Petition for Writ of Certiorari — Jain v. J.P. Morgan Securities, Inc. (No. 08-838)

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Ul se C1) Supreme Court, U.S.

FILED

No. Q8- 838 OCT 30 2008

In The Supreme Court of AFAR Sites-7*

NAVEEN JAIN AND ANURADHA JAIN,

Petitioners,

J.P. MORGAN SECURITIES, INC.,

WILSON SONSINI GOODRICH & ROSATI, P.C.,

AND PERKINS COIE, LLP,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE COURT OF APPEALS

FOR THE STATE OF WASHINGTON

PETITION FOR A WRIT OF CERTIORARI

Arthur W. Harrigan, Jr.

Counsel of Record

Timothy G. Leyh

Christopher T. Wion

DANIELSON HARRIGAN LEYH & TOLLEFSON LLP

999 Third Avenue, Suite 4400

Seattle, Washington 98104

Telephone: (206) 623-1700

Facsimile: (206) 623-8717

Robert B. Gould

LAW OFFICES

2110 North Pacific Street, Suite 100

Seattle, Washington 98103

Telephone: (206) 633-4442

Facsimile: (206) 633-4443

RA SESE ERT EA TEE ANE EERE MEL SETEM NIGP ae gh RIN EI

LEGAL PRINTERS LLC, Washington DC e 202-747-2400 e leyalprinters.com

QUESTION PRESENTED

Section 16(b) of the Securities Exchange Act of 1934

(15 U.S.C. § 78p(b)) (“16(b)’) imposes “strict-hability”

on insiders who engage in “short-swing” trades of

company securities. The Jains were found strictly

hable under 16(b). After satisfying their 16(b)

liability to the issuer, they sued to recover their

losses to the extent they were the result of

Respondents’ negligence. Below, the Court of

Appeals affirmed dismissal of the Jains’ state law

claims, holding they were barred, as a matter of law,

by a federal policy against “de facto indemnification”

for liability imposed by the federal securities laws.

The question presented is:

Whether securities professionals can escape liability

for their chents’ losses on federal policy grounds

where the objectives of the securities statute under

which their clients’ loss occurred were satisfied and

the professionals’ negligence caused those losses.

PARTIES TO THE PROCEEDING

Petitioners are Naveen and Anuradha Jain, a

married couple. They were plaintiffs in Superior

Court, and appellants in both the Court of Appeals

and Supreme Court for the state of Washington.

Respondents are J.P. Morgan Securities, Inc., Wilson

Sonsini Goodrich & Rosati, P.C., and Perkins Coie,

LLP. They were defendants in Superior Court and

respondents in both the Court of Appeals and

Supreme Court for the state of Washington.

TABLE OF CONTENTS

Page

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Parties to the Proceeding ......;.......5.sc0cessvesersesssees il

RGUO OF FMCIIOU NIG cos ooo sie vccesccceectscscasetevensevcens vl

Petition for Writ of Certiorarl...........................065 1

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I ASG ichideuis ineenannnecunaeseeaenenaeeees 1

statutory Provision Involved.................0....0..<cea0s 2

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I. FOCCUAL TRRCEOOUIIG «5.6.20 scncecassscesescsvesance 4

A. Pe FE iieicica cud 4

B. The Securities Transactions at Issue

in the 16(b) Litigation..................... 6

1. The False Footnote in the

InfoSpace IPO Prospectus ... 6

2. The Misdeposits of Trust

Shares into the Jains’

Personal Account ................. 6

C. The 16()) Litigation........................ 7

lil

II. Proceedings Below .............ccsscccssssvscvaeess 10

A. Filing, Removal and Remand....... 10

B. a |, A ee renee aie 12

C. Court OF ABORIS .......).6/i..-6.000 14

D. State Supreme Court.................... 15

Reasons for Granting the Writ.......................... 15

I. The Circuits Are Split .................. 17

II. This Court’s 16(b) Decisions......... 30

A. Rehance Electric ...........0.... 30

B. I TI aos daincicedncss 33

C. Foremost-McKeeson........... 35

III. Ciaims to Apportion Damages for

Violations of the Federal Securities

Laws Based on Fault Should Be

Ue Ba) ae 36

RIES c:5 Sot na iokoa nr eecsmrhameneenen icanc eid aieede: 40

APPENDICES

STATE SUPREME COURT ORDER

Appendix A (Order) (October 1, 2008)............ A’l

COURT OF APPEALS ORDER

Appendix B (Order) (January 14, 2008)

reported at 177 P.3d 117 (Wash. Ct. App.

Me eee aig Peer arene nen term a A-3

SUPERIOR COURT ORDER

Appendix C (Orders) (May 4, 2006)............... A-19

DISTRICT COURT ORDERS

Appendix D (Order) (January 9, 2004)

po eh, nen eae A-31

Appendix E (Judgment) (August 22, 2003)

Dreiling v. Jain, 281 F.Supp.2d 1234

CW Ere BO honk ss A-44

Appendix F (Order) (May 14, 2003)

Dreiling v. Kellett, et al., 281 F.Supp.2d 1215

Oe er I SY osicuilesecednnectacematate. A-60

TABLE OF AUTHORITIES

Page

CASES:

AAL High Yield Bond Fund v. Deloitte & Touche,

LLP, 361 F.3d 1305 (11 Cir. 2004) ....... 27

Arden Way Assoc. v. Boesky,

664 F. Supp. 863 (S.D.N.Y. 1987)........... 20

Baker, Watts & Co. v. Miles & Stockbridge,

876 F.2d 1101 (4th Cir. 1989) ....0000..00..... 21

Bershad v. McDonough,

428 F.2d 693 (7th Cir. 1970) ..... RA cra oe 32

Bunker Ramo-Eltra Corp. v. Fairchild Indus., Inc.,

639 F.Supp. 409 (D. Md. 1986). .............. 25

Cambridge Fund, Inc. v. Abella,

501 F.Supp. 598 (S.D.N.Y. 1980)............ 19

Eichenholtz v. Brennan,

52 F.3d 478 Gad Cir. 1995)....................... 28

First Golden Bancorp. v. Weiszmann,

942 F.2d 726 (10 Cir. 1991)...... 18, 24, 26, 29

Foremost-McKeeson, Inc. v. Provident Sec. Co.,

423 U.S. 232, 96.8.Ct. 508,

OG Lod Bd 466 CASTS)... ovcocccicccccccsscsnseas. 35

Fromer v. Yogel,

50 F.Supp.2d 227 (S.D.N.Y. 1999).......... 20

Globus v. Law Research Serv. Inc.,

418 F.2d 1276 (2d Cir. 1969), cert. denied,

307 U.S. 91S CIGTO) .....060.0000000-.s. 19, 25, 29

Greenwald v. American Medcare Corp.,

666 F.Supp. 489 (S.D.N_Y. 1987) ............ 20

Happ v. Corning, Inc.,

466 F.3d 41 (1st Cir. 2006)...................008 29

Heizer Corp. v. Ross,

601 F.2d 330 (7th Cir. 1979) .............. 22, 23

Herzfeld v. Laventhol, Krekstein, Horwath &

Horwath, 378 F.Supp. 112 '

I ooo ck va ok ncebvva Yousnwins 19

In re Cendant Corp. Sec. Litig.,

139 F. Supp. 2d 585 (D.N.J. 2001)............ 29

In re Sunrise Sec. Litig.,

793 F.Supp. 1306 (E.D.Pa. 1992).............. 29

In re U.S. Ol & Gas Litig.,

967 F.2d 489 (11 Cir. 1992) ............ 26, 27

In re XO Communications, Inc.,

330 B.R. 394 (S.D.N-Y. 2005) .....0......002... 25

Kern County Land Co. v. Occidental Petroleum Co.,

411 U.S. 582, 93 S.Ct. 1736,

eS) 2 33, 36

King v. Gibbs,

876 F.2d 1275 (7h Cir. 1989) .................. 22

Laventhol, Krekstein, Horwath & Horwath v.

Horwitch, 637 F.2d 672 (9th Cir. 1980)... 23

Musick, Peeler & Garrett v. Employers Ins. of

Wausau, 508 U.S. 286, 113 S. Ct. 2085,

124 L.Ed.2d 194 (1998) «0.0... .eccccoeee es 36, 38

Professional Beauty Supply, Inc. v. National Beauty

Supply, Inc., 594 F.2d 1179 (8 Cir. 1979)... 29

Raychem Corp. v. Fed. Ins. Co.,

853 F. Supp 1170 (N.D. Cal. 1994)... 24, 29

Reliance Electric Co. v. Emerson EHiéctric Co.,

404 U.S. 418, 92 S.Ct. 596,

$0 L.£4.20 575 (1972) ..............2. 30, 35, 36

Schaffer v. CC Invs., LDC,

286 F. Supp. 2d 279 (D.N.Y., 2009) ........ 25

Stowell v. Ted S. Finkel Investment Services,

641 F.2d 323 (5t Cir. 1981) .................... 29

Texas Indus., Inc. v. Radcliff Materials, Inc.,

451 U.S. 630, 101 S.Ct. 206i,

GH LT. Se SOO CAGED) 0 ocicccves niieeterrnn 22

STATUTES:

35 GC. Tee askin passim

SS AES Tike eee 37

9 UEC BI vicina 1

BG URAC: 9 B0G8 ovckciiccniniinimamneeee 2

COURT RULES

OTHER AUTHORITIES:

Deborah A. DeMott,

Shareholder Deriv. Actions L. & Practice,

BM CIID oa cacs cscs secocosseccecensessorseesvessees 18

H.R. Conf. Rep. No. 104-369 (1995),

reprinted in 1995 U.S.C.C.A.N. 730....... 37

PETITION FOR WRIT OF CERTIORARI

The Jains respectfully petition the Court for a

writ of certiorari to the Washington State Court of

Appeals (review denied by the Washington State

Supreme Court). That court held that a federal

policy against “de facto indemnity” immunized

securities professionals from liability to their client

where their negligent conduct created the very

transactions that led to the Jains’ strict liability for

“short-swing” trading under Section 16(b) of the

Securities Exchange Act of 1934 (15 U.S.C. § 78p(b))

(“16(b)”), and immunized the lawyers whose

negligence and conflicts of interest resulted in a

ruling of 16(b) liability. The Jains were unaware of

the short-swing transactions, had settled the 16(b)

judgment by paying the issuer, and sought only to

allocate their losses according to fault under well-

recognized principles of state law.

OPINION BELOW

The decision of the Washington State Court of

Appeals (App. B) for which this Petition is filed is

reported at 177 P.3d 117 (Wash. Ct. App. 2008).

JURISDICTION

The jurisdiction of this Court is invoked under

28 U.S.C. § 1257, which provides that “Final

judgments or decrees rendered by the highest court

of a State in which a decision could be had, may be

reviewed by the Supreme Court by writ of certiorari

where the validity of a treaty or statute of the

United States is drawn in questionI.]” On October 1,

2008, the Washington State Supreme Court issued

an order (App. A) denying Petitioners’ Petition for

Review, rendering the Court of Appeals’ January 14,

2008 order (App. B) a “final judgment” rendered by

the highest Washington State court “in which a

decision could be had.” This Petition is timely under

28 U.S.C. § 2101 and Supreme Court Rule 13.1.

STATUTORY PROVISION INVOLVED

Section 16(b) of the Securities Exchange Act of

1934, 15 U.S.C. § 78p(b), states:

Profits from purchase and sale of

security within six months

For the purpose of preventing the

unfair use of information which may

have been obtained by such beneficial

owner, director, or officer by reason of

his relationship to the issuer, any profit

realized by him from any purchase and

sale, or any sale and purchase, of any

equity security of such issuer (other

than an exempted security) or a

security-based swap agreement (as

defined in section 206B of the Gramm-

Leach-Bliley Act) involving any such

equity security within any period of less

than six months, unless such security

or security-based swap agreement was

acquired in good faith in connection

with a debt previously contracted, shall

inure to and be recoverable by the

issuer, irrespective of any intention un

the part of such beneficial owner,

director, or officer in entering into such

transaction of holding the security or

security- based swap agreement

purchased or of not repurchasing the

security or security-based swap

agreement sold for a period exceeding

six months. Suit to recover such profit

may be instituted at law or in equity in

any court of competent jurisdiction by

the issuer, or by the owner of any

security of the issuer in the name and

in behalf of the issuer if the issuer shall

fail or refuse to bring such suit within

sixty days after request or shall fail

diligently to prosecute the same

thereafter; but no such suit shall be

brought more than two years after the

date such profit was realized. This

subsection shall not be construed to

_coverany transaction where such

beneficial owner was not such both at

the time of the purchase and sale, or

the sale and purchase, of the security or

security*-based swap agreement (as

defined in section 206B of the Gramm-

Leach-Bliley Act) involved, or any

transaction or transactions which the

Commission by rules and regulations

may exempt as not comprehended

within the purpose of this subsection.

STATEMENT OF THE CASE

Petitioners request that this Court grant a

writ of certiorari to review a decision of the

Washington State Court of appeals.

This case raises unsettled issues of the extent

to which negligent securities professionals are

protected, by a federal policy against “de facto

indemnity,” from liability they would otherwise have

under state law for losses their client suffered. The

Circuits are divided gn whether and to what extent

the Securities Exchange Act of 1934 (the “1934 Act”)

bars such actions. Specifically, this case presents

the question whether securities professionals whose

negligence a) created short-swing trades and b) in

one case created the appearance of a short-swing

trade that did not actually occur, are immunized

from liability by a federal “anti-indemnity” rule

where the insider held liable for such trades under

Section 16(b) of the 1934 Act (15 U.S.C. § 78p(b)) was

not even aware of the actions that created the

transactions or of the false statements that created

the appearance of a transaction that did not occur.

While this case arises under 16(b), the “de facto

indemnity” issue has also frequently arisen under

other provisions of the 1934 Act and the Securities

Act of 1933 (the “1933 Act”). This Court has not

ruled on the existence or scope of such a bar to state

law claims, and the Circuits are divided.

I. Factual Background

A. The Parties

The Jains founded InfoSpace, Inc. in 1996 and

received “Founders” shares of InfoSpace stock at

that time. Later, they established three trusts to

benefit their children, and funded them with

InfoSpace stock.

InfoSpace completed its IPO in December

1998. Respondents J.P Morgan Securities, Inc.

(“Morgan”), Wilson Sonsini Goodrich & Rosati, P.C.

(“Wilson”), and Perkins Coie LLP (“Perkins”) were

responsible for preparing the IPO Prospectus as lead

underwriter, counsel for the underwriter, and

counsel for InfoSpace, respectively. Morgan also was

the Jains’ personal securities broker. Respondents

each took actions that, individually or collectively,

created “purchases” by the Jains of the trusts’

InfoSpace shares or the appearance of such

purchases — by misdepositing trust shares into the

Jains’ personal investment account and by inserting

into the IPO Prospectus a footnote containing a false

statement regarding creation of an escrow with trust

shares, as discussed below.

Years after the IPO, a shareholder sued the

Jains for “short-swing” trading under 16(b), based

on sales by the Jains of some of their Founders’

shares within six months after “purchases” that

were held to have occurred by reason of the false

footnote and misdeposits. The Jains were unaware

of the misdeposits. The footnote described an event

that never actually occurred. In the 16(b) litigation,

Perkins represented the Jains as defense counsel.

Perkins had _ conflicts both because it also

represented InfoSpace (the direct beneficiary of any

judgment against the Jains) in other matters and

because it was a co-author of the false footnote and

should have been an important witness on the Jains’

behalf.

B. The Securities Transactions at Issue in the

16(b) Litigation

1. The False Footnote in the InfoSpace

IPO Prospectus.

Prior to the IPO, Mr. Jain agreed to place one

million of his InfoSpace shares in escrow to secure a

personal indemnity obligation. On the eve of the

IPO, Wilscn and Perkins added a footnote to the 115-

page Prospectus stating that Mr. Jain had placed in

escrow one million shares owned by one of the trusts.

No such event occurred. Mr. Jain was not aware of

the footnote when he signed the Prospectus as an

InfoSpace Director responsible only for avoiding

misstatements material to investors. As

Respondents actually contended below, the footnote

was false, no such escrow ever was established, and

the District Court’s ruling to the contrary in the

16(b) action was incorrect.

a The Misdeposits of Trust Shares into

the Jains’ Personal Account.

After the IPO, InfoSpace stock split. Both the

Jains and each of their children’s trusts received

additional shares. InfoSpace sent all of the share

certificates to the Jains: the trusts’ certificates

should have been sent to the Trustee. The Jains

forwarded ali of the certificates to their broker,

Morgan, which was aiso slated to become the trusts’

broker. Morgan negligently deposited all of the

shares — including the trust shares — into the Jains’

personal account. At Morgan’s request, Wilson

(acting as InfoSpace’s counsel) authorized re-

registering the trust shares to the Jains, falsely

stating in a letter to InfoSpace that the Jains (not

the trusts) already owned those shares. Morgan and

Wilson did these things because they did not

understand that the shares in question belonged to

trusts even though the certificates plainly stated

that they did.

The Jains were unaware of the misdeposits

and false statements. Morgan secretly corrected the

misdeposit of shares from one of the trusts without

telling anyone of the mistaken deposit. The Jains

discovered the other trust misdeposits (long before

the 16(b) suit was filed) and immediately had them

corrected.

The Jains never had any intention of

“purchasing” any shares from the trusts. The

trustee never had any intention of seliing any trust

shares. Any such transaction would have defeated

the very estate-planning purposes for which the

trusts were created. Because neither the “buyer” nor

the “seller? knew that any “transactions” were

occurring, there obviously was no agreed “purchase

price.

C. The 16(b) Litigation

In 2001, an InfoSpace shareholder, Dreiling,

filed suit in federal District Court, alleging that the

Jains were liable under 16(b) because the false

footnote and misdeposits amounted to “purchases” of

InfoSpace stock from the trusts within six months of

the Jains’ sales of some of their Founders shares.

Dreiling argued that 16(b) required the Jains to

disgorge a sum equal to the difference between the

“purchase” price (which Dreiling claimed was zero

since no price had been agreed upon) and the actual

proceeds from the Jains’ sale of Founders’ shares—

z.e., 100% of the proceeds of those sales.

Perkins defended the Jains in the 16(b) Suit

without seeking the Jains’ waiver of its numerous

conflicts of interest: Perkins was representing

InfoSpace, the recipient of any 16(b) recovery, in

numerous other matters, and owed it fiduciary

duties; it was liable to the Jains for authoring the

false footnote; and its lawyers were _ essential

witnesses. Perkins conducted virtually no discovery

of how the mistakes had come about, did not

withdraw in order to testify about its own error in

writing the footnote, and did not argue that issues of

fact precluded summary judgment against the Jains.

