Opposition Brief — Holmes v. Grubman

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No. 107409 °°

Jn the Supreme Court of the Cited States

WILLIAM K. HOLMES, HOLMES CAPITAL, LLC,

BREW Doa, LLC, BIMINI STAR, LLC, AND

EBH INVESTMENTS Co., LLC, PETITIONERS,

V.

JACK GRUBMAN AND CITIGROUP GLOBAL

MARKETS, INC., F/K/A SALOMON SMITH

BARNEY & Co., INC., RESPONDENTS

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

RESPONDENTS’ BRIEF IN OPPOSITION

WALTER RIEMAN,

Counsel of Record

BRAD S. KARP

PAUL, WEISS, RIFKIND,

WHARTON & GARRISON LLP

1285 Avenue of the Americas

New York, New York 10019-6064

212-373-3000

wrieman@paulweiss.com

November 5, 2010 Attorneys for Respondents

QUESTION PRESENTED

Petitioners here, who were plaintiffs in the district

court, sued respondents, who were defendants in the

district court, for common-law torts under Georgia law.

The district court dismissed petitioners’ complaints for

failure to state a claim. On appeal, the Second Circuit

certified questions of Georgia law to the Supreme

Court of Georgia. Based on an answer provided by the

Supreme Court of Georgia in a published opinion, the

Second Circuit held that petitioners had failed to plead

facts demonstrating proximate cause under Georgia

law and accordingly affirmed the district court’s judg-

ment.

No federal question is presented. The question pur

portedly presented is whether the Supreme Court of

Georgia, in its explanation of proximate cause as an

element of common-law claims under Georgia law con-

cerning publicly traded securities, correctly construed

this Court’s decision in Dura Pharmaceuticals, Inc. v.

Broudo, 544 U.S. 336 (2005), which explained the

analogous doctrine of loss causation under the federa!

securities laws, and which the Supreme Court of Geor-

gia cited as persuasive but not controlling authority.

il

RULE 29.6 STATEMENT

Respondent Citigroup Global Markets [nc., formerly

known as Salomon Smith Barney Inec., is a wholly

owned subsidiary of Citigroup Financial Products Inc.

(formerly known as Salomon Brothers Holding

Company Inc.), which is a wholly owned subsidiary of

Citigroup Global Markets Holding Inc. (formerly

known as Salomon Smith Barney Holdings Inc.), which

is a wholly owned subsidiary of Citigroup Ine.

Citigroup Inc. is a publicly traded corporation that

has no parent corporation. No publicly held corpor

ation owns ten percent or more of its stock.

il

TABLE OF CONTENTS

Page

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pe Pe Bee yy. yy. ae ill

TABLE OF AUTHORITIES ............... RENE R st Ne SR iV

PPG RLsA IVER EM PARR FO LAAL EGIVLEGIN 1 60. 0csceccsccseccsceocsvocsveseses 1

reno, sch ccensevecwunanesemsanerusansoyasers 3

REASONS FOR DENYING THE PETITION............ 8

I. The Petition Does Not Properly

Present Any Federal Question for

ee eT, 8

IT. Even If the Petition Properly

Presented a Federal Question

Respecting the Interpretation of

Dura, Which It Does Not, the

Petition Fails to Demonstrate

Any Conflict or Other Basis for

oR aie 13

I ccs csencnnasnsssscaesnactxenes coasoxssvacestonenecadsoss 17

1V

TABLE OF AUTHORITIES

Cases: Page

Basic, Inc. v. Levinsen.

ON ee Bee occ novserssveceovevcontetenves causes 16

Blue Chip Stamps v. Manor Drug Stores,

BG Tre, FIO oan siensecccasvaccanvonnsvssenenes 8-9

Brockett v. Spokane Arcades, Inc.,

ee I svnaicec sin ines ncaszcyeSensdosnvesannes 10

Bush v. Gore,

Dee 0 I hac nvnncvcsecgcuncdonvensvncurecescuners 11

Dura Pharm., Inc. v. Broudo,

BOG UB. SIG CQO oo nccnsssssecsssvoscccassscvoees passim

Emergent Capital Inv. Mgmt., LLC v.

