here.” Jd. at 97a-98a.

Levy I accordingly not only created expectations,

but also adjudicated rules of liability under Section

16(b). Although this Court cautioned in Landgraf

that a retroactivity problem does not necessarily

arise because a new rule “upsets expectations based

in prior law,” 511 U.S. at 269, it emphasized that the

dispositive issue is whether a new rule attaches

or alters substantive legal consequences of earlier

conduct, :d. at 270. Here, the Third Circuit in Levy J

held that respondents’ short-swing transactions in

2000 were subject to Section 16(b) and did not qualify

for an exemption. That holding fixed the parties’

rights and liabilities under the law with respect to

the relevant short-swing transactions. Applying new

Rule 16b-3 accordingly did more than unsettle the

parties’ expectations; it altered legal liabilities that

a court of appeals had adjudicated. Accord Hughes

Aircraft Co. v. United States ex rel. Schumer, 520

U.S. 939, 948 (1997) (amendment that “eliminate[d]”

an affirmative “defense” to suit has retroactive effect

when applied to prior conduct).*

Second, the holding that clarifying rules are

categorically exempt from the Bowen rule is deeply

flawed. Although “it may be possible to generalize

about types of rules that ordinarily will not raise

retroactivity concerns,” this Court has made clear

that “these generalizations do not end the inquiry.”

Martin v. Hadix, 527 U.S. 343, 359 (1999). A

judgment whether a rule is legislative/interpretive,

procedural/substantive, or clarifying/amending is ac-

cordingly the beginning, not the end, of retroactivity

analysis. See id. (“When determining whether a new

statute vperates retroactively, it is not enough to

attach a label (e.g., ‘procedural,’ ‘collateral’) to the

3 National Cable & Telecommunications Association v. Brand

X Internet Services, 545 U.S. 967 (2005), does not affect this

analysis. The Court held there that “|a] court’s prior judicial

construction of a statute” does not bind a subsequent agency

interpretation. /d. at 982. ‘The case did not involve agency

rulemaking (the question arose from an agency adjudication),

and there was no issue of retroactive application presented.

The Court accordingly said nothing about the issue here —

namely, under what circumstances a subsequent agency rule

that conflicts with a prior court of appeals’ decision can be

applied to conduct predating promulgation of the rule.

statute; we must ask whether the statute operates

retroactively.”); see also Landgraf, 511 U.S. at 269-

70. The Third Circuit’s conclusion that clarifying

rules can never have a retroactive effect — and

therefore that Landgraf aralvsis need not be under-

taken — countermands tlus Court’s teaching that

“categorical arguments are not particularly helpful

in undertaking Landgraf’s commonsense, functional

retroactivity analysis.” INS v. St. Cyr, 533 U.S. 289,

324 (2001).

The Third Circuit’s application of an erroneous

legal standard, predictably, led to an erroneous result.

In this case, the purportedly clarifying Rule 16b-3

transformed the nature of respondents’ liability

under Section 16(b), an issue effectively decided in

Levy I. Therefore, regardless of whether new Rule

16b-3 can be deemed a clarification of prior law, the

rule affected primary conduct and the legal conse-

quences that attach to such conduct. In failing to

acknowledge the continuing relevance of the Land-

graf framework, the decision below conflicts with this

Court’s retroactivity jurisprudence.

Third, the court erred in holding that the distinc-

tion between legislative and interpretive rules has

“no bearing on whether a rule has an impermissible

retroactive effect.” Pet. App. 28a n.10. Legislative

rules, by their nature, have legal effect, “bind mem-

bers of the agency and the public,” and receive

“substantial deference from courts.” Sweet v. Sheahan,

235 F.3d 80, 91 (2d Cir. 2000). Legislative rules are

“powerful” and “can impose obi’ zations on members

of the public distinct from, and in addition to, those

imposed by statute.” Jd.; see also National Ass'n of

Home Builders v. United States Army Corps of Eng’rs,

417 F.3d 1272, 1285 (D.C. Cir. 2005) (“{ljegislative

rules are those that grant rights, impose obligations,

or produce other significant effects on private inter-

ests”) (internal quotation marks omitted). Because

the difference between legislative and interpretive

rules bears directly on the nature and extent of

change in the legal landscape wrought by a rule, the

distinction is plainly relevant to retroactivity analy-

sis. See Landgraf, 511 U.S. at 270 (in determining

whether a law has retroactive effect, a “court must

ask whether the new provision attaches new legal

consequences to events completed before its enact-

ment,” which is a judgment that “comes at the end

of a process of judgment concerning the nature and

extent of the change in the law”) (emphases added).

C. This Case Is An Appropriate Vehicle To

Address These Important Legal Issues

This case presents substantial jurisprudential

issues of great practical importance. Taken together,

Bowen and Landgraf impose important restraints

on the authority of agencies to promulgate rules with

retroactive effect. The decision below, as well as

those of courts of appeals that have aligned them-

selves with the Third Circuit, will encourage agen-

cies to circumvent this Court’s decisions by classify-

ing their actions as “clarifications” subject to neither

the Bowen rule nor the Landgraf retroactivity prin-

ciples.

As a practical matter, allowing that erosion of

Bowen and Landgraf to continue will afford agencies

increasing latitude to manipulate the outcome of

pending litigation and to alter the legal consequences

of past conduct through mere regulatory fiat. Those

outcomes directly conflict with the core principles

animating the longstanding presumption against

retroactivity. See, e.g., Landgraf, 511 U.S. at 265-

66; Eastern Enters., 524 U.S. at 532-33 (plurality)

(collecting authority); St. Cyr, 533 U.S. at 315 (noting

that “[rjetroactive statutes raise special concerns”

because of risk that “political pressures” will “tempt] ]”

decisionmakers “to use retroactive legislation as a

means of retribution against unpopular groups or

individuals”). Given the fundamental values advanced

by retroactivity rules, this Court’s review here is

needed to bring uniformity and to secure clarity with

respect to when agency rules are in fact retroactive

and therefore subject to Bowen’s proscription of retro-

active rulemaking.

This case is an ideal vehicle for this Court to

address thesée\ issues. It squarely presents three

related conflicts, each of which is lhkely outcome-

determinative here. The issues presented are pure

questions of law that involve, among other things,

the proper application of this Court’s decisions in

Bowen and Landgraf. ‘The legal issues, moreover,

were fully briefed before the district court and the

court of appeals, and passed upon by the lower

courts. There is accordingly no reason for this

Court to delay in resolving the important questions

presented.

Il. THE THIRD CIRCUIT’S HOLDING THAT

CONGRESS DELEGATED TO THE SEC

NEAR PLENARY AUTHORITY TO EXEMPT

TRANSACTIONS FROM SECTION _ 16(b)

WARRANTS REVIEW BY THIS COURT

The Thivd Circuit held that new Rule 16b-3, which

exempts all transactions between either officers or

directors and issuers regardless of a compensatory

purpose from the prohibition on short-swing trans-

actions, “is a permissible construction of section 16(b)

and a valid exercise of the SEC’s congressionally

delegated authority.” Pet. App. 24a. That judgment

is incorrect: Congress did not provide the SEC ple-

nary authority to exempt transactions from Section

16(b); rather, any exemption must be “comprehended

within the purpose” of that section. 15 U.S.C.

§ 78p(b). Section 16(b)’s purpose is to prohibit any

profiteering from short-swing transactions, not

merely to ban transactions involving informational

asymmetries. Because new Rule 16b-3 creates an

exemption that is contrary to, and not “compre-

hended within,” the purpose of Section 16(b), the

Third Circuit erred in concluding that the rule is

a valid exercise of delegated authority. ‘That error

affects a crucial regulation of market practices that

could negatively affect the stability of the markets

and thus warrants this Court’s attention.

A. The SEC’s New Rule 16b-3 Conflicts With

The Purposes Of Section 16(b)

Congress intended Section 16(b) broadly to prevent

all profiteering from short-swing transactions. Sec-

tion 16(b) provides the SEC only limited authority to

exempt from the statute’s reach those transactions

that are “not comprehended within the purpose” of

the section. 15 U.S.C. § 78p(b). Because the text and

history of Section 16(b), as well as judicial decisions

interpreting that provision, make clear that Con-

gress’s overriding objective was to curb nearly all

short-swing insider transactions, including the type

of short-swing trading that occurred here, new Rule

16b-3 is an invalid exercise of the SEC’s authority.

1. A proper understanding of Section 16(b)’s pur-

pose must begin from the presumption that Congress

intended the securities laws to advance “broad reme-

dial goals.” Ernst & Ernst v. Hochfelder, 425 U.S.

185, 200 (1976). Although “[t]he ultimate question 15

one of congressional intent,” Touche Ross & Co. v.

Redington, 442 U.S. 560, 578 (1979), this Court has

time and again observed that “Congress intended

securities legislation ... to be construed ‘not techni-

cally and restrictively, but flexibly to effectuate its

remedial purposes.” Affiliated Ute Citizens of Utah

v. United States, 406 U.S. 128, 151 (1972) (quoting

SEC v. Capital Gains Research Bureau, 375 U.S. 180,

195 (1963)).

Viewed against that background understanding,

the statutory text strongly indicates that Congress

intended for Section 16(b) to reach broadly the type

of speculative short-swing transactions that took place

here. The prohibition in Section 16(b) is notable both

in its breadth and in its mandatory nature: under

that section, “any profit” that an insider acquires

from a transaction “within any period of less than

six months ... shall inure to and be recoverable by

the issuer” without regard to the “intention” of the

insider. 15 U.S.C. § 78p(b) (emphases added).

Moreover, the Exchange Act’s structure supports

the conclusion that the SEC has only limited author-

ity to create exemptions from Section 16(b). Unlike

many other provisions of the Exchange Act, Section

16(b) is noteworthy for its rigidity and the fact that

it left virtually no room for interpretation or inter-

ference by the SEC. See Thel, 42 Hastings L.J. at

400-01; see also Karl Shumpei Okamoto, Rereading

Section 16(b) of the Securities Exchange Act. 27 Ga.

L. Rev. 183, 227 (1992) (noting that, “[w]hile the

other provisions” of the Exchange Act “are generally

not self-implementing, section 16 contains substan-

tive prohibitions which do not require administrative

rulemaking for implementation”).4 Indeed the SEC

has no independent authority to enforce Section 16(b).

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

2. The legislative history bolsters the conclusion

that Section 16(b) is intended to curb speculation

and to do so by banning all short-swing trades by

insiders. The Exchange Act’s authors viewed specu-

lation as one of the principal evils contributing to the

1929 stock market crash. See Okamoto, 27 Ga. L.

Rev. at 222-24: Thel, 42 Hastings L.J. at 458-59. In

enacting the statute, “Congress’ goal was to restore

eroded investor confidence in the integrity of the

market, and the technique it chose was a sweeping

removal of any profit motive for .. . ‘sure-thing’ specu-

lation.” Wagman uv. Astle, 380 F. Supp. 497, 501

(S.D.N.Y. 1974). Section 16(b) was a major provision

of the securities law reform movement of the 1930s,

and its forfeiture requirement was intended to apply

broadly and unambiguously as a prophylactic. See

Lewis v. Varnes, 505 F.2d 785, 787-88 (2d Cir. 1974).

Section 16(b) was thus designed “to discourage

insiders from buying stock, but not so much from

4 The first sentence of Section 16(b), moreover, sets forth part

of the statutory purpose — namely, “preventing the unfair use

of information which may have been obtained by [a] beneficial!

owner, director, or officer by reason of his relationship to the

issuer.” 15 U.S.C. § 78p(b) (emphasis added). The text makes

clear that the prohibition in Section 16(b) is not confined simply

to trading on non-public information; rather, it reaches all

insiders regardless of whether they have made use of inside

information. Indeed, new Rule 16b-3 conflicts with even a

narrow understanding of Section 16(b) as limited to addressing

the improper use of inside information because the new rule

permits an insider to profit from that information through

transactions in company stock and provides the insider with an

incentive to manipulate company affaurs so as to take advan-

tayve of price fluctuations.

buying on inside information as from buying on spec-

ulation.” Thel, 42 Hastings L.J. at 414. Congress

viewed short-swing trading by insiders as an evil in

itself, rife with potential for manipulation. Such

manipulation had led to price volatility, often send-

ing false signals about the value of companies, which

in turn rattled investor confidence and allowed insid-

ers to exploit artificially depressed prices. See Oka-

moto, 27 Ga. L. Rev. at 226.

The legislative history therefore evinces a broad

concern with curbing short-swing transactions by

insiders. For instance, Senator Duncan Fletcher, who

sponsored the Exchange Act, noted that Section 16(b)

would forbid “directors, officers, and principal stock-

holders ... to speculate in the securities of [their

own] corporation.” 78 Cong. Rec. 2270, 2271 (19384).

Similarly, Thomas Corcoran explained the bill’s pri-

mary purpose as preventing “short-term speculative

swings on the securities of [insiders’} own compa-

nies.” Stock Exchange Practices: Hearings on S. Res.

