Amicus Curiae Brief — Apollo Group, Inc. v. Policemen's Annuity & Benefit Fund

sit DEC 17 209

OFFICE op THE CLERK

IN THE

Supreme Court of the United States

APOLLO GROUP, INC.., ef all..

Petitioners,

v.

POLICEMEN’S ANNUITY AND BENEFIT FUND

OF CHICAGO.

Respondent.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Ninth Circuit

BRIEF FOR FORMER SEC COMMISSIONERS

AND LAW PROFESSORS AS AMICI CURIAE IN

SUPPORT OF PETITIONERS’ PETITION

SARA B. BRODY DANIEL A. MCLAUGHLIN®*

CECILIA Y. CHAN SIDLEY AUSTIN LLP

SIDLEY AUSTIN LLP 787 Seventh Avenue

555 California Street New York, NY 10019

San Francisco, CA 94010 (212) 839-5300

(415) 772-1200 dmclaughlin@sidley.com

HILLE R. SHEPPARD

BRIAN D. RUBENS

SIDLEY AUSTIN LLP

One South Dearborn

Chicago, IL 60603

(312) 853-7000

Counsel for Amici Curiae

December 17, 2010 * Counsel of Record

WILSON-EPES PRINTING CO , INC — (202) 789-0096 WASHINGTON, D C 20002

TABLE OF CONTENTS

INTRODUCTION AND SUMMARY OF ARGU-

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THIS COURT SHOULD RESOLVE THE

MULTIPLE ONGOING CIRCUIT SPLITS

REGARDING THE EFFICIENT CAPITAL

MEARE Bs PTY POTTS ooocisscecicissssccisecsees

A. The Efficient Capital Markets Hypoth-

esis Underlies All Fraud on the Market

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BS. TO CCU Ave BNE isaiiviiccicdcccascenceccascess

THIS CASE PRESENTS A GOOD VE-

HICLE FOR THIS COURT 'TO ADDRESS

THE LEGAL PRESUMPTIONS DRAWN

FROM THE’ EFFICIENT CAPITAL

MARKETS HYPOTHESIS .............. Behe Sone he

THE NINTH CIRCUIT'S APPROACH DIS.

REGARDS THIS COURT'S CONSISTENT

DIRECTIVE TO AVOID NEW NON.

STATUTORY EXPANSIONS OF THE

IMPLIED PRIVATE RIGHT OF ACTION

UNDER § 10(b).....c0.c-ccceccecescsceeseveee ens

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11

TABLE OF AUTHORITIES

Page

CASES

Alaska Elec. Pension Fund v. Flowserve

Corp., 572 F.3d 221 (5th Cir. 2009)........... 9

Alford v. Greene, Docket No. 09-1478........... 14

Allen v. Pa. Eng’g Corp., 102 F.3d 194 (5th

JER) | Reet Sen OR oye Dean cence) 9

Archdiocese of Milwaukee Supporting

Fund, Inc. v. Halliburton Co., 597 F.3d

Se CD Oa, FB eons cca ccocesecesexacaueessss 12

Ariz, Christian Sch. Tuition Org., v. Winn,

Pe PN I ns ho ces pte snenecccrnnines, 14

Ariz. Free Enter. v. Bennett, Docket No. 10-

TE access ritciecsanewn ceiaadnd ee 14

Basic Inc. v. Levinson, 485 U.S. 224

SE odivoncéckshionsoideSdelbantoreemst ea

Boeing Co. v. United States, Docket No. 09-

Ey a cocincnsas ncrcencag ee ate a ee 14

In re Burlington Coat Factory Sec. Litig.,

114 F.3d 1410 Ge Cir. 1987) ............<02.0<003 10

Camreta v. Greene, Docket No. 09-1454....... 14

Castaneda v. Partida, 430 U.S. 482

Lc 2 gj SO DED RmE Et Soi t nDNA NAA a DE MEOMR Be cht Ob fs)

Cent. Bank of Denver, N.A. v. First

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

Re a egintseisenesusssucsesceccisenkeaiee 16, 17

Corr. Servs. Corp. v. Malesko, 534 U.S. 61

IE opel otidses danituccusueoa auch caeaet eee 16

Dura Pharm., Inc. v. Broudo, 544 U.S. 336

| IR One aOR nae ATER NOR R OR TT 7, 12,18

EEOC v. Ethan Allen, Inc., 259 F. Supp. 2d

TE. CNB GD maces osncnsdcecsascsececencunsos 9

Erica P. John Fund, Inc. v. Halliburton

Co., No. @9-1403......... cabukaauaiamae te duite a ea 13, 14

Garriott v. Winn, Docket No. 09-991 ............ 14

1]

TABLE OF AUTHORITIES — continued

Page

Gen. Dynamics Corp., v. United States,

PUIG FO, CI DIG ooo nicsccvsscsccovssscsccescsvscsss 14

Gilead Scis., Inc. v. Trent St. Clare, No. 08-

a Pe + iS

Holmes v. Grubman, No. 10-409................... 13

Laborers Dist, Council Constr. Indus.