Stonepath Group, Inc.,

343 F.3d 189 (2d Cir. 2003)...00....0cc cece eeee eee 10

Glaser v. Enzo Biochem, Inc.,

464 F.3d 474 (4th Cir, 2006) «.........ccccceseccecsse 16

Grand v. Nacchio,

147 P.3d 763 (Ariz. Ct. App. 2006) ........... 15-16

Greenberg v. De Tessieres,

902 F.2d 1002 (D.C. Cir. 1990) .........0.. cece. 10

Haring v. Prosise,

ME Be By I IIE esses snvnsassenenurceeasecerccscaceoues 10

Huddleston v. Dwyer,

Be ie Ee EN vive ssscescocccssesveesazoxscnccenses 10

Leavitt v. Jane L.,

ae re asa sobs cciaccsapivcesnessiurseveesi 10

Lentellv. Merrill Lynch & Co., Inc.,

SOG F.8d 161 (2d Cir. BOOB) o.oo ccsccccccscccccsseees 14

V

Cases (cont.): Page

Livid Holdings Ltd. v. Salomon Smith

Barney, Inc., 416 F.3d 940

RUD Cin, BORE viesiscs cn esivcceesussstasee eee 14-

Lopez v. Rica Foods, Inc.,

277 Fed. Appx. 931 (11th Cir. 2008)..............

Martin vy. Heinold Commodities, Inc.,

G43 N.E.2d 734 CH. TOGO) ooo cncccsciccsscsasnacerces

McCabe v. Ernst & Young LLP.

494 F.3d 419 (3d Cir. 2007)..............scc0cecsecsees

Merrill Lynch & Co., Inc. v. Allegheny

Energy, Inc., 500 F.3d 171 (2d Cir. 2007)......

Merrill Lynch, Pierce, Fenner & Snuth Inc.

v. Dabit, 547 U.S. 71 (2006) ......c.ccccecesecesesesess

Michigan v. Long,

463 1) .S: WRG IGS eset ii:

Mullaney v. Wilbur,

423 UB. GRA RO esos

New York City Employees’ Ret. Sys. v. Jobs,

593 F.3d 1018 (9th Cir. 2010)... eee

Okla. Tax Comm'n v. Chickasaw Nation,

$15 U.S. 460 (10061 wc c.csseecseeneee

Prerson v. J.L. Ray,

$56 U.8.-647 (3087). audience eee

Schaafy. Residential Funding Corp.,

517 F.3d 544 (8th Cir. 2007)... 14,

Vaso Active Pharm., Inc. v. Robinson &

Cole LLP, No. 06-4958, 2009 WL

971161 (Mass. Super. Jan. 23, 2009).............

16

vl

Cases (cont.): Page

Wharf (Holdings) Ltd. v. United Int’

Holdings, 532 U.S. 588 (2001)..............000. 00 LO

In re Williams Sec. Litig.-WCG Subclass,

558 F.3d 1130 (10th Cir. 2009) ..................006 15

Statutes, Regulation, and Rules:

Private Securities Litigation Reform Act of

1995, Pub. L. No. 104-67, sec. 101(b),

§ 21D(b)(4), 109 Stat. 737, 747.00... eee 13

Securities Act of 1933 § 12(2), 15 U.S.C. 77/....... 4

Securities Exchange Act of 1934:

§ 10(b), 15 U.S.C. § 78j(b)................ 4, 8, 13, 16

§ 21D(b)(4), 15 U.S.C. § 78u-4(B)(4)......000. 13

EE BURTON... svencanescosespsarserenssncsessinsecanns 11

SEC Rule 10b-5, 17 C.F.R. 240.10b°5......... 4,9, 13

Fed. R. Civ. P. 12(b)(6)...ccccccccscscosececsssesscsesvsesecsesee 4

I IND sasesssossssessasonsoerasesensupanstvrsaneens 15

Miscellaneous:

Prosser and Keeton on the Law of Torts

(W. Page Keeton ed., 5th ed. 1984)...........00004. 6

Restatement (Second) of Torts (A977) .........0..00005. 6

l

PRELIMINARY STATEMENT

Petitioners William K. Holmes and investment

vehicles he owns and controls (collectively, “Holmes”)

correctly describe the claims at issue here as his “state

Jaw claims for breach of fiduciary duty, negligent

misrepresentation and fraud” against respondents.

Pet. i (emphasis added). All parties and the courts

below have acknowledged that these claims arise un-

der the common law of Georgia. Pet. App. 2a-3a, 6a,

20a-21a, 23a, 31a, 46a, 53a-60a, 69a. His claims “are

not federal securities fraud claims.” Pet. i.

