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

No. 10 535

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ey) (3 writ wor |

. rn Lui

IN THE | OFFICE OF THE CLERK |

Supreme Court of the United States

RH CAPITOL ASSOCIATES LLC and

PACIFIC INVESTMENT MANAGEMEN'I

COMPANY LLC,

lPelilionesr

MAYER BROWN LLP and JOSEPH P COLLINS,

Respond rl

On PeTirion FORA Writ or Cerrronarns vo Tub UNrrep

STATES Court or APPEALS FOR THE SECOND Circur

REP L ¥ BRIE I

STUART M. GRAN‘ Max W. Bercer

Grant & Kisenuoren BA, Counsel of Record

485 Lexington Avenue, BERNSTEIN Livowitz Bercer &

29th I loor GFROSSMANN LLP

New York, NY 10017 1285 Avenue of the America

(646) 722-8500 New York, NY 10019

(212) 554-1400

mwb@blibglaw.com

Altorneys for Petitioners

(Additional counsel listed on signature pape)

ZtAlag ce

COUNSEL PRES

M0) 274 S821 © (BOO) 460-Om0D

CIreul LVVECISION 4 ni

With Other Courts of Appeals Regardi!

Attribution Necessar\

Vi F : if

iti

TABLE OF CITED AUTHORITIES

Page

CASES

Anixter v. Home-Stake Production Co..

77 F.3d 1215 (10th Cir. 1996) ............... 5

Central Bank, N.A. v.

First Interstate Bank, N.A..,

511 U.S. 164 (1984) ......2...705 50 6, 7,11, 12

City of Monroe Employees Ret. Sys. v.

Bridgestone Corp.,

399 F.3d 651 (6th Cir. 2005) ................ 4

Foman v. Davis,

Sil U.S. 178 (1962) ......5< 0s 0s enen een

In re Mutual Funds Investment Litigation,

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

sub nom. Janus Capital Group, Inc. v. First

Derivative Traders, No. 09-525) ....... 3, 4,5, 10

ln re Software Toolworks,

50 F.3d 615 (Sth Cir. 1904) ......,s0000eee 2,5

In re Tronox, Ine.,

No. 09-ev-6220 (SAS), 2010 U.S. Dist.

LEXIS 67664 (S.D.N.Y. June 28, 2010) ...... 4

Janus Capital Group, Inc. v.

First Derivative Traders,

MO, (B-e . nk cuceee ee i, 7, 5, 20

REPLY BRIEF FOR PETITIONERS

1. The Second Circuit’s Decision Conflicts With

Other Courts of Appeals Regarding Whether

Attribution is Necessary in Order to “Make” a

Statement

Without disputing that there is a split among the

Courts of Appeals as to what it means to “make” a

statement for Rule 10b-5 purposes, or even that the

Second Circuit requires attribution before an actor may

be deemed to have “made” a statement, Respondents

instead argue that the Second Circuit's attribution

requirement iz this case only involved the reliance

element of a Rule 10b-5 claim. This is incorrect.’

Quoting its prior caselaw, the Second Circuit

repeatedly confirmed that its attribution requirement

was due in part to the Circuit’s belief that one has not

“made” a statement for Rule 10b-5 purposes if the

statement is not attributed to that actor at the time of

dissemination. See, e.g., App. l4a (“If Central Bank is

to have any real meaning, a defendant must actually

make a false or misleading statement in order to be held

liable under Section 10(b). Anything short of such

conduct is merely aiding and abetting....” (quoting

Shapiro v. Cantor 123 F.3d 717 (2d Cir. 1997)); App. 18a-

1. Respondents apparently find significance in the fact that

the petition for rehearing en bane was denied “without

recorded dissent.” BIO 8. The petition for rehearing en banc

was filed on May 10, 2010, and held for over two months before

it was denied on July 23, 2010 — shortly after this Court granted

certiorari in Janus Capital Group, Inc. v. First Derivative

Traders, No. 09-525 on June 28, 2010.