Pension Fund v. Omnicare,No. 09-1400.... 13

Lormand v. US Unwired, Inc., 565 F.3d

RICE CAE, SD osccsccicuaevsasavervcssesaveseoacs ss 10

McComish v. Bennett, Docket No. 10-239 .... 14

Merrill Lynch, Pierce, Fenner & Smith Inc.

u. fraps, S47 U.S. T1 C006)...................:... 18

Morrison v. Nat'l Austl. Bank Ltd., 130 S.

Ee I os stv ssuscyisaasnvcesonscsesvass se 17

In re Omnicom Grp., Inc. Sec. Litig., 597

pe Be Pee Ce ae ) |) 9, 10, 11

Oran v. Stafford, 226 F.3d 275 (3d Cir.

ee ee ss eaeananbod ss reais Pace 10

Ottaviani v. State Univ. of N.Y. at New

Paltz, 875 F.2d 365 (2d Cir. 1989)............. 9

Pinter v. Dahl, 486 U.S. 622 (1988) .............. 17

In re Polymedica Corp. Sec. Litig., 432 F.3d

A gO gis 7o.csceunassycevssdnsececcdeveosaaven 11

Stoneridge Inv. Partners, LLC v. Scientiftc-

Atlanta, Inc., 522 U.S. 148 (2008) ............ 16, 17

Teachers’ Retirement Sys. of La. v. Hunter,

477 F.3d 162 (4th Cir. 2007)..................000- 1]

Teamsters Local 445 Freight Div. Pension

Fund v. Bombardter, Inc., 546 F.3d 196

ON ae tal, 10

Thane Intl, Inc. v. Milkowski, No.

kg ff SRR eee ee eee er 13

Wal-Mart Stores, Inc. v. Dukes, No.

ET reer ys gcse se aes eee eee oa, . 14

1V

TABLE OF AUTHORITIES — continued

STATUTE Page

Private Securities Litigation Reform Act of

1995, Pub. L. No. 104-67, 109 Stat. 737.... 18

SCHOLARLY AUTHORITY

Daniel R. Fischel, Use of Modern Finance

Theory in Securities Fraud Cases

Involving Actively Traded Securities, 38

Re Fo ae a be» 2. S| Rae 6,

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met

GO

IN THE

Supreme Court of the United States

APOLLO GROUP, INC., E7'AL.,

Petitioners,

V.

POLICEMEN’S ANNUITY AND BENEFIT FUND

OF CHICAGO,

Respondent.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Ninth Circuit

BRIEF FOR FORMER SEC COMMISSIONERS

AND LAW PROFESSORS AS AMICI CURIAE IN

SUPPORT OF PETITIONERS’ PETITION

INTEREST OF AMICI CURIAE!

Amici curiae are former Commissioners of the

Securities and Exchange Commission (SEC) and

professors of law and finance whose fields of expertise

include securities regulation, class-action practice,

and law and economics. Amici have devoted

substantial parts of their professional careers to

1! Pursuant to Rule 37.6, this brief was not authored in whole

or in part by counsel for a party. No person or entity other than

amicl curiae or their counsel made a monetary contribution to

the preparation or submission of this brief. Pursuant to Rule

37.2(a), counsel of record for both parties received timely notice

of amici’s intent to file this brief. Letters from the parties

consenting to the filing of this brief are on file with the Court.

Y,

he

implementing, drafting, and studying the federal

securities laws, including how those laws should be

interpreted to ensure protection of investors and

promotion of efficiency, competition, and capital

formation.

