Opposition Brief — RH Capital Associates LLC v. Mayer Brown LLP

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Supreme Court. U.S.

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LS OFFICE OF THE CLERK

No. 10-535

Jn the Supreme Court of the Anited States

RH CAPITAL ASSOCIATES LLC AND

PACIFIC INVESTMENT MANAGEMENT COMPANY LLC

PETITIONERS

MAYER BROWN LLP AND JOSEPH P. COLLINS,

RESPONDENTS

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

BRIEF FOR THE RESPONDENTS IN OPPOSITION

JOHN K. VILLA

WILLIAM J. SCHWARTZ

Counsel of Record

JONATHAN P. BACH

KATHLEEN E. CASSIDY GEORGE A. BORDEN

COOLEY LLP CRAIG D. SINGER

1114 Avenue of the WILLIAMS & CONNOLLY LLP

Americas 725 Twelfth Street, N.W.

Washington, DC 20005

New York, NY 10036

(202) 484-5000

jvilla@we.com

QUESTIONS PRESENTED

1. Whether, in a private damages claim under SEC

Rule 10b-5(b) against outside counsel who allegedly

participated in drafting a client’s misleading statements,

the element of reliance is satisfied where the statements

were not attributed to the outside counsel at the time of

dissemination.

2. Whether, in a private damages claim under SEC

Rule 10b-5(a) and (c) against outside counsel, the

element of reliance is satisfied where the outside

counsel’s own conduct was not communicated to the

public and was not known to investors at the time they

invested.

(1)

CORPORATE DISCLOSURE STATEMENT

Mayer Brown LLP is a limited liability partnership

organized under Illinois law. Mayer Brown does not

have a parent corporation, and no publicly held corpora-

tion owns stock in the firm.

(IT)

TABLE OF CONTENTS

Page

SII ssc cnspscanssasdborseweisercosriaveses hinetenemneiéadess 2

A. Refeo and the fraud masterminded by its

i iisdindenkesacsteedes sessscaersoasrris | 2

B. Mayer Brown’s legal services............... eee

C. Procedural history............. Sera are tere aeee 7

LD. Other litigation against respondent Collins.... ee

Reasons for denying the petition....................... seoeas 9

A. The decision below does not conflict with

any decision of any other court of appeals

concerning what is required to ‘make’ a

BERTONE cccscvevsvecncncess secs sabaseabepeccacdeneradiansavesens LQ

B. The decision below does not conflict with

any decision of any other court of appeals

concerning the need for attribution in

claims against secondary actors.................. 1]

C. The decision below does not conflict with

I iiiiniccordeissntscesyerssstetermasereosatesneis ) 15

.). There is no basis to hold the petition

pending the decision in Janus ............. 18

fi}. Important policy considerations militate

against this Court’s review....... 2b aOR Re it

Conclusion............. sakduenes cdebbethuesanveveseie 24

TABLE OF AUTHORITIES

Cases:

Affco Investments 2001, L.L.C. v. Proskauer Rose

LLP, 625 F.3d 185 (5th Cir. 2010) ..............cecceceee 1?

Anirter v. Home-Stake Production Co., 77 F.3d 1215

(10th Cir. 1996)...... sieauedasanxaasnte 15

IV

Page

Cases—continued:

Burks v. Laster, 441 U.S. 471 (1979) .2...........cccccsesssssssesecvece 18

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

Bank of Denver, N.A., 511 U.S. 164 (1994) ........... May Dy

City of Monroe Employees Retirement System v.

Bridgestone Corp., 399 F.3d 651 (6th Cir. 2005).....18, 14

Daily Income Fund, Inc. v. Fox, 464 U.S. 523 (1984) ...... 18

Dinsmore v. Squadron, Ellenoff, Plesent, Sheinfeld

& Sorkin, 135 F.3d 837 (2d Cir. 1998)............ ce ceeceeeeeeeeees 9

Herman & MacLean v. Huddleston, 459 U.S. 375

SUID sc insiuctiiacGiieabiccdeadiamuedeasenenasaddcsteisiuanintdeiiensabsechadeekeenanetets 16

Howard v. Everex Systems, Inc., 228 F.3d 1057

Sai MITE ais tsdiabsisthdentnatcdasanscieacniesbundibilcesaidéineicnindtinsoeidg 14

In re Global Crossing, Ltd. Securities Litigation,

322 F. Supp. 2d 319 (S.D.N.Y. 2004) ..........ceceeseseseeeeees 20

Inre Mutual Funds Investment Litigation, 566

F.3d 111 (4th Cir. 2009), cert. granted sub nom.

Janus Capital Group, Inc. v. First Derivative

re: i, epbinsusauaunaaneeiwecs 13, 20

In re Scholastic Corp. Securities Litigation, 252

Be RE CE IE HEMI icsenksesosnteresoncehestiboansspseusatearstenmncionees 12

In re Software Toolworks Inc. Securities Litigation,

Be ae II FIs, BE iia cosnsintedcesntnasasivevensdonassnanebensiaen 14

Janus Capital Group, Inc. v. First Derivative

EPSP, TOG. DO cncsnecenscesscsccczcvvisesceesecnconrenress 2,9, 18, 19

Jones v. Harris Associates L.P., 1380S. Ct. 1418

SEITE conscietiapevAicidédehiedisadbaanaihinlidindaenasdaaiadidebaimtniteieesesbesees 18

Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000).......000..0..00. 12

Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004).......... ee

SEC v. Berger, 322 F.3d 187 (2d Cir. 2008) ............ eee eeeee 1]

SEC v. Wolfson, 5389 F.3d 1249 (10th Cir. 2008) ................ 13

Simpson v. AOL Time Warner Inc., 452 F.3d 1040

(9th Cir. 2006), vacated and remanded sub nom.