)

19a (liability requires an “articulated statement” by the

defendant, which in turn requires attribution (quoting

Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, 155

(2d Cir. 2007)); App. 20a (“To be cognizable, a plaintiff’s

claim against a secondary actor must be based on that

actor's own ‘articulated statement,’ or on statements

made by another that have been explicitly adopted by

the secondary actor.”).* Previous decisions by the Second

Circuit had similarly stressed that Rule 10b-5 liability

could not be imposed on a defendant who did not

“actually make” a statement. Shapiro, 123 F.3d at 720.

The Second Circuit also repeatedly rejected the

standard employed by the Ninth Cireuit in /n re

Software Toolworks, 50 F.3d 615 (9th Cir. 1994), App.

16a, 22a-23a — a decision that Respondents themselves

acknowledge concerned the definition of “make” under

Rule 10b-5, BIO 14. As Respondents explain in their

opposition brief, the Ninth Circuit employs a

“substantial participation standard” to determine

whether a defendant has “made” a statement within the

meaning of Rule 10b-5, BIO 14; in the decision below,

the Second Circuit explicitly held that the Ninth Circuit’s

“substantial participation” test was incompatible with

its own bright line rule requiring explicit attribution.

App. 22a-28a.

2. Such statements by the Second Circuit adopted the

arguments made by Respondents in their brief to that court.

See, e.g., Brief for Defendants-Appellees in 09-1619-ev (2d Cir.)

(“Although the word ‘make’ may mean ‘create’ in other contexts,

everyone knows that ‘to make a statement’ is not the same thing

as to ‘create’ on by drafting it for use by someone else.’”).

Moreover, had the Second Circuit’s uecision been

based solely on reliance, there would have been no need

for it to require explicit attribution; it would have held

that the reliance element is satisfied so long as the public

is aware of the statement’s true drafter (the approach

taken by the Fourth Circuit in /n re Mutual Funds

Investment Litigation, 566 F3d 111, 124 (4th Cir. 2009),

cert. granted sub nom. Janus Capital Group, Ine. v.

First Derivative Traders, No. 09-525). Instead of

allowing public knowledge to serve as a substitute for

attribution, however, the Second Circuit held that

“publie’s understanding that a secondary actor ‘is at

work behind the scenes’ [is] alone insufficient.” App. 20a

(quoting Lattanzio, 476 F.3d at 155).

Respondents contend that the fact that the Second

Circuit limited its holding to private actions

demonstrates that court only intended to engage the

reliance element of a Rule 10b-5 claim, which is unique

to private claims. BIO 10-11. However, that reservation

cannot trump the clear language of the opinion; if

anything, this reservation merely demonstrates the

Circuit’s own unease regarding the implications of its

holding on Section 10(b) liability, and represents a

further reason why certiorari is warranted.

2. The Second Circuit’s Decision Conflicts With

Other Circuits Regarding the Element of

Reliance

Respondents contend that the Second Circuit's

requirement of explicit attribution to satisfy the element

of reliance does not conflict with the decisions of any

other Court of Appeals. In so doing, Respondents focus

on the facts of the different cases rather than on their

legal reasoning.

First and most obviously, the decision below conflicts

with Mutual Funds. The Fourth Circuit announced that

the reliance element would be satisfied so long as the

investing public is aware of the statement’s drafter, 566

3d at 124, while the Second Circuit rejected this rule

in favor of an explicit contemporaneous attribution

requirement, App. 20a. Although Respondents

emphasize that the Fourth Circuit focused on the precise

relationship between the issuer and the behind-the-

scenes drafter, BIO 13, the court did so for the purpose

of determining whether its test had been satisfied, i.e.,

whether the public was aware of the drafter’s identity,

566 F.3d at 126. The Fourth Circuit did not purport to

hold that it would only impose liability on that precise

set of facts.