This brief reflects the consensus view of the amici,

all of whom believe that this Court should grant

Apollo’s petition for certiorari. Each individual

amicus may not, however, endorse every argument

presented herein. The former Commissioners and

professors joining this brief as amici, listed

alphabetically, are:

The Honorable Charles C. Cox, who served as a

Commissioner of the SEC from 1983 through 1989,

Acting Chairman of the SEC during 1987, and as

Chief Economist of the SEC from 1982 through 1983;

The Honorable Joseph A. Grundfest, who served as

a Commissioner of the SEC from 1985 through 1990

and who is the William A. Franke Professor of Law

and Business at Stanford Law School, Senior Faculty

of the Rock Center on Corporate Governance at

Stanford University;

The Honorable Roberta S. Karmel, who served as a

Commissioner of the SEC from 1977 through 1980,

and who is the Centennial Professor of Law at

Brooklyn Law School.

Simon M. Lorne, who served as General Counsel of

the SEC from 1993 to 1996 and who is an adjunct

professor at the NYU School of Law and NYU’s Stern

School of Business; and

Professor Kenneth E. Scott, who is the Ralph M.

Parsons Professor of Law and Business emeritus at

Stanford Law School.

3

INTRODUCTION AND SUMMARY

OF ARGUMENT

Unlike traditional fraud lawsuits, modern

securities class actions under § 10(b) of the Securities

Exchange Act of 1934 and Rule 10b-5 thereunder

depend on a series of presumptions and methods of

proof that substitute for the traditional forms of

evidence such as investor testimony. Like the

implied § 10(b) right of action itself, these

presumptions are mostly judge-made; for example, in

almost every § 10(b) class action, investor reliance on

the defendant’s misrepresentations is presumed

rather than proven, on the theory that the

impersonal market swiftly assimilates all new

material information and incorporates it in securities

prices. This presumption was enshrined in § 10(b) by

this Court in Basic Inc. v. Levinson, 485 U.S. 224

(1988), which formally adopted the “fraud on the

market” theory of investor reliance.

The underlying theory of _ swift market

incorporation of new, material information, known as

the efficient capital markets hypothesis, is well-

established in academic literature, and _ that

literature -— along with “common sense _ and

probability,” judicial precedent and the history of the

Securities Exchange Act — underlay this Court’s

decision to adopt it as a legal rule of evidence. Basic,

485 U.S. at 246-47 & nn. 24-26. Its acceptance gave

plaintiffs a powerful weapon: by pleading and proving

that a market is efficient, they can recover damages

without actual proof that anyone, anywhere actually

relied on an alleged misrepresentation, based on the

theory that the unsleeping eye of the market took

notice and incorporated the misrepresentation into

its prices. The Circuits have required plaintiffs,

before invoking this weapon, to plead and prove that

the market bears the hallmarks of efficiency under

the “semi-strong” version of the efficient capital

markets hypothesis, meaning proof that the market

for a security actually does react to new, material

information in the way the theory posits

immediately and consistently.

But while the efficient capital markets hypothesis

is the sine qua non of investor class actions in

establishing that market prices reacted to false

information, the Circuits have split over how to apply

the same theory to market responses to true

information for purposes of proving two other

elements of a § 10(b) claim loss causation and

materiality. Some Circuits hold that when the

market fails to react to a subsequent “corrective”

disclosure of the truth, that is proof that the market

didn’t consider those facts material in the first place.

Some Circuits hold that if the market fails to react to

an initial corrective disclosure of facts, the plaintiffs

cannot prove that such disclosures were the cause of

their losses, even if those losses followed some later

disclosure (a newspaper article, analyst report or

other secondary source) repackaging and commenting

on the same facts.

The Ninth Circuit, in this case, took the opposite

view. The market for the defendant company’s

stock — whose efficiency was presumed for purposes of

reliance — did not show a statistically significant

response to initial reports of an adverse report by the

Department of Education that undermined the

defendants’ prior statements, nor to subsequent

extensive press reports detailing the troublesome

findings of that report — only to two later analyst

reports rehashing those facts and opining about

them. Yet, the Ninth Circuit found it legally

permissible for plaintiffs to establish loss causation

oO

from the market’s delayed reaction to the analyst

reports, and to recover damages from the days when

the original facts were disclosed. Under the efficient

capital markets hypothesis as it is applied to the

reliance inquiry, and as it is applied in other Circuits

to materiality and loss causation, this is not a

permissible result.

The split illustrated by the Ninth Circuit’s ruling

between Circuits as well as between elements of the

same claim — creates an unpredictable landscape for

securities class actions and encourages’ forum

shopping in search of courts that will judicially

expand the boundaries of recoverable losses. That

landscape has led to repeated petitions to this Court

to clarify the different ways in which the hypothesis

is used, and disregarded, at different stages and to

different elements of a § 10(b) case. If the efficient

capital markets hypothesis is to form the basis of a

lawsuit, it must be applied consistently to all

elements of the claim. See Basic, 485 U.S. at 23

(noting that this Court has defined a standard of

materiality under the securities law). This Court

should put an end to the confusion by granting the

petition for a writ of certiorari and clarifying that any

lawsuit using the efficient capital markets hypothesis

to establish the reliance element of the claim must

apply the same theory — including its fundamental

premise that the stock price immediately reacts to

new information — to establish the materiality and

loss causation elements as well.