Avis Budget Group, Inc. v. California State

Teachers’ Retirement System, 552 U.S. 1162

SIE 111s casgtahsenccteamunshdveeosecarasdatanbanioacamaidenssastastamrasasonatn 15

Page

Cases—continued:

Stoneridge Investment : artners, LLC v. Scientific-

Atlanta, Inc., 552 U.S. 148 (2008)................cccceeceee passim

United States v. Rande ll 761 F.2d 122 (2d Cir. 1985)........ )

Wright v. Ernst & Young LLP, 152 F. 3d 169

GAPE als RUPE vcdtcsicumssicvseceecseeecdecseecsusacemeicenenaticas eaters 14

Ziemba v. Cascade International, Inc., 256 F.3d

et LOR: Le S| | REN nnat nT |

Statutes, regulations, and rules:

Securities Act of 1933,

oe ee Ef. Ry 5 Rn een

AD UGA SPEED tts OAD Sao aunacianlensaie 16

Securities Exchange Act of 1934,

Pub. L. No. 73-291, 48 Stat. 881............................ 6, 16, 22

15 U.S.C. T8j(D) (§ 1OCD)).........ccccccccossesesceseees eae 16, 22

15 U.S.C. 78t(a) (§ 20(a))........ scacantabesanulsadisemaaeenneee 6

LD UI As. Pe CO BN wcsnbciscttcterstenisunguacemnsceee 22

AS SFG SO vivcccctnsevscesnbetandiadtastetnmmcete see 9g

Dodd-F rank Wall Street Reform and Consumer

Protection Act, Pub. L. No. 111-208, 124 Stat.

AE PE CANE R UD coschececesnsnechbensoceicuabonsusaenbnseusanaanneaaiaeaneieaiatae 22

Le Cicd cies SI sncrnsresinvunisucieenlaaneeaaaenaee passim

hs Ae Mie: Bs cacspncnctunsasecesesnetussnnael ssuaiidednnaeia eespeunahepsealistin me |

Miscellaneous:

156 Cong. Rec. $3569 (May 12, pecs casuisecdiccamieiaaae eae 2?

Complaint, SEC v. Collins, No. 07 Civ. 11343

APT e ks GMO, BE, Fd Peseonisectncncnsecianninannincnaaen 8

Sentencing Memorandum of Phillip R. Bennett,

United States v. Bennett, 05 Cr. 1192 (S.D.N.Y.

INT Gy SRPIOD aiinsnciccsssnssenetussctabnpsoiguebiastiniamaaaen 3, 17

Kugene Gressman et al., Supreme Court Practice

CORRE EE, BRED oh instssecnsrecsctsecvicsnesentsancuseovsuomanviaeaaeen 12

Chris McMahon, Refco Execs to Jail, Futures

CUBIC RMD), PIT 1, TI seinvecersvccecninsrsatvaperasersosevsceaseecuanall

Miscellaneous—continued

Kx Kefco Chief Sentenced to 16

New York Times, July 4, 2008

Refco Ex-VP Pleads Guilty; Maggio to Testify

against ( ‘olleaque : ( yhiearo ‘Tribune. 1)

2007

Jn the Supreme Court of the Gnited States

No. 10-535

RH CAPITAL ASSOCIATES LLC AND

PACIFIC INVESTMENT MANAGEMENT COMPANY LLC.

PETITIONERS

MAYER BROWN LLP AND JOSEPH P. COLLINS

RESPONDENTS

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPELAI

FOR THE SECOND CIRCUIT

BRIEF FOR THE RESPONDENTS IN OPPOSITION

[In this securities-law class action arising from the

collapse of Refco Inc., the Second Circuit held that out

side counsel who allegedly helped Refco commit securi

ties fraud, but who were not the attributed authors of

Refco’s statements and whose own conduct was never

disclosed to investors, cannot be held liable for a primary

violation of Rule 10b-5 in a suit by private plaintiffs. In

doing so, the Second Circuit applied in straightforward

fashion this Court’s decisions in Central Bank of Denver,

N.A. v. First Interstate Bank of Denver, N.A., 511 U.S.

164 (1994), and Stoneridge Investment Partners, LLC v.

Scientific-Atlanta, Inc., 552 U.S. 148 (2008). Under

those decisions, the conduct at issue in this case

amounts, at most, to aiding and abetting securities fraud,

which is subject to civil enforcement actions by the

Securities and Exchange Commission and criminal pros

ecution but does not give rise to a private damages ac

tion.

The Second Circuit’s decision does not conflict with

any decision of another court of appeals. No court of

appeals has held outside counsel primarily liable for a

client’s statements in a private damages action. Nor is

there any reason for the Court to hold the petition

pending its decision in Janus Capital Group, Inc. ’

First Derivative Traders, No. 09-525, in which the Court

is considering the distinct question of whether an in

vestment adviser to a mutual fund-—the party that

creates the fund and manages it on a day-to-day basis

can be held liable for misstatements in the fund’s pros

pectus. Unlike an investment adviser or corporate insid

er, respondents here—Mayer Brown LLP and one of its

former partners, Joseph P. Collins—played typical

secondary roles as outside counsel assisting a client that

decided for itself what statements to make. The decision

in Janus will not affect the outcome here. Further

review in this case is unwarranted

STATEMENT

A. Refco And The Fraud Masterminded By Its Officers

Refco was a leading provider of execution, clearing

and brokerage services. Petitioners allege that Refco

and certain of its customers suffered large trading losses

in the late 1990s that would have threatened Refco’s

survival if it had written them off. Second Am. Compl.

1435. Petitioners claim that, to conceal these losses,

Refco secretly transferred the bad debts to Refco Group

Holdings, Inc. (RGHI)-~—an entity controlled by Refco’s

chief executive officer, Phillip Bennett—in return for a

receivable purportedly owed by RGHI to Refco. /d.