On May 14, 2003, the District Court granted

Dreiling’s motion for summary judgment, ruling

based mainly on the IPO prospectus footnote that an

escrow had been established and holding that the

misdeposits also were purchases. (App. F, pp. A-69

A-70). The District Court held that the issue of the

Jains’ innocence was “largely irrelevant” under 16(b)

and that, on summary judgment, no determination

could be made of whether they had acted in good

faith. (Ud., p. A-67). The District Court’s ruling was

predicated on an application of the rule of

“voluntariness’—u.e., that the Jains had had some

role in the events in question—that the Court

admitted was beyond the margins of the most

directly applicable precedent. (/d., p. A-76).

On May 29, 2003, successor counsel, on

motions for reconsideration and the determination of

damages, ~-resented new evidence that explained the

origins of the false footnote and confirmed that

Morgan and Wilson had acted based on a mistaken

belref that the shares belonging to the trusts were

actually owned by the Jains—and had actually

misled the Jains as a result of their own mistaken

belief. The District Court struck some of this

evidence as untimely, denied the motion for

reconsideration and held that the Jains were liable

for one hundred percent of the proceeds of their

Founders’ share sales because the trust share

“purchases” had been for zero. (App. E, p. A-51).

Judgment was entered against the Jains in

the sum of approximately $247 million, including

prejudgment interest (Ud, p. A-60) — by far the

largest 16(b) judgment in history. In awarding

prejudgment interest, the District Court held that it

could not make any determination of whether the

Jains were in fact innocent and had acted in good

faith. Gad, pp. A-55).

On February 23, 2004, the Jains appealed to

the Ninth Circuit. To avoid foreclosure on their

assets at firessale prices, they were forced to

liquidate their stock portfolio and buy low-yield

bonds as collateral for a $253 million appeal bond.

This asset shift led to more than $10 million in

demonstrable investment losses—gains that actually

would have accrued to their pre-existing portfolio.

On February 15, 2005, the Jains settled by

paying InfoSpace $65 million (plus $40 million in

insurance).

II. Proceedings Below

A. Filing, Removal and Remand

In August, 2003, the Jains commenced this

action by filing their original Complaint against

Morgan and others (including InfoSpace and its

general counsel) in Washington State Superior

Court.

The Jains alleged that defendants were

responsible, through their errors and omissions, for

creating the fictitious escrow “purchase” and for

negligently misdepositing trust shares (and in two

cases re-registering them); and that the misdeposits,

coupled with the false footnote, all of which occurred

without the Jains’ knowledge (or that of the trustee),

were predicates for the Jains’ 16(b) liability and

resulting damages. The Jains asserted causes of

action for breach of fiduciary duty, negligence,

unjust enrichment/set-off, and equitable

subrogation.

The original defendants removed the case to

District Court, where the case was assigned to the

same judge who had rendered the 16(b) judgment.

Defendants asserted that the District Court had

original “federal question” jurisdiction over the

Jains’ claims because “the established federa! policy

against allowing indemnification or ‘reimbursement’

for securities liability bars plaintiffs’ claims.”

The Jains moved for remand, arguing that

“defendants are not parties because of any

contribution, indemnity, or ‘reimbursement’ claim,

but because the defendants are directly liable to the

Jains by reason of the defendants’ negligence and

breaches of fiduciary duties.” The Jains further

asserted that “[nlo federal law or policy precludes

asserting claims under state common law for

breaches of fiduciary duties and negligence for

damages incurred by a plaintiff in a_ lawsuit

involving Section 16(b) claims.”

On January 9, 2004, the District Court

remanded the case, stating that:

[The Jains] are not seeking through

this lawsuit to challenge their Section

16(b) liability or to escape enforcement

of their Section 16(b) liability.

Instead, the Jains are merely seeking to

hold other parties accountable for

negligence in causing the damages they

incurred as a result of their Section

16(b) liability.

(App. D, A-37). The District Court further

recognized that, although the damages recoverable

under the Jains’ tort claims might be similar to those

recoverable under an indemnification claim, the

claims were distinct:

The Jains’ claims against’ these

Defendants rests solidly in tort law.

Defendants argue that the Jains’ claims

in this case are indemnity’ or

reimbursement claims in disguise [but]

have presented no authority

indicating that the elements’ of

negligence and breach of fiduciary duty

are the same as those for

indemnification.

(/d., A-41). Continuing, the District Court stated:

While the ultimate outcome might be

the same if the Jains prevail on their

state law claims — Le. the Jains will

recover the amount of damages they

incurred as Section 16(b) liability — this

does not mean that the Jains

negligence and breach of fiduciary duty

state law claims are equivalent to

claims for indemnification or

reimbursement.

(/d., A-41).

B. Superior Court

Before the action against Morgan and others

was remanded, on October 9, 2003 the Jains

initiated an action against Perkins in Superior

Court. The two actions subsequently were

consolidated.

By September 2005, the Jains had settled the

underlying 16(b) case and dismissed certain of the

original defendants.

On September 19, 2005, the Jains filed their

Third Amended Complaint against Morgan and

Wilson and their Second Amended Complaint

against Perkins. The Jains alleged that

Respondents’ negligent acts and omissions had

caused the 16(b) judgment against them and that

they had acted reasonably in settling, were innocent

of any wrongdoing and had been affirmatively

misled by the professionals.

The Jains also alleged that their losses could

have been avoided had Perkins not had unwaivable

conflicts of interest that motivated them to avoid

discovery, to refrain from advancing key arguments

regarding the origins of the “purchases,” to avoid

withdrawing and testifying that the footnote was

false and even to shrink from arguing that issues of

fact precluded summary judgment against their

clients.

Asserting claims for negligence, breach of

fiduciary duties, equitable apportionment, unjust

enrichment, recovery of non-settlement damages,

and equitable indemnity, the Jains sought, among

other things, a declaration that Respondents were

obligated to compensate the Jains for:

defendants’ fault-based shares, based

on their respective proportionate fault,

of the Jains’ direct damages resulting

from the judgment and settlement in

the 16(b) Suit, including, but not

limited to, the costs and_ other

consideration paid or granted by the

Jains or on their behalf in settlement of

the 16(b) Suit;

...land for] the Jains’ direct, indirect,

consequential and special non-

settlement damages resulting from the

16(b) Suit....

On October 25, 2005, Respondents filed

motions to dismiss the Jains’ Complaints for failure

to state a claim, arguing that all of the Jains’ claims

were barred under a federal policy prohibiting

“securities wrongdoers” from seeking

indemnification.

On May 4, 2006, the Superior Court granted

Respondents’ motions, dismissing with prejudice the

Jains’ Third Amended Complaint against Morgan

and Wilson and the Jains’ Second Amended

Complaint against Perkins. (App. C).

C. Court of Appeals

On October 20, 2006, the Jains appealed the

orders of dismissal directly to the Supreme Court of

the State of Washington, which then transferred the

appeal to the Washington State Court of Appeals on

March 6, 2007.

On January 14, 2008, the Court of Appeals

affirmed dismissal, determining that the Jains’ state

law claims were barred by a federal policy against

“de facto indemnity” for securities liability,

specifically 16(b) liability. (App. B). While

conceding that securities professionals and defense

counsel “should be answerable in state court for

harms they have caused their clients,” the court

found that “to the extent that state claims constitute

any form of indemnification, the strict liability

provisions of section 16(b) would be fatally

undermined were insiders able to pursue those

claimsl|.]” (ad, A-15). Accordingly, the court held

that “because they seek recovery of the profits they

were required to disgorge to InfoSpace, the Jains’

claims constitute de facto indemnification and

present an insuperable bar to relief.” (/d.,, A-16).

The court also noted, in connection with its separate

ruling denying the Jains’ claim for attorneys’ fees (on

state law grounds) that the Jains “were not

blameless in the transactions giving rise to their

[16(b)] liability.” (/d., A-17). The conduct described

to support this statement was the same conduct the

District Court had ruled constituted “voluntariness’;

i.e., the Jains did such things as sending the stock

certificates to their broker, failing to immediately

detect the misdeposits, and signing the IPO

prospectus. No court has held that the Jains were

even negligent.

D. State Supreme Court.

On October 1, 2008, the State Supreme Court

denied the Jains’ Petition for Review. (App. A).

REASONS FOR GRANTING THE WRIT

The Circuits that have addressed the extent to

which federal law bars state law claims for losses

arising from securities liability by classifying such

claims as “de facto indemnity” claims have reached

widely different conclusions. The question this

Petition raises is how to set the boundaries of any

such federal policy so that it supports both the

specific goals of the federal statute involved and the

broader objectives of the federal securities laws.

Some Circuits have applied the _ anti-

indemnity rule in ways that undermine legitimate

state remedies, promote no goal of the federal

securities law at issue, and immunize securities

professionals from the consequences of their own

negligence. This case was decided in reliance on

such rulings. Other Circuits recognize, but in

varying degrees, the right of the injured party to

recover losses in proportion to the fault of the

securities professionals even where (unlike this case)

the client was also negligent.

This case is an extreme example of the evils of

the “de facto indemnity” bar under the facts the

Jains allege. However, the Jains’ claims were

rejected on a motion to dismiss. A pure issue of law

is presented here, essentially untainted by the

factual complexity reflected in the record.

The specific goals of 16(b) were met when the

Jains disgorged their “profits” to InfoSpace in

settling to avoid appeal risks (largely created by

their defense counsel’s failures in connection with

the summary judgment motion below). Their state

law claims seek to do nothing more than allocate

these damages (and their separate investment

losses) in proportion to the fault of Respondents. It

is a verity on this record that the Jains had no

knowledge that the “transactions” were even

occurring (the escrow did not occur). This is not a

case of negligent advice; the Respondents literally

created the short-swing trades through their

mistakes. Neither the disgorgement policy of 16(b)

nor its deterrence goals are implicated here—-one

cannot be deterred from engaging in transactions of

which one is unaware.

A rule that classifies the Jains’ claims as “de

facto” indemnity claims that are barred by federal

law defeats the federal securities law goal that us

implicated here: discouraging careless conduct by

securities professionals. The claims are not for

“indemnity” because the Jains do not seek to shift

damages arising from their own fault, but only to

recover their losses to the extent they arose from the

careless conduct. of others.

The goals of encouraging prudence’ by

securities professionals will be served by this Court’s

defining a rule that bars only claims for true

“indemnity” (shifting damage attributable to the

indemnitee's fault or wrongdoing) while upholding

the states’ right to provide remedies that simply

allocate losses according to fault. This rule should

apply even in favor of parties who, unlike the Jains,

were themselves at fault in creating their own

hability as long as the result is not to shift any

portion of the loss that is properly allocable to the

plaintiff.

I. The Circuits Are Split

Each Circuit examining the issuc_ has

determined that there are circumstances in which a

party found liable under the federal securities laws

may be prohibited from pursuing claims against

third parties for their role in causing that liability or

associated losses. As stated by one commentator:

The cases dealing with indemnification

questions in the context of federal

securities lability ... do not deal with

claims for indemnification against

securities law liabilities in an entirely

consistent fashion; groups of the cases

use three somewhat different standards

to determine whether a defendant is

entitled to be indemnified by other

defendants. Some cases take — or at

least appear to take — the position that

a defendant in a securities action may

claim indemnity from another

defendant whose degree of fault was

greater. Other cases bar

indemnification for defendants whose

liability is premised on intentional,

knowing or reckless behavior,

independent of the quality of the

behavior of the other defendants in the

action, on the rationale that to permit

indemnification of such defendants

would undercut the deterrent mission of

the federal securities’ laws. On

essentially the same rationale, other

cases at least suggest that

indemnification should be denied to

defendants whose liability is based on

negligent violations. Some courts have

held that indemnification is contrary to

public policy for section 16(b) cases,

even though the lability arising under

section 16(b) for short-swing trading by

insiders is the consequence of a strict

liability scheme created by statute that

does not require any proof of fraudulent

intention or negligence.

Deborah A. DeMott, Shareholder Deriv. Actions L. &

Practice, § 6:43 (2008) (citations omitted!).

| Citing, in connection with the discussion of 16(b), Furst Golden

Bancorporation v. Weiszmann, 942 F.2d 726 (10% Cir. 1991).

The Second Circuit, in a securities fraud case

under § 10(b) of the 1934 Act (15 U.S.C. § 78)b)),

involving an issuer who omitted material facts from

an offering circular, prohibited the underwriter from

enforcing an indemnification agreement with the

issuer where the underwriter was reckless. Globus

v. Law Research Service, Inc., 418 F.2d 1276 (2d Cir.

1969). The court found that, where the underwriter

had actual knowledge of the misstatement and

exhibited “wanton indifference ... to its obligations,

‘it would be against public policy embodied in the

federal legislation to permit [the underwriter] to

enforce its indemnification agreement.” /d., at 1288.

The court added that it was considering only the

case were the putative indemnitee “has committed a

sin graver than ordinary negligence.” Jd. Taking its

cue from the Second Circuit’s decision in G/obus, the

District Court for the Southern District of New York

has issued a series of cases allowing claims of

indemnification by innocent, or merely negligent,

defendants accused of violating the federal securities

laws.2, The Jains’ claims should have been upheld

under this approach.

discussed snfra, and the present case.

2 Citing Globus and Herzfeld v. Laventhol, Krekstein, Horwath

& Horwath, 378 F.Supp. 112 (S.D.N.Y. 1976), the court in

Cambridge Fund, Inc. v. Abella, 501 F Supp. 598, 618 (S.D.N_Y.

1980) explained that, “these decisions stand for the proposition

that it is against pubhe policy to allow a party who has been

adjudicated to have been engaged in reckless, willful or

criminal conduct to shift his liability to others.” In Cambridge

Fund, the public policy did not bar indemnification because

there had been “no adjudication of willfulness.” Jd, at 619.

The same court later explained that:

[Tlhe crucial relevant fact in determining

whether indemnification for violations of the

In contrast, the Fourth Circuit has not limited

the bar to cases of the claimant’s intentional

wrongdoing. It has held that the federal securities

laws “preempt plaintiffs pendent state claims to the

extent they allow aé_e right of action for

securities laws is available is whether the

defendant acted with actual knowledge of

falsity or reckless disregard for the truth. . . .

[W]hether indemnification is available may

depend on various questions of fact such as

whether a party is personally at fault, actually

contributed to an injury, incurred merely

vicarious or imputed lability, or had actual

knowledge of alleged misstatements.

Arden Way Assoc. v. Boesky, 664 F. Supp. 863, 865 (S.D.NLY.

1987). In Greenwald v. American Medcare Corp., 666 F.Supp.

489 (S.D.N.Y. 1987), where defendants accused of securities

fraud settled prior to trial, one defendant asserting complete

innocence was permitted to pursue his indemnification claim

against co-defendants. /d., at 493 (“Spanakos is entitled to an

opportunity to prove that he was without fault and is therefore

entitled to indemnity.”). Explaining the rationale behind

Globus and its progeny, the court in Fromer v. Yoge/, 50

F .Supp.2d 227 (S.D.N.Y. 1999) stated that indemnification:

is not available in a case where the party

seeking indemnification has knowingly and

willfully violated the federal securities laws.

Such a remedy would allow a tortfeasor to shift

liability for intentional misconduct onto another

joint tortfeasor and thereby undercut the

deterrence goals of the securities laws.

[However,] indemnity claims under the

Exchange Act may proceed where the wrong

committed hy those seeking indemnity is no

greater than ordinary negligence.

Td, at 237-38 (citations, footnote omitted) (emphasis added).

indemnification.” Baker, Watts & Co. v. Miles &

Stockbridge, 876 F.2d 1101, 1102 (4th Cir. 1989). In

Baker, Watts, investors successfully sued Baker,

Watts under § 12(2) of the 1933 Act for material

omissions in an offering memorandum. The

corporation then asserted claims for contribution

and indemnification against the law firm that

drafted the offering memorandum. Jd, at 1103.

Noting that liability under § 12(2) does not require

scienter but may be “predicated upon negligent

misrepresentations, the court refused to pre-empt

the state law contribution claims, based on the law

firm’s “independent obligation to provide competent

legal representation.” Jd. at 1108. However, the

court held that federal policy bars any state-based

indemnification claims:

[T]he underlying purpose of the 1933

Act is regulatory rather’ than

compensatory. Negligence in the

preparation of a securities prospectus

was made actionable under § 12(2) of

the 1933 Act in order to promote careful

adherence to the requirements of the

statute. . . . [A] right of action for

indemnification would frustrate the

statute’s goal of encouraging diligence

and discouraging negligence in

securities transactions.

Id., at 1105 (quotations, citations omitted). Although

the court determined that the federal policy against

indemnification is not limited to circumstances

where the underlying liability was based on

intentional wrongdoing, it stopped. short of

establishing a bright line rule barring all claims for

indemnification:

Although a right ‘to indemnification

may not be preempted in each and

every circumstance, we reject plaintiff's

assertion that the federal policy against

indemnification extends only to

intentional wrongdoing.

Id., at 1108.

The Seventh Circuit, having initially adopted

a broad rule barring indemnification claims by

“securities wrongdoers,” now allows such claims to

the extent that they have an independent legal basis

in state or federal law. In Heizer Corp. v. Ross, 601

F.2d 330, 334 (7th Cir. 1979), the court barred a

cross-claim for indemnification of liability imposed

for securities fraud, stating that “indemnification

tends to frustrate” the policy of securities legislation

and that a “securities wrongdoer should not be

permitted to escape loss by shifting his entire

responsibility to another party.” The court later

disavowed Heizer’s policy-based approach. Aung v.

Gibbs, 876 F.2d 1275, 1283 (7th Cir. 1989) (“policy

analysis has no role to play in the question of

whether there is a federal right to indemnification”)

(citing Texas Indus., Inc. v. Radcliff Materials, Inc.,

451 U.S. 630, 638, 101 S.Ct. 2061 (1981)). In King,

defendant Gibbs faced claims under § 10(b) and SEC

Rule 10b-5. He claimed that, as an “innocent

conduit of false information” transmitted by cross-

claim defendants, the rule of MHerzzer (barring

indemnification clainis by “securities wrongdoers’)

was inapplicable. Jd, at 1276. Apparently in

agreement, the court focused on whether Gibbs could

establish a legal basis for his indemnity claims.

Gibbs could not rely on state law only because he

had failed to preserve the argument. /d., at 1279,

n.5. Thus, he was required to show “a right to

indemnification under federal law.” Jd, at 1279.

Engaging in an extensive analysis of legislative

history and federal common law principles, the court

held that, regardless of the level of the claimant’s

culpability, “there is no right to indemnification

under the securities laws or federal common law.”

fd., at 1276.