84 (72d Congress) and S. Res. 56 and S. Res. 97

(73d Congress) Before the S. Comm. on Banking and

Currency, 73d Cong. 6556-57 (1934). Accordingly,

Corcoran explained that the element of intent or

expectation had been dropped from the original draft

of the bill, so as to prevent all short-swing trades and

to mandate forfeiture of all short-swing profits. See

id.

3. This Court's decisions strengthen the conclusion

that Section 16(b)’s “purpose” is to prevent short-

swing trading, writ large, by insiders. The Court has

repeatedly acknowledged the statute’s dual purposes:

(1) preventing insider trading (that is, trading on

non-public information) by officers, directors, and

principal beneficial owners; and (2) preventing short-

swing trading by officers, directors, and beneficial

owners. In Reliance Electric Co. v. Emerson Electric

Co., 404 U.S. 418 (1972), for example, this Court

noted that Section 16(b) sweeps far more broadly

than simply preventing insiders from trading on non-

public information (as the SEC and the Third Circuit

assumed):

In order to achieve its goals, Congress chose a

relatively arbitrary rule capable of easy admin-

istration. The objective standard of Section 16(b)

imposes strict liability upon substantially all

transactions occurring within the statutory time

period, regardless of the intent of the insider

or the existence of actual speculation. This

approach maximized the ability of the rule to

eradicate speculative abuses by reducing diffi-

culties in proof. Such arbitrary and sweeping

coverage was deemed necessary to insure the

optimum prophylactic effect.

Id. at 422 (internal quotation marks omitted). This

Court has repeatedly underscored that Congress

sought broadly to “curb|] short-swing speculation,”

id. at 424, and to “impose[] liability without fault,”

Foremost-McKesson, Inc. v. Provident Sec. Co., 423

U.S. 232, 251 (1976). Against that backdrop, Levy J

correctly interpreted Rule 16b-3’s exemption narrowly.

See Pet. App. 97a-98a.

For these reasons, the text and history of Section

16(b), as well as this Court’s decisions interpreting it,

establish that Section 16(b)’s “purpose” is to prevent

any profiteering on short-swing transactions. Because

the “intent of Congress is clear” with regard to the

“purpose” of the statute, “that is the end of the

matter.” Chevron U.S.A. Inc. v. Natural Res. Def.

Council, Inc., 467 U.S. 837, 842 (1984). Congress

intended for Section 16(b) to cover the conduct at

issue here: short-swing trading by an insider.

New Rule 16b-3, which is premised on the view

that Section 16(b) is aimed only at transactions

involving information asymmetries, therefore repre-

sents an unlawful construction of Section 16(b)’s

“purpose.” Indeed, new Rule 16b-3 undermines both

of the core purposes of Section 16(b) by enabling

insiders to engage in trading on inside information in

their own company’s stock and by creating incentives

for insiders to manipulate their company’s affairs to

benefit from price fluctuations. The Third Circuit

erred in according Chevron deference to the SEC’s

enactment of that rule pursuant to Section 16(b).5

5 Once the purpose of Section 16(b) is properly understood,

the SEC’s justifications for new Rule 16b-3 are unresponsive.

For example, in promulgating new Rule 16b-3, the SEC explained

that transactions between insiders and issuers do not usually

present opportunities for insiders to realize profits at the ex-

pense of uninformed shareholders. See 70 Fed. Reg. at 46,083.

But that is beside the point: Section 16(b)’s primary purpose

is not to function as a remedial statute for shareholders or

to guard against informational asymmetries but to promote

market stability by banning profiteering from all short-swing

transactions.

The SEC also relied on the requirement of obtaining board

approval to argue that the transactions in question do not

present a risk of speculative abuse. See id. at 46,082. But

the SEC has never explained how this gate-keeping function

will prevent the kind of speculation that the statute and its

drafters sought to prevent. Moreover, in enacting Section 16(b),

Congress specifically denied boards of directors the ability to

prevent shareholder lawsuits to recover short-swing profits.

Accord Burks v. Lasker, 441 U.S. 471, 444 n.1% (1979).

B. The Court Should Grant Certiorari To

Clarify The Scope Of An Important Provi-

sion Of Securities Law

New Rule 16b-3 threatens to undermine the effi-

cacy of an important and longstanding securities

regulation. Instead of construing Section 16(b) as

Congress intended, the SEC has adopted a narrow

understanding of Section 16(b)'’s purposes that will

invite the very behavior that Congress sought to

prevent. The prevalence of short-swing trading and

the increasing importance of securities regulation

militate in favor of this Court’s intervention now to

clarify an important area of securities law.

Given the important functions served by Section

16(b), this Court’s intervention is crucial to ensure

that Rule 16b-3 does not undermine the statute’s

principal purpose of preventing short-swing trading

and speculative manipulation by insiders. Particu-

larly in the current economic climate, clarity regard-

ing the scope and import of sccuritics laws is of para-

mount importance.

CONCLUSION

The petition for a writ of certiorari should be

granted.

Respectfully submitted,

MITCHELL M.Z. TWERSKY

JEFFREY S. ABRAHAM

ABRAHAM FRUCHTER

& TWERSKY LLP

One Penn Plaza, Suite 2805

New York, New York 10119

(212) 279-5050

March 18, 2009

DAVID C, FREDERICK

Counsel of Record

KELLY P. DUNBAR

KELLOGG, HUBER, HANSEN,

TODD, EVANS & FIGEL,

P.L.L.C.

1615 M Street, N.W.

Suite 400

Washington, D.C. 20036

(202) 326-7900

APPENDIX

TABLE OF CONTENTS

Page

Opinion of the United States Court of Appeals

for the Third Circuit, Levy v. Sterling Holding

Cy Sth, TEE BO CE, TD, Fin nsec cvvseresscevonsscecexesses la

Opinion of the United States District Court

for the District of Delaware, Levy v. Sterling

Holding Co., No. 00-994 (Feb. 13, 2007)...........00.... 32a

Opinion of the United States Court of Appeals

for the Third Circuit, Levy v. Sterling Holding

Co., No. 02-1608 Cec. 16, ZOOZ) ........0cccccnsseressvesare. 63a

Order of the United States Court of Appeals

for the Third Circuit Denying Rehearing, Levy

v. Sterling Holding Co., No. 07-1849 (Nov. 18,

Statutory and Regulatory Provisions Involved....102a

Securities Exchange Act of 1934, § 16(b),

ee ee eH einie isa cisusdvensuhianedsecrtesmnsinernees 102a

SEC Rule 16b-3, 17 C.F.R. § 240.16b-3

<< _ RRRE RPES Some Bp pe nen FRR oF Omri tae ee ene ORI Ia 1038a

SEC Rule 16b-3, 17 C.F.R. § 240.16b-3

5” SREP BR Hote OPP ESE PE Ie Ae tO EEE OE er 107a

SEC Rule 16b-7, 17 C.F.R. § 240.16b-7

STE Ra EME eRe rrr Der ys OF me Rr ie See enon a 110a

SEC Rule 16b-7, 17 C.F.R. § 240.16b-7

6 __ SSBNMEA SRE AIE Sari eer PON eT ORICA Stay, Qe ees Cero gee 112a

Letter from Supreme Court Clerk regarding

grant of extension of time for filing a petition

for a writ of certiorari (Feb. 10, 2009) .................. ll4a

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 07-1849

MARK LEvy,

Appellant,

STERLING HOLDING COMPANY, LLC;

NATIONAL SEMICONDUCTOR CORPORATION;

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.,

Before:

Appellees.

Argued March 24, 2008

Filed: Oct. 1, 2008

McKEE, RENDELL, and TASHIMA,”

Circuit Judges.

OPINION OF THE COURT

RENDELL, Circuit Judge.

Mark Levy filed a shareholder derivative suit on

behalf of Fairchild Semiconductor International, Inc.

(“Fairchild”) against Sterling Holding Company, LLC

(“Sterling”) and National Semiconductor Corporation

(“National”) for disgorgement of short-swing profits,

pursuant to section 16(b) of the Exchange Act of

“ Honorable A. Wallace Tashima, Senior Judge of the United

States Court of Appeals for the Ninth Circuit, sitting by desig-

nation.

1934. National and Sterling contend that two sepa-

rate SEC Rules, 16b-3 and 16b-7, exempt them from

section 16(b) hability. When this case was before us

previously, at the motion-to-dismiss stage, we ruled

that neither exemption applied here. Levy v. Sterling

Holding Co. (Levy 1), 314 F.3d 106 (38d Cir.2002).

Thereafter, however, the SEC amended Rules 16b-3

and 16b-7 to, as it put it, “clarify the exemptive

scope” of these two Rules, making clear that both

apply to the instant fact pattern. Ownership Reports

and Trading by Officers, Directors and Principal

Security Holders, Exchange Act Release No. 52,202

(“2005 Amendments Release”), 70 Fed.Reg. 46,080,

46,080 (Aug. 9, 2005). The District Court then ruled

in favor of National and Sterling and against Levy

on cross motions for summary judgment. We must

decide whether our rulings in Levy J, or the SEC’s

more-recent Rule amendments, govern the case at

this stage. For the reasons that follow, we conclude

that at least one of the amendmente is controlling

and, therefore, we will affirm the District Court’s

grant of summary judgment to National and Ster-

ling, and its denial of summary judgment to Levy.

In 1997, Fairchild was spun off from National as a

new company. Three classes of Fairchild stock were

created: (1) Class A common stock: (2) Class B

common stock, which differed from Class A common

because it did not entail voting rights; and (3) pre-

ferred stock, which offered a cumulative 12% divi-

dend. Class A common and Class B common were

freely convertible into each another, but preferred

stock was not convertible into either Class of com-

mon. National received a mix of all three classes of

stock and, in exchange for its $58.5 million invest-

ment in the new company, so did Sterling. The only

other initial investors were a number of National

employees slated to become key Fairchild employees.

The governing shareholder agreement gave National

the power to designate one of Fairchild’s seven direc-

tors and gave Sterling the power to designate two.

In 1999, Fairchild decided to undertake an initial

public offering (“IPO”) to raise additional capital and

was told by a number of underwriters that it should

eliminate its preferred stock in order for the IPO to

be successful. Consistent with this advice, a majority

of Fairchild’s board voted that, as part of the IPO, all

of the company’s outstanding shares of preferred

stock would automatically be reclassified as shares of

Class A common steck. A majority of each of the

three classes of shareholders subsequently approved

the reclassification by written consent. Preferred

shares were to be valued at their contractual liquida-

tion value — the original price plus accumulated un-

paid dividends — and Class A common shares were

to be valued at the price at which the Class A

shares would be offered to the public in the IPO, less

underwriting fees and commissions. Dividing the

former by the latter yielded a 76-to-1 conversion

ratio, meaning that each share of preferred stock

would become 76 shares of Class A common.' Prior

to the execution of the IPO, according to the JPO

prospectus, Sterling owned 48% of the outstanding

Class A con.mon, 85.1% of the outstanding Class B

common, and 75.9% of the outstanding preferred,

while National owned 14.8%, 14.9%, and 16.7%,

respectively.

1 We have rounded off the figures throughout this opinion

because the precise figures are unimportant.

On August 9, 1999, the IPO was completed and

the shares of preferred stock owned by Sterling and

National were reclassified as 4 million and 900,000

shares of Class A common, respectively. On January

19, 2000 — less than six months later — with Fairchila

undertaking a secondary offering of Class A common

stock, Sterling sold 11 million shares of Class A

common and National sold 7 million shares of Class

Acommon. The share price of Class A common had

increased 84% since the reclassification.

In November 2000, Levy, a Fairchild shareholder,

filed a derivative suit against National and Sterling,

pursuant to section 16(b) of the Securities and

Exchange Act of 1934, which generally provides for

the disgorgement of any profits earned by statutory

insiders from short-swing trading. See 15 U.S.C.

§ 78p(b).2. The four elements required for section

2 Section 16(b) provides, in pertinent part:

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) or a security-

based swap agreement ... involving any such equity secu-

rity within any period of less than six months, unless such

security or security based swap agreement was acquired in

good faith in connection with a debt previously contracted,

shall inure to and be recoverable by the issuer, irrespective

of any intention on the part of such beneficial owner, direc-

tor, or officer in entering into such transaction of holding

the security or security-based swap agreement purchased

or of not repurchasing the security or security-based swap

agreement sold for a period exceeding six months.... This

subsection shall not be construed to cover any transaction

where such beneficial owner was not such both at the time

16(b) hability are (1) a purchase of a security and

(2) a sale of that security (3) by a director or officer

of the issuer or by a beneficial owner of 10% of any

Class of the issuer’s securities (4) within a six-month

period. See id.; Levy J, 314 F.3d at 111. As a general

rule, any profits earned through transactions that

meet these elements rightfully belong to the issuer.

There is no mens rea requirement — section 16(b) cre-

ates a strict liability regime.