1439. According to the complaint, beginning in 2000,

this RGHI receivable was hidden at the end of each

financial reporting period by a series of “round trip” loan

transactions. /d. 1% 450-451. Petitioners contend that,

as a result of those transactions, Refco’s financial state-

ments—and the offering documents pursuant to which

the plaintiff class purchased Refco securities—were

misleading. See, e.g., id. 191 5, 96, 128, 578.

The “round trip” loans were merely one aspect of a

more extensive fraud perpetrated by Bennett and a

small group of other Refco senior executives. Bennett

pleaded guilty to twenty criminal counts and is serving a

sixteen-year prison sentence.' He has admitted that he

“came up with [the] plan” to hide losses by using the

RGHI receivable.“ His chief co-conspirators—Robert

Trosten (Refco’s former chief financial officer) and Santo

Maggio (former president of an unregulated offshore

subsidiary that was used to conduct several components

of the alleged fraud)—also pleaded guilty.’ Petitioners

sued those Refco insiders and many other parties,

including respondents, Refco’s outside auditors, and var

ious investment banks. /.g., Second Am. Compl. 19 33,

36, 41.

' See, e.g., Ex-Refco Chief Sentenced to 16 Years in Cover-t/p,

N.Y. Times, July 4, 2008, at C4.

* Sentencing Memorandum of Phillip R. Bennett, United States

Bennett, 05 Cr. 1192, at 20 (S.D.N.Y. May 30, 2008).

* See, e.y., Chris McMahon, Refco Execs lo Jail, Futures (Chi.),

Apr. 1, 2008, at 14; Refco Ex-VP Pleads Guilty; Maggio to Testify

against Colleagues, Chi. Trib., Dec. 20, 2007, at 1.

B. Mayer Brown’s Legal Services

Mayer Brown represented Refco as outside counsel

beginning in 1994. Second Am. Compl. 176. Joseph

Collins was the Mayer Brown partner primarily respon-

sible for the relationship. /d. 1977-78. Dennis Klejna,

Refco’s general counsel, who was also a named defendant

in this action, “supervis[ed]| [ Refco’s] outside legal coun-

sel on all significant legal matters.” Jd. 139.

Petitioners do not allege that Mayer Brown lawyers

made any statements to investors about Refco. Instead,

petitioners seek to hold respondents liable under Rule

10b-5(b) for statements that Refco made in three offering

documents: the offering memorandum for an unregis-

tered bond offering in August 2004, a subsequent regis-

tration statement for a registered bond offering, and a

registration statement for Refco’s initial public offering

of common stock in August 2005. See, e.g., Second Am.

Compl. 11 745-755; Pet. 4-6.

Contrary to the petition’s assertions, the complaint

does not allege that respondents had “control” over

Refco’s SEC filings, Pet. 26, drafted its financial

statements, zd. at 24, or “developed” Refco’s fraudulent

“scheme,” zbid. Rather, the complaint alleges that, as is

routine in such circumstances, Mayer Brown lawyers

participated in a collaborative process controlled by

Refco that ultimately produced the offering documents

at issue. Thus, the complaint alleges that Mayer Brown

lawyers “reviewed” or “revised” various sections of the

documents, “attended numerous drafting sessions,” and

received drafts circulated by others. Second Am. Compl.

1 116, 170, 201.

The closest the complaint comes to making a particu-

larized allegation of authorship is that “Collins and other

Mayer Brown attorneys personally drafted certain

—

sections of the Offering Memorandum, including the

Management Discussion & Analysis (MD&A’) section

which was drafted by [Mayer Brown partner Kdward]

Best and reviewed by Collins.” Second Am. Compl.

1116. Yet even that allegation neither describes any

specific false statement that was drafted by any Mayer

Brown lawyer nor shows that any Mayer Brown lawyer

was responsible for a falsehood appearing in the final

document. By contrast, the complaint elsewhere specifi-

cally alleges that other parties played more important

roles in the formulation of the same documents.’ Even

as to the MD&A section of the bond offering memoran-

dum, which the complaint conclusorily alleges a Mayer

Brown lawyer drafted, the specific allegations are that

(1) Refeo itself, (2) another law firm, and (3) the lead

underwriter had “principal drafting” responsibility. /¢.

7115. | ‘

The documents in question do not attribute author.

ship of any of their content to respondents, and indeéd

barely mention Mayer Brown. The IPO registration

statement and bond offering memorandum refer to

Mayer Brown only once in the body of the documents,

noting (after stating that another law firm had “passed

upon the validity” of the notes and common stock) that

Mayer Brown also represented Refco. See C.A. App.

632, 1061. The bond registration statement never refers

* See Second Am. Compl. 11 174, 177 (the MD&A section of the

bond registration statement was “heavily edited” by others, with

“significant revisions and edits” by the bond underwriters’ counsel);

{1 173-174 (a drafting session that did not include Mayer Brown

attorneys resulted in “significant revisions to the MD&A section”);

{200 (attributing “principal drafting responsibility” for the MD&A

section (and other sections) of the IPO registration statement to the

underwriter defendants).

to Mayer Brown. The offering documents consistently

use the first-person plural and make clear that “the

terms ‘Refco,’ ‘we,’ ‘our,’ and ‘us’ refer to” Refco and its

subsidiaries—confirming that it was Refco and _ its

subsidiaries who made the representations to investors

about Refco’s financial condition. C.A. App. 986; accord

id. at 461, 697.

In addition to their claim under Rule 10b-5(b),

petitioners seek to hold respondents liable on a theory of

scheme liability under Rule 1L0b-5(a) and (c) based on the

firm’s transactional legal work on the so-called “round

trip” loans. From 2000 to 2005, Mayer Brown attorneys

documented seventeen of the loan transactions to and

from Refeo customers that Refco and Bennett allegedly

used to disguise Refco’s true financial condition. Second

Am. Compl. 11 451-452. Although the complaint alleges

in summary fashion that respondents “design[ed]” the

sham transactions, id. 766, the main thrust of the

complaint is that respondents aided the Refco insiders’

primary fraud. See, e.g., 7d. 11 450-451.