Before King called Heizer into question, the

Ninth Circuit invoked Heizer’s policy arguments to

bar a “cross claim for indemnity.” JLaventhol,

Krekstein, Horwath & Horwath v. Horwttch, 637

F.2d 672, 676 (9th Cir. 1980). Laventhol involved

claims for securities fraud under § 11 of the 1933

Act, 15 U.S.C. § 77k. The issue was whether certain

non-settling defendants could pursue

indemnification or contribution against defendants

who had settled for a nominal amount in exchange

for their agreement to cooperate with plaintiffs.

After noting that contribution was permitted by

statute, the court held that the cross-claim for

indemnity had been properly dismissed:

In extending liability to underwriters

and those who prepared misleading

statements, the purpose of the Act is

regulatory rather than compensatory,

and permitting indemnity would

undermine the statutory purpose of

assuring diligent performance of duty

and deterring negligence.

Id., at 676. However, the District Court for the

Northern District of California has determined that

federal law does not bar a corporation’s voluntary

indemnification of its directors and officers for

payments made to settle a securities fraud class

action under SEC Rule 10(b)-5, where such

indemnification is permitted by state law. Raychem

Corp. v. Fed. Ins. Co., 853 F. Supp. 1170, 1177-78

(N.D. Cal. 1994).

The Tenth Circuit is the only Court of Appeals

that has addressed the indemnification issue in the

context of liability imposed by 16(b). In First Golden

Bancorporation v. Weiszmann, 942 F.2d 726 (10t

Cir. 1991), defendant Weiszmann acquired First

Golden stock as a result of a tender offer, which he

then sold within six months. First Golden sued

Weiszmann under the strict liability provisions of

16(b), which require disgorgement to the issuer of all

profits resulting from a statutory insider’s® sale and

purchase, or purchase and sale, of stock within a

given six-month period. Weiszmann filed a third-

party complaint against his financial advisor,

seeking (among other things) “indemnification for

any liability he may have to First Golden.” Jd, at

728. Weiszmann and First Golden settled the

primary 16(b) lawsuit on terms that did not require

Weiszmann to make any payment to First Golden,

though he was required to dismiss' certain

unspecified counterclaims. Jd. The court noted that

other federal courts have “rejected indemnity for a

variety of securities violations” as a matter of policy,

3 Although the basis for concluding that Weiszmann was an

“insider” subject to 16(b) is not stated, it appears likely that he

qualified as a “beneficial owner” with more than 10% of the

corporation's stock. 15 U.S.C. § 78pf(a), (b).

including that “indemnity would undermine the

deterrent purpose of the Acts.” Jd, at 728-29

(citations omitted). The court found these concerns

“applicable to indemnification in section 16(b) cases,

even though section 16(b) does not require proof of

fraudulent intent” but did not address’ the

differences among the cases it cited, including the

Second Circuit’s recognition in Globus, supra, that

innocent or merely negligent parties may pursue

fault-based claims. /d., at 729. In light of the “clear

congressional intent to provide a_— catch-all,

prophylactic remedy, not requiring proof of actual

misconduct” the court held that “the public policy

behind section 16(b) renders invalid any attempt by

an insider to seek indemnification for his lability

under section 16(b).” Jd. (citations omitted).4

4 Other lower court decisions addressing indemnification for

16(b) liability have taken a more limited approach, concluding

that the sssuer may not indemnify the insider without

defeating the 16(b) remedy of disgorgement to the issuer. See.

e.g., Bunker Ramo-Eltra Corp. v. Fairchild Industries, Inc. 639

F. Supp. 409, 419 (D. Md. 1986); Schaffer v. CC Invs., LDC, 286

F. Supp. 2d 279, 283 n6 (D.N.Y., 2003); In re XO

Communications, Inc., 330 B.R. 394, 441 (S.D.N.Y. 2005) (“The

court is persuaded that allowing indemnification for [Section]

16(b) violations [by the issuing corporation] would frustrate the

public policy behind the statute because liable parties would

not have to return their short-swing profits to the plaintiff

issuer.”) (quoting from Schaffer but adding the bracketed

language). Bunker-Ramo explained this rationale, in che

context of contractual indemnification by the issuer:

If this indemnification is found to be valid, then the

defendants would have been able to waive, in effect, the

requirement of section 16(b) since they would not have

to return the short-swing profits back to the plaintiff

issuer.

In affirming the Superior Court’s dismissal of

the Jains’ claims for failure to state a claim, the

Court of Appeals relied heavily on first Golden.

(App. B).

The Third and Eleventh Circuits have

considered the issue only in the context of the lower

courts’ issuance of a “settlement bar order” barring

cross-claims for contribution and indemnification

between settling and nonrsettling defendants

accused of federal securities law violations.

The Eleventh Circuit bars settling defendants

from seeking contribution, indemnity or asserting

“interrelated” state law claims against a non-settling

defendant. Jn re U.S. Oi/ & Gas Litigation, 967 F.2d

489 (11 Cir. 1992). In a securities fraud class

action involving the sale of investor advisory services

related to the purchase of federal oil and gas leases,

defendant Pinnacle settled with the plaintiff class

before trial, but wished to preserve its cross-claims

against a non-settling co-defendant, A&A. Jd, at

492. Pinnacle asserted claims for indemnity, fraud,

breach of fiduciary duty, and negligence, alleging

that A&A wrongfully withheld information of the

fraudulent activities. /d. The court issued a

settlement bar order prohibiting Pinnacle from

pursuing its cross-claims, primarily based on policy

considerations favoring settlement of complex class

action cases. /d., at 493. The court found that

independent state law claims, including fraud and

negligence, that are “interrelated” with the

Id., at 419 (emphasis added). Such a result would be a direct

violation of Section 29(a) of the Securities Exchange Act — the

“anti-waiver provision” — because the issuer would not recover

the short-swing profits, as required by 16(b). /d., at 418-19.

indemnification claim and founded on the same facts

may be the subject of a proper settlement bar:

The propriety of the settlement bar

order should turn upon the

interrelatedness of the claims that it

precludes, not upon the labels which

parties attach to those claims. If the

cross‘claims that the district court

seeks to extinguish through the entry of

a bar order arise out of the same facts

as those underlying the ltigation, then

the district court may exercise its

discretion to bar such claims in

reaching a fair and_ equitable

settlement.

Id. at 496. The court did not rule on whether a

settlement bar order could bar “truly independent”

claims. J/d., at 496, n.5; see also AAL High Yield

Bond Fund v. Deloitte & Touche, LLP, 361 F.3d

1305, 1312 (11% Cir. 2004) (‘the [U.S. Oil & Gas]

opinion expressly declined to address the issue of

‘truly independent claim”). In dictum, the court also

noted that “the substantive weakness of Pinnacle’s

indemnity claim supported the entry of the

settlement bar against it” and that

“ijndemnification claims are not cognizable under

the Securities Acts of 1933 and 1934.” Jn re U.S. O1l

& Gas, 964 F.2d at 495 (citation omitted).

In the Third Circuit, while claims for true

indemnification are not permitted as a matter of

federal policy, a party liable under the securities

laws may recover its losses from a party who has

breached independent state law duties to the

claimant. In a securities fraud case involving the

sale of securities at artificially inflated prices,

plaintiffs settled with certain defendants and the

trial court entered an order barring “all claims for

contribution or indemnification however

denominated” by non-settling defendants (including

the underwriter) against settling defendants.

E:chenholtz v. Brennan, 52 F.3d 478, 481 (34 Cir.

1995). Affirming issuance of the “settlement bar”

order, the court stated that claims for

indemnification “run counter to the _ policies

underlying the securities acts”:

The underlying goal of securities

legislation is encouraging diligence and

discouraging negligence in securities

transactions. These goals’ are

accomplished “by exposing issuers and

underwriters to the substantial hazard

of liability for compensatory damages.”

Id., at 484 (citations omitted). The court agreed with

other courts that have held the policy against

indemnification applies even where the _ liability

imposed by the securities laws is predicated on mere

negligence. /d., at 484-85. The court also upheld the

bar order as to any contribution claims, because any

subsequent judgment against the non-settling

defendants would be reduced in proportion to the

settling defendants’ relative culpability: “The

proportionate fault rule is the equivalent of a

contribution claim; the non-settlhng defendants are

only responsible for their portion of the liability.”

Id., at 487. However, because the bar order barred

only claims against settling defendants, the non-

settling underwriter could seek indemnification from

its non-settling co-defendant agent “if it is held

vicariously liable for [its agent’s] conduct.” /d, at

485, n.13. The lower courts in the Third Circuit

similarly have distinguished between barred

indemnification claims and state law claims for

breaches of independent duties.®

The First, Fifth, and Eighth Circuits each

have acknowledged, in aicta, the other Circuits’

treatment of the issue. See Happ v. Corning, Inc.,

466 F.3d 41, 44 (1st Cir. 2006) (recognizing view in

“some circuits” that “federal law—although only by

implication—forbids indemnification for federal

regulatory violations like insider trading”) (citing

First Golden, Globus, and Raychem, supra); Stowell

v. Ted S. Finkel Investment Services, 641 F.2d 323,

325 (5th Cir. 1981) (indemnification tends to

frustrate the policy of securities legislation.”) (citing

Heizer, supra); Professional Beauty Supply, Inc. v.

National Beauty Supply, Inc., 594 F.2d 1179, 1186

(8th Cir. 1979) (noting, in antitrust case, that “the

sound reasoning of the security cases which deny

indemnity to tortfeasors who have committed a

5 See, e.g., In re Cendant Corp. Sec. Litig., 139 F. Supp. 2d 585,

595 (D.N.J. 2001):

merely because Cendant’s tort and contract claims seek

to recover damages that could be recoverable in a state

law indemnity action doles] not convert these claims

into impermissible indemnity claims under the federal

securities laws. Rather, they are independent, non-

indemnity claims that are neither barred nor

preempted by the federal securities laws.

See also In re Sunrise Sec. Litig., 793 F.Supp. 1306, 1321

{E.D.Pa. 1992) (same).

wrong graver than ordinary negligence is equally

applicable here.”) (citations omitted).

II. This Court’s 16(b) Decisions

This Court has never addressed whether, or to

what extent, a statutory insider held strictly lable

under the provisions of 16(b) may attempt to hold

third parties accountable for their role in causing

that liability. This Court has not addressed the

scope of a defendant’s liability under 16(b) since

issuing a set of three decisions in the 1970s. In each

case, the Court ameliorated the harsh effect of the

strict liability provisions of the statute, by

narrowing the circumstances under’ which

lability

would be found.

A. Reliance Electric Co. v. Emerson Electric Co.,

404 U.S. 418, 92 S.Ct. 596, 30 L.Ed.2d 575

(1972)

In Reliance, this Court was asked to

determine whether the owner of more than 10% of a

corporation’s shares could retain some of its “short-

swing’ profits by selling the entirety of its holdings

in two steps — the first designed to reduce its

holdings just below the 10% threshold. Section 16(b)

requires that all “short-swing” profits be disgorged

where the owner held more than 10% “both at the

time of the purchase and sale.” This Court held that

any profits from the second sale were not recoverable

by the corporation even though the transactions

expressly were designed to “avoid” 16(b) liability.

Emerson Electric Co. acquired 13.2% of the

stock of Dodge Manufacturing Co. pursuant to a

tender offer made in an unsuccessful takeover

attempt. Shortly thereafter, Dodge shareholders

approved a merger with Rehance Electric Co.

Emerson thereupon embarked upon a two-step plan

to sell its holdings, designed to avoid the full impact

of 16(b). First, Emerson sold 37,000 shares to a

holding company, reducing its stake in Dodge to

9.96%. Then, two weeks later, it sold the remainder

to Dodge.

Reliance demanded the profits from both

sales, and Emerson filed a lawsuit seeking a

declaration of non-liability. This Court accepted

certiorari to the Court of Appeals for the Eighth

Circuit.

Discussing the history and purpose of 16(b),

this Court recognized that Congress had adopted a

“flat rule” of strict liability designed to remove any

profits from “a class of transactions in which the

possibility of abuse was believed to be intolerably

great.” Jd, at 422. The rule would be applied

mechanically and have “sweeping coverage” so as to

“insure the optimum prophylactic effect”: a

In order to achieve its goals, Congress

chose a relatively arbitrary rule capable

of easy administration. The objective

standard of Scction 16(b) imposes strict

liability upon substantially all

transactions occurring within’ the

statutory time period, regardless of the

intent of the insider or the existence of

actual speculation. This approach

maximized the ability of the rule to

eradicate speculative abuses’ by

reducing difficulties in proof. Such

arbitrary and sweeping coverage was

deemed necessary to insure. the

optimum prophylactic effect.

Id. (quoting Bershad v. McDonough, 428 F.2d 693,

696 (7th Cir. 1970)).

Reliance argued that Emerson’s two sales

should be treated as part of a single transaction and

that Emerson should be treated as having been a

10% owner “at the time of the [second] sale.” The

Court rejected the argument:

To be sure, where _ alternative

constructions of the terms of 16(b) are

possible, those terms are to be given the

construction that best serves’ the

congressional purpose of curbing short-

swing speculation by corporate insiders.

But a construction of the term “at the

time of ... sale” that treats two sales as

one upon proof of a pre-existing intent

by the seller is scarcely in harmony

with the congressional design of

predicating hability upon an “objective

measure of proof.”

Id, at 424-25 (citation omitted). Accordingly, the

Court found that Emerson was not required to

disgorge any profits from the second transaction

because it technically was not a 10% owner at the

time. J/d., at 424-25.

B. Kern County Land Co. v. Occidental

Petroleum Co., 411 U.S. 582, 93 S.Ct. 1736, 36

L.Ed. 503 (1973)

One yeer later, in Kern County, the Court

again limited the reach of 16(b), this time by

narrowly construing the term “sale” as not to include

certain “unorthodox” transactions where there is no

opportunity for “speculative abuse” based on inside

information.

As in Reliance, Kern County involved a failed

takeover attempt. Defendant Occidental became a

“beneficial owner” subject to 16(b) when it acquired

more than 10% of Kern’s stock in a tender offer.

Soon thereafter, Kern and Tennecco signed a merger

agreement that, upon approval by Kern’s

shareholders, would entitle Occidental to exchange

eack share of Kern stock for one share of Tennecco

stock. So as not to become a minority shareholder of

Tennecco, Occidental and Tennecco entered into a

call option contract whereby Tennecco acquired the

right to purchase Occidental’s Tennecco stock

outside the six-month | short-swing period.

Subsequently, Occidental exchanged its Kern shares

and Tennecco exercised its option, resulting in total

profits to Occidental of almost $Z0 million.

Citing its introductory clause, the Court noted

that 16(b) was enacted “for the purpose of preventing

the unfair use of information which may have been

obtained by (a statutory insider) ... by reason of his

relationship to the issuer.” J/d., at 591. Citing the

statute’s legislative history, the Court also noted

that “the bill aimed at protecting the public ‘by

preventing directors, officers, and_ principal

stockholders of a corporation ... from speculating in

the stock on the basis of information not available to

others” Ud., at 592) and reflects “a congressional

effort to curb short-swing trading by insiders whose

position gives them access to iniormation not

available to the investing public and the ability to

influence corporate policy.” J/d., at 592, n. 23.

Although the Court noted that many decisions

have been read to apply an “objective” test under

16(b), “[bly far the greater weight of authority is to

the effect that a “pragmatic” approach to 16(b) will

best serve the statutory goals.” Jd., at 594, n.26.

The Court recognized that Occidental “knew it

could sell its stock to the target company’s merger

partner at a substantial profit” if its own takeover

attempt was unsuccessful. Jd., at 597. But this was

not the type of speculation 16(b) was designed to

prevent. Ult:mately, the Court found that any

“sales” by Occidental were essentially “involuntary”

and, due to the hostile nature of the takeover bid,

not based on inside information:

[Thhe involuntary nature of Occidental’s

exchange, when coupled with the

absence of the possibility of speculative

abuse of inside information, convinces

us that 16(b) should not apply to

transactions such as this one.

Id., ac 600. Similarly, because the “call” option

contract afforded the buyer — Tennecco — the mght,

in its discretion, to purchase the Kern shares, there

was no possibility of “speculative abuse” because

Occidental would not benefit from a rising market.

Id., at 602.

C. Foremost-McKeeson, Inc. v. Provident

Securities Co., 423 U.S. 232, 96 S.Ct. 508, 46

L.Ed.2d 464 (1976).

In Foremost, the Court continued to narrow

the circumstances in which a statutory insider may

be found liable under 16(b). As in Re/Yance Electric,

where the Court found a “beneficial owner” must

own more than 10% immediately prior to any sale

subject to 16(b), in Foremost, the Court created

symmetry by holding that the owner must. have

owned more than 10% immediately prior to any

purchase subject to 16(b).

Provident Securities Co. sold its assets to

Foremost in exchange for cash and debentures

immediately convertible into more than 10% of

Foremost stock. J/d., at 236. The next day, the

parties entered into an underwriting agreement with

a third party, pursuant to which Provident sold a

substantial amount of the debentures to an

underwriter for shghtly more than face value.

Provident then sued for a declaration that it was not

liable to Foremost for any profits on the sale of the

debentures.

Provident argued that it fell within the

“exemptive provision” of 16(b) -exempting

transactions “where such beneficial owner was not

such both at the time of the purchase and sale” —

because it was not a 10% owner of Foremost stock at

the time it initially acquired the debentures. /d.,

239. The Court of Appeals agreed: “Congress

intended to reach only those beneficial owners who

both bought and sold on the basis of inside

information, which was available to them only after

they became statutory ‘insiders.” Jd., at 242-43.

While Foremost acknowledged the ambiguity

of the “exemptive provision,” it argued that “where

‘alternative constructions’ of 16(b)’s terms are

available, [courts] should choose the construction

that best serves the statute’s purposes” relying on

Reliance Electric and Kern County. However, the

Court rejected the argument:

In neither of those cases, however, did

the Court adopt tne construction that

would have imposed liability, thus

recognizing that serving the

congressional purpose does not require

resolving every ambiguity in favor of

liability under 16(b).

Id., at 252.

III. Claims to Apportion Damages for Violations of

the Federal Securities Laws Based on

FaultShould Be Treated Uniformly

While this Court never has had occasion to

address whether state law claims may be barred as

“indemnity” or “de facto” indemnity claims for

securities law liability, it came closest to doing so in

Musick, Peeler & Garrett v. Employers Ins. of

Wausau, 508 U.S. 286, 113 S. Ct. 2085, 124 L. Ed. 2d

194 (1993). There, the Court concluded that there

was an implied right of contribution under § 10(b) of

the 1934 Act and SEC Rule 10b-5. In reaching its

decision, the Court determined that, even where the

claimant was adjudged liable for intentional

wrongdoing, the right to contribution was not at

odds with any policy underlying or expressed in the

1934 Act. /d., at 298.

Two years later, Congress passed the Private

Securities Litigation Reform Act of 1995 (“PSLRA”),

codifying an express right to contribution. 15 U.S.C.