According to the statute itself, the purpose of

section 16(b) is “preventing the unfair use of infor-

mation which may have been obtained by such

beneficial owner, director, or officer by reason of his

relationship to the issuer.” 15 U.S.C. § 78p(b). The

statute authorizes the SEC to promulgate rules and

regulations exempting from liability transactions

that are “not comprehended within [this] purpose.”

Id.; see Levy I, 314 F.3d at 112. Exercising this

authority, the SEC has established a number of

section 16(b) exemptions. See 17 C.F.R. §§ 240.16b-1,

.16b-3, .16b-5 to .16b-8 (codifying SEC Rules 16b-1,

16b-3, and 16b-5 to 16b-8).

Levy claimed that the reclassification of National’s

and Sterling’s preferred stock holdings constituted

a “purchase” of Class A common stock so that the

profits that National and Sterling earned from their

sale of Class A common less than six months later

belong to Fairchild. National and Sterling filed

motions to dismiss, contending that two separate

of the purchase and sale, or the sale and purchase, of the

security or security-based swap agreement... involved, or

any transaction or transactions which the Commission by

rules and regulations may exempt as not comprehended

within the purpose of this subsection.

Securities Exchange Act of 1934 § 16(b), 15 U.S.C. § 78p(b).

exemptions — Rule 16b-3 and Rule 16b-7 — shielded

them from section 16(b) liability.

Adopted in 1996, the version of Rule 16b-3 that

was in effect until 2005 provided, in pertinent part:

Transactions between an issuer and its officers or

directors.

(a) General. A transaction between the issuer

(including an employee benefit plan sponsored by

the issuer) and an officer or director of the issuer

that involves issuer equity securities shall be

exempt from section 16(b) of the Act if the trans-

action satisfies the applicable conditions set forth

in this section.

(d) Grants, awards and other acquisitions from

the issuer. Any transaction involving a grant,

award or other acquisition from the issuer (other

than a Discretionary Transaction) shall be exempt

if:

(1) The transaction is approved by the board of

directors of the issuer... ;

(2) The transaction is approved or ratified by

the written consent of the holders of a

majority of the securities of the issuer entitled

wo vote ...; or

3 National and Sterling also maintained — and continue to

maintain — that, under the so-called “unorthodox transaction”

doctrine, the reclassification did not constitute a “purchase” for

section 16(b) purposes. See Kern County Land Co. v. Occidental

Petroleum Corp., 411 U.S. 582, 593-94, 93 S.Ct. 1736, 36 L.Ed.

2d 503 (1973). We will refrain from addressing this argument

because our analysis of Rules 16b-3 and 16b-7 below makes it

unnecessary for us to do so.

(3) The issuer equity securities so acquired are

held by the officer or director for a period of six

months following the date of such acquisi-

tion....

17 C.F.R. § 240.16b-3 (amended 2005).

The 1991 version of Rule 16b-7, which remained in

effect until 2005, provided, in pertinent part:

Mergers, reclassifications, and consolidations.

(a) The following transactions shall be exempt

from the provisions of section 16(b) of the Act:

(1) The acquisition of a security of a company,

pursuant to a merger or consolidation, in

exchange for a security of a company which,

prior to the merger or consolidation, owned 85

percent or more of either:

(i) The equity securities of all other compa-

nies involved in the merger or consolidation,

or in the case of a consolidation, the resulting

company; or

(ii) The combined assets of all the companies

involved in the merger or consolidation... .

17 C.F.R. § 240.16b-7 (amended 2005). Even though

the SEC added the word “reclassifications” to the

Rule’s title in 1991, the Rule’s text did not specifi-

cally refer to them.

National and Sterling argued that Rule 16b-3(d)

exempted them from any liability related to the

reclassification because the reclassification fit within

the category of a “grant, award, or other acquisition

from the issuer” — as an “other acquisition” — and was

approved by a majority of Fairchild’s board and a

majority of the voting shareholders (even though

approval by either of the two would have sufficed).

They maintained that Rule 16b-7’s exemption apphed

as well because they acquired the disputed Class A

common stock as part of a “reclassification” that met

the Rule’s 85% cross-ownership requirement.

The District Court granted National’s and Ster-

ling’s motions to dismiss, finding that the reclassifi-

cation fell within the scope of Rule 16b-7 and that

Levy’s section 16(b) suit thus necessarily failed.

The Court did not rule on the applicability of Rule

16b-3(d). Levy then appealed to our Court.

In an opinion filed December 19, 2002, we

reversed, concluding that neither Rule 16b-3(d) nor

Rule 16b-7 exempted National or Sterling from sec-

tion 16(b) hability. As to Rule 16b-3(d), we reasoned

that, despite the apparent open-endedness of the

language “other acquisition from the issuer,” and

despite the fact that the Rule made no mention of

“compensation,” the SEC intended it to apply only to

transactions with a compensatory nexus. Levy J, 314

F.3d at 120-24. We reviewed in depth the release

issued by the SEC in 1996 in connection with the

adoption of the Rule, and relied on a number of

excerpts that, we thought, indicated that the SEC

adopted the 1996 version of the Rule in order to spur

participation in employee benefit plans and to make

it clear that the exemption applied to participant-

directed transactions, such as the exercise of a stock

option. Jd. at 122-24. We did acknowledge, however,

that one portion of the release “appear[ed] to cut

against our position” that Rule 16b-3(d) required a

compensatory nexus. /d. at 124. In that portion, the

SEC explained:

New Rule 16b-3 exempts from short-swing profit

recovery any acquisitions and dispositions of

issuer equity securities ... between an officer or

director and the issuer, subject to simplified con-

ditions. A transaction with an employee benefit

plan sponsored by the issuer will be treated the

same as a transaction with the issuer. However,

unlike the current rule, a transaction need not

be pursuant to an employee benefit plan or any

compensatory program to be exempt, nor need it

specifically have a compensatory element.

Ownership Reports and Trading by Officers, Direc-

tors and Principal Security Holders, Exchange Act

Release No. 37,260 (“1996 Rule 16b-3 Release”), 61

Fed.Reg. 30,376, 30,378-79 (June 14, 1996) (emphasis

added) (footnotes omitted). Nonetheless, we concluded

that “the weight of the SEC’s pronouncements on

Rule 16b-3, and particularly Rule 16b-3(d), suggest

that the transaction should have some connection to

a compensation-related function.” Levy J, 314 F.3d at

124.

Examining the applicability of the exemption set

forth in Rule 16b-7, we began our analysis by noting

that “the SEC has not set forth its interpretation

clearly so our threshold challenge is to ascertain

what in fact was its interpretation.” Jd. at 112. We

reasoned that the SEC must have added “reclassifi-

cations” to the Rule’s title for a reason, but found

that, “[uJnfortunately, ... the title and text of the

rule, standing alone, do not provide us assistance in

our effort to ascertain the SEC’s purpose.” Jd. at 113.

Based on a pair of SEC releases, we concluded that

the SEC intended for Rule 16b-7 to exempt some, but

not all, reclassifications from section 16(b) hability.

Id. at 113-15. The first release was from 1981 (e.,

ten years before “reclassifications” was added to the

Rule’s title) and included a question and answer

regarding the Rule's applicability to reclassifications:

10a

Question: Although not specifically mentioned,

does Rule 16b-7 apply to transactions structured

as (1) statutory exchanges; (2) liquidations; or (3)

reclassifications?

Answer: The staff is of the view that, for pur-

poses of Rule 16b-7, a statutory exchange may

be the substantive equivalent of a merger, con-

solidation or sale of assets. Therefore, the acqui-

sition and disposition of stock in a statutory

exchange would be exempt under Rule 16b-7,

assuming all of the conditions of the rule are

satisfied. A liquidation, on the other hand, is not

covered by Rule 16b-7, since the liquidation in

substance and purpose bears little resemblance

to the types of transactions specified in the rule.

Rule 16b-7 does not require that the security

received in exchange be similar to that surren-

dered, and the rule can apply to transactions

involving reclassifications.

Interpretive Release on Rules Applicable to Insider

Reporting and Trading, Exchange Act Release No.

18,114, 46 Fed.Reg. 48,147, 48,176-77 (Oct. 1, 1981)

(emphasis added) (footnotes omitted). Essentially,

we read the language “can apply” to mean “some-

times applies.” Levy /, 314 F.3d at 113-14.

The second release, from 2002, pertained to pro-

posed amendments to Form 8-K and exempted from

reporting requirements “[a]cquisitions or dispositions

pursuant to holding company formations and similar

corporate reclassifications and consolidations.” Form

8-K Disclosure of Certain Management Transactions,

Exchange Act Release No. 45,742, 67 Fed.Reg.

19,914, 19,919 (Apr. 23, 2002) (emphasis added). It

noted that “|t]hese are the transactions exempted

from Section 16(b) short-swing profit recovery by

Lila

Exchange Act Rule 16b-7.” Jd. at 19,919 n. 56. We

reasoned that this release “does not suggest that all

reclassifications are per se exempt” and that, because

it “clearly hedges on the point,” it “thus supports a

conclusion that some but not all reclassifications are

exempt from section 16(b)’s restrictions.” Levy J, 314

F.3d at 114.

Next, lacking “specific SEC guidance about which

reclassifications are exempt from section 16(b) under

Rule 16b-7,” we devised a two-part test, under which

a particular reclassification would be exempt if it (1)

met the 85% cross-ownership requirements that the

Rule clearly made applicable to mergers and consoli-

dations and (2) was a transaction “not comprehended

within the purpose” of section 16(b). Jd. at 114-15

(quoting 15 U.S.C. § 78p(b)).

Applying our newly-created test, we found that the

reclassification here failed part two-at least at the

motion-to-dismiss stage. /d. at 115-18. We rejected

National and Sterling’s argument that the reclassi-

fication changed only the form, not the substance,

of their investments in Fairchild such that it did

not present an opportunity for insiders to benefit

over the public and thus did not implicate Congress’s

purpose in enacting section 16(b). Indeed, we con-

cluded that it did present such an opportunity. We

based our conclusion on two independent grounds.

First, we found that, reading the pleadings in the

hght most favorable to Levy, the reclassification

proportionately increased National’s and Sterling’s

interests in Fairchild by leaving them with a greater

percentage of Fairchild’s common stock. /d. at 116-

17. Second, after contrasting the pros and cons

of common-stock and preferred-stock ownership, we

decided that the reclassification “so changied] the

"Wu

risks and opportunities of the preferred shareholders

in [Fairchild4] that the SEC would not have intended

to exempt the reclassification from section 16(b) by

Rule 16b-7.” Jd. at 117-18.

National and Sterling petitioned for rehearing, and

the SEC submitted an amicus brief in support. We

denied the rehearing request, despite the fact that

the SEC maintained in its brief that our ruling in

Levy I was inconsistent with its view that both ex-

emptions applied here.®

In 2005, in response to our opinion in Levy J, the

SEC adopted amendments to Rules 16b-3 and 16b-7

in order “to clarify the exemptive scope of these rules,

consistent with statements in previous Commission

releases.” 2005 Amendments Release, 70 Fed.Reg.

at 46,080. The SEC explained its disagreement with

Levy I and its impetus for the amendments in the

adopting release:

In particular, the Levy v. Sterling opinion read

Rules 16b-3 and 16b-7 to require satisfaction of

conditions that were neither contained in the text

of the rules nor intended by the Commission.

The resulting uncertainty regarding the exemp-

tive scope of these rules has made it difficult

for issuers and insiders to plan legitimate trans-

actions, and may discourage participation by

4 While we wrote “National and Sterling” here, the context

makes clear that this was a mistake and that we meant to write

“Fairchild.”

5 Despite Levy's contention to the contrary, “(t]he failure of a

petition to achieve the necessary votes for rehearing does not

imply any judgment on the merits and has no jurisprudential

significance.” In re Grand Jury Investigation, 542 F.2d 166, 173

(3d Cir. 1976).

13a

officers and directors in issuer stock ownership

programs or employee incentive plans. With the

clarifying amendments to Rules 16b-3 and 16b-7

that we adopt today, we resolve any doubt as

to the meaning and interpretation of these rules

by reaffirming the views we have consistently

expressed previously regarding their appropriate

construction.

Id. at 46,081.

Rule 16b-3 (d) was amended to read, in pertinent

part:

(d) Acquisitions from the issuer. Any transaction,

other than a Discretionary Transaction, involving

an acquisition [by an officer or director] from the

issuer (including without limitation a grant or

award), whether or not intended for a compensa-

tory or other particular purpose, shall be exempt

if [one of the same three conditions from the 1996

version of the Rule are met}.

17 C.F.R. § 240.160-3(d) (new material underlined).

Thus, there is now no doubt that Rule 16b-3(d) does

not require a compensatory nexus.

Rule 16b-7 was amended to read, in pertinent part:

(a) The following transactions shall be exempt

from the provisions of section 16(b) of the Act:

(1) The acquisition of a security of a company,

pursuant to a merger, reclassification or consol-

idation, in exchange for a security of a company

that before the merger, reclassification or con-

solidation, owned 85 percent or more of either:

(i) The equity securities of all other compa-

nies involved in the merger, reclassification,

or consolidation, or in the case of a consolida-

tion, the resulting company; or

l4a

(ii) The combined asscts of all the companies

involved in the merger, reclassification, or

consolidation....

to any securities transaction that satisfies the

conditions specified in this section and is not con-

ditioned on the transaction satisfying any other

conditions.