Critically, petitioners do not allege that they or any

other market participants were aware of respondents’

alleged conduct. To the contrary, petitioners affirma-

tively allege that they were “ignoran[t]” of respondents’

conduct at the time they purchased Refco securities. See

Second Am. Compl. 9 771.

Petitioners also assert a claim for control-person

liability under Section 20(a) of the Exchange Act, but not

on the basis that Mayer Brown lawyers controlled Refco.

Rather, the Section 20(a) claim is asserted against

Mayer Brown on the theory that the firm controlled

Collins and other individual Mayer Brown lawyers and

could be held liable for any primary violation committed

by them. See Second Am. Compl. 19 818-827 (Count

Iifteen).

C. Procedural History

Respondents moved to dismiss the complaint for

failure to state a claim, and the district court granted

respondents’ motion. See Pet. App. 37a-70a. The court

held that, because the statements in Refco’s offering

documents were not attributed to Mayer Brown, respon-

dents could not be liable for them under Rule 10b-5(b).

Id. at 5la-58a. The district court further held that

petitioners’ “scheme liability” claim under Rule 10b-5(a)

and (c) was foreclosed by this Court’s decisions in Stone

ridge and Central Bank. Id. at 59a-69a. Finally, the dis

trict court also dismissed petitioners’ control-person

claim against Mayer Brown on the ground that no claim

of a primary violation had been pleaded as to Collins or

any other allegedly controlled person. /d. at 69a-70a.

The court of appeals affirmed. See Pet. App. la-34a.

As to petitioners’ Rule 10b-5(b) claim, the court

reaffirmed its settled rule that, for secondary actors to

be liable in a private damages action, the false statement

must be attributed to the defendant. The court empha-

sized that the attribution requirement stems from the

element of reliance, the importance of which this Court

emphasized in Central Bank and Stoneridge. Id. at 16a,

22a. It explained that, “[wJithout explicit attribution to

the [professional] firm, ... reliance on that firm’s partic-

ipation can only be shown through ‘an indirect chain. . .

too remote for liability.”” /d. at 22a (quoting Stoneridge,

552 U.S. at 159). The court concluded that petitioners’

Rule 10b-5(b) claim was properly dismissed because

petitioners “cannot show reliance” on any statements by

respondents. /d. at 27a. The court distinguished cases

against secondary actors from those against corporate

insiders, and noted that “|t]here may be a justifiable

basis for holding that investors rely on the role corporate

executives play in issuing public statements even in the

absence of explicit attribution.” /d. at 26a n.6.

Turning to petitioners’ Rule 10b-5(a) and (c) “scheme

liability” claim, the court of appeals reasoned that the

allegations against respondents were materially indis-

tinguishable from those in Stoneridge, and it concluded

that petitioners’ claim was properly dismissed for that

reason. See, e.g., Pet. App. 30a. The court explained

that petitioners’ claim failed Stoneridge’s requirement

that the plaintiff rely on the defendants’ “own deceptive

conduct.” /bid. The court found significant that peti-

tioners had “admit{ted] that they were unaware of

defendants’ deceptive conduct or ‘scheme’ at the time

they purchased Refco securities.” /d. at 29a-30a.

Judge Parker concurred. See Pet. App. 34a-36a. He

reasoned that “[t]he panel’s opinion dlid] an admirable

job [of] distilling a theory of Rule 10(b) liability for

secondary actors from our precedents.” Jd. at 34a. At

the same time, he contended that “our own precedent

appears to be not invariably consistent.” /d. at 35a.

Petitioners filed a petition for rehearing en banc,

which was denied without recorded dissent.

D. Other Litigation Against Respondent Collins

The SEC brought a civil enforcement action against

respondent Collins that alleged only a single count of

aiding and abetting securities fraud. Compl., SEC v.

Collins, No. O07 Civ. 113438 (S.D.N.Y. Dec. 18, 2007)

<tinyurl.com/sec-complaint>. Respondent Collins con-

sented to entry of a judgment enjoining him from future

violations of the securities laws.

Although not relevant to the sufficiency of petition-

ers’ allegations, on July 10, 2009, a jury found respon-

deut Collins guilty of five out of fourteen counts, includ-

ing one count of conspiracy to commit, inter alia, securi-

ties fraud, and two counts of securities fraud.” Private

plaintiffs cannot bring conspiracy claims, see Dinsmore

v. Squadron, Kllenoff,; Plesent, Sheinfeld & Sorkin, 135

F.3d 837, 842 (2d Cir. 1998), and all of the other counts —

including the two securities-fraud counts—incorporated

18 U.S.C. 2(a), which makes anyone who “aids [or] abets”

the commission of a crime punishable as a principal

offender.

REASONS FOR DENYING THE PETITION

The petition should be denied. The decision of the

court below was compelled by this Court’s precedents,

and it does not conflict with any decision of another court

of appeals. No circuit has held outside counsel liable in a

private action for statements made by a client.

Moreover, there is no basis to hold the petition pending

the decision in Janzs, because the decision there will not

affect the outcome of this case. As both the plaintiff and

the government emphasized in Janus, outside counsel to

a corporation play a role that is fundamentally different

from that played by an investment adviser to a mutual

* The jury could not reach a verdict on the remaining nine counts.

Although petitioners rely on the criminal conviction, they fail to tell

the Court that the case is now on appeal. In that appeal, respondent

Collins has argued that (1) he was denied the opportunity to present

proof that the supposed omission of fact supporting his conviction

did not need to be disclosed, (2) he was denied any opportunity to

present expert testimony relevant to this critical issue, and (8) the

trial judge delivered a prejudicial private deadlock charge to a juror

when the jury deadlocked and threats of physical violence erupted in

the jury room. Petitioners also fail to tell the Court that the district

court granted Collins bail pending appeal, which is only available

where there is “a ‘close’ question or one that very well could be

decided the other way.” United States v. Randell, 761 F.2d 122, 125

(2d Cir. 1985) (internal quotation marks omitted).