§ 78u-4((8). The legislative history of the PSLRA

explains the rationale behind contribution in cases

involving the federal securities laws:

One of the most manifestly unfair

aspects of the current system of

securities litigation is its imposition of

liability on one party for injury actually

caused by another....

The current system of joint and several

liability creates coercive pressure for

entirely innocent parties to settle

meritless claims rather than _ risk

exposing themselves to liability for a

grossly disproportionate share of the

damages in the case.

H.R. Conf. Rep. No. 104-369 (1995), reprinted in

1995 U.S.C.C.A.N. 730, 736-37.

The Jains cannot claim contribution in this

action because 16(b) liability extends only to the

insider whose purchases and sales occur within six

months of each other. “Contribution” arises only

where there is joint liability. Parties who caused

short-swing transactions, for which the Jains were

held strictly hable, are not liable to the issuer under

16(b). The relief sought by the Jains in this action,

however, is conceptually and substantively similar to

the contribution rights recognized by this Court in

Musick, Peeler and determined by this Court to be

consistent with the policy underlying the 1934 Act.

It also is consistent with the policies embodicd in the

PSLRA.

Fault-based claims for damages arising from

16(b) liability should not be barred under federal law

unless doing so would defeat 16(b)’s deterrent

policies, including its prescription of a “flat rule”

designed for “mechanical application.” Liability

under 16(b) does not imply wrongdoing or even

fault—it is “strict.” The purpose of the statute is to

make short-swing trades pointless—z.e., by assuring

that the insider must disgorge any profit to the

issuing corporation. For this reason, contractual

indemnity by the issuer has been properly held to be

inconsistent with federal law (and 16(b)).6 Such

indemnity would defeat the disgorgement policy that

is central to deterrence.

Where the insider has paid the issuer but

seeks to recover all or part of the loss because the

trades arose from the negligence of securities

professionals, allowing recovery is not inconsistent

with 16(b)’s policies. First, the statute’s mechanical

application has produced the intended result: the

insider has paid any profit over to the issuer.

Second, the deterrent effect of 16(b) has been

achieved: the insider retains no profits, but only the

right to establish that others were at fault in

6 Seen.4, supra.

creating the conditions that gave rise to liability. As

in the case of classic “contribution,” one cannot be

“deterred” from being the victim of others’ mistakes.

This case starkly presents the central

question on which the Circuits differ: Can securities

professionals escape responsibility for negligence on

public policy grounds where the objectives of the

securities statute under which their client's loss

occurred were satisfied? The Jains have disgorged

their “profits” via the settlement. Section 16(b)’s

deterrent policy —including its mechanical

application approach to liability—has been achieved.

No policy of 16(b) outweighs the clear policy of the

securities laws to deter negligence, and encourage

prudence, by professionals who handle securities

transactions for their clients and author the

prospectuses on which investments are based. No

“anti-indemnity” policy should bar the Jains from

allocating their losses to those whose negligence

caused them.

By contrast, an “anti-indemnity” policy limited

to cases where a securities law violator secks

damages allocable to its own negligence or

wrongdoing serves the same federal goal as allowing

fault-based claims: encouraging prudence and

probity.

The Second, Third and Seventh Circuits

appear to have struck the appropriate balance,

allowing claims that allocate losses according to

fault. The Tenth and Eleventh Circuit do not permit

such claims. The result in the remaining Circuits is

less clear.

This thicket of contradictory approaches

across the Circuits creates many routes for negligent

securities professionals to escape responsibility for

the damage they have caused. Like the Jains, the

clients of such professionals are left in the lurch

when no sound reason exists for the federal courts to

sponsor such a result.

CONCLUSION

For the foregoing reasons, Naveen and

Anuradha Jain respectfully request that the Court

grant their Petition for Writ of Certiorart.

DATED this 30 day of December, 2008.

DANIELSON HARRIGAN LEYH &

TOLLEFSON LLP

By: /s/ Arthur W. Harrigan, Jr.

Arthur W. Harrigan, Jr.

Counsel of Record

WSBA #1751

Timothy G. Leyh,

WSBA #14853

Christopher T. Wion

WSBA #33207

Robert B. Gould

LAW OFFICES

2110 North Pacific Street, Suite 100

Seattle, Washington 98103

Attorneys for Petitioners Naveen Jain

and Anuradha Jain

APPENDIX A

THE SUPREME COURT OF WASHINGTON

NAVEEN JAIN and ANURADHA ) NO. 81388-4

JAIN, husband and wife, and their )

Marital community, ) ORDER

)

Petitioners, ) C/A NO.

) 59661-6-I1

Vv. )

)

J.P. MORGAN SECURITIES, INC., )

A Delaware corporation, as successor )

In interest to Hambrecht & Quist LLC;)

WILSON SONSINI GOODRICH & )

ROSATI, P.C., a California professional )

Corporation; and PERKINS COIE LLP,)

PERKINS COIE, LLP,

Respondents.

)

Respondents. )

ean nod )

NAVEEN JAIN and ANURADHA )

JAIN, )

Petitioners )

v. )

)

Department I of the Court, composed of Chief

Justice Alexander and Justices C. Johnson, Sanders,

Owens and J. Johnson, at its October 1, 2008,

Motion Calendar, considered whether review should

be granted pursuant to RAP 13.4(b), and

unanimously agreed that the following order be

entered.

A:l

Page 2

81388-4

IT IS ORDERED:

That the Petition for Review is denied. The

Respondents’ joint motion to strike the reply to

answer is granted.

DATED at Olympia, Washington this 1° day

of October, 2008.

For the Court

/s/ Gerry L. Alexander

CHIEF JUSTICE

APPENDIX B

Court of Appeals of Washington, Division 1.

Naveen JAIN and Anuradha Jain, husband and

wife, and their marital community, Appel-

lants/Cross:-Respondents,

J.P. MORGAN SECURITIES, INC., a Delaware cor-

poration, as successor in interest to Hambrecht &

Quist LLC; Wilson Sonsini Goodrich & Rosati, P.C.,

a California professional corporation, Respondents,

Perkins Coie LLP, Respondent/Cross-Appellant.

No. 59661-6-I.

Jan. 14, 2008.

Reconsideration Denied Feb. 12, 2008.

Background: After settling shareholder suit for al-

leged “short-swing” trading, former corporate direc:

tor brought action against brokerage and law firms

for negligence, breach of fiduciary duty, legal mal-

practice, and equitable indemnity. Defendants re-

moved to federal court. The United States District

Court for the Western District of Washington, 2004

WL _212999,Pechman, J., remanded. The Superior

Court, King County, Richard A Jones, J., dismissed.

Director appealed.

Holdings: The Court of Appeals, Baker, J., held

that:

(1) claims were de facto indemnity claims barred un-

der federal securities law, and

(2) director did not qualify under “ABC rule” to re-

cover attorney fees.

Affirmed.

A-3

Appelwick, C.J., filed concurring opinion.

**118 Arthur Washington Harrigan Jr., Timothy

George Leyh, Katherine See Kennedy, Randall Thor

Thomsen, Danielson Harrigan Leyh & Tollefson

LLP, Larry Steven Gangnes, John R. Neeleman,

Theodore Alexander Sheffield, Lane Powell PC, Ro-

bert B. Gould, Attorney at Law, Seattle, WA, for Ap-

pellants/Cross-Respondents.

Brian Corker Free, Michael Ramsey Scott, Hillis

Clark Martin & Peterson, PS, John D. Pernick, Da-

vid M. Balabanian, Bingham McCutcheon LLP, San

Francisco, CA, Gregory J. Hollon, Barbara Himes

Schuknecht, Robert M. Sulkin, McNaul Ebel Nawrot

& Helgren, Seattle, WA, for Respondents.

Bradley S. Keller, Keith David Petrak, Attorney at

Law, Howard Mark Goodfriend, Edwards Sieh Smith

& Goodfriend PS, Seattle, WA, for Respon-

dent/Cross-Appellant.

BAKER, J.

*577 Y 1 The Jains were found by a federal district

court to have violated section 16(b) of the Securities

Exchange Act of 1934.! The case was settled pend-

ing appeal. The Jains then brought state tort claims

against a brokerage**119 and two law firms in-

volved in the securities case. The superior court dis-

missed those claims, finding that they constituted de

facto indemnity claims barred under federal securi-

ties law. We affirm.

{| 2 Naveen Jain founded InfoSpace, Inc. in 1996,

and served as an officer and director of the company

until 2002. In 1998, InfoSpace went public, and sold

' Codified at 15 U.S.C.A. § 78p.(b).

A-4

five million shares of common stock. The lead un-

derwriter of the initial public offering (IPO) was

Hambrecht and Quist (subsequently acquired by

respondent J.P. Morgan (Morgan)). InfoSpace was

represented by respondent Perkins Coie LLP (Per-

kins). Respondent Wilson Sonsini Goodrich & Rosati,

P.C. (Wilson) served as Morgan's counsel.

*578 4 3 For the benefit of their children, Jain and

his wife Anuradha established three trusts for which

Jain's brother served as trustee. Two of the trusts

were initially funded with two million shares of In-

foSpace stock, and the third purchased one million

shares of InfoSpace stock from the Jains.

4 4 As InfoSpace was preparing for its IPO in late

1998, Jain executed an indemnification agreement

with InfoSpace, agreeing to place one million shares

of InfoSpace stock into an escrow account. Jain

signed a registration statement and prospectus sent

to the Securities and Exchange Commission (SEC).

The prospectus included a footnote disclosing the in-

demnity agreement, stating that Jain had placed one

million shares held by one of the trusts into escrow,

and indicating that Jain retained voting control over

the shares. According to the -lains, no escrow account

was ever actually created. Nevertheless, over the

next year, Jain signed, or authorized his attorney to

sign, numerous SEC filings representing that he had

placed the trust shares in escrow.

4 5 In 1999, InfoSpace stock split two-for-one, and

Jain, like other shareholders, was issued new share

certificates. Two of the trusts were entitled to nearly

one million shares, and the third to 500,000 shares.

After the Jains mistakenly sent the trust shares to

Morgan, Morgan deposited them into the Jains' per-

sonal account. The alleged mis-deposits into the

Jains' personal account were subsequently rectified,

and the shares transferred to the appropriate trusts.

The Jains claim not to have read their brokerage

statements, and were thus initially unaware of the

mis-deposits.

$1 6 In 2001, an InfoSpace shareholder, Thomas

Dreiling, filed suit in United States District Court,

naming the Jains as defendants for engaging in

“short-swing” trading in violation of section 16(b) of

the Securities Exchange Act of 1934.

{| 7 Dreiling alleged that the Jains engaged in four

purchases that subjected them to lability for short-

swing trades. He contended that the escrow set up

under the *579 indemnity agreement constituted an

unlawful transfer of shares from one of the trusts to

Jain, triggering liability for short-swing trades. The

other alleged purchases occurred at the time the In-

foSpace stock split and shares intended for the trusts

were deposited instead in the Jains’ personal bro-

kerage account. It was undisputed that the Jains

sold InfoSpace shares within six months of the al-

leged purchases.

4 8 The district court ruled that the transferred

shares were purchases for purposes of determining

whether short-swing trades had occurred, and

granted Dreiling summary judgment. The court en-

tered judgment against the Jains, ordering that the

putative profits realized from the sales be disgorged

to InfoSpace as required under section 16fb). The

court also ordered payment of prejudgment interest.

A-6

‘| 9 The Jains appealed. Pending the appeal, they ob-

tained a supersedeas bond, and the district court

stayed execution of the judgment. The SEC inter-

ceded on the Jains' behalf and filed an amicus brief

in support of their appeal. Before the appeal was

heard, however, the Jains entered into a global sci-

tlement with Dreiling, InfoSpace, and various insur-

ers.

| 10 The Jains then filed suit against the respon-

dents in superior court, alleging, inter alia, negli-

gence, breach of fiduciary duty, legal malpractice,

and equitable indemnity. They sought reimburse-

ment by the respondents**120 for the costs and

damages resulting from the judgment and settle-

ment in the 16(b) suit, including attorney fees and

litigation costs, as well as the loss of appreciation

and other opportunity costs to their investment port-

folios alleged to have resulted from obtaining the su-

persedeas bond. The Jains alleged various irregular-

ities regarding the escrow account, the footnote in

the SEC prospectus regarding the escrow account,

the mis-deposit of split stock shares into their per-

sonal account rather than the trust account, and

numerous claims of legal malpractice by Perkins in

its representation of the Jains in the federal 16(b)

sult.

*580 4 11 The court dismissed the Jains' com-

plaints. The Jains now appeal.

(1j[2] § 12 A trial court's ruling to dismiss a claim

under CR 12(b)(6) is reviewed de novo.2 Dismissal

is warranted only if the court concludes, beyond a

reasonable doubt, the plaintiff cannot prove any set

of facts which would justify recovery. The court

presumes al! facts alleged in the plaintiff's complaint

are true.4 The court is not, however, required to ac-

cept the complaint's legal conclusions as true. A

motion to dismiss is granted sparingly and with care

and, as a practical matter, only where it appears on

the face of the complaint that there is some insuper-

able bar to relief.6 Here, section 16(b) and the Wash-

ington State “ABC rule” governing attorney fees bar

the Jains' claims.

De Facto Indemuitication

4 13 Section 16(b) of the Securities Exchange Act is

designed to deter transactions which have a high po-

tential for fraud.? The section prohibits corporate

insiders from buying and selling their company's

stock within a six-month period.’ Profits resulting

from purchase-and-sale, or sale-and-repurchase

transactions within a period of less than six months

are commonly known as “short-swing” transactions.

2 Tenore v. AT & T Wireless Servus., 136 Wash.2d 322, 329-30,

962 P.2d 104 (1998).

3 Tenore, 136 Wash.2d at 330, 962 P.2d 104.

4 Tenore, 136 Wash.2d at 330, 962 P.2d 104.

5 Haberman v. Wash. Pub. Power Supply Sys., 109 Wash.2d

107, 120, 744 P.2d 1032, 750 P.2d 254 (1987).

6 Kinney v. Cook, 159 Wash.2d 837, 842, 154 P.3d 206 (2007)

(quoting Hoffer v. State, 110 Wash.2d 415, 420, 755 P.2d 781

(1988)).

? First Golden Bancorporation v. Weiszmann, 942 F.2d 726, 729

(10th Cire.1991).

815 U.S.C.A. § 78p.(b).

9 Roth v. Jennings, 489 F.3d 499, 507 (2d Cir.2007).

A-8

*581 4 14 Congress recognized that insiders may

have access to information about their corporations

not available to the rest of the investing public.!°

By trading on this information, insiders could reap

profits at the expense of less well informed inves-

tors.!1 Congress sought to curb insider trading by

enacting a strict rule requiring any insider who vi-

olates section 16(b) to return to the company any

profits they might gain.!2

4 15 Where the possibility of abuse is so intolerably

great, Congress deemed such a strict rule to be the

only effective method of curbing the evils of insider

trading, and considered the rule's arbitrary and

sweeping coverage necessary to insure the optimum

prophylactic effect.14

[8] § 16 Unlike other provisions of the securities

laws, section 16(b) is a strict lability provision

where questions of intent or scienter are irrelevant.!4

This approach maximizes the ability of the rule to

eradicate speculative abuses by reducing difficulties

in **121 proof. The thrust of the statutory scheme

thus places responsibility for meticulous observance

of the provision squarely on the shoulders of the in-

sider alone.!5 The insider is deemed capable of

structuring his or her dealings to avoid any possibili-

10 Foremost-McKesson, Inc. v. Provident Sec. Co., 423 U.S. 232,

243, 96S.Ct. 508, 46 L.Ed.2d 464 (1976).

1! Foremost-McKesson, 423 U.S. at 243, 96 S.Ct. 508.

1215 U.S.C.A. § 78p.(b).

13 Reliance Elec. Co. v. Emerson Elec. Co., 404 U.S. 418, 422, 92

S.Ct. 596, 30 L.Ed.2d 575 (1972) (quoting Bershad v. McDo-

nough, 428 F.2d 693, 696 (7th Cir.1970)).

3 Deephaven Capital Mgmt., LLC v. Schnell, No. 06-844, 2007

WL 38911, 2007 U.S. Dist. LEXIS 1504, at *8 (Jan. 5, 2007)

18 Bershad v. McDonough, 428 F.2d 693, 696 (7th Cir.1970).

A-9

ty of taint, and therefore must bear the risks of any

inadvertent miscalculation. !®

{| 17 Congress recognized from the outset that sec-

tion 16(b) might impose liability on some innocent

insiders whose *582 short-swing transactions were

wholly inadvertent.'? Nevertheless, while the re-

sults may be harsh in individual cases, this arbitrary

rule is necessary to attain the goal set forth in the

statute. 18

[4] 7 18 It is well settled that an insider found to

have violated section 16(b) may not seek indemnifi-

cation for the ensuing liability.19 This is to prevent

an insider from effectively waiving the requirement

that short-swing profits be returned, thus frustrat-

ing the policy behind section 16(b).2°

[5] 4 19 In addition to barring direct indemnity, the

courts also bar de facto indemnification.?! To the ex-

tent that a plaintiff's state actions are found to be de

facto claims for indemnification, they are

preempted.22 Claims integrally related to securities

16 Bershad, 428 F.2d at 696.

17 Peter J. Romeo & Alan L. Dyce, Section 16 Deskbook 365

(2007).

18 Petteys v. Butler, 367 F.2d 528, 532 (8th Cir.1966).

19 See First Golden Bancorporation, 942 F.2d at 728-29;

Bunker Ramo-Eltra Corp. v. Fairchild Indus., Inc., 639 F.Supp.

409, 418-19 (D.Md.1986).

20 Schaffer ex rel. Lasersight, Inc. v. CC Inus., LDC, 286

F Supp.2d 279, 283 (2003); Bunker Ramo-Elitra Corp., 639

F.Supp. at 419.

21 Lucas v. Hackett Assocs., Inc., 18 F.Supp.2d 531, 536

(E.D.Pa.1998); Baker, Watts & Co. v. Miles & Stockbridge, 876

F.2d 1101, 1108 (4th Cir.1989).

22 Baker, Watts, 876 F.2d at 1108.

A-10

claims that have been settled are likewise preempted

by federal securities laws.?3

{| 20 The Jains argue that their state law claims are

legaily distinguishable, fault-based claims approved

by federal securities law, and are not merely de facto

indemnity claims. They further argue that barring

their state tort claims will serve to shield brokers

and law firms from negligence and breach of duty

claims.