17 C.F.R. § 240.16b-7 (new material underlined).

Thus, there is no now no doubt that Rule 16b-7

applies to any reclassification that meets the Rule’s

85% cross-ownership requirement.

Further, the SEC explicitly indicated that “because

[the Rule 16b-3 amendments] clarify regulatory con-

ditions that apphed to [that exemption] since [it] be-

came effective on August 15, 1996, they are available

to any transaction on or after August 15, 1996 that

satisfies the regulatory conditions so clarified.” 2005

Amendments Release, 70 Fed.Reg. at 46,080. The

SEC similarly made clear its view that “because [the

Rule 16b-7 amendments] clarif|y} regulatory condi-

tions that applied to that exemption since it was

amended effective May 1, 1991, [they are] available

to any transaction on or after May 1, 1991 that satis-

fies the regulatory conditions so clarified.” Jd. The

transaction at issue here occurred in August 1999 —

well after both of these dates, but six years before the

adoption of the “clarifying” regulations.

Before the adoption of the 2005 amendments, Levy,

National, and Sterling had filed cross motions for

summary judgment. After the amendments were

adopted, the District Court denied Levy’s motion and

15a

granted those of National and Sterling, finding that

the new versions of both Rules applied to the 1999

reclassification and shielded National and Sterling

from section 16(b) hability. Levy v. Sterling Holding

Co., 475 F.Supp.2d 463 (D.Del.2007). Specifically,

the Court concluded that the new Rules were permis-

sible constructions of section 16(b), id. at 470-74, and

that applying them here would have no impermissi-

ble retroactive effect because the changes made to

the old Rules were “clarifying” rather than “substan-

tive,” id. at 475-78. Levy then filed this timely

appeal.

[I.

The District Court had jurisdiction pursuant to 15

U.S.C. § 78aa and 28 U.S.C. § 1331, and we now have

appellate jurisdiction pursuant to 28 U.S.C. § 1291.6

We review de novo the grant or denial of summary

judgment by a district court. Abramson v. William

Paterson Coll. of N.J., 260 F.3d 265, 276 (3d Cir.

2001). Summary judgment is appropriate “if the

pleadings, depositions, answers to interrogatories,

and admissions on file, together with the affidavits, if

any, show that there is no genuine issue as to any

material fact and that the moving party is entitled to

a judgment as a matter of law.” Fed.R.Civ.P. 56(c).

6 Although denials of summary judgment usually are not

appealable, we have repeatedly made clear that “‘when an ap-

peal from a denial of summary judgment is raised in tandem

with an appeal of an order granting a cross-motion for summary

judgment, we have jurisdiction to review the propriety of the

denial of summary judgment by the district court.” T'rans-

portes Ferreos de Venezuela II CA v. NKK Corp., 239 F.3d 555,

560 (3d Cir.2001) (quoting Nazay v. Miller, 949 F.2d 1323, 1328

(3d Cir.1991)).

16a

Iil.

Levy raises three issues on appeal. First, he main-

tains that, under the doctrine of stare decisis, the

mandate that we issued in Levy J requires the grant

of summary judgment in his favor. Second, Levy

contends that new Rule 16b-3 and new Rule 16b-7

both exceed the authority that Congress delegated to

the SEC in section 16(b). Third, he asserts that ap-

plying either of the new Rules to exempt National’s

or Sterling’s acquisition of Class A common stock

through Fairchild’s 1999 reclassification would have

an impermissible retroactive effect. Levy does not

argue, however, that the transactions at issue failed

in any way to meet the requirements of the new

Rules. Thus, he has effectively conceded that if we

were to conclude that either of the new Rules is a

permissible exercise of the SEC’s authority that may

properly be applied to a 1999 reclassification, we

would affirm the District Court’s grant of summary

judgment to National and Sterling and its denial of

his motion for summary judgment.

Levy argues that the following three premises,

together, require the grant of summary judgment

in his favor: (1) all four elements of a section 16(b)

violation were met by both National and Sterling;

(2) we already ruled in Levy / that neither Rule 16b-3

nor Rule 16b-7 exempted National or Sterling from

hability; and (3) prior panel decisions may only be

overruled by our Court sitting en banc, which has not

happened here. Even assuming that these premises

are correct, however, Levy’s proposed conclusion does

not follow from them.

In National Cable & Telecommunications Associa-

tion v. Brand X Internet Services, 545 U.S. 967, 125

17a

S.Ct. 2688, 162 L.Ed.2d 820 (2005), the Supreme

Court left no doubt that if a court of appeals inter-

prets an ambiguous statute one way, and the agency

charged with administering that statute subse-

quently interprets it another way, even that same

court of appeals may not then ignore the agency’s

more-recent interpretation. In 2000, the United

States Court of Appeals for the Ninth Circuit held

that broadband cabie Internet service constituted a

“telecommunications service” under ‘Title Il of the

Communications Act, a classification with significant

regulatory implications. Jd. at 979-80, 125 S.Ct.

2688. In 2002, however, the Federal Communica-

tions Commission (“FCC”) issued a declaratory ruling

that the term “telecommunications service” did not

encompass broadband cable Internet service. Jd. at

977-78, 125 S.Ct. 2688. When numerous parties

challenged the FCC ruling, the Ninth Circuit held,

under principles of stare decisis, that it was bound by

its interpretation of “telecommunications service,”

notwithstanding the FCC’s conflicting interpretation

from two years later. Jd. at 979-80, 125 S.Ct. 2688.

The Supreme Court reversed, explaining that “[a]

court’s prior judicial construction of a statute trumps

an agency construction otherwise entitled to Chevron

deference’ only if the prior court decision holds that

its construction follows from the unambiguous terms

of the statute and thus leaves no room for agency

discretion.” Jd. at 982, 125 S.Ct. 2688. The Court

reasoned that “allowing a judicial precedent to fore-

7 As discussed below, under Chevron U.S.A., Inc. v. Natural

Resources Defense Council, Inc., courts generally must accord

great deference to an agency's interpretation of a statute that

Congress has authorized it to administer. 467 U.S. 837, 842-43,

104 S.Ct. 2778, 81 L.Ed.2d 694 (1984).

18a

close an agency from interpreting an ambiguous

statute ... would allow a court’s interpretation to

override an agency’s,” which would fly in the face of

“Chevron’s premise ... that it is for agencies, not

courts, to fill statutory gaps.” Jd. Further, the Court

emphasized, the Ninth Circuit’s approach “would

produce anomalous results,” as the relative weight of

conflicting judicial and agency interpretations of an

ambiguous statute “would turn on the order in which

the interpretations issue.” Jd. at 983, 125 S.Ct. 2688;

see also Smiley v. Citibank (S.D.), N.A., 517 U.S. 7385,

744 n. 3, 116 S.Ct. 1730, 1385 L.Ed.2d 25 (1996)

(“Where ... a court is addressing transactions that

occurred at a time when there was no clear agency

guidance, it would be absurd to ignore the agency’s

current authoritative pronouncement of what the

statute means.”); Reich v. D.M. Sabia Co., 90 F.3d

854, 858 (3d Cir.1996) (“Although a panel of this

court is bound by, and lacks authority to overrule, a

published decision of a prior panel, a panel may re-

evaluate a precedent in light of intervening authority

and amendments to statutes or regulations.” (empha-

sis added) (citation omitted)).

We see no reason why these principles should not

apply equally to the interpretation of a regulation.

After all, “[w]hen the construction of an administra-

tive regulation rather than a statute is in issue,

deference is even more clearly in order.” Udall v.

Tallman, 380 U.S. 1, 16-17, 85 S.Ct. 792, 13 L.Ed.2d

616 (1965); see also Facchiano Constr. Co. v. U.S.

Dept of Labor, 987 F.2d 206, 213 (3d Cir.1993)

(“[A]n administrative agency’s interpretation of its

own regulation receives even greater deference than

that accorded to its interpretation of a statute.”).

Accordingly, we conclude that a judicial opinion con-

19a

struing an agency’s regulation does not necessarily

bar a court from giving effect to a subsequent, differ-

ent interpretation by the agency, unless, according to

the earlier opinion, the judicial construction flowed

unambiguously from the terms of the regulation. To

find otherwise would produce the same “anomalous

results” that the Brand X Court sought to avoid, cre-

ating a first-in-time rule for determining whether a

judicial or administrative interpretation of a regula-

tion 1s authoritative.

We reached a similar conclusion in a similar con-

text in United States v. Marmolejos, 140 F.3d 488 (3d

Cir.1998), a case that involved an amendment by the

Sentencing Commission of an application note that

accompanied an ambiguous section of the Sentencing

Guidelines. There, we made clear that an earlier,

conflicting judicial construction of the ambiguous

Guidelines section did not preclude us from consider-

ing the more-recent interpretation of that section

provided by the Commission in the application note

amendment. /d. at 492-93 & n. 7. In such a situation,

we explained, “‘this court is not bound to close its

eyes to the new source of enlightenment.” Jd. at 493

(quoting United States v. Joshua, 976 F.2d 844, 855

(3d Cir.1992)). Importantly, as we noted in Marmol-

ejos, the Supreme Court has analogized Sentencing

Commission commentary on the Guidelines to an

agency's interpretation of its own rules. Id. at 493

n. 7 (citing Stinson v. United States, 508 U.S. 36, 44-

45, 113S8S.Ct. 1913, 123 L.Ed.2d 598 (1993)).

Here, the new Rules constitute both (1) interpreta-

tions of a statute, as they construe the provision of

section 16(b) granting the SEC authority to exempt

transactions “not comprehended within [the statute’s|]

purpose,” and (2) interpretations of regulations, as

20a

they set forth the SEC’s understanding of what the

old Rules meant all along. Looking at the new Rules

from either perspective, it is clear that, notwith-

standing the doctrine of stare decisis, Levy I does not

necessarily foreclose us from considering them. In

Levy I, we did not conclude that section 16(b) un-

ambiguously precluded the SEC from exempting

transactions like the 1999 reclassification. Similarly,

we did not indicate that our reading of old Rule 16b-3

or of old Rule 16b-7 flowed unambiguously from their

terms. Indced, we struggled to divine their applica-

bility to the instant fact pattern. With respect to

Rule 16b-3, we concluded only that “the weight of

the SEC’s pronouncements ... suggest/ed/’ that we

should read in a compensatory nexus requirement.

Levy I, 314 F.3d at 124 (emphasis added). Further,

we recognized that a portion of the SEC’s adopting

release “appear[ed] to cut against” this interpreta-

tion. Jd. As to Rule 16b-7, we repeatedly noted the

lack of clear guidance in the text or elsewhere re-

garding whether and to what extent reclassifications

fell within the Rule’s scope. /d. at 112-14. Our con-

clusion as to both represented our view of what the

SEC probably intended.

Accordingly, Levy I does not control the result here

simply by virtue of the fact that 1t came first and has

not been overturned.

Levy also contends that new Rule 16b-3 and new

Rule 16b-7 are improper exercises of the authority

that Congress granted the SEC in section 16(b). This

argument equates to a claim that both new Rules

are impermissible interpretations of the portion of

the statute that provides that section 16(b) does not

apply to “any transaction or transactions which the

21a

Commission by rules and regulations may exempt

as not comprehended within the purpose of this sub-

section.” 15 U.S.C. § 78p(b). Because Chevron defer-

ence applies here, and the statutory interpretations

embodied in the new Rules easily pass muster under

this lenient standard, we disagree with Levy on this

issue as well.

Chevron deference applies to an agency’s statutory

interpretation “when it appears that Congress dele-

gated authority to the agency generally to make rules

carrying the force of law, and that the agency inter-

pretation claiming deference was promulgated in the

exercise of that authority.” United States v. Mead

Corp., 533 U.S. 218, 226-27, 121 S.Ct. 2164, 150

L.Ed.2d 292 (2001). If we determine that the situa-

tion does indeed call for Chevron deference, we pro-

ceed to a two-step inquiry. First, we ask “whether

Congress has directly spoken to the precise question

at issue.” Chevron U.S.A., Inc. v. Natural Res. Def.

Council, Inc., 467 U.S. 837, 842, 104 S.Ct. 2778, 81

L.Ed.2d 694 (1984). If the answer is yes, we “must

give effect to the unambiguously expressed intent of

Congress” and our inquiry ends there. Jd. at 842-43,

104 S.Ct. 2778. If, however, the answer is no, we

move on to step two, under which we must give the

agency’s interpretation “controlling weight” unless it

is “arbitrary, capricious, or manifestly contrary to the

statute.” Jd. at 843, 104 S.Ct. 2778. In other words,

where Congress has left a “statutory gap” for the

agency to fill, we must accept any interpretation by

the agency that fills the gap “in reasonable fashion.”