10

fund. Finally, there is no public-policy justification for

granting review here, because Congress has repeatedly

declined to expand the scope of the private right of

action under Rule 10b-5—even after some urged it to do

so for the specific purpose of reversing the decision in

this case. This Court should not interfere with that

judgment.

A. The Decision Below Does Not Conflict With Any

Decision Of Any Other Court Of Appeals Concerning

What Is Required To ‘Make’ A Statement

Petitioners are wrong in asserting that the decision

below implicates a conflict among the circuits on what it

means to “make” a statement for purposes of Rule 10b-

5(b). Pet. 12-19. The Second Circuit did not address

whether respondents had “made” any statement.

Rather, it held that, because the statements in question

were not contemporaneously attributed to Mayer Brown

or Collins, “plaintiffs cannot show reliance on any state-

ments of Mayer Brown” or “reliance on any of Collins’

statements.” Pet. App. 27a (emphasis added). Reliance

is a separate element from whether the defendant

“made” the statement in question. See, e.g., Stoneridge,

552 U.S. at 157 (noting that the elements of a Rule 10b-5

claim include both “(1) a material misrepresentation or

omission by the defendant” and “(4) reliance upon the

misrepresentation or omission”’).

By stating that “nothing in this opinion limits the

scope of liability with respect to government enforce-

ment actions, whether civil or criminal in nature,” Pet.

App. 10a n.2, the Second Circuit confirmed that its

decision did not turn on whether respondents “made”

any statement. A holding that respondents did not

“make” the statements in question would have adversely

affected government enforcement actions, because both

the government and private plaintiffs must show that the

ll

defendant “made” a statement to establish primary

liability under Rule 10b-5(b). By contrast, it is settled

that reliance is a required element in private actions, but

not in government actions. See, e.g., SEC v. Berger, 322

F.3d 187, 193 (2d Cir. 2003).

B. The Decision Below Does Not Conflict With Any

Decision Of Any Other Court Of Appeals Concerning

The Need For Attribution In Claims Against Second-

ary Actors

Petitioners also contend that the Second Circuit’s

decision conflicts with decisions of other courts of

appeals on the issue of whether “a [d]rafter [m]ust be

fildentified to [slatisfy the [e]lement of [rJeliance in a

[p]rivate [alction.” Pet. 20. There is no such conflict.

The Second Circuit’s decision did not address whether

attribution is required as to any and all drafters of

alleged misstatements; rather, the court expressly

limited its holding to secondary actors, such as respon-

dents. No decision of any other court of appeals has held

that attribution is unnecessary to establish reliance

against a traditional secondary actor.

1. The Second Circuit could not have been clearer as

to the scope of its holding: “We hold that a secondary

actor can be held liable in a private damages action

brought pursuant to Rule 10b-5(b) only for false state-

ments attributed to the secondary-actor defendant at the

time of dissemination.” Pet. App. 3a-4a (emphasis

added; footnote omitted). Throughout its opinion, more-

over, the court included the secondary-actor qualification

whenever it described its attribution rule or its Rule 10b-

5(b) holding, Pet. App. 12a, 16a, 18a, 20a, 2la, 22a, 23a-

24a, 26a; indeed, it used the phrase “secondary actor” 40

times in its opinion.

In addition, the Second Circuit expressly recognized

the distinction between secondary actors and other types

12

of defendants. In particular, it noted that a number of its

prior cases had held corporate insiders liable for

unattributed statements. Pet. App. 17a-18a (citing Jn re

Scholastic Corp. Securities Litigation, 252 F.3d 63, 75-

76 (2d Cir. 2001); Rombach v. Chang, 355 F.3d 164, 174

(2d Cir. 2004); and Novak v. Kasaks, 216 F.3d 300, 314

(2d Cir. 2000)). Although the court “intimate[d] no view”

on whether attribution would be required in corporate

insider cases, it observed that “[t]here may be a justifia-

ble basis” for finding reliance even in the absence of

express attribution in such cases. /d. at 26a n.6.

2. “A genuine conflict ... arises when it may be said

with confidence that two courts have decided the same

legal issue in opposite ways, based on their holdings in

different cases with very similar facts.” Eugene Gress-

man et al., Supreme Court Practice § 4.3, at 242 (9th ed.

2007). In requiring attribution to establish reliance for

private damages claims against secondary actors, the

Second Circuit’s decision does not conflict with any

decision of another court of appeals.

To the contrary, the only decisions of other circuits

involving similar facts follow the same attribution rule as

the Second Circuit. In Affco Investments 2001, L.L.C. v.

Proskauer Rose LLP, 625 F.3d 185 (5th Cir. 2010),

decided shortly after the petition here was filed, the

Fifth Circuit considered a claim by tax-shelter investors

against a law firm that allegedly assisted the promoters

of the tax shelters. The court found “persuasive the

reasoning of the Second Circuit” and held “that explicit

attribution is required to show reliance under section

10(b).” 7d. at 194. Similarly, the Eleventh Circuit re-

jected a claim against a law firm that was alleged to have

played a “significant role in drafting, creating, reviewing

or editing ... fraudulent letters or press releases.”

Ziemba v. Cascade Int'l Inc., 256 F.3d 1194, 1205 (11th

13

Cir. 2001) (internal quotation marks omitted). Because

permitting such claims would allow private plaintiffs “to

avoid the ‘reliance’ requirement,” the Eleventh Circuit

also decided to “[(flollow{] the Second Circuit” and adopt

the attribution requirement. /d. at 1205, 1206.