{ 21 The respondents insist that section 16(b) serves

as a categorical bar on recovery, and that the Jains'

state tort actions can be viewed only as de facto in-

demnity claims.

{| 22 Those courts which have dealt with indemnifi-

cation under section 16(b) have reached a harsh and

restrictive *583 conclusion. Given that section 16(b)

is a strict liability provision, any claim which is co-

lorable as indemnity or de facto indemnity is barred.

4] 23 For guidance on distinguishing de facto indem-

nification from separate tort claims, we turn to First

Golden Bancorporation v. Weiszmann.”4

| 24 First Golden Bancorporation sued Weiszmann

for recovery of profits he made through short-swing

trades in violation of section 16(b).25 Weiszmann, in

turn, brought third party claims against Morgan

Stanley, which had acted as Weiszmann's financial

advisor during the course of the section 16(b) viola-

23 In re Cendant Corp. Sec. Litig., 139 F. Supp.2d 585, 596

(D.N.J.2001).

24 942 F.2d 726 (10th Cir.1991).

25 First Golden, 942 F.2d at 728.

A-11

tion, and against the purchaser of the stock.26 He

claimed indemnity, as well as a number of state tort

claims including outrageous conduct, breach of con-

tract, fraud, and negligent representation.27 He

sought indemnification for any liability to First Gol-

den, reimbursement of attorney fees and costs, and

recovery of commissions and profit realized by Mor-

gan Stanley from the sale of the stock.28

**122 4 25 The court upheld the dismissal of

Weiszmann's indemnity claim, noting that sich in-

demnity contravened the public policy enunciated by

the federal securities laws.29 While Congress felt

that the imposition of strict liability was the most

effective way to deter fraud, the imposition of strict

hability did not minimize the purpose of preventing

fraudulent trading based upon insider information

or manipulation.*°

{| 26 The court then proceeded to analyze Weisz:

mann's remaining claims to determine whether they

constituted de *584 facto indemnification, stating

that to the extent that they were disguised indemni-

ty claims, they could not stand.?! The court drew a

distinction between profits which would rightly be

disgorged to First Golden, and those which arose

separately.32 Thus, for instance, Weiszmann might

properly seek the return of Morgan's commissions

and profits from the sale of First Golden stock.

26 First Golden, 942 F.2d at 728.

27 First Golden, 942 F.2d at 728.

28 First Golden, 942 F.2d at 728.

29 First Golden, 942 F.2d at 728.

30 First Golden, 942 F.2d at 729.

31 First Golden, 942 F.2d at 731-32.

32 First Golden, 942 F.2d at 731.

A-12

We note that the $112,260 sum at issue in these re-

maining claims is not part of First Golden's claims

against Weiszmann because the profit made by the

third-party defendants is clearly not profit inuring to

Weiszmann through his sale of First Golden stock.

Therefore, because First Golden never had a right to

this $112,260, Weiszmann may be able to character-

ize this portion of his third-party claims as non-

indemnity claims.33

4] 27 The court held that the profits and commissions

the third parties earned off the sale of Weiszmann's

stock were clearly not recoverable by First Golden in

its original section 16(b) action, and to that extent

Weiszmann's claims may not have been de facto in-

demnity claims.*4

4] 28 The court then remanded to the district court to

review the claims and determine whether and to

what extent they sought relief other than indemnifi-

cation.*°> The court instructed the district court that

to the extent any of the claims were indemnification

claims for lability that Weiszmann incurred under

section 16(b), they should be dismissed with preju-

dice .36 .

4] 29 The First Golden court's analysis is reinforced

by the recent holding in *585Deephaven Capital

Memt., LLC v. Schnell37 Deephaven sued Schnell,

one of its portfolio managers, alleging that Schnell's

33 First Golden, 942 F.2d at 731.

34 First Golden, 942 F.2d at 732.

35 First Golden, 942 F.2d at 732.

36 First Golden, 942 F.2d at 732.

37 No. 06-844, 2007 WL 38911, 2007 U.S. Dist. LEXIS 1504

(Jan. 5.2007).

A-13

trading activities on behalf of funds he managed

caused the funds to violate section 16(b).38 The court

held that any indemnity for section 16(b) violations

would undermine the deterrent purpose of the sec-

tion by allowing a wrongdoer to recoup its disgorged

profits. It concluded that Deephaven was not en-

titled to seek reimbursement for short-swing profits

it disgorged, even when the losses resulted from al-

legedly rogue trades by one of its own managers.*9

{| 30 The First Golden court remarked that strict lia-

bility did not minimize the purpose behind the secur-

ities statute.4° If anything, that understates the

case. Section 16(b) is draconian. By imposing strict

liability, Congress has given notice to insiders that

they should exercise great vigilance in the disposi-

tion of their shares. The necessity of protecting in-

vestors is no less compelling today than it was when

Congress wrote the securities act. To allow indemni-

fication or de facto indemnification by an insider

would run **123 counter to the public policy behind

section 16(b).

4 31 The first Golden court's analysis of de facto in-

demnity is persuasive. Under its holding, to whatev-

er extent funds recovered under a state tort claim

are comparable to the funds disgorged under section

16(b), they must be barred as de facto indemnifica-

tion.

38 Deephaven, 2007 WI. 38911, 2007 US. Dist. LEXIS 1504, at

*1-3.

39 Deephaven, 2007 WL 38911, 2007 U.S. Dist. LEXIS 1504, at

*8-10.; Peter J. Romeo & Alan L. Dye, Section 16 Deskbook 371

(2007).

40 First Golden, 942 F.2d at 729.

A-14

[6] ¢ 32 The Jains listed equitable indemnity as one

of their causes of action. They seek reimbursement

by the respondents for the costs and damages result-

ing from the judgment and settlement in the 16(b)

suit, the attorney fees they expended in defending

the section 16(b) action, and the investment losses

they claim to have suffered in connection *586 with

the bonding requirements for their appeal of the sec-

tion 16(b) action.

4] 33 The Jains' request for equitable indemnification

reinforces the respondents’ contention that the Jains'

claims are merely requests for de facto indemnifica-

tion in a different guise.

4] 34 The Jains argue that dismissal of their state

tort claims might shield securities professionals from

the consequences of their negligence and malprac-

tice. Certainly the state has a strong interest in en-

forcing its tort laws. Brokers, financial advisors, and

lawyers should be answerable in state court for

harms they have caused their clients. But, to the ex-

tent that state claims constitute any form of indem-

nification, the strict liability provisions of section

16(b) would be fatally undermined were insiders able

to pursue those claims, however named, against

third parties. To permit such claims to proceed

would essentially make the insiders whole again, as

if they had not been obliged to disgorge their profits

in the first place.

4] 35 The Supreme Court made clear that section

16(b)'s arbitrary and sweeping coverage was deemed

necessary to insure the optimum prophylactic ef-

fect.41 Only by exercising uncompromising rigidity

can the courts maintain the prophylactic standard of

beh vior imposed by section 16(b).42

4| 36 The Jains' argument that the state has an in-

terest in allowing their claims to proceed under sep-

arate and distinct legal theories must ultimatcly

give way to the bright line, strict liability provisions

of section 16(b). We hold that because they seek re-

covery of the profits they were required to disgorge

to InfoSpace, the Jains' claims constitute de facto in-

demnification and present an insuperable bar to re-

lief. To the extent the Jains raise other claims, *587

they are governed by state law. Because we hold the

Jains' claims are barred, we do not address Perkins's

cross-appeal.

The ABC rule

{7] 4 37 In addition to being barred as de facto in-

demnity, the Jains' claims also fail to satisfy the re-

quirements of Washington's “ABC rule.”

[8] 4] 38 The general rule in Washington is that at-

torney fees are not awarded unless permitted by con-

tract, statute, or in specific equitable circums-

tances.43 One such equitable exception is the so-

called “ABC rule,” which allows an award of attorney

fees as consequential damages.*4

41 Reliance, 404 U.S. at 422, 92 S.Ct. 596 (quoting Bershad, 428

F.2d at 696).

42 Volk v. Zlotoff, 285 F.Supp. 650, 656 (D.C.N.Y.1968) (quoting

Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545 (1928)).

43 Morgan v. Roller, 58 Wash.App. 728, 730, 794 P.2d 1313

(1990).

44 Manning v. Loidhamer, 13 Wash.App. 766, 769, 538 P.2d

A-16

{| 39 However, we have consistently held that a par-

ty may not recover attorney fees or costs of litigation

under the theory of equitable indemnity if, in addi-

tion to the wrongful act or omission of A, there are

other reasons why B became involved in litigation

with C.45 “[T]he critical inquiry under the causation

element of equitable indemnity is whether, apart

from A's actions, B's own conduct caused it to be ‘ex-

posed’ or ‘involved’ in litigation with C."46

**124 4 40 The Jains were not blameless in the

transactions giving rise to their liability. The district

court laid out how the Jains' own actions caused

them to run afoul of section 16(b):

The Jains signed papers allowing transfer of

funds from the [trusts]. The Jains caused de-

posits of trust stock into their personal bro-

kerage accounts by forwarding stock certifi-

cates to their personal broker. Mr. Jain

promised to place shares of the ... trust into

escrow to fulfill a personal obligation. The

fact that the Jains failed to read their bro-

kerage statements, simply signed legal doc-

uments without knowing what they were,

and *588 mistakenly sent certificates to their

personal broker does not make their actions

involuntary.... [T]he Jains participated in the

transfers and retained more than a degree of

contro] over the transactions. Without the

participation of the Jains, the transfers

would not have happened.

136, 86 Wash.2d 1001 (1975).

45 Tradewell Group, Inc. v. Mavis, 71 Wash.App. 120, 126, 857

P.2d 1053 (1993).

46 Tradewell Group, 71 Wash.App. at 129, 857 P.2d 1053.

A717

§| 41 We hold that the Jains' own conduct caused

them to be involved in the litigation and, therefore,

under the ABC rule they may not recover fees or liti-

gation costs.

§| 42 The superior court's grant of the respondents’

motions to dismiss is affirmed.

{ 43 AFFIRMED.

I CONCUR: COLEMAN, J. Pro Tem.APPELWICK,

C.J. (concurring).

§| 44 I concur in the reasoning and result reached by

the majority. The majority opinion tacitly acknowl-

edges the Jain's claims for attorney fees were not ex:

tinguished by section 16(b)

4, 45 1 would however explicitly hold that section

16(b) of the Securities Exchange Act of 1934 E%2 is

not a bar to malpractice claims under state tort law.

Rather the act limits the relief available under those

claims by precluding indemnification for profits dis-

gorged for violation of the act. The unavailability of

indemnity will be dispositive of claims in some cases,

but not necessarily all.

FN1. Codified at 15 U.S.C.A. § 78p.(b).

Wash.App. Div. 1,2008.

Jain v. J.P. Morgan Securities, Inc.

142 Wash.App. 574, 177 P.3d 117

END OF DOCUMENT

A-18

APPENDIX C

HONORABLE RICHARD JONES

IN THE SUPERIOR COURT OF WASHINGTON

FOR KING COUNTY

NAVEEN JAIN and

ANURADHA JAIN,

Plaintiffs,

VS.

J.P. MORGAN

SECURITIES, INC., a

Delaware corporation, as

successor in interest to

Hambrecht & Quist LLC;

and WILSON SONSINI

GOODRICH & ROSATI, a

California professional

corporation,

Defendants.

NAVEEN JAIN and

ANURADHA JAIN,

Plaintiffs, |

vs.

PERKINS COIE LLP,

Defendant. |

CONSOLIDATED

NO. 03-2-32427-2 SEA

[Consolidated with 03-2-

34789-2 SEA and 04-2-

1655-0 SEA)

ORDER GRANTING

DEFENDANT J.P.

MORGAN SECURITIES,

INC.'S MOTION TO

DISMISS

A-19

Before this Court is Defendant J.P. Morgan

Securities, Inc.'s Motion to Dismiss. In connection

with this motion, the Court has reviewed the

following materials:

:. Defendant J.P. Morgan Securities,

Inc.'s Motion to Dismiss;

2. Defendant J.P. Morgan Securities,

Inc.'s Request for Judicial Notice in Support of

Defendant J.P. Morgan Securities, Inc.'s Motion to

Dismiss;

3. Consolidated Opposition of Naveen and

Anuradha Jain to Motions to Dismiss by Wilson

Sonsini Goodrich and Rosati, P.C. and J.P. Morgan

Securities, Inc.;

4, The Declaration of Timothy Leyh In

Support of the Consolidated Opposition of Naveen

and Anuradha Jain to Motions to Dismiss by Wilson

Sonsini Goodrich and Rosati, P.C. and J.P. Morgan

Securities, Inc.;

>. Defendant J.P. Morgan Securities,

Inc.'s Reply to Opposition to Motion to Dismiss Third

Amended Complaint;

6. Defendant J.P. Morgan Securities,

Inc.'s Request for Judicial Notice in Support of

Defendart J.P. Morgan Securities, Inc.'s Reply to

Opposition to Motion to Dismiss Third Amended

Complaint;

‘2 Non-Washington Authorities cited in

Defendant J.P. Morgan Securities, Inc.'s Reply to

Opposition to Motion to Dismiss Third Amended

Complaint.

The Court has also reviewed the records and

files herein, including plaintiffs’ Third Amended

Complaint, and has considered the arguments of

counsel at a hearing before this Court on April 28,

2006.

A-20

Being advised in this matter, the Court

hereby finds that the Third Amended Complaint

fails to state a claim upon which relief can be

granted against defendant J.P. Morgan Securities,

Inc. It is hereby ORDERED that defendant J.P.

Morgan Securities, Inc.’s Motion to Dismiss is

GRANTED, and that plaintiffs’ Third Amended

Complaint is dismissed with prejudice.

IT IS SO ORDERED.

DATED this 5t day of May, 2006.

/s/ Richard A. Jones

JUDGE RICHARD JONES

Presented by:

HILLIS CLARK MARTIN & PETERSON PS

By /s/ Michael R. Scott

Michael R. Scott, WSBA #12822

Brian C. Free, WSBA #35788

BINGHAM MCCUTCHEN LLP

David M. Balabanian (admitted pro hac vice)

John D. Pernick (admitted pro hac vice)

3 Embarcadero Center

San Francisco, CA 94111

Telephone: (415) 393-2000

Attorneys tor J.P. Morgan Securities Inc.

Notice of Presentation Waived; Accepted as to Form:

DANIELSON HARRIGAN LEYH &

TOLLEFSON LLP

A-21

By /s/ Michael R. Scott

Arthur W. Harrigan, Jr.. WSBA #1751

for Timothy G. Leyh, WSBA #14583 pursuant to

email authorization

Randall T. Thomsen, WSBA #25310

999 Third Avenue, Suite 4400

Seattle, WA 98104

Telephone: (206) 623-1700

LANE POWELL PC

Larry Ganges, WSBA #8118

John R. Necleman, WSBA #19752

1420 Fifth Avenue, Suite 4100

Seattle, WA 98101-2338

Telephone: (206) 223-7000

LAW OFFICES OF ROBERT B. GOULD

Robert B. Gould, WSBA #4353

2110 North Pacific Street, Suite 100

Seattle, WA 98103-9181

Telephone: (206) 633-4442

Attorneys for Plaintiff

A-22

Hon. Richard A. Jones

SUPERIOR COURT OF WASHINGTON FOR

KING COUNTY

NAVEEN JAIN and

ANURADHA JAIN, Consolidated

No. 03-2-32427-2 SEA

Plaintiffs,

[Consolidated with 03-2-

Vs. 34789-2 SEA and 04-2-

1655-0SEA]

J.P. MORGAN

SECURITIES, INC., a \ORDER GRANTING

Delaware corporation, |WILSON SONSINI'S

as successor in interestIMOTION TO DISMISS

to Hambrecht & Quist [THIRD AMENDED

LLC; and WILSON |COMPLAINT

SONSINI GOODRICH

& ROSATI, a

California professional

corporation,

Defendants.

Pending before this Court is defendant Wilson

Sonsini Goodrich and Rosati’s Motion to Dismiss

Third Amended Complaint. In connection with this

motion, the Court has reviewed the following

materials:

:. Defendant Wilson Sonsini Goodrich and

Rosatis Motion to Dismiss Third Amended

Complaint;

A-23

4 Declaration of Gregory J. Hollon in

Support of Wilson Sonsini Goodrich and Rosati’s

Motion to Dismiss Third Amended Complaint and

Exhibits A-C attached thereto;

3. Consolidated Opposition of Naveen and

Anuradha Jain to Motions to Dismiss by Wilson

Sonsini Goodrich and Rosati, P.C. and J.P. Morgan

Securities, Inc.;

4. Declaration of Timothy G. Leyh in

Support of the Consolidated Opposition of Naveen

and Anuradha Jain to Motions to Dismiss by Wilson

Sonsini Goodrich and Rosati, P.C. and J.P. Morgan

Securities, Inc. and the exhibits attached thereto:

5. Defendant Wilson Sonsini Goodrich and

Rosati's Reply in Support of Opposition to Motion to

Dismiss Third Amended Complaint;

6. Jains Request for Leave to File

Surreply to New Argument in Wilson Sonsini

Goodrich and Rosati’s Reply in Support of Motion;

7. Defendant Wilson Sonsini’s Opposition

to Plaintiff's Request for Leave to File Surreply; and

8. The Jains’ Reply in Support of Request

for Leave to File Surreply to New Argument in

Wilson Sonsini Goodrich and Rosati’s Reply in

Support of Motion and Jains’ Surreply;

9. Wilson Sonsini’s Reply to Surreply.

The Court has also reviewed the records and

files herein, including plaintiffs’ Third Amended

Complaint, and has considered the arguments of

counsel at a hearing before this Court on April 28,

2006.

Being advised in this matter, the Court

hereby finds that the Third Amended Complaint

fails to state a claim upon which relief can be

granted against defendant Wilson Sonsini. It is

hereby ORDERED that defendant Wilson Sonsini

Goodrich and _ Rosati’s Motion to Dismiss _ is

A-24

GRANTED, and that plaintiffs’ Third Amended

Complaint is dismissed with prejudice.

IT IS SO ORDERED.

DATED this 4t day of May, 2006.

/s/ Richard A. Jones

HONORABLE RICHARD JONES

Presented by:

McNAUL EBEL NAWROT & HELGREN PLLC

By /s/ Robert M. Sulkin

Robert M. Sulkin, WSBA #15425

Gregory J. Hollon, WSBA #26311

Attorneys for Defendant Wilson Sonsini Goodrich &

Rosati, P.C.