Brand X, 545 U.S. at 980, 125 S.Ct. 2688.

Here, Congress has generally authorized the SEC

to make rules that have the force of law in imple-

menting the Exchange Act, Securities Exchange

22a

Act of 1934 § 23(a), 15 U.S.C. § 78w(a), and has

specifically authorized it to create binding exemp-

tions from short-swing profit recovery, 15 U.S.C.

§ 78p(b). Because the SEC was acting pursuant to

this authority when it promulgated new Rule 16b-3

and new Rule 16b-7, Chevron deference clearly

applies. See 2005 Amendments Release, 70 Fed.

Reg. at 46,084-85 & nn. 54, 71. Further, by broadly

pronouncing that section 16(b) does not apply to “any

transaction or transactions which the Commission by

rules and regulations may exempt as not compre-

hended within the purpose of this subsection,” 15

U.S.C. § 78p(b), Congress certainly left a gap for

the agency to fill. Thus, the key question for us to

answer is whether it was reasonable for the SEC to

think that the transactions exempted by the new

Rules are “not comprehended within the purpose” of

section 16(b).

As noted above, section 16(b)’s self-proclaimed pur-

pose is “preventing the unfair use of information

which may have been obtained by such beneficial

owner, director, or officer by reason of his relation-

ship to the issuer.” 15 U.S.C. § 78p(b). The Supreme

Court has expanded upon this purpose:

The general purpose of Congress in enacting

s{ection] 16(b) is well known. Congress recog-

nized that insiders may have access to informa-

tion about their corporations not available to the

rest of the investing public. By trading on this

information, these persons could reap profits at

the expense of less well informed investors. In

s[ection] 16(b) Congress sought to “curb the evils

of insider trading [by]... taking the profits out of

a Class of transactions in which the possibility of

abuse was believed to be intolerably great.” It

23a

accomplished this by defining directors, officers,

and beneficial owners as those presumed to have

access to inside information and enacting a flat

rule that a corporation could recover the profits

these insiders made on a pair of security transac-

tions within six months.

Foremost-McKesson, Inc. v. Provident Sec. Co., 423

U.S. 232, 243-44, 96 S.Ct. 508, 46 L.Ed.2d 464 (1976)

(alterations in original) (citations and footnotes omit-

ted) (quoting Reliance Elec. Co. v. Emerson Elec. Co.,

404 U.S. 418, 422, 92 S.Ct. 596, 30 L.Ed.2d 575

(1972)).

In the 2005 adopting release, the SEC explained

why it believed the transactions exempted by new

Rule 16b-3 — transactions between directors or offi-

‘cers and the issuer — were not comprehended withir

this purpose:

Typically, where the issuer, rather than the trad-

ing markets, is on the other side of an officer or

director’s transaction in the issuer’s equity secu-

rities, any profit obtained is not at the expense of

uninformed shareholders and other market par-

ticipants of the type contemplated by the statute.

2005 Amendments Release, 70 Fed.Reg. at 46,083

(quoting 1996 Rule 16b-3 Release, 61 Fed.Reg. at

30,377).

In other words, the purchase of securities from, or

sale of securities to, the issuer by a director or officer

does not present the same informational asymmetry,

and associated opportunity for speculative abuse,

that, according to the Supreme Court, Congress was

targeting in enacting section 16(b). Because this

rationale is perfectly reasonable — and apphes

equally whether or not the transaction has a com-

24a

pensatory nexus — we conclude that new Rule 16b-3

is a permissible construction of section 16(b) and a

valid exercise of the SEC’s congressionally delegated

authority. The two courts of appeals that have con-

sidered this question reached the same conclusion.

Roth v. Perseus, L.L.C., 522 F.3d 242, 249 (2d Cir.

2008); Dreiling v. Am. Express Co., 458 F.3d 942,

949-52 (9th Cir.2006).

As for new Rule 16b-7, the SEC explained in the

2005 adopting release that it is “based on the prem-

ise that the exempted transactions” — including re-

classifications — “are of relatively minor importance

to the shareholders of a particular company and do

not present significant opportunities to insiders to

profit by advance information concerning the trans-

action.” 2005 Amendments Release, 70 Fed.Reg. at

46,085. “Indeed,” the SEC continued, “by satisfying

either of the rule’s 85% ownership tests, an exempted

transaction does not significantly alter the economic

investment held by the insider before the transac-

tion.” Jd. In essence, the SEC’s position is that re-

classifications, in addition to mergers and consolida-

tions, that meet the 85% cross-ownership require-

8 Levy maintains that the SEC’s reasoning is flawed because

it “ignores [the fact] that such unfair short-term speculative

activity can take place even absent a transaction with an un.

informed member of the investing public.” (Appellant’s Br. 60

(emphasis added)). But Levy’s argument is based on a faulty

premise, as a transaction “need not ... pose absolutely no risk

of speculative abuse” for the SEC to be free to exempt it from

section 16(b) liability. Dreiling v. Am. Express Co., 458 F.3d

942, 950 (9th Cir.2006). Rather, as indicated by the Supreme

Court in its above explanation of section 16(b)’s purpose, the

relevant inquiry is whether the risk of speculative abuse is not

““intolerably great.” Foremost-McKesson, Inc., 423 U.S. at 243,

96 S.Ct. 508 (quoting Reliance Elec. Co., 404 U.S. at 422, 92

S.Ct. 596); accord Dreiling, 458 F.3d at 950.

25a

ment do not pose much risk of abuse of inside infor-

mation because they usually change merely the form

of the insider’s pre-existing investment in the issuer.

Id. We think this is a reasonable explanation as to

why the exempted transactions are not compre-

hended within the purpose of section i6(b) and,

therefore, conclude that new Rule 16b-7, like new

Rule 16b-3, is a permissible construction of section

16(b) and a valid exercise of the authority delegated

to the SEC by Congress. We note that the only other

court of appeals to have faced this issue as to Rule

16b-7 agreed, finding that new Rule “falls safely

within the Commission’s delegated authority.” Bruh

v. Bessemer Venture Partners III L.P., 464 F.3d 202,

214 (2d Cir.2006).

Finally, Levy contends that, even if Levy J does not

bind us for any of the reasons discussed above, and

even if the new Rules are permissible constructions

of section 16(b), actually applying the new Rules here

to the 1999 reclassification would have an impermis-

sible retroactive effect.

Drawing on the well-established principle that

“Irjetroactivity is not favored in the law,” the Su-

preme Court held in Bowen v. Georgetown University

Hospital, 488 U.S. 204, 208, 109 S.Ct. 468, 102

L.Ed.2d 493 (1988), that an agency may not promul-

gate rules that operate retroactively unless Congress

has expressly delegated to it the authority to do so.

However, we have held that a new rule should not be

deemed to be “retroactive” in its operation — and thus

does not implicate the Supreme Court’s concerns in

Bowen — if it “d[oes] not alter existing rights or obli-

gations [but] merely clarifie{s] what those existing

rights and obligations halve] always been.” Appala-

26a

chian States Low-Level Radioactive Waste Comm’n

v. O'Leary, 93 F.3d 103, 113 (3d Cir.1996). Thus,

where a new rule constitutes a clarification — rather

than a substantive change — of the law as it existed

beforehand, the application of that new rule to pre-

promulgation conduct necessarily does not have

an impermissible retroactive effect, regardless of

whether Congress has delegated retroactive rule-

making power to the agency.

Many of our sister courts of appeals have endorsed

similar approaches, finding retroactivity to be a non-

issue with respect to new laws that clarify existing

law. See, e.g., Piamba Cortes v. Am. Airlines, Inc.,

177 F.3d 1272, 1283 (11th Cir.1999) (“[C]oncerns

about retroactive application are not implicated

when an amendment that takes effect after the ini-

tiation of a lawsuit is deemed to clarify relevant law

rather than effect a substantive change in the law.”);

Pope v. Shalala, 998 F.2d 473, 483 (7th Cir.1993) (“A

rule simply clarifying an unsettled or confusing area

of the law ... does not change the law, but restates

what the law according to the agency is and has al-

ways been: ‘It is no more retroactive in its operation

than is a judicial determination construing and ap-

plying a statute to a case in hand.’” (quoting Mana:at-

tan Gen. Equip. Co. v. Comm, 297 U.S. 129, 135, 56

S.Ct. 397, 80 L.Ed. 528 (1936))), overruled on other

grounds by Johnson v. Apfel, 189 F.3d 561, 563 (7th

Cir.1999); Cookeville Reg'l Med. Ctr. v. Leavitt, 531

F.3d 844, 849 (D.C.Cir.2008); Brown v. Thompson,

374 F.3d 253, 258-61 & n. 6 (4th Cir.2004); ABKCO

Music, Inc. v. LaVere, 217 F.3d 684, 689-91 (9th Cir.

2000); Orr v. Hawk, 156 F.3d 651, 654 (6th Cir.1998);

Liquilux Gas Corp. v. Martin Gas Sales, 979 F.2d

27a

887, 890 (1st Cir.1992). But see Princess Cruises, Inc.

v. United States, 397 F.3d 1358, 1363 (Fed.Cir.2005).

In determining whether a new regulation merely

“clarifies” the existing law, “[t]here is no bright-line

test” to guide us. Marmolejos, 140 F.3d at 491.9

After reviewing the relevant case law from our Court

and other courts of appeals, however, we think that

four factors are particularly important for making

this determination: (1) whether the text of the old

regulation was ambiguous, see, e.g., ABKCO Music,

Inc., 217 F.3d at 691; Piamba Cortes, 177 F.3d at

1283-84; (2) whether the new regulation resolved, or

at least attempted to resolve, that ambiguity, see,

e.g., Marmolejos, 140 F.3d at 491; Liquilux Gas

Corp., 979 F.2d at 890; (3) whether the new regula-

tion’s resolution of the ambiguity is consistent with

the text of the old regulation, see, e.g., Marmolejos,

140 F.3d at 491; Boddie v. Am. Broad. Cos., 881 F.2d

267, 269 (6th Cir.1989); and (4) whether the new

regulation’s resolution of the ambiguity is consistent

with the agency’s prior treatment of the issue, see,

e.g., First Natl Bank of Chi. v. Standard Bank &

Y Marmolejos and a number of other Third Circuit cases that

we discuss in this section involve amendments to the Sentenc-

ing Guidelines or its commentary made after the defendant had

already been sentenced. Generally, a defendant’s sentence ts to

be based on the version of the advisory Guidelines and commen-

tary in effect at the time of sentencing. U.S.S.G. § 1B1.11(a).

However, unless an Ex Post Facto Clause violation would re-

sult, “a post-sentencing amendment ... should be given effect” —

and the defendant's sentence adjusted accordingly — “if it ‘clari-

fies the guideline or comment in place at the time of sentenc-

ing. Marmolejos, 140 F.3d at 490 (emphasis added). Because

the ultimate inquiry is the same, we think our statements as to

when an amendment to the Guidelines or its commentary is

“clarifying” are equally applicable to the determination of

whether an amendment to a statute or regulation is “clarifying.”

28a

Trust, 172 F.3d 472, 479 (7th Cir.1999); Orr, 156

F.3d at 654.10

Before turning to the application of these four fac-

tors to the case before us, we note that there are two

other factors on which some courts of appeals rely

that we do not find to be all that significant. ‘First, we

do not consider an enacting body’s description of an

amendment as a “clarification” of the pre-amendment

Jaw to necessarily be relevant to the judicial analysis.

United States v. Diaz, 245 F.3d 294, 304 (3d Cir.

2001); Marmolejos, 140 F.3d at 493. But see Heim-

mermann v. First Union Mortgage Corp., 305 F.3d

1257, 1260 (1ith Cir.2002); First Nat? Bank, 172

F.3d at 478. Second, we do not take the fact that an

amendment conflicts with a judicial interpretation of

the pre-amendment law to mean that the amend-

ment is a substantive change and not just a clarifica-

tion. Marmolejos, 140 F.3d at 492-93. As we ex-

plained in Marmolejos, “one could posit that quite the

opposite was the case — that the new language was

fashioned to clarify the ambiguity made apparent by

10 Levy devotes a number of pages in his briefs to the argu-

ment that the new Rules may not be applied to the 1999 reclas-

sification because they are “legislative,” as opposed to “interpre-

tive.” This distinction, however, does not advance his cause.

The significance of a rule’s classification as “legislative” is that

an agency must promulgate it through the use of the formal

notice-and-comment rulemaking procedures contained in the

Administrative Procedure Act (“APA”). Chao vu. Rothermel, 327

F.3d 223, 227 (3d Cir.2003). Although the inquiries may hinge

on some of the same factors, the legislative-interpretive dichot-

omy has no bearing on whether a rule has an impermissible

retroactive effect. Similarly, in response to another of Levy's

contentions, we note that an agency's decision to use the APA’s

formal rulemaking procedures to promulgate a rule does not

affect whether that rule may be applied to pre-promulgation

conduct.