3. There is no conflict between the Second Circuit’s

decision and the Fourth Circuit’s decision in /n re

Mutual Funds Investment Litigation, 566 F.3d 111 (4th

Cir. 2009), cert. granted sub nom. Janus Capital Group,

supra. The Fourth Circuit’s decision addressed the

unique issue of an investment adviser’s liability for

statements in a mutual fund prospectus. The Fourth

Circuit “look{ed] to the nature of the relationship”

between the defendant and the speaker, id. at 125, and

emphasized that investment advisers “typically organ-

ize[] and operate[]” mutual funds and are “responsible

for the day-to-day operations of the fund[s],” id. at 126

(emphasis added; internal quotation marks omitted). By

contrast, outside counsel such as respondents have no

such control.

Petitioners cite SEC v. Wolfson, 539 F.3d 1249 (10th

Cir. 2008), but that case did not address the issue of

reliance because it was an SEC enforcement action, and

“the SEC need not plead or prove reliance in a § 10(b)

case.” Jd. at 1260. The court’s holding was expressly

limited to the context of an SEC enforcement action.

Ibid. In fact, the Wolfson court acknowledged “the

unambiguous connection between reliance and attribu-

tion,” z2bid.; it simply had no occasion to decide whether

attribution would be required in a private damages

action.

City of Monroe Employees Retirement System v.

Bridgestone Corp., 399 F.3d 651 (6th Cir. 2005), also does

not conflict with the Second Circuit’s decision. That case

did not involve secondary actors but rather a corporate

14

parent and subsidiary. The Sixth Circuit said in a foot

note that it would “not foreclose the possibility” that the

subsidiary could be liable for alleged misstatements by

its parent, if the subsidiary passed the misleading

information to the parent. /d. a! 686 n.29. That issue

was not before the Second Circuit in this case.

Finally, while petitioners claim the Ninth Circuit

does not require attribution, that court has not consi-

dered whether attribution would be necessary to show

reliance in claims against secondary actors. Howard v.

Everex Systems, Inc., 228 F.3d 1057 (9th Cir. 2000),

involved not a secondary actor but the CEO of the

issuing corporation. Moreover, that case addressed the

issue of what is required to “make” a statement, zd. at

1061, not whether attribution is necessary to establish

reliance. In fact, attribution was present in that case

because the CEO signed the false SEC filings at issue.

Ibid. The issue addressed by the court was whether the

attributed author could be held liable despite not having

drafted the statements in question—the converse of the

issue in this case. /bid.

In re Software Toolworks Inc. Securities Litigation,

50 F.3d 615 (9th Cir. 1994), involved secondary actors,

but, like Howard, it addressed who “made” the state-

ments at issue, not reliance. On that issue, the court

adopted what has become known as the substantial-

participation standard; it held that an accounting firm

could be liable based on “a significant role in drafting

and editing” a letter submitted by its client. /d. at 628

n.3. Nowhere in Software Toolworks—which was

decided before the Second Circuit first articulated the

attribution rule in Wright v. Ernst & Young LLP, 152

F.3d 169 (2d Cir. 1998)—did the Ninth Circuit reject an

attribution requirement to show reliance or even hint

that it was considering the element of reliance. Thus, it

Ld

is not surprising that both the Ninth Circuit and other

courts have understood the Ninth Circuit’s substantial

participation standard as relating to the “making of [a

statement” element of primary liability. Simpson v.

AOL Time Warner Inc., 452 F.3d 1040, 1048 (9th Cir.

2006), vacated and remanded sub nom. Avis Budget

Group, Inc. v. Cal. State Teachers’ Retirement Sys., 552

U.S. 1162 (2008); see Aniater v. Home-Stake Prod. Co.,

77 F.3e 1215, 1226-1227 & 1226 n.10 (10th Cir. 1996).

C. The Decision Below Does Not Conflict With Stone-

ridge

Petitioners assert that the Second Circuit’s decision

with respect to their claim under Rule 10b-5(a) and (c)

conflicts with Stoneridge. Pet. 24. There is no conflict.

To the contrary, Stoneridge’s clear holding that plaintiffs

must rely on the defendants’ “own .. . conduct,” 552 U.S.

at 160, is dispositive of both petitioners’ scheme claim

and their false-statement claim. Petitioners engage in a

futile attempt to show that the Second Circuit misapplied

Stoneridge, but this Court generally does not grant

certiorari where the asserted error is “misapplication of

a properly stated rule of law” to the facts of a particular

case. S. Ct. R. 10.

In any event, the Second Circuit’s application of

Stoneridge to the facts pleaded by petitioners was

straightforward and correct. As the Second Circuit

recognized, petitioners’ scheme claim suffers from the

same fundamental flaw as the claim in Stoneridge. In

both cases, investors were not aware of the transactions

that the issuer of the securities used to misstate its

financial condition. Indeed, petitioners affirmatively

allege that they had no knowledge of respondents’

conduct. See Second Am. Compl. 1771. Therefore, peti

tioners could not have relied on that conduct, just as the

16

plaintiffs in Stoneridge did not know of, and thus could

not have relied on, the transactions in that case. See

Stoneridge, 552 U.S. at 159. And as to the false-

statement claim, “[i]f a plaintiff must rely on a secondary

actor’s own deceptive conduct to state a claim under

Rule 10b-5(a) and (c), it stands to reason that a plaintiff

must also rely on a secondary actor’s own deceptive

statements .. . to state a claim under Rule 10b-5(b).”