Approved as to form

/s/ Timothy G. Leyh

A-25

The Honorable Richard Jones

SUPERIOR COURT OF WASHINGTON FOR

KING COUNTY

NAVEEN JAIN and

ANURADHA JAIN,

husband and wife, and

their Maritial

Community,

Plaintiffs,

Vs.

J.P. MORGAN

SECURITIES, INC.,a

Delaware corporation, as

successor 1n interest to

Hambrecht & Quist

LLC, et al,

Defendants.

NAVEEN JAIN and

ANURADHA JAIN,

Plaintiffs,

VS.

PERKINS COIE LLP,

Defendant.

Case No. 03-2°32427-°2 SEA

[Consolidated with 03-2-

34789-2 SEA and 04-2-1655-

0 SEA]

ORDER GRANTING

PERKINS COIE’S MOTION

TO DISMISS PLAINTIFFS’

SECOND AMENDED

COMPLAINT AND

DENYING PLAINTIFFS’

MOTION FOR PARTIAL

SUMMARY JUDGMENT

A-26

This matter came for hearing on the motion of

Perkins Coie LLP ("Perkins”) to dismiss the Second

Amended Complaint filed against it by plaintiffs

Naveen and Anuradha Jain ("Plaintiffs"), and

Plaintiffs’ Motion for Partial Summary Judgment

Striking Perkins Coie’s Affirmative Defense of

Federal Preemption With Respect to Plaintiffs’

Litigation Malpractice Claims. The Court has

reviewed the records submitted in regard to these

motions, including but not limited to the following:

1. Perkins Coie’s Motion to Dismiss

Second Amended Complaint;

2. Declaration of Keith D. _ Petrak,

Including Request for Judicial Notice in Support of

Perkins Coie’s Motion to Dismiss Second Amended

Complaint;

3. Defendant J.P. Morgan’ Securities,

Inc.'s Motion to Dismiss;

4. Defendant J.P. Morgan Securities,

Inc.'s Request for Judicial Notice in Support of

Defendant J.P. Morgan Securities, Inc.'s Motion to

Dismiss;

5. Defendant Wilson Sonsini Goodrich and

Rosatis Motion to Dismiss Third Amended

Complaint;

6. Declaration of Gregory J. Hollon in

Support of Wilson Sonsini Goodrich and Rosati’s

Motion to Dismiss Third Amended Complaint and

Exhibits A-C attached thereto;

‘# Consolidated Opposition of Naveen and

Anuradha Jain to Motions to Dismiss by Wilson

A-27

Sonsini Goodrich and Rosati, P.C. and J.P. Morgan

Securities, Inc.;

8. December 2, 2005 Order Denying

Plaintiffs Motion: (1) To Strike Perkins Motion to

Dismiss Litigation Malpractice Claims; and/or (2) To

Strike Extra-Pleading Materials Presented in

Support of That Motion; and/or (3) For a CR 56(f)

Continuance of Motion Hearing until Following

Completion of Expert Deposition Discovery; And

Denying Plaintiffs Motion for Extension of Time to

Respond to Perkins Coie’s Motion to Dismiss

Litigation Malpractice Claims

9. Defendant J.P. Morgan Securities,

Inc.'s Reply to Opposition to Motion to Dismiss Third

Amended Complaint;

10. Wilson Sonsini Goodrich and Rosati's

Reply in Support of Motion to Dismiss Third

Amended Complaint;

11. Plaintiff Jains’ Opposition to Perkins to

These Motion to Dismiss;

12. Plaintiffs, Motion for Partial Summary

Judgment Striking Perkins Cooties Affirmative

Defense of Federal Preemption with Respect to

Plaintiffs’ Litigation Malpractice Claims;

is. Plai..tiffs’ Offer of Intended and/or

Hypothetical Proof Re: Proximate Cause Arguments

Made in Perkins Motion to Dismiss;

14. Declaration of Robert J. Adolf;

15. Declaration of John A. Strait In

Support of Jains’ Motion to Strike, etc.;

16. Perkins Coie’s Consolidated Reply in

Support of Motion to Dismiss Second Amended

Complaint and Opposition to Plaintiff's Motion for

Partial Summary Judgment:

17. Plaintiffs’ Reply in Support of Motion

for Partial Summary Judgment Striking Perkins

Coie’s Affirmative Defense of Federal Preemption

with Respect to Plaintiffs Litigation Malpractice

Claims;

18. May 2, 2006 Letter from Larry Gagnes;

and

19. May 3, 2006 letter from Bradley S.

Keller.

Having considered the foregoing record and

the arguments of counsel, and finding as a matter of

law that Plaintiffs’ Second Amended Complaint for

Damages and Other Relief against Perkins fails to

state a claim upon which relief may be granted, and

that further amendment would be futile, it is hereby

ORDERED, ADJUDGED AND DECREED

that Plaintiffs’ motion is denied, Perkins’ motion is

granted, and Plaintiffs’ claims against Perkins as set

forth in Plaintiffs’ Second Amended Complaint for

Damages and Other Relief are hereby dismissed

with prejudice.

DATED this 4 day of May, 2006.

/s/ Richard A. Jones

THE HONORABLE RICHARD JONES

A-29

Presented by:

BYRNES & KELLER LLP

By /s/ Keith D. Petrak

Peter D. Byrnes, WSBA #00446

Bradley S. Keller, WSBA #10665

Keith D. Petrak, WSBA #19159

Attorneys for Defendant

Perkins Coie, LLP

A-30

APPENDIX D

United States District Court, W.D. Washington.

Naveen and Anuradha JAIN, Plaintiffs,

Vv.

INFOSPACE, INC, et al., Defendants.

No. C03-2897P.

Filed Sept. 23, 2003.

Jan. 9, 2004.

represented by G. Val Tollefson, Danielson Harrigan

& Tollefson, Seattle, WA, Lead Attorney, Attorney to

be Noticed, John R Neeleman, Larry Steven

Gangnes, Lane Powell Spears Lubersky, Seattle,

WA, Lead Attorney, Attorney to be Noticed, Timothy

G Leyh, Danielson Harrigan & Tollefson, Scattic,

WA, Lead Attorney, Attorney to be Noticed, Randall

Thor Thomsen, Danielson Harrigan & Tollefson,

Seattle, WA, Attorney to be Noticed, for Naveen

Jain, Plaintiff.

represented by G. Val Tollefson, John R Neeleman,

Larry Steven Gangnes, Timothy G Leyh, (See above

for address), Lead Attorney, Attorney to be Noticed,

for Anuradha Jain, husband and wife, and the Ma-

rital Community, Plaintiff.

represented by Brian D Buckley, Stellman Keehnel,

Gray Cary Ware & Freidenrich LLP, Seattle, WA,

Lead Attorney, Attorney to be Noticed, for InfoSpace

Inc, a Delaware corporation, Defendant.

represented by Brian D Buckley, Stcllman Keehnel,

(See above for address), Lead Attorney, Attorney to

be Noticed, for Mellon Investor Services LLC, a New

Jersey corporation, as successor in interest to Cha:

seMellon Shareholder Services, LLC, Defendant.

represented by David M Balabanian, McCutchen

A°3]1

Doyle Brown & Enersen, San Francisco, CA, Lead

Attorney, Attorney to be Noticed, John D Pernick,

Bingham Mccutchen (SF), San Francisco, CA, Lead

Attorney, Attorney to be Noticed, Michael Ramsey

Scott, Hillis Clark Martin & Peterson, Seattle, WA,

Lead Attorney, Attorney to be Noticed, for JP Mor-

gan Securities Inc, a Delaware corporation as suc”

cessor in interest to Hambrecht & Quist LLC, De-

fendant.

represented by Brian D Buckley, Stellman Keehnel,

(See above for address), Lead Attorney, Attorney to

be Noticed, for Ellen Alben, Defendant.

represented by Brian D Buckley, Stellman Keehnel,

(See above for address), Lead Attorney, Attorney to

be Noticed, for Alex Alben, and their Marital Com-

munity, Defendant.

ORDER GRANTING PLAINTIFFS' MOTION TO

REMAND

PECHMAN, J.

*1 This matter comes before the Court on Plaintiffs’

motion to remand. (Dkt. No. 6.) Having reviewed all

of the pleadings and supplemental materials and

having heard oral argument on the matter, the

Court GRANTS Plaintiffs’ Motion to Remand. De-

fendants argue that the Plaintiffs' (‘the Jains”) state

law tort claims are really claims for reimbursement

or indemnification of the Jains' Section 16(b) liability.

under the Securities and Exchange Act (“the SEA” or

“the Act”). According to Defendants, federal law bars

indemnification for Section 16(b) liability. Based on

this, Defendants maintain that there is removal ju-

risdiction under the artful pleading doctrine. How-

ever, Defendants have failed to meet the require-

ments of the artful pleading doctrine. The Jains'

A°32

claims are not necessarily federal in character. Nor

is a federal question an element of their state law

tort claims. Instead, Defendants' argument is prop-

erly characterized as a defense based on a federal

question. As a defense, it cannot provide the basis

for removal jurisdiction.

BACKGROUND

This case stems from the Dreiling v. Jain case (“the

Dreiling \itigation”), CO1-1528P. On May 14, 2003,

this Court entered summary judgment against the

Jains, concluding that they had engaged in prohi-

bited short-swing trading in violation of Section

16(b) of the SEA. On August 22, this Court entered

judgment against the Jains, ordering them to dis-

gorge the profits from these trades, totaling approx:

imately $200 million dollars plus prejudgment inter-

est.

In August, the Jains filed this law suit in state court

against two securities firms that worked with Infos-

pace, Infospace's general counsel, and Infospace. The

Jains claim that all of these Defendants were negli-

gent and breached their fiduciary obligations to the

Jains, which caused the damages chat the Jains in-

curred as a result of the Dreiling litigation. They al-

so seek equitable subrogation against all Defen-

dants, and claim unjust enrichment against Infos-

pace.

Defendants removed the Jains' D & O insurers suit.

In their removal notice, Defendants claimed that the

federal district court has removal jurisdiction be-

cause “plaintiffs' claims implicate and depend upon a

substantial federal question.... [T]he Jains' claims

A-33

depend upon whether indemnity is available for Sec-

tion 16(b) liability. The federal case law is clear that

Section 16(b) liability cannot be indemnified.”(Notice

of Removal, § 3)

ANALYSIS

The removal statute 1s strictly construed against

removal jurisdiction. Gaus v. Miles, Inc., 980 F.2d

564, 566 (9th Cir.1992).“Federal jurisdiction must be

rejected if there is any doubt as to the right of re-

moval in the first instance.’/d. The removing party

has the burden of proof that removal was proper. /d.

When removal is premised on a federal question, the

removing party must establish the federal nature of

the claim.

Removal analysis begins with the well-pleaded com-

plaint rule, in which federal question jurisdiction ex-

ists only when a federal question is present on the

face of the plaintiff's properly plead complaint. Rivet

v. Regions Bank of Ia., 522 U.S. 470, 475 (1998) (cit-

ing Caterpillar Inc. v. Wilhams, 482 U.S. 386, 392

(1987)). Moreover, a plaintiff may defeat removal by

choosing not to plead independent federal claims.

ARCO Envtl. Remediation v. Dep't of Health and

Envtl. Quality, 213 F.3d 1108, 1114 (9 Cir.2000).

Both parties agree that neither of the complaints in

these actions explicitly set forth a federal cause of

action.

*2 Nonetheless, Defendants argue that this Court

has removal jurisdiction under the artful pleading

doctrine. A plaintiff may not defeat removal of a fed-

eral claim by artfully pleading it as a state claim or

omitting to plead necessary federal questions. Pivet,

A-34

522 U.S. at 475,Franchise, 22. The artful pleading

doctrine applies when either 1) federal law complete-

ly preempts state law, 2) the claim is necessarily

federal in character, or 3) the right to relief depends

on the resolution of a substantial, disputed federal

question. ARCO, 213 F.3d at 1114. (A recent Ninth

Circuit opinion combined 2) and 3) into one stan-

dard, with two sub-parts. Lippitt v. Raymond James

Fin. Servs., 340 F.3d 1033, 1041-42 (9th Cir.2003).

This appears to be merely a semantic difference .)

Both parties agree that the SEA does not completely

preempt the field.

However, Defendants contend that the Jains' claims

are necessarily federal in character and that the

Jains' right to relief depends on resolution of a sub-

stantial, disputed federal question. The Defendants'

two arguments stem from their basic premise that

the Jains' claims are really claims for reimburse-

ment or indemnification disguised as state law

claims. Defendants cite a Tenth Circuit case for the

proposition that the SEA prohibits indemnification

for Section 16(b) liability. First Golden Bancorpora-

tion v. Weiszmann, 942 F.2d 726 (10 Cir.1991).

Therefore, according to Defendants, the Jains must

show that their Section 16(b) liability can be indem-

nified. In other words, indemnification for Section

16(b) liability is a condition precedent to Jains' state

law claims.

In contrast, if a defendant's basis for removal juris:

diction is a federal question defense, as opposed to

an affirmative federal claim that plaintiff disguised

as a state law claim, there is no removal jurisdiction.

It is settled law that a defense based on a federal

question does not establish federal jurisdiction. This

A-35

is true “even if the defense is anticipated in the

plaintiff's complaint and both parties agree that the

defense is the only question truly at issue in the

case.” Franchise Tax Bd. of Cal. v. Constr. Laborers

Vacation, 463 U.S. 1, 14 (1983).“A defense is not part

of a plaintiff's properly pleaded statement of his or

her claim.” Arvet, 522 U.S. at 475. The Jains con-

tend that Defendants' argument is a federal question

defense.

IL. The Jains' Claims Are Not Necessarily Federal in

Character

Defendants' “necessarily federal” argument rests on

two provisions of the SEA. First, Section 16(b) liabil-

ity cannot be waived or altered by agreement. 15

U.S.C. § 78cc(a). Second, federal courts have exclu-

sive jurisdiction over all suits “brought to enforce

any liability or duty created by this chapter or the

rules and regulations thereunder.” § 78aa. According

to Defendants, Plaintiffs' claims, which are really an

attempt to seek reimbursement or indemnification

for their Section 16(b) liability, undermine the pro-

hibition on waiving or altering liability by agree-

ment. In essence, Defendants argue that by seeking

reimbursement or indemnification from the securi-

ties firms and Infospace for the Jains' Section 16(b)

liability, the Jains would be escaping their Section

16(b) liability, or “shifting their entire 16(b) liability

onto Defendants,” in violation of § 78cc(a). Moreover,

by doing so, they are attempting to escape enforce-

ment of their Section 16(b) liability. This challenge

to the enforcement of Section 16(b) liability triggers

the exclusive jurisdiction provision in § 78aa.

*3 A similar issue was addressed by the Ninth Cir

A-36

cuit in Lippitt.The plaintiff alleged that marketing

by brokerage firms of a “callable certificate of depo-

sit” violated state unfair competition laws. Defen-

dant claimed that the exclusive federal jurisdiction

provision in § 78aa of the SEA supported removal

jurisdiction. 340 F.3d at 1036. The Ninth Circuit re-

jected this argument. The court held that plaintiff's

claims did not fall within the scope of § 78aa because

plaintiff was not attempting to enforce any provision

of the Act. Rather, he sought to enforce state law. /d.

at 1037.

Like the plaintiff in Lippitt, the Jains‘ claims do not

touch upon the enforcement of their Section 16(b)

hability. They are not seeking through this lawsuit

to challenge their Section 16(b) liability or to escape

enforcement of their Section 16(b) liability. In fact,

the Jains’ Section 16(b) liability is the premise upon

which their state law claims rest. If they were chal-

lenging the validity of their Section 16(b) liability,

they could not allege negligence by Infospace, its

general counsel, and two securities firms for “caus-

ing” that hability. This lawsuit does not challenge

the liability itself; success on the merits would not

negate the fact that they were held strictly liable for

Section 16(b) violations. Instead, the Jains are mere-

ly seeking to hold other partics accountable for neg-

ligence in causing the damages they incurred as a

result of their Section 16(b) liability. Like the plain-

tiff in Lippitt, the Jains' state law claims do not fall

within the scope of the Act. As such, the exclusive

jurisdiction provision of § 78aa is not triggered. De-

fendants' argument that the Jains are directly chal-

lenging a right or liahility under the SEA mischarac-

terize the Jains' claims.

A-37

The Court does not find Bunker Ramo-Electra Corp.

v. Fairchilds Industries, Inc. persuasive on this is-

sue. 639 F.Supp. 409 (D.Md.1986). That court held in

dicta that indemnification for Section 16(b) liability

would violate § 78cc because it would allow the viola-

tors to waive their Section 16(b) liability “since they

would not have to return their short-swing prof:

its...."/d. at 419.First, the Jains have alleged negli-

gence, not indemnification. Despite the fact that the

result be the same, these are legally distinct causes

of action. Second, the Jains must disgorge their

short-swing profits regardless of whether they can

prove as a matter of law and fact that the Defen-

dants were negligent, causing the damages the Jains

incurred in the Dreiling litigation. They are not

waiving their Section 16(b) liability.

Defendants’ reliance on ARCO is equally misplaced.

In determining whether a claim is necessarily feder-

al in character, ARCO looked to the language of the

federal statute upon which the defendant premised

removal jurisdiction. 213 F.3d at 1115. Like the

SEA, the federal statute at issue in ARCO, the Com-

prehensive Environmental Responsibility, Compen-

sation, and Liability Act (the Superfund legislation),

conferred exclusive federal jurisdiction in limited

circumstances. Under this Act, exclusive federal ju-

risdiction existed when a plaintiff's claims chal-

lenged a Superfund cleanup. The court held that an

action challenged Superfund cleanup if the action

was related to the goals of the cleanup. Plaintiff

sought disclosure of certain cleanup documents. As

such, the plaintiff's claim was not related to Super-

fund cleanup goals. Therefore, plaintiff's claim was

not necessarily federal in character. /d. Defendants

seize upon this language and argue that, unlike the

A-38

plaintiff's claims in ARCO, the Jains' claims directly

challenge the goals of Section 16(b) liability by seek-

ing to pass their liability on to other parties, in viola-

tion of § 78cc. However, the Jains' claims do not di-

rectly challenge the strict lability goal of Section

16(b). As discussed above, their Section 16(b) liabili-

ty is the premise of their state law claims. Prevailing

on their state law claims would not negate the fact

that they were deemed liable under Section 16(b).

*4 For this reason, this is case is not analogous to

Gilson v. Chock Full O'Nuts Corp. 331 F.2d 107 (2d

Cir.1964). In Gilson, the Second Circuit concluded

that awarding attorney's fees to sharcholder's coun-

sel who brought a Section 16(b) violation to the at-

tention of the corporation was within the scope of the

Act because it was a remedy incidental to the federal

right created by Section 16(b). Unlike attorney's fees,

which are appropriately deemed instrumental to the

enforcement of Section 16(b), barring a person found

liable under Section 16(b) from alleging negligence

against another for causing the Section 16(b) dam-

ages incurred is not instrumental to the enforcement

of Section 16(b). While it may or may not undermine

the policy behind Section 16(b), that argument is

more appropriately characterized as a federal ques:

tion defense.