29a

the caselaw.” Id. at 492.1! But see Natl Mining Ass’n

v. Dep’t of Labor, 292 F.3d 849, 860 (D.C.Cir.2002);

United States v. Capers, 61 F.3d 1100, 1110 (4th Cir.

1995).

Focusing first on Rule 16b-3, we think that all four

factors identified above point to the conclusion that

the new Rule is a clarification of the previous version

and that, thus, applying it to the 1999 reclassifica-

tion would have no impermissible retroactive effect.

First, we already determined in Levy J that old Rule

16b-3 (d)’s reference to “[a]ny transaction involving a

grant, award or other acquisition from the issuer’

was ambiguous. As discussed above, we thought it

unclear from the text of the Rule whether “other

acquisition” referred truly to any other acquisition or,

instead, only to those acquisitions that, like grants

and awards, involve compensation. Levy J, 314 F.3d

at 121-22.!2 Second, new Rule 16b-3 resolved this

11 There are Guideline amendment cases in which we have

made statements to the contrary, suggesting that a conflict with

a prior judicial interpretation does make an amendment sub-

stantive, as opposed to clarifying. But these cases are distin-

guishable. In United States v. Brennan, 326 F.3d 176, 197-98

(3d Cir.2003), Diaz, 245 F.3d at 303, and United States v. Ber-

toli, 40 F.3d 1384, 1405-07 (3d Cir.1994), applying the new

amendment would have resulted in a greater sentence for the

defendant and thus would have implicated the Ex Post Facto

Clause. As we explicitly indicated in Marmolejos, when ex post

facto issues are involved, the rules of the game are different.

140 F.3d at 492 n.6. In United States v. Roberson, 194 F.3d

408, 417-18 (3d Cir.1999), there was no pre-existing ambiguity

in the Guidelines section at issue. The Sentencing Commis-

sion’s amendment to the commentary conflicted not only with a

prior judicial construction, but also with the plain meaning, of

the relevant provision. Id.

12 L evy con tend

s that “other acquisition” in the phrase

“grant, award or other acquisition from the issuer” unambigu-

30a

ambiguity, explicitly providing that the Rule’s ex-

emption is available “whether or not [the transaction

at issue was] intended for a compensatory or other

particular purpose.” 17 C.F.R. § 240.16b-3(d). Third,

the new Rule’s resolution of the ambiguity is con-

sistent with the text of the old Rule, which made

no mention of a compensatory nexus requirement.

Finally, the new Rule’s resolution of the ambiguity is

not at odds with the SEC’s earlier-expressed under-

standing of the old Rule. To the contrary, as noted

above, the SEC stated in the release it issued upon

adopting the old Rule that “a transaction need not be

pursuant to an employee benefit plan or any compen-

satory program to be exempt, nor need it specifically

have a compensatory element.” 1996 Rule 16b-3

Release, 61 Fed.Reg. at 30,379. Levy points to a

number of SEC statements that suggest that, in

promulgating old Rule 16b-3(d), the agency was

primarily concerned with transactions pursuant to

employee benefit plans; however, these statements

do not conflict with the position that the old Rule

ously referred only to transactions with a compensatory nexus

because “grants” and “awards” both involve compensation. As

support, he invokes the interpretive canon ejusdem generis,

under which “where general words follow specific words in a

statutory enumeration, the general words are construed to em-

brace only objects similar in nature to those objects enumerated

by the preceding specific words.” Circuit City Stores, Inc. v.

Adams, 532 U.S. 105, 114-15, 121 S.Ct. 1302, 149 L.Ed.2d 234

(2001) (internal quotation marks omitted). But while this may

be one way to approach the language, it is not the only way. See

Chickasaw Nation v. United States, 534 U.S. 84, 94, 122 S.Ct.

928, 151 L.Ed.2d 474 (2001) (“{[C]anons [of interpretation] are

not mandatory rules. Thev are guides that ‘need not be conclu-

sive.” (quoting Circuit City Stores, Inc., 532 U.S. at 115, 121

S.Ct. 1302)).

3la

also applied to transactions with no compensatory

nexus whatsoever. !3

While the District Court chose to address the retro-

activity implications of new Rule 16b-7 as well, we

decline to do so. We have already determined that

new Rule 16b-3(d) is a valid exercise of the SEC’s

authority, whose application to the 1999 reclassifica-

tion would not give rise to any retroactivity concerns.

Because this is a sufficient independent ground for

affirming the District Court’s disposition of the case,

we express no opinion as to whether new Rule 16b-7

merely clarifies the old Rule or, relatedly, whether

applying it here would have an impermissible retro-

active effect. .

IV.

In light of the foregoing, we will AFFIRM the Dis-

trict Court’s grant of summary judgment to National

and Sterling and its denial of summary judgment to

Levy. Further, to the extent it is inconsistent with

our opinion today, we OVERRULE Levy I.

13 Levy also maintains that by including subsection (f), which

provided that certain “discretionary transactions” involving

employee benefit plans required a six-month waiting period in

order to be exempt, the SEC somehow implicitly conveyed the

view that old Rule 16b-3(d) required a compensatory nexus.

Specifically, he contends that it would have been irrational for

the SEC not to exempt these discretionary transactions but

to exempt purely volitional, non-compensation-related trans-

actions, given that the latter arguably present greater opportu-

nity for speculative abuse. Although Levy’s argument may

raise questions as to the wisdom of a particular regulatory

scheme, we do not think that the SEC’s inclusion of subsection

(f) equated to a statement from the SEC that only transactions

involving compensation fell within the scope of old Rule 16b-

3(d).

32a

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF DELAWARE

No. 00-994

MARK LEvy,

Plaintiff,

Vv.

STERLING HOLDING COMPANY, LLC;

NATIONAL SEMICONDUCTOR CORPORATION;

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.,

Defendants.

Feb. 13, 2007

SLEET, District Judge.

I. INTRODUCTION

On November 28, 2000, the plaintiff Mark Levy

(“Levy”) filed this shareholder’s derivative suit on

behalf of the defendant Fairchild Semiconductor

(“Fairchild”) after making an appropriate demand to

the board. The complaint alleges that defendants

National Semiconductor (“National”) and Sterling

Holding Company (“Sterling”) (collectively, the “defen-

dants”), who sit on the Fairchild Board of Directors,

purchased Fairchild stocks and then sold those

stocks at a profit within six months after purchase.

Levy further alleges that National and Sterling’s con-

duct violated the prohibition on short-swing profits

due to insider trading expressed in section 16(b) of

33a

the Securities and Exchange Act of 1934 (the “Act”).

See 15 U.S.C. § 78p(b).

Presently before the court are Levy’s, National’s,

and Sterling’s cross-motions for summary judgment,

pursuant to Federal Rule of Civil Procedure 56(c).

For the reasons that follow, the court will grant

National’s and Sterling’s motions for summary judg-

ment and deny Levy’s motion for summary judgment.

Il. BACKGROUND

A. Factual Background

National and Sterling are both incorporated in the

State of Delaware. On March 11, 1997, Fairchild

was spun off from National pursuant to an Agree-

ment and Plan of Recapitalization (the “Agreement’).

The newly-created Fairchild issued three classes of

stock to its original equity investors, i.e. National,

certain members of Fairchild’s management, and

Sterling: (1) preferred stock, valued at $1,000 per

share with a cumulative dividend rate of 12%; (2)

class A common stock, which had voting powers and

was valued at $0.50 per share; and (3) class B com-

mon stock, which did not have voting powers and was

valued at $0.50 per share. The class A common stock

and class B common stock were freely convertible

into each other at the election of the shareholder.

The Agreement. permitted National and Sterling to

retain or purchase stock in Fairchild. At that time,

National retained 4,380,000 shares of class A

common stock, 5,243,621 shares of class B common

stock (after a four-for-one common stock split, which

occurred in April 1998), and 11,667 shares of 12%

series A cumulative compounding preferred stock.

Sterling exercised its rights under the Agreement

and purchased, for $58.5 million, approximately

34a

3,553,000 shares of class A common stock, 7,099,000

shares of class B common stock (again, after the

April 1998 split), and 53,113 shares of the preferred

stock.

In May 1999, Fairchild decided to go public

through an initial public offering (“IPO”). When

Fairchild interviewed potential underwriters, each

of them took the position that Fairchild needed to

eliminate its preferred stock in order to accomplish

an IPO. In other words, Fairchild was informed that

it should undergo a recapitalization in anticipation of

its IPO. The recapitalization contemplated that pre-

ferred shares would be converted to common stock.

Fairchild’s certificate of incorporation, however, did

not provide for the conversion of preferred stock

into common stock. Accordingly, on July 1, 1999, a

majority of Fairchild’s common and preferred share-

holders voted to convert all shares of preferred stock

into class A common stock “automatically” upon

completion of the IPO. The certificate of incorpora-

tion was amended to reflect the reclassification, and

also set out a formula for the conversion of the

shares.! According to the formula, each share of

Fairchild’s preferred stock was worth 75.714571

shares of class Acommon stock. As a result, Sterling

acquired 4,021,428 shares and National acquired

888,362 shares of common stock in exchange for

their preferred stock. These acquisitions occurred on

1 The conversion of preferred stock to common stock in the

reclassification was accomplished by dividing the liquidation

value of the preferred stock (1.e. $1,000 per share plus accumu-

lated unpaid dividends) by the price per share at which class A

common stock would be offered to the public in the IPO, less the

underwriting fees and commissions (1.e. $17.39). ‘The conversion

resulted in a 75 to 1 ratio.

35a

August 9, 1999, the date the [PO was completed.

According to the prospectus filed by Fairchild on

August 4, 1999, National was the beneficial owner of

14.8% of class A common stock and 14.9% of class B

common stock. The prospectus also disclosed that, by

1999, Sterling was the beneficial owner of 48.0% of

the class A common stock and 85.1% of the class B

common stock.? Thus, both National and Sterling had

stock ownership in Fairchild exceeding ten percent.

In late 1999, Fairchild planned a follow-on or sec-

ondary offering of its common stock. In accordance

with Fairchild’s plan, on January 19, 2000 (with a

closing date of January 25, 2000), Sterling sold

11,115,000 shares of class A common stock and Na-

tional sold 7,243,360 shares of class A common stock

in the secondary offering for profits of $58,511,777.00

and $14,124,958.00, respectively. Both sales were

within six months of the time National and Sterling

acquired the new shares of common stock.

B. Procedural Background

On November 28, 2000, Levy filed this share-

holder’s derivative suit against National and Ster-

ling. On January 29, 2001, National and Sterling

moved to dismiss the complaint pursuant to Federal

Rule of Civil Procedure 12(b)(6). On February 5,

2002, the court issued a Memorandum and Order

granting the motion to dismiss and holding that Rule

16b-7 exempted the reclassification transaction at

issue. (D.1. 46.) Levy appealed the court’s decision to

the Court of Appeals for the Third Circuit. On De-

cember 13, 2002, the Third Circuit issued an opinion

-“ By 1999, Sterling’s number of shares had grown to

14,212,000 shares of class A common stock and 28,396,000

shares of class B common stock.

36a

in the matter, reversing this court’s decision and

holding, under its interpretation of Rule 16b-7, that

it could not conclude at the motion to dismiss stage

that Rule 16b-7 exempted the reclassification. See

Levy v. Sterling Holding Co., 314 F.8d 106, 125 (3d

Cir.2002). The Third Circuit also held that, under its

interpretation of Rule 16b-3(d), the exemption af-

forded could not apply to the reclassification at issue

unless the transaction had some connection to a

compensation-related function. Jd. at 124.

National and Sterling subsequently petitioned the

Third Circuit for rehearing or rehearing en banc on

the issue. The Securities and Exchange Commission

(the “SEC”) joined the petition and filed an amicus

brief, which urged the court to vacate its opinion. On

April 30, 2003, the Third Circuit denied the petition

for rehearing or rehearing en banc. National and

Sterling filed a writ of certiorari with the Supreme

Court, which the Court denied on October 14, 2003.

See Sterling Holding Co. v. Levy, 540 U.S. 947, 124

S.Ct. 389, 157 L.Ed.2d 277 (2003).

On June 4, 2004, the parties filed the cross-motions

for summary judgment that are presently at issue.

On June 21, 2004, the SEC disseminated a release

titled Proposed Rule: Ownership Reports and Trad-

ing by Officers, Directors and Principal Security

Holders, Release Nos. 34-49895; 35-27861; IC-26471,

69 Fed.Reg. 35,982 (the “Proposed Amendments”)

in an effort to amend Rules 16b-3(d) and 16b-7. On

June 25, 2004, National and Sterling filed a motion

to stay the proceedings pending final action by the

SEC on the Proposed Amendments to SEC Rules

16b-3 and 16b-7. The court issued an Order (D.1.

223) on September 27, 2004, granting the motion and

staying the proceedings. On August 3, 2005, the SEC

37a,

adopted the Proposed Amendments. See Ownership

Reports and Trading by Officers, Directors and Prin-

cipal Security Holders, Exchange Act Release No.

34-52202, 70 Fed.Reg. 46,080 (Aug. 9, 2005) (the

“Amendments’).