The Sixth Circuit’s decision in City of Monroe

Employees Ret. Sys. v. Bridgestone Corp., 399 F.3d 651

(6th Cir. 2005), is also at odds with the Second Circuit’s

decision. Respondents stress that Bridgestone involved

related corporations, BIO 13-14, but nothing in the

Second Circuit’s definition of “secondary actor” — to

which its attribution rule explicitly applies, App. 3a n.1

— excludes related corporations. To the contrary, since

the decision was issued, the Second Circuit’s attribution

rule has been applied to dismiss claims against a parent

corporation for statements issued by its subsidiary. See

In re Tronox, Inc., No. 09-ev-6220 (SAS), 2010 U.S. Dist.

LEXIS 67664 (S.D.N.Y. June 28, 2010).

o

Respondents next contend that Software Toolworks

involved only the question of what it means to make a

statement, and did not involve the question of reliance;

however, the Ninth Circuit allowed plaintiffs to proceed

with their claims despite the lack of attribution. See 50

F.3d at 629. The court thus demonstrated that it did

not believe that explicit attribution was necessary to

satisfy any of the elements of a private Rule 10b-5 action,

including reliance. See Mutual Funds, 566 F.3d at 123

(“The Ninth Circuit, in contrast, has concluded that

publie attribution is not required to plead reliance.”).

As for the Tenth Circuit, that court articulated its

standard for private liability in Anixter v. Home-Stake

Production Co., 77 F.3d 1215 (10th Cir. 1996), holding

that “[t]he critical element separating primary from

aiding and abetting violations is the existence of a

representation, either by statement or omission, made

by the defendant, that is relied upon by the plaintiff.”

Id. at 1225. Subsequently, the court explicitly held that

this standard does not impose a requirement of

attribution. See SEC v. Wolfson, 539 F.3d 1249, 1259

(10th Cir. 2008). Thus, once again, the Tenth Circuit

made it clear that it does not require explicit attribution

to satisfy the element of reliance.

What is particularly noteworthy about the Second

Circuit’s decision, moreover, is its apparent view that

the standard for liability changes depending on the

status of the actor. The Second Circuit’s decision applies

only to “secondary actors,” and thus, presumably, would

not require explicit attribution if the issuing corporation

funneled false information to the market through a

conduit. See, e.g., Novak v. Kasaks, 216 F.3d 300, 314

6

(2d Cir. 2000). However, the Fourth, Sixth, Ninth, and

Tenth Circuits have all adopted standards for liability

that are based solely on the defendant’s conduct, without

regard for the “status” of the actor.

3. The Second Circuit’s Yolding Conflicts with This

Court’s Decision in Stoneridge

Respondents contend that the Second Circuit’s

holding was in accord with Stoneridge Investment

Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148

(2008) because their conduct was not revealed to the

market. BIO 15. As Petitioners previously explained,

however, at least one aspect of their conduct — their

words — was disclosed directly to the market and,

Petitioners allege, relied upon by investors. Pet. 24.

Respondents’ position, which would require disclosure

of sham transactions before liability could be imposed,

is paradoxical, as even the Second Circuit

acknowledged, App. 30a: Since disclosure itself would

reveal the fraud, such a requirement would simply be

the equivalent of holding that no actor but the issuing

corporation can be liable for deceptive conduct — a

position that stands in direct contradiction to this

Court’s holdings in both Central Bank, N.A. v. First

Interstate Bank, N.A., 511 U.S. 1€4, 191 (1994) and

Stoneridge, 552 U.S. at 166.

There is also no relevance to Respondents’

argument that outside counsel, unlike corporate

employees, are not “agents” for all purposes. BIO 17.

As Respondents do not dispute, they functioned as

Refco’s authorized agents for all of the actions that form

the basis of Petitioners’ claims. Respondents have cited

7

no authority to suggest that their actions, as Refco’s

authorized agents, were in any way distinguishable from

the actions of Refco itself or its numerous employee-

agents. It is precisely because Respondents acted on

Refco’s behalf that their conduct made it “necessary or

inevitable” that Refco would misreport its financial

condition, Stoneridge, 552 U.S. at 161; and it is this

distinction that makes Respondents’ actions

categorically different from those of the vendors who

engaged in arms’-length business dealings with the

primary actor in Stoneridge.