Il. Federal Law Is Not an Element of the Jains' State

Law Claims

Under the third prong of the artful pleading doc-

trine, federal jurisdiction exists over a state law

claim if the right to relief depends on the resolution

of a substantial, disputed federal question. In ana-

lyzing a state claim under this prong, both Lipprtt

A°39

and ARCO look to whether a substantial, disputed

question of federal law is a necessary element of the

plaintiff's state law claim. Without this requirement,

it would be difficult to impossible to determine when

an issue is a substantial and disputed federal ques-

tion supporting removal jurisdiction versus when an

issue is a defense that happens to raise a substantial

and disputed federal question upon which the merits

of the case may turn, but which cannot support re-

moval jurisdiction. The law is clear that a federal

question defense cannot support removal jurisdic-

tion, no matter how central it is to the resolution of

plaintiffs claims, nor how novel or complex the fed-

eral question may be. Azvet, 522 US. at

475, Franchise Tax Bd., 463 U.S. at 14. Without a

clear and systematic way of distinguishing an artful-

ly plead federal claim from a federal question de-

fense, resolution of the kinds of questions presented

in this motion would lead to inconsistent and see-

mingly random results wherein removal jurisdiction

would sometimes exist but not others. The necessary

element requirement provides a clear and systematic

way to distinguish the two. In Lippitt, the court re-

viewed the elements of plaintiff's state law unfair

competition claim, finding that “his allegations

[were] sufficient ... to sustain the elements of his

[unfair competition] claim without resort to federal

law.” 340 F.3d at 1043. In ARCO, the court held

that the plaintiffs right to relief seeking disclosure

of state agency documents was not predicated on

federal law. 213 F.3d at 1116. Like these two cases,

federal law is not a necessary element of the Jains'

claims in either of their complaints.

The Jains allege that two securities firms, Infos-

pace's general counsel, and Infospace were negligent

A-40

and breached their fiduciary duties in handling the

transactions that lead to the short-swing purchases.

The Jains' claims against these Defendants rests so-

lidly in tort law. Defendants argue that the Jains'

claims in this case are indemnity or reimbursement

claims in disguise. However, Defendants have pre-

sented no authority indicating that the elements of

negligence and breach of fiduciary duty are the same

as those for indemnification. Indemnity is defined as

“a duty to make good any loss, damage, or lability

incurred by another; the right of an injured party to

claim reimbursement for its loss, damage, or liability

from a person who has such a duty; reimbursement

or compensation for loss, damage, or lability in

tort....” Black's Law Dictionary (7 ed.1999). Thus, it

seems that a claim for indemnification or reim-

bursement only requires showing that the Defen-

dants had an obligation to “make good” or reimburse

the Jains and have failed to fulfill that obligation.

The Jains have not alleged this. They have alleged

negligence and breach of fiduciary duty, which re-

quires them to show that the Defendants owed the

Jains a duty of care, the Defendants breached that

duty, and the breach was the actual and proximate

cause of damages suffered by the Jains. While the

ultimate outcome might be the same if the Jains

prevail on their state law claims-i.e. the Jains will

recover the amount of damages they incurred as Sec:

tion 16(b) liability-this does not mean that the Jains'

negligence and breach of fiduciary duty state law

claims are equivalent to claims for indemnification

or reimbursement.

*5 Defendants argue that two of the elements of the

Jains' negligence claims depend on federal law,

namely causation and damages. According to Defen-

dants, only insider-traders can be the legal cause of

Section 16(b) lability. Therefore, the Jains must

prove that Defendants were the legal cause of their

Section 16(b) liability. This mischaracterizes the

Jain's claims. The Jains are not claiming that the

Defendants caused their liability, but rather that the

Defendants caused the prohibited short-swing pur-

chases, which lead to the assignment of Section 16(b)

liability. Similarly, Defendar.ts argue that the Jains

have not suffered legally-cognizable damages be-

cause they were never entitled to the short-swing

profits in the first place. However, contrary to De-

fendant's argument, the Jains' damages are an es-

tablished fact based on the judgment in the Dreiling

litigation. Defendants argument that such damages

are not legally cognizable is a defense to the damage

element that the Jains must prove. The Court notes

that state court judges commonly rule on complex

and novel issues of federal law. There is no reason to

suggest that only federal court judges have the abili-

ty to decide the issues presented in this case.

Lastly, ARCO’ s analysis of the necessary element

requirement provides further support for this

Court's conclusion. In holding that the plaintiff's

claims was not predicated on federal law, the court

distinguished two cases where federal question ju-

risdiction existed for state law claims, beth of which

are equally distinguishable here. 213 F.3d at 1116.

In one, an element of the plaintiff's state law tort

claim was the breach of a duty created by federal

law. Sable v. General Motors Corp., 90 F.3d 171 (6th

Cir.1996). In the other, an element of the plaintiff's

state law breach of warranty claim was an agree-

ment created by federal law. Marcus v. AT & T, 138

F.3d 46 (2d Cir.1998). Here, the contract providing

A-42

for Section 16(b) liability was not created by federal.

law, regardless of the fact that it covered a federal |

law violation. :

CONCLUSION

Defendants have failed to establish removal jurisdic-

tion under any of the prongs of the artful pleading

doctrine. The Jains' state law tort claims are not

necessarily federal in character. Nor is a federal

question an element of their state law tort claims.

Instead, Defendants' argument that the Jains'

claims are really claims for reimbursement or in-

demnification barred by federal law is a federal

question defense. As such, it cannot provide the ba-

sis for removal jurisdiction. Therefore, the Court

GRANTS Plaintiffs' motion to remand.

The clerk is directed to provide copies of this order to

all counsel of record.

W.D.Wash.,2004.

Jain v. Infospace, Inc.

Not Reported in F.Supp.2d, 2004 WL 212999

(W.D.Wash.)

A-43

APPENDIX E

United States District Court, W.D. Washington.

Thomas R. DREILING, on behalf of INFOSPACE,

INC., Plaintiff,

Naveen JAIN and Anuradha Jain, husband and

wife, and their marital community, the Jain Family

Irrevocable Trust, the Naveen Jain Grat No. 1

Trust, and the Anuradha Jain Grat No. 1 Trust, De-

fendants,

and

Infospace, Inc., Nominal Defendant.

No. C01-1528P.

Aug. 22, 2003.

In action seeking disgorgement of profits earned by

corporate insiders in short-swing trades, plaintiff

filed motion for judgment, and defendants filed mo-

tion for partial summary judgment. The District

Court, Pechman, J., held that: (1) in calculating

short-swing profits required to be disgorged, pur-

chase price of the shares transferred from trust ac-

counts to insiders personal accounts was $0; (2) in-

siders could not avoid liability for short-swing profits

by returning the money to the trusts; and (3) balance

of equities favored award of prejudgment interest.

Motions granted in part and denied in part.

*1236 William H. Beaver, Jr.,.Karr Tuttle Campbell,

Seattle, WA, for Naveen Jain Grat No 1 Trust, De-

fendant.

Beth Ann Colgan, Harry H. Schneider, Jr., Brent

Snyder, Perkins Coie, Seattle, WA,.for Jain Family

A-44

Irrevocable Trust, Defendant.

Timothy P Crudo, Paul H Dawes, David M. Fried-

mam, Latham & Watkins, San Francisco, CA, Mark

Maynes, Stokes Lawrence, Seattle, WA, Kevin Mi-

chael Paulich, Wolfstone, Panchot & Block, Seattle,

WA, John C. Tang, Aaron Levine & Associates,

Washington, DC, for InfoSpace Inc, Interested Party.

Judith A Endejan, Graham & Dunn, Seattle, for

Seattle Times Company, Intervenor.

Christine E Gardiner, Karr Tuttle Campbell, Seat-

tle, for Anuradha Jain Grat No 1 Trust, Defendant.

Douglas W_Greene, Barry M. Kaplan, Perkins Coie,

Seattle, for Kellett Partners LP, Stiles A Kellett, Jr,

Defendants.

Arthur W. Harrigan, Jr., G. Val Tollefson, Danielson

Harrigan & Tollefson, Seattle, WA, for Anuradha

Jain, Defendant.

Jonathan P Meier, Stephen John Sirianni, Richard

E. Spoonemore, Sirianni & Youtz, Seattle, WA, for

Thomas R Dreiling, Plaintiff.

Elaine L Spencer, Graham & Dunn, Seattle, WA, for

Seattle Times Company, Intervenor.

ORDER GRANTING PLAINTIFF'S MOTION FOR

ENTRY OF JUDGMENT AND DENYING

DEFENDANTS' MOTION FOR PARTIAL

SUMMARY JUDGMENT

PECHMAN, District Judge.

™he Court having concluded as a matter of law that

-efendants are liable for short-swing trades, Plain-

tiff moves for entry of judgment against Defendants

Naveen and Anuradha Jain (“the Jains” or “Jain De-

fendants”). (Dkt. No. 140.) The Jain Defendants

move for partial summary judgment that they en-

gaged in no short-swing trades, and alternatively

A-45

that they realized no profit on the trades. (Dkt. No.

196.) Plaintiff moves to strike numerous declara-

tions, exhibits, and briefing by Defendants as im-

permissibly seeking reconsideration of the Court's

prior order on liability. (Dkt. No. 198.) Because De-

fendants may not attempt to relitigate liability at

this stage of the proceeding, Plaintiff's motion to

strike is GRANTED in part. Because the Jain De-

fendants engaged in short-swing trades by transfer-

ring for no cost millions of shares from Trust ac-

counts to personal accounts, they are required to

disgorge the profit from these trades. Accordingly,

Plaintiffs motion for entry of judgment is

GRANTED and the Jain Defendants'*1237 motion

for partial summary judgment is DENIED.

BACKGROUND

On the parties’ stipulation to present the issue of

liability to the Court on summary judgment, the

Court concluded that the Jain Defendants engaged

in prohibited short-swing trades in violation of Sec-

tion 16(b) of the 1934 Securities and Exchange Act,

15 U.S.C. § 78p(b). At issue now is the Jain Defen-

dants' disgorgement of the profit from their short-

swing trades, as well as prejudgment interest ~->

that profit. In its prior order, the Court concluded

that, in December 1998, Mr. Jain purchased, for the

purposes of Section 16(b), 1,000,000 shares of InfoS-

pace stock through his agreement to place Trust

shares into an escrow account to satisfy a personal

obligation. The Court also concluded that, on May

24, 1999, the Jains purchased 2,490,472 shares of

InfoSpace stock by transferring these shares from

the Trusts to their personal brokerage accounts.

There is no dispute regarding the Jains' sale of In-

A-46

foSpace stock within six months of the above pur-

chases. On April 6, 1999, the Jains sold 1,000,000

shares of InfoSpace stock, receiving $85,600,000.00.

On April 12, 1999, the Jains sold 210,000 shares of

InfoSpace stock, receiving $17,955,000.00. On May

13, 1999, the Jains sold 1,800,000 shares of Infos-

pace stock, receiving $98,966,696.05. In light of this

Court's prior order, and accounting for stock splits,

the Jains within six months purchased more shares

than they sold, so that all profits realized from the

above sales of $202,551,696.05 must be disgorged.

ANALYSIS

This matter comes before the Court on summary

judgment. Summary judgment is not warranted if a

material issue of fact exists for trial. Warren v. City

of Carlsbad, 58 F.3d 439, 441 (9th Cir.1995), cert.

denied, 516 U.S. 1171, 116 S.Ct. 1261, 134 L.Ed.2d

209 (1996). The underlying facts are viewed in the

light most favorable to the party opposing the mo-

tion. Matsushita Elec. Indus. Co. v. Zenith Radio

Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d

538 (1986). “Summary judgment will not lie if ... the

evidence is such that a reasonable jury could return

a verdict for the nonmoving party.” Anderson v. Li-

berty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505,

91 L.Ed.2d 202 (1986).

I. Plaintiff's Motion to Strike

Plaintiff moves to strike: (1) 15 declarations filed by

Defendants on June 23, 2003, except for paragraphs

1-5, 16-17, 28, and 29, 44 of the Naveen Jain Decla-

ration; (2) all exhibits to these declarations except

for No. 25 to Mr. Jain's Declaration; (3) page 1

A-47

through page 11 In. 10, and page 15 In. 8 through

page 20 In. 17, of Mr. Jain's opposition to Plaintiffs

motion for entry of judgment; (4) the Anuradha Jain

and Trusts' opposition to the motion for entry of

judgment; and (5) the Jain Defendants' motion for

partial summary judgment.

The Court largely agrees with Plaintiff that the ma-

jority of Defendants' briefing is an untimely attempt

to reconsider this Court's summary judgment order

on liability. The Court has already denied reconside-

ration of liability, and all of the above motions, dec-

larations, and exhibits come outside the ten-day pe-

riod for reconsideration. Local Rule CR 7(h)(2). Anu-

radha Jain and the Trusts submit a brief that con-

tests that there was a change in beneficial owner-

ship, even though this issue was decided on sum-

mary judgment. Mr. Jain also contends that there is

no purchase without an exchange of consideration,

even though this was also addressed on summary

judgment. Mr. Jain again raises the argument, re-

jected on reconsideration, that there was no pur-

chase because the *1238 transactions were res-

cinded. Defendants make numerous new arguments

regarding how trusts are regulated under Washing-

ton law, none of which were pled on summary judg-

ment, and none of which are relevant to a determi-

nation of liability or damages under Section 16(b). In

pari delicto is a new defense to liability that was not

pled or argued on summary judgment or reconside-

ration. In sum, Defendants raise issues already de-

cided, as well as new arguments, well past the date

for reconsideration. The Court will not entertain

these untimely submissions and allow Defendants to

relitigate hability.

A-48

The only issue properly before the Court at this time

is the question of judgment. Accordingly, Plaintiff's

motion to strike is GRANTED in part. The Court

strikes the 15 declarations filed by Defendants on

June 23, 2003, and all exhibits to these declarations,

except for paragraphs 5, 28, and 29 and Exhibit No.

25 of the Naveen Jain Declaration. Pages 1 through

11 In. 10 and page 15 ln. 20 through page 20 In. 17 of

the Jains' opposition to Plaintiffs motion for entry of

judgment are stricken. The Court strikes pages 2 to

11 In. 6 of Anuradha Jain and the Trust's opposition

to Plaintiffs motion for entry of judgment. The Court

strikes page 6 In. 10 to page 10 In. 4, and page 11 In.

16 to page 14 In. 6, of the Jain Defendants' motion

for partial summary judgment.

IT. Entry of Judgment

{1}[2][3] Section 16(b) was enacted for the purpose of

preventing the unfair use of information which may

have been obtained by a statutory insider through

his or her relationship to the issuing corporation.

Kay v. Scientex Corp., 719 F.2d 1009, 1012 (9th

Cir.1983). Congress recognized that short-swing

speculation by stockholders with advance, inside in-

formation would threaten the goal of the Securities

Exchange Act to insure the maintenance of fair and

honest markets. Jd. Section 16(b) was aimed at pro-

tecting the public by preventing directors, officers,

and principal stockholders of a corporation from spe-

culating in the stock on the basis of information not

avallable to others. Jd. (citations and quotations

omitted). Under the statute, all profit realized by the

short-swing trades is disgorged to the corporation,

and the Court may also allow recovery of prejudg-

ment interest. Whittaker v. Whittaker Corp., 639

A-49

F.2d 516, 522, 533 (9th Cir.1981), cert. denied, 454

U.S. 1031, 102 S.Ct. 566, 70 L.Ed.2d 473 (1981). Sec-

tion 16(b) is a strict liability statute that “operates

mechanically, and makes no moral distinctions, pe-

nalizing technical violators of pure heart, and by-

passing corrupt insiders who skirt the letter of the

prohibition.” Magma Power Co. v. Dow. Chem. Co.,

136 F.3d 316, 320-21 (2d Cir.1998).

A. Calculating profit

[4] “For the purpose of preventing the unfair use of

information which may have been obtained by ... [an

insider], any profit realized by him from any pur-

chase and sale, or any sale and purchase, of any eq-

ulty security ... within any period of less than six

months ... shall inure to and be recoverable by the

issuer.” 15 U.S.C. § 78p(b). “Profit” is understood in

its ordinary sense as “the excess of returns over ex-

penditures ... the excess of the price received over

the price paid for the goods sold” S & S. Realty

Corp. v. Kleer Vu Indus., Inc., 575 F.2d 1040, 1043

(2d Cir.1978).

[5] In calculating the profit realized as a result of

stock purchases, courts use the “lowest purchase

price, highest sale price” method. Whittaker, 639

F.2d at 530. Under this rule, called the Smolowe rule

after the leading case on the matter, the highest

sales price is matched with the lowest purchase price

in any given six month period. /d. at 530-31. In

analyzing the legislative *1239 history of the sta-

tute, the court in Smolowe concluded:

The statute is broadly remedial. Recovery runs not

to the shareholder, but to the corporation. We must

A-50

suppose that the statute was intended to be tho-

roughgoing, to squeeze all possible profits out of

stock transactions, and thus to establish a standard

so high as to prevent any conflict between the selfish

interest of a fiduciary officer, director, or stockholder

and the faithful performance of his duty. The only

rule whereby all possible profits can be surely recov-

ered is that of lowest price in, highest price out with-

in six months. |

Smolowe v. Delendo Corp., 136 F.2d 231, 239 (2d

Cir.1943), cert. denied, 320 U.S. 751, 64 S.Ct. 56, 88

L.Ed. 446 (1943).

{6] Calculating the profit in this case is straightfor-

ward. The Jains paid nothing for shares that were

transferred, therefore their purchase price is $0.

Within six months of acquiring the InfoSpace shares

for nothing, the Jains’ sold shares _ for

$202,551,696.05. Consistent with the definition of

profit and the “lowest in, highest out” rule, therefore,

the Jains' profit is calculated at $202,551,696.05.

The Jains contend that, even though they acquired

the InfoSpace shares for nothing, the Court should

nonetheless impute a price to the shares because the

Jains ultimately returned the shares to the Trust. A

number of cases recognize that a value may be im-

puted to shares when non-monetary consideration is

given. For example, courts will place a dollar value

on intangible assets or non-monetary consideration,

such as hours worked for a corporation in return for

stock. See, e.g., Truncale v. Blumberg, 88 F.Supp.