6

ARGUMENT

I. THIS COURT SHOULD RESOLVE THE

MULTIPLE ONGOING CIRCUIT SPLITS

REGARDING THE EFFICIENT CAPITAL

MARKETS HYPOTHESIS

A. The Efficient Capital Markets Hypoth-

esis Underlies All Fraud on the Market

Cases

The efficient capital markets hypothesis states that

ir “an open and developed securities market, the

price of a company’s stock is determined by the

available material information regarding’ the

company and its business.” Basic, 485 U.S. at 241.

“{A]jll publicly available information is embedded in

stock prices.” Daniel R. Fischel, Use of Modern

Finance Theory in Securities Fraud Cases Involving

Actively Traded Securities, 38 Bus. Law. 1, 5 (1982-

83) (cited in Basic). New information important to

reasonable investors (in effect, the market) is

immediately incorporated into stock prices. Basic,

485 U.S. at 244. The “semi-strong” version of the

hypothesis recognizes that “the collective action of a

sufficient number of market participants buying or

selling the stock causes a very rapid, if not virtually

instantaneous, adjustment in price.” Fischel, supra,

at 10 n.30 (internal quotation marks omitted).2

Because the market immediately incorporates new

information into stock prices, this Court in Basic

2 This is in contrast to the “strong” version of the efficient

capital markets theory, which posits that the market’s reaction

is correct, in addition to being immediate, and the “weak”

version — inconsistent with Basic but effectively the theory

adopted here by the Ninth Circuit — which does not presuppose

that new information is immediately and fully reflected in

market prices.

oe

(

compared the market to “the unpaid agent of the

investor, informing him that given all the information

available to it, the value of the stock is worth the

market price.” Basic, 485 U.S. at 244. That goes

equally for both true and false information: “the

market price of stocks reflects all available public

information — and hence necessarily, any material

misrepresentations as well.” Fischel, supra, at 10

n.30. Thus, if there have been material misrepre-

sentations, the market price will be fraudulently

inflated, and can be legally presumed as such without

further proof: “Misleading statements will therefore

defraud purchasers of stock even if the purchasers do

not directly rely on the misstatements. ... [a]n

investor who buys or sells stock at the price set by the

market does so in reliance on the integrity of that

price.” Basic, 485 U.S. at 241-42, 247 (internal

quotation marks omitted). This Court concluded that

“[b]ecause most publicly available information is

reflected in market price, an investor’s reliance on

any public material misrepresentations, therefore,

may be presumed for purposes of a Rule 10b-5

action.” Id. at 247.

In Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S.

336 (2005), this Court adopted a rule for loss

causation in Rule 10b-5 actions that is consistent

with the efficient capital markets hypothesis. The

Court held that, in order to satisfy the element of loss

causation, a plaintiff must allege that the “share

price fell significantly after the truth became known.”

Id. at 347. This requirement for loss causation

complements the presumption of reliance. In Basic,

the Court could presume reliance on the theory that

all information, even misstatements, will be

immediately incorporated in the price of the stock; in

Dura, the Court required plaintiffs to demonstrate

oe)

loss causation with a decline in price following a

corrective disclosure, because the truth — like the

misrepresentation — will be immediately incorporated

into the price of the stock.

Unfortunately, not all Circuits have read Dura and

Basic as applying the same rule.

B. The Circuits Are Split

The Circuits are in direct conflict as to what

constitutes a corrective disclosure, and whether a

subsequent republication of a prior disclosure can be

actionable. On the one end of the spectrum, as

clearly illustrated by the facts of this case, the Ninth

Circuit holds that the market can be deemed to have

reacted to a “corrective disclosure” even when

reacting to facts that were disclosed days, weeks, or

even months earlier. Other circuits, such as the Fifth

Circuit, have endorsed a similar approach, albeit only

in some procedural settings. On the other end of the

spectrum, the Second, Third, and Fourth Circuits

have held that there must be an immediate decline in

the market price following a disclosure of new facts to

establish a market reaction probative of loss

causation or materiality. The division cannot be

reconciled without this Court’s intervention.