Moreover, contrary to Respondents’ argument, this

Court has not “carefully drawn [a] line between primary

actors and secondary actors.” BIO 17. To the contrary,

this Court has made it clear that liability is based on

conduct, and the degree and manner in which that

conduct harmed investors. See Central Bank, 511 U.S.

at 177-78; Stoneridge, 552 U.S. at 160. Nothing in the

text of either Section 10(b) or Rule 10b-5 states that

liability will be imposed based on the status of the actor,

and, as Petitioners previously explained, status-based

liability would immunize a wide swath of fraudulent

conduct that is designed and effectuated by persons

other than the issuing corporation. Pet. 27.

4. This Case Should Be Held Pending the Court’s

Determination in Janus

The questions presented in Janus are: “(1) Whether

a service provider can be held primarily liable in a

private securities-fraud action for ‘helpling]’ or

‘participating in’ another company’s misstatements. (2)

Whether a service provider can be held primarily liable

'e)

in a private securities-fraud action for statements that

were not directly and contemporaneously attributed to

the service provider?” Respondents do not dispute that

at least the second question is squarely presented in

this case. Instead, they argue that because the Janus

plaintiffs claim that the defendant in that case is not

actually a service provider, this Court’s holding in Janus,

even if it favors the plaintiffs, will necessarily diverge

from the questions on which it granted certiorari and

therefore will have no relevance to this case. BIO 18-19.

There is no basis for this conclusion. This Court is

not bound by the plaintiffs’ characterization of the

relationship between the Janus entities, nor is this

Court required to fashion a ruling specific only to those

facts. Moreover, both the plaintiffs and the Solicitor

General in Janus have explicitly argued that attribution

is not necessary for imposition of liability on any

defendant. Resp. Br. at 48-51; see also id. at 15-16 (urging

adoption of the “creator” standard rejected by the

Second Circuit); Gov’t Br. at 26-27.

Respondents also argue that Janus will not have

any effect on the petition because the Second Circuit

would likely dismiss the complaint on the alternative

ground that it is insufficiently particularized to

demonstrate either that Respondents’ drafted false

statements on Refco’s behalf, or that the market was

aware of Respondents’ role in drafting. BIO 20-21.

Respondents’ speculation as to how the Second Circuit

might rule on alternative issues is not grounds for

determining that Janus could have no effect on the

outcome of this case.

v

l‘irst, Respondents are simply wrong to argue that

the complaint does not sufficiently allege that they

drafted false statements. To the contrary, both the

Second Circuit and the District Court explicitly held that

Petitioners had so alleged. App. 6a (“Collins and another

Mayer Brown attorney also personally drafted” false

sections of the Offering Memorandum); App. 30a n.7

(refusing to allow the fact that Respondents “allegedly

drafted” false disclosures alter its Stoneridge analysis);

App. 45a (“The portions of the memorandum drafted

by the Mayer Brown Defendants included the

Management’s Discussion & Analysis ... and Risk

Factors portion”); App. 5la-52a (“In Count Nine of their

Complaint, plaintiffs allege that the Mayer Brown

Defendants violated § 10(b) and Rule 10b-5(b) when they

drafted, reviewed, and revised portions of the Offering

Memorandum and the IPO Registration Statement”).

The mere fact that the SEC, in its amicus brief, did not

explicitly weigh in on the subject is not proof that the

complaint is inadequate: It is hardly surprising that the

SEC — concerned only with the substantive standards

for primary liability in the absence of attribution — did

not take a position on the completely distinct issue as to

whether Petitioners’ 329-page complaint (which, at the

time the SEC filed its brief, was subject to a court order

of confidentiality) contains sufficiently particularized

allegations to meet the pleading standards of the

PSLRA.