On August 11, 2005, the court issued an Order

(D.I. 236) lifting the stay and directing the parties to

file briefing with respect to two issues: (1) whether

the Amendments are entitled to deference; and (2)

whether the court should apply the Amendments

retroactively to the reclassification at issue in the

context of resolving the parties’ competing summary

judgment motions. The court heard oral argument

regarding the two issues on November 1, 2005 and

took the matter under advisement.

Ill, STANDARD OF REVIEW

A grant of summary judgment is appropriate “if the

pleadings, depositions, answers to interrogatories,

and admissions on file, together with the affidavits, if

any, show that there is no genuine issue as to any

material fact and that the moving party is entitled to

a judgment as a matter of law.” Fed.R.Civ.P. 56(c);

Biener v. Calio, 361 F.3d 206 (3d Cir.2004). In

reviewing summary judgment decisions, the Third

Circuit views all evidence and draws all inferences in

the light most favorable to the non-movant, affirming

if no reasonable jury could find for the non-movant.

See Whiteland Woods, L.P. v. Twp. of West White-

land, 193 F.3d 177, 180 (3d Cir.1999). Thus, a trial

court should only grant summary judgment if it

determines that no “reasonable jury could return a

verdict for the nonmoving party.” Anderson v. Liberty

Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91

L..Fd.2d 202 (1986).

38a

If a moving party has demonstrated the absence of

a genuine issue of material fact — meaning that no

reasonable jury could find in the nonmoving party’s

favor based on the record as a whole — concerns

regarding the credibility of witnesses cannot defeat

summary judgment. Instead, the nonmoving party

must “present affirmative evidence in order to defeat

a properly supported motion for summary judgment.”

Liberty Lobby, 477 U.S. at 256-57, 106 S.Ct. 2505

(citation omitted). Thus, summary judgment is par-

ticularly appropriate where, notwithstanding issues

of credibility, the nonmoving party has presented no

evidence or inferences that would allow a reasonable

mind to rule in its favor. In this situation, it may be

said that the record as a whole points in one direc-

tion and the dispute is not “genuine.” Matsushita

Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S.

574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).

IV. DISCUSSION

Before the court can consider the parties’ cross-

motions for summary judgment, it must determine

whether it owes deference to the SEC’s interpreta-

tion of Rules 16b-3 and 16b-7. Additionally, the court

must determine whether the Amendments apply to

the reclassification at issue in the present case.

A. Whether the Amendments are Permissible

Readings of Section 16(b)

The SEC amended Rules 16b-3 and 16b-7 in 2005

to “resolve any doubt as to the meaning and interpre-

tation of these rules [16b-3 and 16b-7] by reaffirming

the views [it has] consistently expressed previously

regarding their appropriate construction.” 70 Fed.

Reg. 46,080, 46,080 (Aug. 9, 2005). Specifically, with

respect to Rule 16b-3(d), the SEC noted that the

amendment was necessary “to eliminate the un-

39a

certainty generated by the Levy v. Sterling opinion,”

and to reassure insiders and issuers that non-

compensatory acquisitions are included within the

scope of Rule 16b-3’s exemption.’ Jd. at 46,082; see

id. at 46,083 (exempting “any transaction ... involv-

ing an acquisition by an officer or director from the

issuer (including without limitation a grant or

award), whether or not intended for a compensatory

or other particular purpose”). Further, the SEC con-

3 Prior to the Amendments, Rule 16b-3(d) stated:

17 C.F.R § 240.16b-3 Transactions between an issuer and

its officers or directors.

(d) Grants, awards and other acquisitions from the issuer.

Any transaction involving a grant, award or other acquisi-

tion from the issuer (other than a Discretionary Transac-

tion) shall be exempt if:

(1) The transaction is approved by the board of directors of

the issuer, or a committee of the board of directors that is

composed solely of two or more Non-Employee Directors;

(2) The transaction is approved or ratified, tn compliance

with section 14 of the Act, by either: the affirmative votes

of the holders of a majority of the securities of the issuer

present, or represented, and entitled to vote at a meeting

duly held in accordance with the applicable laws of the

state or other jurisdiction in which the issuer is incorpo-

rated; or the written consent of the holders of a majority of

the securities of the issuer entitled to vote; provided that

such ratification occurs no later than the date of the next

annual meeting of shareholders; or

(3) The issuer equity securities so acquired are held by

the officer or director for a period of six months following

the date of such acquisition, provided that this condition

shall be satisfied with respect to a derivative security if at

least six months elapse from the date of acquisition of the

derivative security to the date of disposition of the deriva-

tive security (other than upon exercise or conversion) or its

underlying equity security

40a

cluded that, because Rule 16b-3(d) “clariffies] regula-

tory conditions that applied to the[] exemptions since

they became effective on August 15, 1996, [it is]

available to any transaction on or after August 15,

1996 that satisfies the regulatory conditions so clari-

fied.” Id. at 46,080.

With respect to Rule 16b-7, the SEC stated that the

Levy opinion “imposed upon reclassifications exemp-

tive conditions that are not found in the language

of [the rule,] and would not apply to a merger or

consolidation relying upon the rule.” 70 Fed.Reg.

46,080, 46,084. Thus, the SEC proposed to amend

Rule 16b-7 “to eliminate uncertainty generated by

the Levy v. Sterling opinion,” and to specify that that

the rule applies to reclassifications on the same basis

as mergers and consolidations.’ Jd. at 46,084-85. In

4 Prior to the Amendments, Rule 16b-7 stated:

17 C.F.R. § 240.16b-7 Mergers, reclassifications, and con-

solidations.

(a) The following transactions shall be exempt from the

provisions of section 16(b) of the Act:

(1) The acquisition of a security of a company, pursuant to

a merger or consolidation, in exchange for a security of

a company which, prior to the merger or consolidation,

owned 85 percent or more of either (i) The equity securities

of all other companies involved in the merger or consolida-

tion, or in the case of a consolidation, the resulting com-

pany; or (ii) The combined assets of all the companies

involved in the merger or consolidation, computed accord-

ing to their book values prior to the merger or consolidation

as determined by reference to their most recent available

financial statements for a 12 month period prior to the

merger or consolidation, or such shorter time as the com-

pany has been in existence.

(2) The disposition of a security, pursuant to a merger or

consolidation, of a company which, prior to the merger or

consolidation, owned 85 percent or more of either (i) The

4la

addition, the SEC concluded that, because Rule 16b-7

“clarifies regulatory conditions that applied to th[e]

exemption since it was amended e.iective May l,

1991, it is available to any transaction on or after

May 1, 1991 that satisfies the regulatory conditions

so clarified.” Id. at 46,080.

Here, the defendants contend that because the

Amendments do not change the law but, rather, clar-

ify what it was before, they apply to the reclassifica-

tion at issue in this case. (D.1. 242, at 5.) To support

their proposition, the defendants cite a number of

cases, as well as the SEC’s own language in the

Amendments’ adopting release, which refers to them

as “clarify[ing],” and explains that they apply to any

transaction occurring on or after the dates that the

pre-amendment versions of the rules were adopted.

equity securities of all other companies involved in the

merger or consolidation or, in the case of a consolidation,

the resulting company; cr (ii) The combined assets of all

the companies undergoiny; merger or consolidation, com-

puted according to their hook values prior to the merger or

consolidation as determined by reference to their most re-

cent available financial statements for a 12 month period

prior to the merger or consolidation.

(b) A merger within the meaning of this section shall in-

clude the sale or purchase of substantially all the assets of

one company by another in exchange for equity securities

which are then distributed to the security holders of the

company that sold its assets.

section 16 of the Act makes any non-exempt purchase of a

security in any company involved in the merger or consoli-

dation and any non-exempt sale of a security in any com-

pany involved in the merger or consolidation within any

period of less than six months during which the merger or

consolidation took place, the exemption provided by this

Rule shall be unavailable to the extent of such purchase

and sale.

42a

(See Id. at 7-9.) Conversely, Levy contends that “the

[SEC’s] views as to whether its rules are legislative

or interpretive are not entitled to deference” and,

regardless of how labeled, the Amendments cannot

be applied retroactively. (D.I. 239, at 4, 9.) Here, if

the defendants are correct, and the Amendments

apply to any transaction occurring after the Rules’

effective dates, then the transactions at issue are

exempt from section 16(b). The court, therefore,

must determine whether the Amendments “estab-

lish[] an interpretation that ‘changes the legal land-

scape.” Natl Mining Ass’n v. Dep’t of Labor, 292

F.3d 849, 859 (D.C.Cir.2002) (citing cases); see also

Princess Cruises, Inc. v. United States, 397 F.3d

1358, 1363 (Fed.Cir.2005). However, prior to making

that determination, the court must consider whether

Congress has authorized the SEC to exempt the

insider short-swing transactions at issue from section

16(b) liability and, if so, whether the SEC’s interpre-

tation of its own rules is a permissible reading of sec-

tion 16(b).

Section 16(b) of the Act imposes hability for “short-

swing” profits — that is — it forbids an insider’s specu-

lative short-term trading based upon insider infor-

mation. “Its purpose is to prevent corporate insiders

from exploiting material information about the issuer

to have an advantage over others with whom they

trade.” Bruh v. Bessemer Venture Partners Ill L.P.,

No. 03 Civ. 7340(GBD), 2005 WL 2087803, at * 3

(S.D.N.Y. Aug. 29, 2005) (citing Gwozdzinsky v. Zell/

Chilmark Fund, L.P., 156 F.3d 305, 308 (2d Cir.

1998)). Section 16(b) provides, in pertinent part:

For the purpose of preventing the unfair use of

information which may have been obtained by

such beneficial owner, director, or officer by rea-

43a

son 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

the issuer ... within a period of less than six

months ... shall inure to and be recoverable by

the issuer, irrespective of any intention on the

part of such beneficial owner, director, or officer

in entering into such transaction .... This sub-

section shail not be construed to cover ... any

cransaction or transactions which the [SEC] by

rules and regulations may exempt as not compre-

hended within the purpose of this subsection.

15 U.S.C. § 78p(b) (2004) (emphasis added). Accord-

ingly, the text of section 16(b) demonstrates that

Congress gave the SEC broad authority, which

includes the authority to promulgate binding legal

rules to exempt certain insider transactions from sec-

tion 16(b)’s reach. In view of this broad authority,

the court will apply the analysis set forth in Chevron

U.S.A. Inc. v. Natural Resources Defense Council,

Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694

(1984) to the SEC’s interpretation of its rules exempt-

ing transactions from section 16(b).

In Chevron, the Supreme Court espoused a two-

step framework for courts to follow when reviewing

an agency’s actions. The court must first determine

“whether Congress has directly spoken to the precise

question at issue.” Appalachian States Low-Level

Radioactive Waste Commission v. O’Leary, 93 F.3d

103, 108 (3d Cir.1996) (citing Chevron, 467 U.S. at

842-43, 104 S.Ct. 2778). If the court’s answer is “no,”

meaning that Congress has not directly spoken to the

issue, then “the question for the court is whether the

agency's answer is based on a permissible construc-

tion of the statute.” Appalachian States, 93 F.3d at

44a

108 (citation omitted). If the court finds that it

is, it must give deference to that interpretation. “If

Congress ‘explicitly left a gap for an agency to fill ...

a court may not substitute its own construction of a

statutory provision for a reasonable interpretation

made by the administrator of an agency.’”® Robert

Wood Johnson Univ. Hosp. v. Thompson, 297 F.3d

273, 281 (3d Cir.2002).

Moreover, “[a] court’s prior judicial construction of

a statute trumps an agency construction otherwise

entitled to Chevron deference only if the prior court

decision holds that its construction follows from the

unambiguous terms of the statute and thus leaves no

room for agency discretion.” Natl Cable & Telecomm.

Assoc. v. Brand X Internet Servs., 545 U.S. 967, 982,

125 S.Ct. 2688, 162 L.Ed.2d 820 (2005) (emphasis

added). This is because “Chevron established a ‘pre-

sumption that Congress, when it left ambiguity in

a statute meant for implementation by an agency,

understood that the ambiguity would be resolved,

first and foremost, by the agency, and desired the

agency (rather than the courts) to possess whatever

degree of discretion the ambiguity allows.” Jd. (citing

Smiley v. Citibank (South Dakota), N.A., 517 U.S.

735, 740-41, 116 S.Ct. 1730, 135 L.Ed.2d 25 (1996)).

Therefore, “fo|nly a judicial precedent holding that

the statute unambiguously forecloses the agency’s

interpretation, and therefore contains no gap for the

agency to fill, displaces a conflicting agency construc-

tion.” Brand X, 545 U.S. at 982-83, 125 S.Ct. 2688.

® Chevron analysis also applies to an agency interpretation

contained in a reyulation. Christensen v. Harrts County, 529

U.S. 576, 587, 120 S.Ct. 1655, 146 L.Ed.2d 621 (2000).