The district court dismissed Holmes’s claims for

failure to state aclaim. Pet. App. 53a-63a. On appeal,

the Second Circuit certified three questions of Georgia

law to the Supreme Court of Georgia, including a

question concerning the requirements for demonstra-

ting proximate cause “under Georgia law.” Pet. App.

42a-43a. In its answer to that certified question, the

Supreme Court of Georgia ruled that under Georgia

law, “with respect to a tort claim based on misrep-

resentations or omissions concerning publicly traded

securities, a plaintiff at trial has the burden of proving

that the truth concealed by the defendant entered the

marketplace, thereby precipitating a drop in the price

of the security.” Pet. App. 16a. In so holding, the Geor-

gia court found this Court’s opinion in Dura Pharma-

ceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), which

explained the analogous doctrine of loss causation un-

der the federal securities laws, to be “informative” (Pet.

App. 15a), but the Georgia court did not decide any fed-

eral question.

The Second Circuit, by unpublished summary order,

then affirmed the judgment of the district court. Pet.

2

App. 4a. The Second Circuit held that under the legal

standard quoted above from the Supreme Court of

Georgia’s answer to the relevant certified question,

Holmes had failed to plead facts demonstrating prox-

imate cause as an element of his common-law claims

under Georgia law. Pet. App. la-4a.

The implicit premise of Holmes’s petition is that

because the Supreme Court of Georgia, in interpreting

the doctrine of proximate cause under Georgia common

law, found this Court’s analysis in Dura of an

analogous doctrine under the federal securities laws to

be “informative,” the Georgia court and the Second

Circuit must have decided a federal question. That

premise is mistaken: the relevant holdings of the Geor-

gia court and the Second Circuit rested entirely on

Georgia law. Except in extraordinary circumstances

not present here, this Court does not grant certiorari to

a federal court of appeals in order to review a decision

on a question of state law. And here, the governing

rule of Georgia law was determined by the Supreme

Court of Georgia in this very case. As a decision of

state law by a state’s highest court is ordinarily bind-

ing on all federal courts, including this Court, the deci-

sions below are particularly inappropriate for review.

Holmes also fails to demonstrate any reason why this

Court should grant review to elaborate on the holding

of Dura—even assuming, contrary to the facts, that the

decisions below rested on an application of the federal

law explained in Dura.

STATEMENT

1. AsofJune 1999, Holmes owned approximately

2.1 million shares of common stock of WorldCom, Inc.,

which was a telecommunications company. Holmes’s

stockbroker was respondent Salomon Smith Barney

Inc., which is now known as Citigroup Global Markets

Inc. (“SSB”). SSB employed the other respondent, Jack

Grubman, as an equity analyst. Pet. App. 5a, 22a.

On June 25, 1999, Holmes allegedly telephoned his

broker at SSB and placed an oral order to sell all of his

WorldCom shares. The broker allegedly dissuaded

Holmes from selling his WorldCom shares based on

analyst reports and related analysis concerning World-

Com that Grubman had prepared and that SSB had

publicly disseminated. According to Holmes, Grub-

man’s analyst reports and other analysis did-not dis-

close alleged conflicts of interest on SSB’s part and

employed unprincipled methodology. After June 25,

1999, Holmes purchased additional WorldCom shares

and entered into options transactions in WorldCom

stock in supposed reliance on Grubman’s work. Pet.

App. 5a, 22a-23a, 46a-48a, 52a-53a, 69a-7 1a.

Holmes’s WorldCom shares and options declined in

price from June 1999 to October 2000. By October

2000, all of his WorldCom shares and options had been

involuntarily liquidated to pay margin calls. Pet. App.

5a, 22a-23a. Holmes does not allege any reason for the

decline in price of WorldCom shares from June 1999 to

October 2000. See Pet. App. 57a-60a & nn.7-8. That

period coincided with a sector-wide decline in the

prices of telecommunications stocks generally, includ-

ing WorldCom stock.

4

WorldCom entered bankruptcy proceedings in 2002,

shortly after the public revelation of a major account-

ing fraud perpetrated by its senior executives. Pet.

App. 5a, 26a n.3, 69a. As the district court in this case

observed, “[t]hat fraud did not begin to come to light

until early 2002, long after Holmes’ entire portfolio in

WorldCom securities had been liquidated to meet

margin calls.” Pet. App. 57a-58a n.7.