Pet. App. 21a.°

Respondents’ conduct did not make Refco’s fraud

“necessary or inevitable.” Pet. 25. As in Stoneridge, “{ilt

was [the issuer], not respondents, that .. . filed fraudu-

lent financial statements.” 552 U.S. at 161. Although

lawyers are typically their clients’ agents for limited

purposes, outside counsel do not decide how to report

their clients’ finances or whether or not to engage in

transactions. Clients make those decisions, acting

through their finance departments and senior manaye-

° Petitioners’ reliance on Herman & Maclean v. Huddleston, 459

U.S. 375 (1983), also is misplaced. See Pet, 23. That pre-Central

Bank case did not hold that “one who drafts false portions of a

registration statement filed with the SEC is liable in a private action

under Section 10(b),” as petitioners suggest. Pet. 13. Huddleston

merely held that Section 10(b) applies to conduct that is also covered

by Section 11 of the Securities Act of 1933. The Court noted in a

footnote that limiting the scope of Section 10(b) would effectively

immunize from suit certain persons who “participat[e}” in a registra-

tion statement, including “lawyers not acting as experts,” since such

persons are not subject to liability under Section 11. 459 U.S. at 385

n.22. Huddleston was decided at a time when federal courts—

including the trial court in Huddleston—gencrally recognized

liability for aiding and abetting a violation of Section 10(b).

Contrary to petitioners’ characterization, the Huddleston Court did

net “base[) its reasoning on primary liability,” Pet. 14 n.3; rather,

the Court simply noted that it had not yet decided whether aiding

and abetting was actionable. Huddleston, 459 U.S. at 379 n.5.

ment. That was certainly the case at Refco: it was Ben

nett who “came up with [the] plan” to hide losses, and

other senior executives conspired with him to do so. See

p.3, supra n.2. Petitioners do not allege that respon

dents controlled Refco, nor would any such allegation be

plausible.

Petitioners argue that, because corporations act only

through their agents (and lawyers are agents for their

clients), Mayer Brown became “indistinguishable from

Refco itself” and “(the Mayer Brown lawyers’} conduct

was Refco’s conduct,” Pet. 25, 26. But unlike corporate

officers and employees, outside counsel are not agents of

their clients for all purposes. Petitioners do not allege

that Refco ever appointed Mayer Brown as its agent for

making securities disclosures, much less that investors

were aware of any such appointment. Petitioners’

argument would simply collapse the distinctions that this

Court has carefully drawn between primary actors and

secondary actors; between primary liability and aiding

and abetting; and between reliance on a de® dant’s

“own conduct” and lack of reliance. It is pe “soners’

argument, not the Second Circuit’s decision, that runs

afoul of Stoneridge and Central Bank.

Petitioners attempt to muddy the application of

Stoneridge here by emphasizing that the transactions in

Stoneridge occurred in “the marketplace for goods and

services” rather than the “investment sphere.” Pet. 25.

The Second Circuit correctly recognized that this

distinction is irrelevant. Pet. App. 3la. Under Stone

ridge, the critical question is not in not in which “sphere”

the conduct took place; it is whether the plaintiff relied

on the defendant’s “own ... conduct.” 552 U.S. at 160.

Because petitioners did not rely on Mayer Brown law

yers’ “own conduct,” their claims fail under Stoneridge.

13

D. There Is No Basis To Hold The Petition Pending The

Decision In Janus

Contrary to petitioners’ claim that “[t]his case

presents similar questions to the ones pending before

this Court in Janus,” Pet. 2, this case presents the

fundamentally different situation of a claim against

outside counsel, as both the plaintiff in Janus and the

government have pointed out. Consequently, there is no

reason for this Court to hold the petition in this case

pending the outcome of Janus.

1. As explained above, see p. 13, Janus does not

involve a claim against a lawyer or any other outside

professional. Rather, the issue in Janus is the liability of

an investment adviser to several mutual funds for state-

ments made in prospectuses issued under the funds’

names. At least in the government’s view, the case turns

on “an investment adviser’s unique and close relationship

with a mutual fund.” Gov’t Br. at 17, Janus, supra. This

Court has recognized that an investment adviser gener-

ally creates the mutual fund and operates its business.

See Jones v. Harris Assocs. L.P., 1380S. Ct. 1418, 1422

(2010); Daily Income Fund, Inc. v. Fox, 464 U.S. 523,

536 (1984); Burks v. Laster, 441 U.S. 471, 480-481 (1979).

2. As the plaintiff in Janus told the Court, an

investment adviser “is not comparable to an independent

service provider such as an auditor or outside attorney.”

Resp. Br. at 38, Janus, supra. Instead, as the govern

ment explained, “[aJn investment adviser’s managerial

role makes it essentially a corporate insider, and distin-

guishes it from a true secondary actor like an accoun-

tant, lawyer, or bank.” Gov’t Br. at 9, Janus, supra; see

id. at 17. That distinction is borne out in this case.

Investment advisers to mutual funds play a role that is

completely different from the role played by outside

counsel to a corporation, such as respondents. Respon

LY

dents did not create and manage Refeo. The complaint

here alleges no facts that could cast Mayer Brown in the

role of corporate “insider.”

3. Because of those fundamental differences, the

decision in Janus will not affect the disposition of this

case. Of course, if Janus results in the reversal of the

Fourth Circuit’s decision, which permitted the claim at

issue to proceed, that reversal could not conceivably

support petitioners’ position in this case. Even an

affirmance, however, would not affeet this case if the

Court limits its holding to investment advisers or other

wise makes clear that the attribution requirement

applies to claims against outside counsel, as the plaintiff

in that case has suggested. See Resp. Br. at 49, Janus,

supra (stating that the Second Circuit decision in this

case is “inapt” because it involved a true secondary

actor); Tr. of Oral Arg. at 30, Janus, supra (statement by

plaintiffs counsel that “this case is not about service

providers”); zd. at 38 (statement by plaintiffs counsel

that “outside lawyers, I think, are distinguishable in a

number of different ways”); see also Gov't Br. at 10,

Janus, supra (stressing that “[t]he Court need not

decide when an outside accountant or lawyer may be

subject to Rule 10b-5 lability based on its involvement in

creating or disseminating a statement in a client’s

name”).

4. Finally, even if the Court were to suggest in

Janus that the attribution requirement does not apply to

claims against outside counsel, petitioners in this case

still would not be able to prevail. In an alternative

holding, the district court in this case held that, even

under the reliance standard later adopted by the Ifourth

Circuit in /anus, petitioners failed to state a claim.