As for Respondents’ claim that the complaint fails

to demonstrate that the market was aware of their

involvement in the drafting of the documents, the

Seeond Circuit did not rule on this argument.

Petitioners alleged that Joseph Collins’s long-term

10

relationship with Refco was so well-known that he was

publicly identified as the “go-to guy at Refco” in press

reports, and that Mayer Brown was explicitly identified

as Refco’s counse} in the Offering Memorandum and the

IPO Registration Statement. Notably, as counsel for

Janus flatly stated in oral argument, “Lawyers write

prospectuses.” Tr. of Oral Argument at 12, Janus,

supra. Under these facts, there is every reason to

believe that, at least for pleading purposes, the market

was aware of Respondents’ involvement in drafting; at

the very least, should this Court adopt a standard similar

to that employed by the Fourth Circuit in Mutual

Funds, the Second Circuit should be piven the

opportunity in the first instance to determine how the

standard applies to the facts of this case.

Finally, even if the complaint is insufficiently

particularized, Respondents should at least be given the

opportunity to amend to meet whatever standard this

Court adopts in Janus. “The court should freely give

leave [to amend] when justice so requires,” Fed. R. Civ.

P 15(a); see Foman v. Davis, 371 U.S. 178, 182 (1962).*

5. Strong Policy Reasons Favor Granting the

Petition

Respondents argue that the Second Circuit’s rule

would not immunize fraudulent conduet from the reach

of the securities laws because the SEC and the

%. Although the Second Circuit denied Respondents’

request to amend, it did so based on its view that under its

explicit attribution standard, any amendment would be futile.

App. 33a.

11

Department of Justice would still be able to bring

enforcement actions. BIO 21. However, as has been

repeatedly acknowledged by this Court, government

enforcement efforts alone are not sufficient to

adequately protect the securities markets. See, e.g.,

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S.

308, 320 n.4 (2007) (characterizing private litigation as

“an indispensable tool with which defrauded investors

can recover their losses” and thus “a matter crucial to

the integrity of domestic capital markets”). This case

provides a perfect example: Despite actions by both the

Department of Justice and the SEC against Joseph

Collins, not a single penny has been recovered from

Collins or Mayer Brown for the benefit of investors.

Respondents similarly claim that Second Circuit’s

decision does not implicate situations involving parent

and subsidiary corporations, or anonymous speakers.

BIO 21-22. However, the Second Circuit defined

“secondary actors” to mean anyone other than the

issuing corporation and its employees, and did not

articulate any exceptions. App. 3a n.1.

Finally, the mere fact that Congress did not adopt

an amendment permitting a private right of action for

aiding and abetting does not establish either that the

Second Circuit’s interpretation of Section 10(b) and

Rule 10b-5 are correct, or that the issue is unworthy of

review. Indeed, this Court rejected a similar argument

in Central Bank, when it held that Congress's failure to

enact bills that would explicitly permit aiding and

abetting liability did not indicate, one way or another,

the proper interpretation of Section 10(b). As this Court

put it, “failed legislative proposals are ‘a particularly

tation of

it 187 (quoting Pension Benefit

Guaranty Corporati

tion v. LTV Corp., 496 U

1990)).

dangerous ground on which to rest an interpre

a prior statute.” Jd

y

1 fan OFF

i. 633, 650

CONCLUSION

With respect to Respondents’ remaining arguments,

Petitioners stand on the contents of their petition. TI

petition for a writ of certiorari should be granted

. .

Respectfu

2 Ley a AED.

Max W. BERGER

Counsel of Record

BERNSTEIN Litow1Tz B

GROSSMANN LLP

SALVATORE J. GRAZIA?

JOHN C. BROWNE

ELLiIotr WEIss

ANN M. Lipron

1285 Avenue of the An

New York, NY 10019

(212) 554-1400

mwb@blbglaw.con

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