2. Holmes initiated a bankruptcy case under Chap-

ter 11 in the United States Bankruptcy Court for the

Middle District of Georgia. As part of that case,

Holmes brought this action in June 2003 as an adver"

sary proceeding. The Judicial Panel on Multi-District

Litigation transferred this action to the United States

District Court for the Southern District of New York.

The district court dismissed Holmes’s complaints for

failure to state a claim under Rule 12(b)(6) of the Fed-

eral Rules of Civil Procedure. Pet. App. 23a-24a, 45a-

46a, 67a, 76a.

As relevant here, Holmes’s complaints asserted

common-law claims under Georgia law for negligence,

negligent misrepresentation, and fraud against SSB

and Grubman, and for breach of fiduciary duty against

SSB alone, based on Grubman’s allegedly defective

work. See Pet. i, 11, 12-13, 17; Pet. App. 48a.! The

! Holmes’s initial complaint purported to assert a claim under

section 10(b) of the Securities Exchange Act of 1934 (the “Ex-

change Act”), 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R.

240.10b-5. (2d Cir. J.A. A-1111 to A-1112.) Holmes’s First

Amended Complaint purported to reassert that claim and to as-

sert a claim under section 12(2) of the Securities Act of 1933, 15

U.S.C. § 771 (2d Cir. J.A. A-1166 to A-1169.) Holmes voluntarily

abandoned these claims by omitting them from his Second Amen-

ded Complaint (2d Cir. J.A. A-1599 to A-1634), and he did not

fs)

district court dismissed Holmes’s claim for breach of

fiduciary duty on the ground that under Georgia law,

SSB did not owe a fiduciary duty to Holmes. Pet. App.

6la-63a.

The district court dismissed Holmes’s claims for

fraud, negligence, and negligent misrepresentation on

the ground that Holmes had failed to plead facts

demonstrating proximate cause. Pet. App. 60a. “Proxi-

mate causation,” the district court held, “is an element

of a claim of fraud under Georgia law. Similarly,

proximate causation is one of the elements of a claim of

negligence under Georgia law.” Pet. App. 53a (citations

to decisions by Georgia courts omitted). The district

court then looked for guidance to this Court’s decision

in Dura Pharmaceuticals v. Broudo, 544 U.S. 336

(2005). In Dura, this Court analyzed loss causation as

an element of a fraud claim under section 10(b) of the

Exchange Act and Rule 10b-5. In explaining loss caus-

ation, the Dura Court relied on precedents and author-

ities interpreting the analogous doctrine of proximate

cause under the common law. /d. at 343-45. Surveying

these authorities, the district court in this case ruled

that:

Applying the principle of proximate caus-

ation to tort claims based on misrepresen-

tations or omissions concerning securities

requires an assertion that the truth con-

cealed by the defendant entered the

market place. With such an assertion, a

trading loss can be said to have been

proximately caused by a prior misrep-

thereafter attempt to reassert any claim under the federal

securities laws.

6

resentation. See Dura Pharmaceuticals,

Inc. v. Broudo, (544 U.S. 336 (2005).) In

the absence of a disclosure, the misrep-

resentation has simply permitted the

stock to trade at an inflated price. Until

the concealed information is disclosed, a

drop in price may reflect any number of

things, but it will not reflect the impact of

the misrepresentation or omission on the

stock price.

Pet. App. 55a.

As the district court explained, these principles “are

widely recognized preconditions for a tort recovery.”

Pet. App. 55a-56a (discussing Restatement (Second) of

Torts § 548A cmts. a & b (1977), and Prosser and

Keeton on the Law of Torts § 110 (W. Page Keeton ed.,

5th ed. 1984). In the district court’s view, which on this

point correctly anticipated the ruling of the Supreme

Court of Georgia described below, “[t]here is no reason

to believe that the Georgia common law embodies any

different standard.” Pet. App. 57a. Holmes’s com-

plaints did not meet this standard, the district court

ruled, because he had “not given [SSB and Grubman|

fair notice of his theory of proximate causation, that is,

how any risk concealed by [SSB and Grubman] materi-

alized before [Holmes’s] portfolio was involuntarily

sold.” Pet. App. 60a.

3. Holmes appealed from the district court’s judg-

ment to the Second Circuit. In its initial opinion on

that appeal, the Second Circuit observed that “Georgia

courts have not decided whether a plaintiff may

establish a prima facie case for securities fraud without

alleging that the information allegedly withheld by

defendants entered the marketplace and caused the

7

value of securities to decrease.” Pet. App. 40a-41a.