Apollo initially disclosed the existence of the DOE

report and its settlement with the DOE on September

7, 2004. On September 14-15, the media extensively

covered the contents of the NOE report and Apollo's

practices. Apollo's stock price did not react: there

was no statistically significant reaction. Two weeks

3In a typical § 10(b) action, expert econometric testimony

premised upon the efficient capital markets hypothesis is used

to establish the timing and duration of price inflation for

purposes of establishing reliance loss causation and damages.

Courts have generally recognized the standard applied by

9

after Apollo’s initial disclosures, however, a securities

analyst, Kelly Flynn, issued two reports republishing

the facts in the DOE report, offering her opinions

about the DOE reported facts and other unrelated

negative information and downgrading the stock.

Immediately following the issuance of the Flynn

reports, Apollo's stock price suffered a statistically

significant decline. Notwithstanding the fact that the

Flynn reports merely incorporated and synthesized

the information that had been disclosed by Apollo two

weeks earlier, the Ninth Circuit treated the Flynn

reports as permissible corrective disclosures. This

econometric experts under which a stock price reaction is only

legally significant if it is statistically significant after excluding

the movement of market-wide indices. See, e.g., In re Omnicom

Grp., Inc. Sec. Litig., 597 F.3d 501, 505 (2d Cir. 2010); Alaska

Etec. Pension Fund v. Flowserve Corp., 572 F.3d 221, 230 (5th

Cir. 2009) (per curiam). Such standards are necessary to exclude

the possibility that prices moved due to random chance. See

Castaneda v. Partida, 430 U.S. 482, 496 n.17 (1977) (pegging

level of statistical significance at “greater than two or three

standard deviations”); Ottaviani v. State Univ. of N.Y. at Neu

Paltz, 875 F.2d 365, 371 (2d Cir. 1989) (“two standard deviations

corresponds approximately to a one in twenty, or five percent,

chance that a disparity is merely a random Veviation from the

norm, and most social scientists accept two standard deviations

as a threshold level of ‘statistical significance”); Allen v. Pa

Engg Corp., 102 F.3d 194, 197 (5th Cir. 1996) (excluding expert

testimony that failed to meet standards of statistical

significance); EEOC v. Ethan Allen, Inc., 259 F. Supp. 2d 625,

635 (N.D. Ohio 2003) (excluding expert testimony that used 2

68% confidence !evel, “only slightly higher than the predicted

results of tossing a coin.”). Despite this consensus, the Ninth

Circuit in this case permitted damages to be recovered even for

days on which no statistically significant price reaction could be

proven.

10

view is irreconcilable with the efficient capital

markets hypothesis.4

The Third Circuit, in a line of cases beginning with

In re Burlington Coat Factory Sec. Litig., 114 F.3d

1410, 1416, 1425 (3d Cir. 1997) (Alito, J.), has taken a

more orthodox view of how efficient markets operate.

The defendant company in Burlington disclosed the

poor sales figures that had been claimed to constitute

a disclosure of the fraud on July 29, 1994, to no

market reaction; the stock did not plunge sharply

until the company’s year-end revenues and earnings

were released in a press release on September 20,

1994. The court explained that, “[blecause the

market for BCF stock was ‘efficient’ and because the

July 29 disclosure had no effect on BCF’s price, it

follows that the information disclosed on September

20 was immaterial as a matter of law.” Id. at 1425.

In a later case, then-Judge Alito elaborated that

“when a stock is traded in an efficient market, the

materiality of disclosed information may be measured

post hoc by looking to the movement, in the period

immediately following disclosure, of the price of the

firm’s stock.” Oran v. Stafford, 226 F.3d 275, 282 (3d

Cir. 2000) (Alito, J.).5

4The Fifth Circuit, while taking a more stringent positjon at

later stages of the litigation, hikewise permits a delayed-reaction

theory of loss causation at the pleading stage. See Lormand v.

US Unwired, Inc., 565 F.3d 228, 266 n.33 (5th Cir. 2009).

5 Other circuits that follow this approach include the Second

Circuit, see, e.g., In re Omnicom Grp, Inc. Sec. Litig., 597 F.3d

501 (2d Cir. 2010) (noting that plaintiff must prove that the

corrective disclosure was “promptly digested” by the market);

Teamsters Local 445 Freight Div. Pension Fund v. Bombardier,

Inc., 546 F.3d 196, 207 (2d Cir. 2008) (noting that “[e]vidence

that unexpected corporate events or financial releases cause an

immediate response in the price of a security” is the most

important factor in determining whether the stock trades in an

11

In this case, the Ninth Circuit concluded that the

Flynn reports were “corrective disclosures” because

they could have provided “additional or more

authoritative fraud-related information,” even

though, notably, they did not contain any new facts

not previously disclosed but only offered the third

party analyst’s opinions. In so doing, the Ninth

Circuit rejected the district court’s conclusion that

the Flynn reports could not be treated as a corrective

disclosure because, in an efficient market, the market

is presumed to have already incorporated the facts

contained in the initial disclosure.

