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

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386017_2643%3A4

## Record

- **Collection:** Supreme Court brief
- **Document type:** Reply Brief
- **Published:** January 1, 2011
- **Citation:** 564 U.S. 1018

## Text

No. 10 535

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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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Sie!

GRANT & EISENHOFER PA
STUART M. GRANT

JAMES J. SABELLA
BRENDA FE SzypD.o
485 Lexington Avent
29th Floor
New York, NY 10017
646) T22-S500

iN D. McIn1 YR}
tISTINE M, MACKIN rOs
Chase Manhe‘tan Centr:
1201 North Market Street
Wilmington, DE 1980]
302) 622-7000

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386017_2643%3A4. Public record. Not legal advice.