Accordingly, the Second Circuit certified the following

question of Georgia law (along with two other

questions of Georgia law) to the Supreme Court of

Georgia:

With respect to a tort claim based on mis’

representations or Omissions concerning

publicly traded securities, is proximate

cause adequately pleaded under Georgia

law when a plaintiff alleges that his in-

jury was a reasonably foreseeable result

of defendant’s false or misleading state’

ments but does not allege that the truth

concealed by the defendant entered the

market place, thereby precipitating a

drop in the price of the security?

Pet. App. 42a-43a.

The Supreme Court of Georgia answered the ques:

tions certified by the Second Circuit in a unanimous

published opinion. Pet App. 5a-18a. In that opinion,

the Supreme Court of Georgia ruled that “with respect.

to a tort claim based on misrepresentations or omis-”

sions concerning publicly traded securities, a plaintiff

at trial has the burden of proving that the truth con-

cealed by the defendant entered the market-place,

thereby precipitating a drop in the price of the secur

ity.” Pet. App. 16a. In support of this conclusion, the

Georgia court noted that “in order to recover in tort for

fraud, the plaintiff must prove that he sustained loss or

damage as the proximate result of the alleged misrep-

resentations.” Pet. App. 14a (citing six prior decisions

of the Georgia Supreme Court). The Georgia court

further explained that it found the reasoning of this

8

Court’s decision in Dura “informative” on the proxi-

mate-cause issue. Pet. App. 15a-16a.

The appeal then returned to the Second Circuit for

final resolution in that court. As the Second Circuit

stated in its second opinion, “lt]he District Court

dismissed [Holmes’s] claims of fraud, negligence, and

negligent misrepresentation because [Holmes] failed to

plead adequately proximate cause, and the Supreme

Court of Georgia confirmed that in doing so, the Dis-

trict Court applied the correct legal standard.” Pet.

App. 4a. Although the district court had dismissed

Holmes’s claim for breach of fiduciary duty on another

ground, the Second Circuit observed that “proximate

cause is an element of a claim for breach of fiduciary

duty” under Georgia law, and consequently held that

“dismissal of that claim was also warranted.” /d. The

Second Circuit therefore affirmed the judgment of the

district court. /d.

REASONS FOR DENYING THE PETITION

I. The Petition Does Not Properly Present Any

Federal Question for Review by This Court

Holmes’s petition presents no question for review

under the federal securities laws. Holmes did not

pursue any claim under those laws, presumably be-

cause the great bulk of his purported damages arose

from his alleged decision to forbear from selling his

WorldCom shares in reliance on allegedly fraudulent

statements. As to these purported damages, Holmes

could not have established standing to bring a private

claim under section 10(b) of the Exchange Act. See

Blue Chip Stamps v. Manor Drug Stores, 421 US.

723 (1970) (holding that only a purchaser or seller of

Y

securities has standing to bring a private claim under

§ 10(b) and Rule 10b-5); see also Merrill Lynch, Pierce,

Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 78°81

(2006).

Instead, Holmes brought, as relevant here, only

claims for negligence, negligent misrepresentation,

fraud, and breach of fiduciary duty under the common

law of Georgia. The Supreme Court of Georgia, in re-

sponse to the Second Circuit's certified question on the

subject, issued an opinion on the meaning of proximate

cause under Georgia law. In its discussion, the Georgia

court found “informative”—1.e., regarded as persuasive

authority—this Court’s decision in Dura. Pet. App.

15a- 16a.

In Dura, this Court interpreted loss causation as an

element of a fraud claim under section 10(b) of the Ex-

change Act and Rule 10b-5. Loss causation is analo-

gous to proximate cause as an element of a common:

law tort based on misrepresentations or omissions con”

cerning publicly traded securities. See Dura, 544 U.S.

at 343-45. It was thus natural for the Dura Court to

look, as it did, for guidance to common-law cases and

authorities. See id. And given the roots of Dura in the

common law, it was also natural for the Supreme Court

of Georgia to find that Dura S analysis of loss causation

had persuasive force in this case.