In contrast, in other Circuits, this type of

republication or amplification of previously disclosed

facts cannot constitute a corrective disclosure. For

example, in Teachers’ Retirement System of Louisiana

v. Hunter, the Fourth Circuit found that the

republication of previously disclosed facts in a

complaint (which was followed by a _ stock price

decline) could not have caused the stock price to

decline. 477 F.3d 162, 187 (4th Cir. 2007); see also Jn

re Omnicom Crp., Inc. Sec. Litig., 997 F.3d 501, 512

(2d Cir. 2010) (finding that a subsequent negative

characterization of previously known facts cannot

constitute a corrective disclosure).

As these cases demonstrate, the Circuits have

adopted diametric positions on what constitutes a

efficient market), and the First Circuit. See In re Polymedica

Corp. Sec. Litig., 432 F.3d 1, 14 (ist Cir. 2000) (a “market price

‘fully reflects’ all publicly available information when prices

respond so quickly to new information that it is impossible for

traders to make trading profits on the basis of that information.

... Where the market reacts slowly to new information, it is less

likely that misinformation was reflected in market price and

therefore reed upon.”) (internal quotation marks omitted), see

also Petition at 15-18.

12

has

corrective disclosure and how quickly the market

must react to bad news to satisfy loss causation

under Dura, and in so doing have failed to apply a

consistent theory of market behavior. This conflict

warrants further clarity from this Court. Absent

further guidance, the circuits are left to create a body

of diverging case law that offends the notions of

justice and fundamental fairness.

Beyond the fundamental conflict discussed above,

this Court should also provide clear guidance to the

lower courts on the application of Dura to efficient

markets because it is an issue that is often raised at

various stages of a ttigation, and _ consistent

application at the different stages of the ltigation is

equaliy important. In the case at hand, the issue

arose at the proof stage, following the completion of a

trial. However, loss causation is often addressed also

at the pleading and class certification stage. See, e.g.,

Dura, 544 U.S. at 348 (finding that plaintiffs’

complaint allegations insufficient to plead _ loss

causation); Archdiocese of Milwaukee Supporting

Fund, Inc. v. Halliburton Co., 597 F.3d 330, 344 (5th

Cir. 2010) (affirming district courc’s denial of class

certification on the ground that plaintiff failed to

meet the requirements for proving loss causation at

the class certification stage).

Amici believe that the efficient capital markets

hypothesis should be consistently applied to federel

securities fraud claims. Courts that allow such

claims to proceed despite a delay of days, weeks or

months between the revelation of the truth and the

(allegedly) corresponding stock price adjustment,

even if that later adjustment corresponds to release

of an analyst report that repackages the information,

fundamentally ignore the efficient capital markets

hypothesis as applied in Basic and Dura. When truth

13

is introduced into the market, the inflation in the

stock price will be immediately removed. Deflation

resulting from the truth is immediate just as the

inflation resulting from the misstatement is

immediate. Fischel, supra, at 10 n.30. An investor

who purchased stock after the truth correcting a prior

misrepresentation was revealed would not be able to

claim that he was defrauded by the _ prior

misrepresentation. Rather, once the truth has veen

revealed, the truth necessarily is incorporated into

the stock price. At that point, the stock is no longer

artificially inflated as a_=result of the prior

misrepresentation. Thus, even if the stock price

declines after a later analyst report repackages the

information, that stock price decline cannot be due to

artificial inflation being removed from the _ stock’s

price. Otherwise persons purchasing stocks after the

truth has come out would have a claim for fraud.

Il. THIS CASE PRESENTS A GOOD VEHICLE

FOR THIS COURT TO ADDRESS THE

LEGAL PRESUMPTIONS DRAWN FROM

THE EFFICIENT CAPITAL MARKETS

HYPOTHESIS

This is at least the second Petition on an aspect of

loss causation to reach the Court just this Term, and

one in a series of such Petitions in recent years. The

Court has already asked the Solicitor General to

weigh in on the petition in Erica P. John Fund, Inc.

v. Halliburton Co., which seeks review of the Fifth

Circuit’s standard for loss causation at the class

§ See, e.g., Erica P. John Fund, Inc. v. Halliburton Co., No. 09-

1403; Grlead Scis., Inc. v. Trent St. Clare, No. 08-1021; Laborers

Dist. Council Constr. Ind. Penston Fund v. Omnicare, No. 09-

1400; Holmes v. Grubman, No. 10-409; Thane Intl, Inc. v.