In Janus, the Fourth Circuit held that, in order to

és

satisfy the reliance element of a Rule 10b-5 claim, “a

20

plaintiff seeking to rely on the fraud-on-the-market

presumption must ultimately prove that interested

investors (and therefore the market at large) would

attribute the allegedly misleading statement to the

defendant.” 566 F.3d at 124. In this case, Judge Lynch

applied that standard (which he had originally formu-

lated in In re Global Crossing, Ltd. Securities Litiga

tion, 322 F. Supp. 2d 319 (S.D.N.Y. 2004)), and held that

petitioners had not alleged facts showing public under-

standing that Mayer Brown lawyers were responsible

for Refco’s statements, much less the “rather extraordi-

nary awareness found sufficient in Global Crossing.”

Pet. App. 55a. That conclusion, moreover, was clearly

correct, because no investor would attribute statements

in an issuer’s offering documents—which largely concern

business and financial matters not generally within the

expertise of a lawyer—to one of the issuer’s outside law

firms. Refco’s documents said nothing that would give

an investor any reason to believe that Mayer Brown was

responsible for any statements they contained.

Nor would the result be any different in this case if,

in Janus, the Court were to allow for primary liability

against a defendant who “creates” a false or misleading

statement, as the government advocates. Gov’t Br. at 13,

Janus, supra. The SEC filed an amicus brief in the

court below advocating adoption of the same standard,

but it conspicuously took no position on whether respon-

dents would be liable under that standard in this case.

See Brief of the SEC, Amicus Curiae, in Support of the

Position of Plaintiffs-Appellants on the Issue Addressed

and in Support of Neither Affirmance Nor Reversal.

Petitioners’ allegations do not show that any Mayer

Brown lawyer “created” any specific false statement; the

complaint contains only vague allegations concerning

respondents’ role in the formulation of Refco’s offering

Z1

documents. Even under a “creator” standard, those al

legations are insufficient. In sum, because no outcome in

Janus would compel a different result here, a hold for

Janus is unwarranted.

EK. Important Policy Considerations Militate Against

This Court’s Review

Petitioners advance several policy arguments in favor

of this Court’s review, Pet. 27-29, but none withstands

scrutiny. Policy considerations strongly favor permit

ting the Second Circuit’s decision to stand.

1. Petitioners defy reality by contending that the

Second Circuit “immunized a wide class of persons” from

the consequences of violating the securities laws. Pet.

27. The Second Circuit did not immunize anyone. The

type of conduct alleged by petitioners is fully subject to

civil enforcement by the SEC and criminal enforcement

by the Department of Justice. This Court observed in

Stoneridge that the SEC’s enforcement power is far

from toothless, and that “criminal penalties are a strong

deterrent.” 552 U.S. at 166. Those comments ring

particularly true here because respondent Collins was

sued by the SEC for aiding and abetting securities fraud

and was criminally prosecuted for the same conduct.

The addition of class action liability is not necessary to

achieve deterrence and has many countervailing detri

ments.

Nor did the decision below immunize parent corpora

tions or subsidiaries that use one another to disseminate

false statements from private civil damages claims, as

petitioners contend. Pet. 27-28. This case does not

involve those situations, and the Second Circuit did not

address them. Similarly, this case does not involve

}

fraudfeasors who “adopt{] a false identity, or speak |

anonymously.” Pet. 28. Investors knew exactly who was

speaking in Refco’s offering documents: Refco.

2. In Stoneridge, this Court made clear that because

of “{cJoncerns with the judicial creation of a private right

of action” under Section 10(b), the “private right should

not be extended beyond its present boundaries.” 552

U.S. at 165. Any such expansion “is for Congress,” not

the judiciary. /d. Congress has declined many oppor-

tunities to expand the scope of secondary actors’ liability

to private plaintiffs under Rule 10b-5. It did so again

quite recently, even though advocates of expansion

argued that the result in this case cailed for legislative

overruling. Congress rejected an amendment to Section

2.2) that would have authorized a private right of action

against “any person that knowingly provides substantial

assistance to another person in violation of this title.”

156 Cong. Rec. $3569, S8618 (May 12, 2010). Rather,

Congress directed the Comptroller General to “conduct

a study on the impact of authorizing a private mght of

action against any person who aids or abets another per

son in violation of the securities laws,” including “a

review of the role of secondary actors in companies

issuance of securities.” Dodd-Frank Wall Street Reform

and Consumer Protection Act, Pub. L. No. 111-208,

§ 929Z, 124 Stat. 13876, 1871 (2010). This Court should

not short-circuit the process mandated by Congress by

granting review on that issue.

3. Although it is not necessary to expound on their

views at length here, in the court below numerous amici

supported respondents for policy reasons. See Brief of

Former SEC Commissioners and Officials, Law and

Finance Professors, and Securities Law Practitioners as

«>

ant ©

Amici Curiae in Support of Appellees and Affirmance;'

Brief of Amici Curiae Law Firms in Support of Defen-

dants-Appellees and Affirmance of the Decision Below

(stating that an amorphous liability standard “could have

a serious effect on how law firms provide services to

their clients,” conflict with existing ethical duties, and

ultimately “impair the availability and increase the costs

of legal services that are, on the whole, highly beneficial

in advancing the cause of securities law compliance”).

' This group of amici included former SEC commissioners Harvey

L. Pitt, Edward H. Fleischman, and Joseph A. Grundfest; former

SEC officials Simon M. Lorne and Richard H. Rowe; professors

such as Richard A. Epstein of the University of Chicago, Allen

Ferrell of Harvard Law School, and Larry E. Ribstein of the Uni-

versity of Illinois; and practitioners such as James H. Cheek III and

Stanley Keller.

4 5 | wt Ar A |

MJ. SCHWA 1K.\

NATHAN P. BAC (J;EORGE A. BORI