But because Holmes’s claims, as presented to the

Supreme Court of Georgia and the Second Circuit, “are

not federal securities fraud claims” (Pet. i), Dura did

not directly govern any aspect of this case. Dura thus

was not, and could not have been, controlling authority

in the Supreme Court of Georgia. The Georgia court

accurately read Dura to have “adopted common law

causation requirements” (Pet. App. 15a), which sug”

10

vests that the Georgia court would have followed the

common-law authorities and principles described in

Dura even if Dura itself had never been decided. There

is certainly no basis in the Georgia court’s opinion for

assuming that the Georgia court’s decision would have

been different in the absence of Dura. Even before

Dura, courts applying the common law of states other

than Georgia had ruled in substance that in order to

show proximate cause in a securities case, a plaintiff

must demonstrate a materialization of the risk con:

cealed by the defendant.?

This Court does “not normally grant petitions for

certiorari to review what purports to be an application

of state law.” Leavitt v. Jane L., 518 U.S. 137, 144

(1996); see Haring v. Prosise, 462 U.S. 306, 314 n.8

(1983) (“[Sltanding alone, a challenge to state-law

determinations by the Court of Appeals will rarely con:

stitute an appropriate subject of this Court’s review.”);

Pierson y. JL. Ray, 386 U.S. 547, 558 n.12 1967) “We

do not ordinarily review the holding of a court of

appeals on a matter of state law, and we find no reason

for departing from that tradition in this case.”).“ This

principle has particular force here, where the Second

See, cg. Martin v. Heinold Commodities, Ine. 643 Nb 2d

734, 746°47 (Ib. 1994), Rmergent Capital Inv. Mymt., LLC v

Stonepath Group, Ine, 843 F.3d 189, 197-98 C2d Cir, 2003) (New

York law); see also Greenberg v. De Tessieres, 902 F.2d 1002,

1004 (D.C, Cir. 1990) (common law fraud claim under District of

Columbia law relating to investment in loan),

' See also Wharf (Holdings) Ltd. vy. United Int'l Holdings, Ine.,

532 U.S. 588, 596 (2001) (refusing, in opinion on merits, to review

determination of state law by federal court of appeals, because “we

ordinarily will not consider such a state'law issue"); Okla. Tax

Comm'n v. Chickasaw Nation, 515 U.S. 450, 461-62 (1995);

Brockett v. Spokane Arcades, Inc., 472 U.S. 491, 499-500 (1985);

Huddleston vy. Dwyer, 322 U.S. 232, 237 11944).

1]

Circuit’s application of Georgia law followed directly

from an exposition of that law by the Supreme Court of

Georgia in this very case based on the same record that

was before the Second Circuit. “The Court... repeat-

edly has held that state courts are the ultimate

expositors of state law, and that we are bound by their

constructions except in extreme circumstances not. pre-

sent here.” Mullaney v. Wilbur, 421 U.S. 684, 691

(1975) (citing cases); see also Bushv. Gore, 531 U.S. 98,

112 (2000) (Rehnquist, C.J., concurring); id. at 123

(Stevens, J., dissenting); 7d. at 142 (Ginsburg, J..

dissenting).

Holmes’s petition focuses his attack on the rule of

law announced by the Supreme Court of Georgia. And

that decision was indeed the crucial event on appeal in

this case. After the Georgia court had issued its de-

cision, Holmes’s claims were doomed; the Second Cir-

cuit just carried out the sentence. In any event, the

Second Circuit’s application of the rule of law an-

nounced by the Georgia court to Holmes’s particular

pleadings involved only case-specific issues not war-

ranting this Court's review.

Even apart from problems of finality, however,

Holmes could not have obtained direct review by this

Court of the decision of the Supreme Court of Georgia,

because that decision rested on an adequate and inde-

pendent state ground. As the opinion of the Georgia

court makes plain, that “state court cholse] merely to

rely on [a] federal precedent{ ] as it would on the

precedents of all other jurisdictions”; Dura was “being

used [by the Georgia court] only for the purpose of

guidance, and dlid] not [itself] compel the result that

the court ... reached.” Michigan v. Long, 463 U.S.

1032, 1041 (1983); see also 28 U.S.C. § 1257(a).

12

a

Holmes, who is effectively seeking review of the Geor-

gia court’s decision, should not be able to obtain in-

direct review of the Georgia court’s decision through

the petition now before the Court, where the principles

of federalism, comity, and judicial efficiency that

Michigan v. Long furthers would have barred direct

review, simply because the case went from the Georgia

court to the Second Circuit. In other words, this

Court’s authority to review a decision by a federal court

of appeals on an issue of state law, which is exercised

only very rarely, should not be exercised where the con-

trolling decision of state law was rendered by the high-

est court of the relevant state in the very case at hand,

and where Michigan v. Longwould not have permitted

direct review of that decision.