Milkowski, No. 07-1577.

14

certification stage, and the Solicitor General has

responded by urging the Court to grant that Petition.

Brief for the United States as Amicus Curiae, No. 09-

1403 (U.S. Dec. 3, 2010).

Amici express no view on the Halliburton petition,

but agree that the Court should take this opportunity

to resolve the confusion among the Circuits regarding

the substantive standards for applying the efficient

capital markets hypothesis to fraud-on-the-market

lawsuits, and submit that this case is a superior

vehicle for doing so. Accordingly, wh ther or not this

Court takes the Halliburton Petition, it should grant

this Petition, and if appropriate consolidate it with

Halliburton.7

The instant Petition presents two advantages over

Halliburton. First, Halliburton presents’ the

threshold issue — a significant question in itself — of

the proper procedural standard to apply at the class

certification stage, an issue related to the one the

Court has already agreed to hear in Wal-Mart Stores,

Inc. v. Dukes, No. 10-277. If the Court determines

that the Fifth Circuit applied the wrong standard

under Rule 23, it might not reach the question of the

substantive methods of proving loss causation, and

indeed the Solicitor General has not even asked the

Court to address that question. Here, by contrast,

the case comes to the Court on a full trial record, and

7In the October 2010 term, the Court consolidated the

following cases in order to resolve a shared issue: Ariz. Christian

Sch. Tuition Org., v. Winn, Docket No. 09-987 and Garriott v.

Winn, Docket No. 09-991; Ariz. Free Enter. v. Bennett, Docket

No. 10-238 and McComish v. Bennett, Docket No. 10-239; Boeing

Co. v. United States, Docket No. 09-1302 and Gen. Dynamics

Corp. v. United States, Docket No. 09-1298; and Camreta v.

Greene, Docket No. 09-1454 and Alford v. Greene, Docket No. 09-

1478.

15

the sole question presented is what constitutes a

corrective disclosure in the context of a § 10(b) claim

brought under the fraud-on-the- market theory.

Second, this case presents comparatively simple

facts. The trial record involves no factual ambiguities

regarding what the market was told, and when. The

jury was instructed that it could base hability only on

a single day’s corrective disclosures: the two

September 20, 2004 Flynn reports, which the plaintiff

contended revealed a_= single alleged fraud.®

Supplemental Excerpts of Record at 118, Jn re Apollo

Group Sec. Litig., No. 08-16971 (9th Cir. June 23,

2010). By contrast, Halliburton involves ten correc-

tive disclosures covering three separate subjects,

none of which presents the question of whether a

disclosure is corrective if it repackages facts that had

been previously disclosed to no reaction. Thus, this

case 1s a much more straightforward vehicle for

addressing the recurring questions of law surround-

ing application of the efficient capital markets

hypothesis.

Alternatively, taking this case in tandem with

Halliburton would enable this Court to resolve the

Circuit splits regarding the law of loss causation at

the various stages of a case’s life cycle in a

comprehensive manner, and to avoid having to revisit

the issue repeatedly in the years to come.

8 The availability of damages for four additional trading

days —permitted by the Ninth Circuit here — is likewise a

straightforward question of law tied to the same narrow set of

facts.

16

Ill. THE NINTH CIRCUIT'S APPROACH DIS-

REGARDS THIS COURT’S CONSISTENT

DIRECTIVE TO AVOID NEW NON-

STATUTORY EXPANSIONS OF THE

IMPLIED PRIVATE RIGHT OF ACTION

UNDER § 10(b)

As set forth above, the Ninth Circuit’s approach to

loss causation amounts to a judicial expansion of the

implied § 10(b) cause of action, enabling plaintiffs to

selectively use the efficient capital markets

hypothesis to sustain a legal presumption of reliance

while disregarding precisely the same theory for

purposes of proving loss causation and materiality.

This Court’s precedents have consistently rejected

such expansions. This Court should take this

opportunity to rein in unreasonable extensions of the

efficient capital markets hypothesis as an evidentiary

presumption.