45a

Here, as previously mentioned, Congress explicitly

afforded the SEC the authority to exempt trans-

actions from the reach of section 16(b). Therefore,

section 16(b) does not unambiguously foreclose the

SEC’s interpretation but, rather, requires the SEC

to interpret which transactions are exempt from its

application. See Levy, 314 F.3d at 112 (“As we have

indicated, section 16(b) explicitly authorizes the SEC

to exempt ‘any transaction ... as not comprehended

within the purpose of the statute. This section is

critical, for courts defer to an agency’s interpretation

of statutes, particularly where the statute provides

the agency with authority to make the interpreta-

tion.”) In other words, Congress did not speak to the

precise question at issue, but explicitly left a gap for

the SEC to fill. The SEC filled this gap by promul-

gating rules exempting certain transactions. As the

Third Circuit noted in Levy, however, “the SEC [rules

did] not set forth [the SEC’s] interpretation [of sec-

tion 16(b)] clearly.” Jd. Thus, the court endeavored

to determine the proper interpretation of those rules.

Noteworthy, however, is the fact that the Third Cir-

cuit did not hold that its interpretation of the SEC

Rules was derived from the unambiguous language

of either section 16(b) or Rules 16b-3 and 16b-7.6 In

6 Levy seems to suggest otherwise, arguing that the Amend-

ments cannot overrule the Third Circuit’s “mandate” in Levy.

(D.I. 247, at 10-11.) What Levy fails to appreciate, however, is

the Third Circuit’s guidance with respect to issues of interpreta-

tion, set forth in U/nited States v. Marmolejos, for example, in

which Judge Rendell stated “|[w]here a prior panel of this court

has interpreted an ambiguous statute in one way, and the re-

sponsible administrative agency later resolves the ambiguity

another way, this court is not bound to close its eyes to the new

source of enlightenment.” 140 F.3d 488, 493 (3d Cir.1998).

Consequently, Levy’s arguments to the contrary with respect

46a

response to the Third Circuit’s criticism of its lack

of clarity in the interpretation of section 16(b), the

SEC released the Amendments to “resolve any doubt

as to the meaning and interprctation of these rules

[Rules 16b-3 and 16b-7].” 70 Fed.Reg. 46,080, 46,081.

Accordingly, because the Third Circuit did not

conclude that section 16(b) unambiguously foreclosed

the SEC’s interpretation as set forth in the Amend-

ments, its ruling in the Levy case does not displace

that interpretition. The court, therefore, must apply

the second prong of the Chevron analysis to deter-

mine whether the Amendments are based on a per-

missible construction of section 16(b).

Here, the legislative history and purpose of the

statute support the SEC’s interpretations set forth in

the Amendments. The clear aim of the section was

“the general evil of officers and directors rigging their

stock up and down squeezing out their own stock-

holders.” Interpretive Release on Rules Applicable

to Insider Reporting and Trading, Release No. 34-

18114, 46 Fed.Reg. 48,147 (Sept. 24, 1981) (quoting

Stock Exchange Practices, Report of the Committee

on Banking and Currency, S.Rep. No. 1455, 73rd

Cong., lst Sess., pt. 15, at 6559 (1934)). In Levy, the

Third Circuit noted that the Supreme Court has also

explained the purpose of section 16(b):

The general purpose of Congress in enacting

slection] 16(b) is well known .... Congress rec-

ognized that insiders may have access to infor-

mation about their corporations not available to

the rest of the investing public. By trading on

this information, these persons could reap profits

to deference to administrative agency interpretations are mis-

guided.

47a

at the expense of less well informed investors. In

s[ection] 16(b) Congress sought to ‘curb the evils

of insider trading (by)... taking the profits out of

a class of transactions in which the possibility of

abuse was believed to be intolerably great.’ ... It

accomplished this by defining directors, officers,

and beneficial owners as those presumed to have

“access to inside information and enacting a flat

rule that a corporation could recover the profits

these insiders made on a pair of security transac-

tions within six months.

314 F.3d at 110 (quoting Foremost-McKesson, Inc. v.

Provident Sec. Co., 423 U.S. 232, 243-44, 96 S.Ct.

508, 46 L.Ed.2d 464 (1976)).7 Based on the Senate

Committee’s observations and the Supreme Court’s

explanation, the court finds that the central purpose

behind section 16(b) was to curb insider trading,

which “is rooted in inequality of information between

persons who are aware of it and the persons they

“ Further, the Senate Committee that considered the bill

which became section 16(b) observed the following:

{a]mong the most vicious practices unearthed at the hear-

ings before the subcommittee was the flagrant betrayal of

their fiduciary duties by directors and officers of corpora-

tions who used their positions of trust and the confidential

information which came to them in such positions, to aid

them in their market activities. Closely allied to this type

of abuse was the unscrupulous employment of inside infor-

mation by large stockholders who, while not directors and

officers, exercised sufficient control over the destinies of

their companies to enable them to acquire and profit by

information not available to others.

Interpretive Release on Rules Applicable to Insider Reporting

and Trading, Release No. 34-18114, 46 Fed.Reg. 48,147 (Sept.

24, 1981) (quoting Stock Exchange Practices, Report of the

Committee on Banking and Currency, S.Rep. No. 1455, 73rd

Cong., 2d Sess., at 55 (1934)) (emphasis added).

48a

transact with.” 70 Fed.Reg. 46,080, 46083. Stated

another way, the unfair use of information that

Congress desired section 16(b) to remedy was the use

of information known by officers and directors, but

not by investors, to the disadvantage of uninformed

investors.

As the SEC explains in both the adopting release to

the 1996 amendment to Rule 16b-3 and the current

Amendments, the inequality of information that

section 16(b) was designed to remedy “generally does

not exist when an officer or director acquires securi-

ties from, or disposes of them to, the issuer.” 70

Fed.Reg. 46,080, 46,083; see Ownership Reports and

Trading by Officers, Directors and Principal Security

Holders, Exchange Act Release No. 34-37260, 61

Fed.Reg. 30,376, 30,377 (June 14, 1996). Indeed, the

1996 amendment focused on the distinction between

issuer and officer/director transactions, and market

transactions by officers and directors, explaining that

“where the issuer, rather than the trading markets,

is on the other side of an officer or director’s trans-

action in the issuer’s equity securities, any profit

obtained is not at the expense of uninformed share-

holders and other market participants of the type

contemplated by the statute.” 61 Fed.Reg. 30,376,

30,377. The SEC then concluded that its experience

with section 16 “persuaded [it] that transactions

between the issuer and its officers and directors

that are pursuant to plans ... that satisfy ... objec-

tive gate-keeping conditions are not vehicles for the

speculative abuse that section 16(b) was designed

to prevent,” and exempted those transactions under

Rule 16b-3. Jd. After exempting transactions

between an issuer and its officers and directors,

the SEC explained that transactions with issuer-

49a

sponsored employee benefit plans would be treated

as issuer to officer/director transactions and, further,

that they “need not be pursuant to an employee bene-

fit plan or any compensatory program to be exempt,

nor need [they] specifically have a compensatory

element.” Jd. at 30,378-79. The SEC made these re-

visions to Rule 16b-3 in 1996, in order “to align better

the regulatory requirements under the rule with the

statutory goals underlying section 16,” and intended

them, in part, “to streamline the section 16 regula-

tory scheme, particularly with respect to transactions

between an issuer and its officers and directors ...

{and| broaden exemptions trom short-swing profit re-

covery where consistent with the statutory purpose.”

61 Fed.Reg. 30,376, 30,376, 30,380.

The Amendment to Rule 16b-3 reiterates the pur-

pose behind and legislative contemplation that went

into section 16(b). 70 Fed.Reg. 46,080, 46,081-82.

More important, however, is the fact that the

Amendment reaffirms the SEC’s earlier conclusion

that transactions between an issuer and its officers

and directors are not the type of “insider” transac-

tions contemplated by section 16(b), and need not

have a compensatory element to qualify for exemp-

tion under Rule 16b-3(d). Jd. at 46,083.

The SEC also has interpreted that reclassifications

fall outside the evils that section 16(b) was designed

to protect against. In 1981, the SEC issued a re-

lease in which it interpreted its rules under section

16(b). See Interpretive Release on Rules Applicable

to Insider Reporting and Trading, Exchange Act

Release No. 34-18114, 46 Fed.Reg. 48,147 (Oct. 1,

1981). The SEC issued the interpretive release

because it had been receiving a number of similar

questions regarding the provisions of the rules prom-

50a

ulgated under section 16. See id. at 48,147. In the

release, the SEC states that the exemption under

Rule 16b-7 “is based on the premise that |the ex-

empted] transactions are of relatively minor impor-

tance to the stockholders of a particular company

and do not present significant opportunities to insid-

ers to profit by advance information ....” Id. at

48,176. One of the questions that the SEC addressed

in the release was whether Rule 16b-7 applied to re-

classifications, even though they weren’t specifically

mentioned in the text of the rule. Jd. at 48,176-77

(Question 142). It concluded that, because Rule 16b-

7 “does not require that the security received in

exchange be similar to that surrendered,” it “can

apply to transactions involving reclassifications.” Jd.

at 48,177.

In 1991, the SEC made revisions to Rule 16b-7,

adding the word “reclassifications” to the title of

the rule, but explaining that the amendment was

not intended to make any substantive change. See

Ownership Reports and Trading by Officers, Direc-

tors and Principal Security Holders, Exchange Act

Release No. 34-28869, 56 Fed.Reg. 7242, 7262-63,

7273 (Feb. 21, 1991). In 2002, the SEC expressly

stated that corporate reclassifications were exempt

from 16(b) lability under Rule 16b-7. See Form 8-k

Disclosure of Certain Management Transactions,

Release Nos. 33-8090, 34-45742, 67 Fed.Reg. 19,914,

11,919 n.56 (“These [acquisitions or dispositions

pursuant to holding company formations and similar

corporate reclassifications and consolidations] are

the transactions exempted from section 16(b) short-

swing profit recovery by Exchange Act Rule 16b-7.”).

The current Amendment to Rule 16b-7 reaffirms

the SEC’s prior position on reclassifications, as voiced

Hla

in the 1981, 1991, and 2002 releases. The Amend-

ment also notes that, similar to a merger exempted

by the rule, a reclassification “effects no major

change in the issuer’s business or assets.” 70 Fed.

Reg. 46,080, 46,084 (illustrating that reclassifica-

tions are similar to mergers exempted by Rule 16b-7,

in that an issuer “could effect a reclassification by

forming a wholly-owned ‘shell’ subsidiary, merging

the issuer into the subsidiary, and exchanging secu-

rities for the issuer's securities”). Finally, the

Amendment reaffirms that reclassifications, “which

do not involve a substantial change in the business

owned, do not involve the holders’ payment of consid-

eration in addition to the reclassified class or series

of securities, and have the same effect on all holders

of the reclassified class or series, do not present

insiders the significant opportunities to profit by

advance information that [s]ection 16(b) was designed

to address.” 70 Fed.Reg. 46,080, 46,085.

Given the foregoing analysis, the court finds that

the Amendments are permissible readings of the

statute and further concludes that they “bear|[] a fair

relationship to the language of the statute, reflect[]

the views of those who sought its enactment, and

match{] the purpose they articulated.” Appalachian

States, 93 F.3d at 110. As such, this court may not

substitute its judgment for the SEC’s judgment.

Therefore, the only issues remaining for the court

to determine are whether the amended or pre-

amendment Rules 16b-3 and 16b-7 apply to the

transactions at issue in the present case, which

occurred in 1999 and 2000, and whether any party is

entitled to summary judgment.

52a

B. Retroactivity

Levy contends that even if the court labels the

Amendments interpretive rules, applying them to the

case at bar is impermissible under the retroactivity

doctrine. (See D.I. 247, at 10.) “Retroactivity is not

favored in the law.” Bowen v. Georgetown Univ.

Hosp., 488 U.S. 204, 208, 109 S.Ct. 468, 102 L.Ed.2d

493 (1988). Thus, “congressional enactments and

administrative rules will not be construed to have

retroactive effect unless their language requires this

result.” Jd. However, not every change in an admin-

istrative rule effects such a change that it will be

considered as operating retroactively. The Supreme

Court has stated in Landgraf v. USI Film Products

that:

[a] statute [or rule] does not operate “retrospec-

tively” merely because it is applhed in a case

arising from conduct antedating the statute’s jor

rule’s] enactment... or upsets expectations based

in prior law. Rather, the court must ask whether

the new provision attaches new legal conse-

quences to events completed before its enact-

ment. The conclusion that a particular rule op-

erates “retroactively” comes at the end of a proc-

ess of judgment concerning the nature and extent

of the change in the law and the degree of

connection between the operation of the new rule

and a relevant past event.

511 U.S. 244, 269-70, 114 S.Ct. 1483, 128 L.Ed.2d

229 (1994) (internal citations and footnote omitted).

Following this pronounced standard, the court must

determine whether the Amendments “take[] away

or impair[] vested rights acquired under the existing

laws, or create[] a new obligation, impose[] a new

duty, or attach[ |] a new disability, in respect to trans-

53a

actions or considerations already past.” Prince

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