Holmes’s petition provides no warrant for departing

from these fundamental principles. Point I of the

petition seems to argue that claims for fraud and

negligent misrepresentation under the common law of

a state should provide broader protections to investors

than claims under the federal securities laws. Point II

of the petition seems to argue that claims for breach of

fiduciary duty under the common law of a state should

provide broader protections to the customers of

stockbrokers, and should impose more extensive

potential liability on stockbrokers, than Vura permits

for claims under the federal securities laws. Point III

of the petition seems to argue that the Supreme Court

of Georgia, by interpreting a traditional element of a

common-law claim in a manner consistent with Dura

and with Duras description of the common law,

invaded the prerogatives of the Georgia legislature and

engaged in “judicial legislation.” Pet. 17. The dispos-

itive answer to all of these contentions is the same: the

Supreme Court of Georgia announced the rule of Geor-

13

gia law to which Holmes objects. This Court does not

sit to review decisions of a state’s highest court on state

law.

II. Even If the Petition Properly Presented a

Federal Question Respecting the Interpretation

of Dura, Which It Does Not, the Petition Fails to

Demonstrate Any Conflict or Other Basis for

Review by This Court

Holmes argues that the lower courts are in conflict

over the proper interpretation of Dura (Pet. 14-17),

which has controlling precedential force only for claims

under the federal securities laws. As Holmes’s claims

are not claims under the federal securities laws, this

case is not an appropriate vehicle for this Court to

elaborate on the holding of Dura. 4

In addition, although different courts sometime use

somewhat different verbal formulations to describe

Dura, Holmes fails to demonstrate the existence of any

4 Holmes’s petition contains numerous references to the Dura

“pleading standard.” Pet. i, 1, 12; see also id. at 14,17. Dura did

not primarily concern pleading standards; it explained loss caus-

ation as a substantive clement of a private action under section

10(b) of the Exchange Act and Rule 10b-5. Holmes’s petition also

inaccurately implies that the courts below rejected Holmes’s

pleadings as barred by section 21D(b)(4) of the Exchange Act, 15

U.S.C. § 78u-4(b)(4), which was added to that Act by section

101(b) of the Private Securities Litigation Reform Act of 1995 (the

“PSLRA”), Pub. L. No. 104-67, 109 Stat. 737, 747. Pet. i., ii, 8, 9,

10, 13, 17. Section 21D(b)(4) concerns economic loss and loss caus-

ation as elements of a private action under the Exchange Act.

None of the courts below applied section 21D(b)(4) or any other

section of the PSLRA to this case. The pleading requirements

applicable to this case, as all of the courts below recognized, are

those set forth in the Federal Rules of Civil Procedure. Pet. App.

14a, 22a, 25a, 49a-50a.

14

actual conflict concerning that case that warrants re-

view by this Court. He also does not argue, and could

not credibly argue, that the result in this case would

have been different under the formulations set forth in

any of the allegedly conflicting cases he cites. For ex-

ample, Schaaf v. Residential Funding Corp., 517 F.3d

544 (8th Cir. 2007), commented that the standard for

loss causation under Dura “does not. differ from that

employed in a common-law fraud case.” /d. at 550. As

Schaaf further noted, this standard requires a plaintiff

to show, among other things, that a loss was “caused

by the materialization of the concealed risk.” Jd.

(quoting Lentel/l v. Merrill Lynch & Co., Inc., 396 F.3d

161, 173 (2d Cir. 2005)). In this case, the district court

held that Holmes “has not given [SSB and Grubman]

fair notice of ... how any risk concealed by [SSB and

Grubman!] materialized before his portfolio was invol-

untarily sold.” Pet. App. 60a.

New York City Employees’ Retirement System v.

Jobs, 593 F.3d 1018, 1024 (9th Cir. 2010), merely ob-

served in dicta that “Dura does not purport to establish

a single method of proving loss causation,” and imme-

diately proceeded to reject plaintiffs’ allegations respec-

ting loss causation. Merril/ Lynch & Co., Inc. v. Alle-

gheny Energy, Inc., 500 F.3d 171, 182-83 (2d Cir. 2007),

held that the analysis in Dura was not fully applicable

to a particular claim for common-law fraud under New

York law because that claim, unlike Holmes’s claims,

did not relate to securities. Livid Holdings Ltd. v.