The § 10(b) cause of action was a judicial creation,

and while its existence has been effectively ratified by

Congress, this Court has repeatedly held that

Congress, not the courts, must take the lead if § 10(b)

is to be extended beyond its present boundaries. See

Stoneridge Inv. Partners, LLC v. Sctentific-Atlanta,

Inc., 522 U.S. 148, 165 (2008) (“The decision to extend

the cause of action is for Congress, not for us.”); Cent.

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

Denver, N.A., 511 U.S. 164, 173 (1994). This i

consistent with this Court’s general approach to

implied causes of action. See, e.g., Corr. Servs. Corp.

v. Malesko, 534 U.S. 61, 67 n.3 (2001) (explaining

that this Court has “retreated from [its] previous

willingness to imply a cause of action where Congress

has not provided one”) (internal quotation marks

omitted).

17

This Court’s hesitance to expand the implied right

of action without Congressional direction to do so has

long been informed by “[t]he practical consequences’

of interpreting the statute expansively. Stoneridge,

522 U.S. at 158-65. Judicial improvisation creates

uncertainty in “an area that demands certainty and

predictability.” Cent. Bank, 511 U.S. at 188 (internal

quotation marks omitted); see also Pinter v. Dahl, 486

U.S. 622, 652—54 & n. 29 (1988). For the same

reasons, this Court has likewise rejected tests that

are “complex in formulation and unpredictable in

application.” Morrison v. Nat'l Austl. Bank Ltd., 130

S. Ct. 2869, 2878 (2010). As the Court noted in

Central Bank, the lack of clear and predictable

liability rules “leads to the undesirable result of

decisions ‘made on an ad hoc basis, offering little

predictive value’ to those who provide services to

participants in the securities business.” 511 U.S. at

188. “[Sluch a shifting and highly fact-oriented

disposition of the issue of who may [be liable for] a

damages claim for violation of Rule 10b-5 is not a

satisfactory basis for a rule of liability imposed on the

conduct of business transactions.” Jd. (internal

quotation marks’ omitted). Here, the more

predictable and administrable rule is one that

subjects the reliance, materiality and loss causation

inquiries to the same empirical standards for showing

that an efficient market has reacted in a statistically

significant way to new informatio:

Moreover, judicial expansion of statutes for which

there is an implied cause of action, such as § 10(b),

upsets the careful balance the securities laws strike

between compensating fraud victims and protecting

capital markets from the damaging effects of

frivolous litigation. The securities laws and

specifically the rules governing market efficiency and

13

loss causation were not intended “to provide

investors with broad insurance against market losses,

but to protect them against those economic losses

that misrepresentations actually cause.” Dura, 544

U.S. at 345 (citing Basic, 485 U.S. at 252 (White, J.,

concurring 1n part and dissenting in part)). Congress

has not been silent in striking this balance, but has

actively and repeatedly legislated in this area, as

illustrated by the fact that the securities laws were

amended in 1995, 1996, 1998, 2000, 2002, and 2010

The loss causation provisions applicable to § 10(b)

claims were enacted in 1995, in the Private Securities

Litigation Reform Act, Pub. L. No. 104-67, 109 Stat

737 (1995), as part of an “effort to deter or at least

quickly dispose of those suits whose nuisance value

outweighs their merits.” Merrill Lynch, Pierce, Fenner

& Smith Inc. v. Dabit, 547 U.S. 71, 82 (2006)

Congress drafted those provisions against the

backdrop of the efficient-market presumption in

Basic; if it had wanted to provide a more expansive

method of proving damages, it could have done so

Indeed, in §§ 11 and 12 claims under the 1933 Act,

which do not rest on the fraud-on-the-market theory

Congress maintained the statutory damages formulas

and placed the burden of disproving loss causation on

the defendants — but not in § 10(b) cases

In sum, the Ninth Circuit’s rule leaves. the

determination of recoverable losses under § 10(b)

uncertain from case to case and Circuit to Circuit

and untethered from the efficient capital market:

hypothesis that gives the claim life in the first

instance. ‘This Court should grant the petition to

resolve these uncertalintie

} |

h «

CONCLUSION

Kor the for roimng reason the petition for a wt

certiorari should be granted

Respectfully submitt

SARA B. BRODY DANIEL A. MCLAUE I

CECILIA Y. CHAN SIDLEY Al IN LLP

SIDLEY AUSTIN LLI i87 Seventh Avenue

55 California Street New York, NY 1LOO19

San Francisca, CA 94010 (212) 889-5800

115) (42-1200 imclaughhln@sidk

One South Dearbor:

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ST) RH 7000