Salomon Smith Barney, Inc., 416 F.3d 940 (9th Cir.

2005), concerned a “private sale of privately traded

stock,” id. at 949 n.2, while the holdings of the courts

below were expressly limited to “publicly traded

securities” (Pet. App. 2a, 16a). And the Zivid plaintiff,

whose complaint was upheld, alleged facts showing

15

that the defendants’ misrepresentation “was directly

related to the actual economic loss it suffered,” 416

F.3d at 949, and “was causally related to the loss it

sustained,” 7d. at 949 1.2. In contrast, Holmes pleaded

no such facts.

According to Holmes’s petition, Grand v. Nacchio,

147 P.3d 763 (Ariz. Ct. App. 2006), adopted a view of

Dura that differs from the view set forth by the courts

below. Pet. 15-17. Under Grand, the approach to loss

causation described in Dura also applies to proximate

cause as an element of certain statutory and common-

law claims under Arizona law. 147 P. 3d at 782. In

dicta, Grand questioned the breadth with which sever-

al federal courts had characterized Dura, but Grand

agreed that under Dura, “a plaintiff must show a caus-

al connection between a defendant’s alleged misrepre-

sentations and a decline in share value.” /d. at 774-75.

Grand ultimately concluded that the relevant claims

under Arizona law in that case should be dismissed

because the plaintiff had not satisfied this standard.

Id. at 782-83.

Holmes’s complaints did not allege any reason for

the decline in price of WorldCom shares between June

1999 and October 2000, and he therefore manifestly

failed to plead the “causal connection” required by

Grand. In any event, as Grand was decided by an

intermediate state appellate court, the views in that

opinion on what Holmes claims to be an issue of federal

law could not give rise to a conflict for purposes of this

Court’s certiorari jurisdiction. See S. Ct. R. 10(a).5

>’ Holmes is wrong to suggest that the holding as to loss

causation in /n re Williams Securities Litigation—WCG Subclass,

558 F.3d 1130 (10th Cir. 2009), is inapplicable to a direct-reliance,

16

Holmes’s petition can also be read to suggest that

the lower courts are in conflict as to whether a court, in

interpreting proximate cause as an element of a

common-law tort under state law based on misrep-

resentations or omissions concerning publicly traded

securities, should or should not choose to follow the

principles explained in Dura. See Pet. 15 (citing Lopez

v. Rica Foods, Inc., 277 Fed. Appx. 931 (11th Cir. 2008)

(purporting to apply Florida law)), 17. That sugges-

tion, if Holmes does intend to advance it, would be

incorrect. First, such an alleged “conflict” would not

constitute a conflict on any question of federal law or

even on any question of the law of any particular state.

Second, there is no such divergence in the state-law de-

cisions addressing this issue. So far as SSB is aware,

all of the cases to have addressed this question since

Dura, with the sole exception of the aberrational de-

cision in the Lopez case, which was not officially re-

ported and has no precedential force, have found that

Dura does provide appropriate guidance in common-

law cases.®

individual claim. Pet. 14 n.2. The fraud-on-the-market presump-

tions involve reliance, notloss causation. See Basic, Inc. v. Levin-

son, 485 U.S. 224, 248 (1988). Accordingly, the requirement that

a plaintiff in an action under section 10(b) of the Exchange Act

plead and prove loss causation is fully applicable to a direct-re-

liance, individual (as opposed to class-action) claim. See McCabe

v. Ernst & Young LLP, 494 F.3d 418, 425 n.2 (3d Cir. 2007).

6 See, e.g., Grand, 147 P.3d at 782 (Arizona law); Vaso Active

Pharm., Inc., v. Robinson & Cole LLP, No. 06-4958, 2009 WL

971161, at *8 (Mass. Super. Jan. 23, 2009); Schaaf 517 F.3d at

549-53 (Minnesota law); McCabe, 494 F.3d at 438-39 (New Jersey

law); Glaserv. Enzo Biochem, Inc., 464 F.3d 474, 477-80 (4th Cir.

2006) (Virginia law).

17

CONCLUSION

The petition for a writ of certiorari should be

denied.

November 5, 2010

Respectfully submitted,

WALTER RIEMAN,

Counsel of Record

BRAD S. KARP

PAUL, WEISS, RIFKIND,

WHARTON & GARRISON LLP

1285 Avenue of the Americas

New York, New York 10019-6064

212-373-3000

wrieman@paulweiss.com

Attorneys for Respondents