677 (S.D.N.Y.1950). In this matter, however, the

Jains gave neither monetary nor intangible consid-

eration for the InfoSpace shares. The shares were

A-51

transferred to the Jains for no consideration. As the

Court decided on summary judgment and reconside-

ration, such a transfer-even if it was an unautho-

rized transfer, with no consideration given, and later

rescinded-can be a purchase for the purpose of Sec-

tion 16(b) because of the possibility for speculative

abuse. Because no consideration was given for the

InfoSpace shares, the Jains' cost was nothing, and

therefore to “squeeze all possible profits out of’ the

stock transactions requires disgorgement of

$202,551,696.05.

Defendants' proposal that the Court should impute

the market price of the InfoSpace shares at the time

the Jains transferred the shares from the Trusts to

themselves, or alternatively at the time the Jains

returned the shares to the Trusts, is particularly

problematic. This suggestion fails to capture the

profit that the Jains realized from the transfers, be-

cause the market price of the shares at the time of

transfer or return is not related to the profit that an

insider might make in transferring shares to a per-

sonal account. To illustrate, an insider might trans-

fer a thousand shares valued at $10 each, speculate

with those shares to make a profit by buying and

selling when the shares are valued at less than $10

each, and then return the shares when they are

again valued at $10 each. In such a case, the profit

made by the insider through speculation has no rela-

tion to the market value of the shares at the time of

transfer or return. Such an application of Section

16(b) not only fails to disgorge the profits realized by

the transfer, but invites abuse and manipulation of

the statute.

{7] The Jains argue that Plaintiffs proposed judg-

A-52

ment is unconstitutional and punitive because it

forces disgorgement of all profit on the sale of the In-

foSpace shares even though the Jains eventually re-

turned an equal number of shares to the Trusts. Be-

cause the share transfers were unauthorized, the

Jain Defendants contend *1240 that had they not

returned the shares, they might have faced liability

to the Trusts for conversion. The Jains insist that,

because the transfers were rescinded, disgorgement

of all profit would in effect mean the Jains paid twice

for the shares at issue.

{[8][9][10] The Jains cannot use their conduct in

avoiding liability to the Trusts under state or other

federal law as a method to avoid Section 16(b) dis-

gorgement. “The determination that an act is illegal

under state law and the Internal Revenue Code does

not make the rescission of that act free from federal

securities law problems.... The exercise of the duty to

rescind ... does not immunize the rescinding transac-

tion from securities law liability.” Oliff v. Exchange

Int'l Corp., 449 F.Supp. 1277, 1293 (N.D_II1.1978),

aff'd, 669 F.2d 1162 (7th Cir.1980), cert. denied sub

nom., 450 U.S. 915, 101 S.Ct. 1358, 67 L.Ed.2d 340

(1981). The Jains' conduct in transferring shares

simply subjected them to multiple legal obligations.

“The fact that other state or federal laws may have

affected a penalty or caused defendants in a section

16(b) proceeding to take a particular action does not

prevent a finding of section 16(b) liability.” Jd. As

this Court ruled on summary judgment and on re-

consideration, the Jains' transfers of the stocks from

the Trusts and subsequent short-swing sales sub-

jected them to liability because of the possibility of

speculative abuse. The collateral obligations the

Jains acquired regarding the transferred shares, and

A-53

the actions they took in response to these obliga-

tions, do not impact the calculation of short-swing

profits. Therefore, the profit realized by the Jains by

short-swing trades is $202,551,696.05. Although

courts recognize that Section 16(b) may be harsh in

application, Defendants cite no authority for finding

the statute unconstitutional. Section 16(b) has been

applied for decades, and this Court declines the invi-

tation to strike the statute as unconstitutional.

B. Prejudgment Interest

[11][12] Whether prejudgment interest is awarded as

part of a Section 16(b) recovery is a question of fair-

ness to be answered by balancing the equities.

Whittaker, 639 F.2d at 533. Although prejudgment

interest is generally considered a part of Section

16(b) recovery, it is denied when its exaction would

be inequitable. Jd. The burden is on the insider to

“show there is an overriding inequity in allowing in-

terest in order to overcome the granting of interest.”

Id.

[13] In weighing the equities, the Court takes into

account several factors: (1) whether the insider acted

innocently or knowingly; (2) whether the insider re-

paid the corporation promptly upon demand; and (3)

whether there has been substantial delay caused by

the insider. Whittaker at 533-34.

1. Appropriateness of Prejudgment Interest

[14][15] The Court's consideration of the first factor

is not a one-dimensional question of subjective good

or bad faith. Whittaker, 639 F.2d at 533. The type

and degree of the insider's inadvertence, the position

A-54

of the insider in the corporation, and other circums-

tances of each case are considered. Jd. Even when

bad faith may have been absent, interest 1s still

sometimes awarded. /d. The insider's good faith

must be shown; bare allegations are not sufficient.

Id.

[146] The Court cannot conclusively determine

whether the Jains acted in either good faith or bad

faith. However, Mr. Jain's status as a key insider

weighs in favor of prejudgment interest. Mr. Jain

*1241 was the founder, Chairman of the Board of

Directors, and CEO of InfoSpace. The Jains claim

that they were victims of a combination of errors and

oversights by others. Nonetheless, without the par-

ticipation of the Jains, the purchases would not have

happened. The Jains transferred shares to their per-

sonal accounts by signing letters of authorization

and claim to have failed to notice the discrepancies

in their account statements. Mr. Jain personally

signed SEC filings representing that he had placed

shares into escrow. Although the Jains may not have

acted in bad faith, they clearly were not diligent in

their transactions with the Trusts.

The second factor rewards an insider who repays the

corporation promptly upon demand. Prompt pay-

ment has been taken as betokening good faith and

justifying denial of interest, especially when the

prompt repayment means the corporation has not

lost use of the money for a long time. Whittaker,

639 F.2d at 534.

The second factor favors the Plaintiff. The Jains did

not offer to repay the profits upon filing of the law-

suit. Though it is important to note that the corpora-

A-55

tion did not decide to bring suit, the corporation non-

etheless has been deprived of the use of the money at

issue for several years because of the Jains' actions.

The third factor in balancing the equities is the

length of time involved. When there has been sub-

stantial delay between transactions and complaint or

between complaint and judgment, courts consider

who was responsible for the delay an important fac-

tor in allowing interest for such periods. Whittaker,

639 F.2d at 534.

Considerations of delay favor an award of prejudg-

ment interest. Several years have passed since the

complaint and this ruling on judgment. The Court

ultimately agrees with the lability and judgment

arguments that Plaintiff advances in this litigation.

While it is understandable that Defendants would

litigate this matter, they are nonetheless responsible

for the delay between complaint and judgment.

Defendants have failed to mect their burden of show-

ing that an award of prejudgment interest is ine-

quitable. The factors to weigh in deciding to award

prejudgment interest favor Plaintiff. Defendants

have enjoyed the profits from the short-swing trade

for years, and have had the opportunity to invest

and earn from these profits. Accordingly, the Court

GRANTS Plaintiffs request for prejudgment inter-

est.

2. Calculation of Interest

In awarding prejudgement interest, the Ninth Cir-

cult favors application of the federal post-judgment

interest rates specified in 28 U.S.C. § 1961. Western

A-56

Pacific Fisheries, Inc. v. S.S. President Grant, 730

F.2d 1280, 1289 (9th Cir.1984). The parties do not

dispute that interest for transactions completed on

April 6 is calculated at 4.732% per year, compounded

yearly, and for transactions completed on May 24,

1999 the interest is 4.727%. Neither have the parties

disputed that interest should be awarded from the

date of the sales which produced the profit that the

Jains have since held.

The Jains realized $85,600,000.00 in profit from the

April 6, 1999 sale. The Court awards prejudgment

interest at a rate of 4.732% per year from the date of

the sale to the date of this order. Defendants have

not contested that the calculation of this award

amounts to $18,297,057.00 plus $13,352.00 for each

day after June 13, 2003. Therefore, the Court awards

$18,297,057.00 plus $921,288.00 in prejudgment in-

terest, for a total of $19,218,345.00 on the April 6,

1999 sale.

The Jains realized $116,951,696.05 in profit from the

April 6 and May 13, 1999 sales and the May 24, 1999

purchase. The *1242 Court awards prejudgment in-

terest of 4.727% per year on this amount from the

date of the purchase to the date of this order. Defen-

dants have not contested that the calculation of this

award amounts to $24,095,542.98 plus $18,219.26

for each day after June 13, 2003. Therefore, the

Court awards $24,095,542.98 plus $1,257,128.94, for

a total of $25,352,671.92 in prejudgment interest on

the May 24, 1999 purchase.

C. Total Judgment

The Court orders disgorgement of $202,551,696.05 in

A-57

profit. Preyjudgment interest on this sum amounts to

$44,571,016.92. Total judgment is for

$247,122,712.97.

II. Separate Judgment Under Rule 54(b)

Plaintiff requests that the Court enter separate

judgment on the claims against the Jain Defendants

in accordance with Fed.R.Civ.P. 54(b). “[T]he Court

may direct the entry of a final judgment as to one or

more but fewer than all of the claims or parties only

upon an express determination that there is no just

reason for delay and upon an express direction for

the entry of judgment.” Fed.R.Civ.P. 54(b). The only

Defendants remaining after resolving this motion

are the Trusts. Withholding judgment until the

claims of the Trusts are resolved only serves to delay

any appeal of the claims of the Jain Defendants, who

have already indicated through a motion for interlo-

cutory appeal that they wish to appeal this Court's

decision. There being no just reason to delay entry of

judgment, the Court will enter separate judgment on

the claims against the Jain Defendanis.

CONCLUSION

The Jain Defendants engaged in short-swing trades

by transferring for no consideration millions of In-

foSpace shares from Trust accounts to personal ac-

counts within six months of selling InfoSpace shares.

Under Section 16(b) the Jain Defendants are re-

quired to disgorge the profit from these trades. Ac-

cordingly, Plaintiff's motion for entry of judgment is

GRANTED and the Jain Defendants' motion for par-

tial summary judgment is DENIED. The Court or-

ders disgorgement of $202,.551,696.05 of profit from

A-58

short-swing trades. Prejudgment interest on this

sum amounts to $44,571,016.92, for a total judgment

of $247,122,712.97. The Court authorizes publication

of notice of Plaintiff counsel's forthcoming request

for fees in The Wall Street Journal and The Seattle

Times.

W.D.Wash.,2003.

Dreiling ex rel. Infospace, Inc. v. Jain

281 F.Supp.2d 1234

END OF DOCUMENT

APPENDIX F

United States District Court, W.D. Washington.

Thomas R.- DREILING, on behalf of INFOSPACE,

INC., Plaintiff,

Vv.

Stiles A. KELLETT, Jr., an individual; and Kellett

Partners LP, a limited partnership, and Naveen

Jain and Anuradha Jain, husband and wife, and

their marital community, the Jain Family [rrevoca-

ble Trust, the Naveen Jain Grat No. 1 Trust, and

the Anuradha Jain Grat No. 1 Trust, Defendants,

and

Infospace, Inc., Nominal Defendant.

No. C01-1528P.

May 14, 2003.

Order Denying Reconsideration July 9, 2003.

Shareholder brought suit against settlors of trusts,

consisting of corporation's shares, seeking to recover

on behalf of corporation short-swing profits allegedly

made by settlors based on theory that they pur-

chased securities when they moved them from trust

to an escrow and into individual trading accounts.

Parties moved and cross moved for summary judg-

ment. The District Court, Pechman, J., held that: (1)

settlors were not beneficial owners, for purposes of

claims that transactions were changes in beneficial

ownership not subject to short-swing profits; (2)

movement of shares from trust to escrow counted as

purchase for short-swing profit purposes; (3) no gifts

were involved; and (4) there was valid escrow, prec-

luding claim of no liability because of no escrow.

A-60

Judgment for shareholder.

*1216 William H. Beaver, Jr..Karr Tuttle Campbell,

Seattle, WA, for Naveen Jain Grat No 1 Trust, De-

fendant.

Beth Ann Colgan, Harry H. Schneider, Jr., Brent

Snyder, Perkins Coie, Seattle, WA, for Jain Family

Irrevocable Trust, Defendant

Timothy P Crudo, Paul H Dawes, David M. Fried-

man, Latham & Watkins, San Francisco, CA, Mark

Maynes, Stokes Lawrence, Seattle, WA, Kevin Mi-

chael Paulich, Wolfstone, Panchot & Block, Seattle,

WA, John C Tang, Aaron Levine & Associates,

Washington, DC, for InfoSpace Inc, Interested Party.

Judith A Endejan, Graham & Dunn, Seattle, WA,

Elaine L Spencer, Graham & Dunn, Seattle, WA, for

Seattle Times Company, Intervenor.

Christine EK Gardiner, Karr Tuttle Campbell, Seat-

tle, WA, for Anuradha Jain Grat No 1 Trust. Defen-

dant.

Douglas W Greene, Barry M. Kaplan, Perkins Coie,

Seattle, WA, for Kellett Partners LP, Stiles A Kel-

lett, Jr, Defendants.

Arthur W. Harrigan, Jr., Danielson Harrigan & Tol-

lefson, Seattle, WA, G. Val Tollefson, Danielson Har-

rigan & Tollefson, Seattle, WA, for Anuradha Jain,

Defendant.

Jonathan P Meier, Stephen John Siriann), Richard

IK. Spoonemore, Sirianni & Youtz, Seattle, WA, for

Thomas R Dreiling, Plaintiff.

ORDER ON CROSS-MOTIONS FOR SUMMARY

JUDGMENT

PECHMAN, District Judge.

This matter comes before the Court on cross-motions

for summary judgment. (Dkt.Nos.68, 82.) Plaintiff

A-61

alleges that the Jain Defendants engaged in prohi-

bited short-swing trades of InfoSpace stock by *1217

transferring shares from the Defendant trusts to

personal and escrow accounts. Because these trans-

fers are purchases for purposes of determining short-

swing trades, Plaintiff's motion for summary judg-

ment is GRANTED and Defendants' motion for

summary judgment is DENIED.

BACKGROUND

This is a suit by a shareholder of InfoSpace, Mr.

Dreiling, against numerous insider Defendants, al-

leging that the insiders engaged in unlawful short

swing trading-the purchase and sale (or vice versa)

of stock within a six month period. There are two

groups of Defendants in this matter: the Jain Defen-

dants and the Kellett Defendants. The Kellett De-

fendants have settled the claims against them. (Dkt.

No. 133.) Currently before the Court are cross-

motions for summary judgment on Plaintiff's claims

against the Jain Defendants. The Jain Defendants

are the Naveen Jain, a founder and former CEO of

InfoSpace, Anuradha Jain, and three trusts estab-

lished by the Jains for the benefit of their children.

This litigation arises from stock transfers from three

trusts established by the Jains in mid-1998: the Na-

veen Jain Grantor Retained Annuity Trust No. 1

(“NJGRAT”), the Anuradha Jain GRAT (““AJGRAT’”),

and the Jain Family Irrevocable Trust (“Family

Trust”). The Jains established these trusts for tax

purposes. Each of the two GRATs were initially

funded with two million shares of InfoSpace stock.

The Family Trust purchased one million shares of

InfoSpace stock from the Jains. Naveen Jain's broth-

A-62

er, Atul Jain, was named as the trustee of both

GRATs. The GRATs are irrevocable, and the Jains

receive annual annuities from the GRATs. Under the

terms of the GRATs, the trustee 1s the owner of the

trust estate The remainder of the trust estate of the

GRATs is paid out to the Jains' children after the

Jains' death. Unlike the GRAT, the Family Trust

pays no annuity and the sole beneficiaries are the

Jains' children.

Plaintiff alleges that the Jain Defendants engaged mm

four purchases that subject them to lability for

short-swing trades. The first purchase allegedly oc-

curred in December 1998, when Mr. Jain took one

million InfoSpace shares from a trust and placed this

stock 1n escrow to satisfy a personal indemnity obli-

gation. The second, third, and fourth purchases took

place in May 1999, when the Jains deposited trust

shares into their personal trading accounts. Defen-

dants argue that the above transactions were not

“purchases,” as they are understood under securities

law.

The first alleged purchase in December 1998 oc-

curred when Mr. Jain agreed to place in escrow one

million shares of his InfoSpace stock. As InfoSpace

was preparing for its initial public offering (“TPO”) in

late 1998, the Board of Directors learned that Mr.

Jain might have incurred hability on behalf of In-

foSpace through option grants and disputes arising

out of commercial contracts. InfoSpace hired the law

firm PerkinsCoie to investigate, and the Board later

required Mr. Jain to personally indemnify the com-

pany for potential claims by placing one million

shares of his InfoSpace stock in escrow. Mr. Jain ex-

ecuted an agreement with InfoSpace to establish an

A-63

escrow, with InfoSpace as the escrow agent. Per-

kinsCoie drafted a Securities and Exchange Com-

mission (“SEC”) amendment filed on behalf of InfoS-

pace. (Spoonemore Decl. Ex. 24.) This filing

represented that Mr. Jain had placed one million

shares of common stock held by the NJGRAT trust

in escrow, and that Mr. Jain retained voting control

over those shares. (/d. Ex. 25.) Because the NJGRAT

trust is irrevocable, Mr. Jain had no authority to

transfer these shares.

*1218 Over the next year, Mr. Jain signed, or autho-

rized his attorney in fact to sign, numerous SEC fil-

ings representing that he had placed the NJGRAT

shares in escrow. (/d. Exs. 25-34.) A year later, after

no claims were made against InfoSpace for Mr.

Jain's actions, Mr. Jain requested that the Board re-

lease the escrowed shares. In early 2000, the Board

officially released Mr. Jain from the indemnity

agreement and the shares from escrow. Plaintiff al-

leges that the escrow agreement was an unlawful

transfer of shares to Mr. Jain from the NJGRAT,

triggering liability for short swing trades. Defen-

dants contend that no escrow was ever in fact

created. Despite the SEC filings, Mr. Jain states that

neither he nor InfoSpace officially established the

escrow. Defendants' attorneys in this matter, Per-

kinsCoie, states that it “is not clear why those [re-

porting] mistakes [to the SEC] were made.” (Def's

Resp. at 6.) Defendants produce statements from

numercus other witnesses testifying to their lack of

knowledge of an escrow account.

The other alleged purchases in May 1999 occurred

when the Jains deposited shares of the trusts into

their personal brokerage accounts. In May 1999, In-

A-64

foSpace stock split two-for-one. InfoSpace then is-

sued new stock certificates representing the new

shares and sent these certificates to its shareholders.

The NJGRAT and AJGRAT split share certificates

were sent to InfoSpace's office, while the Family

Trust split share certificate was sent to the Jains'

home. These stock certificates were marked on their

face as belonging to the trusts. Aithough the trust

accounts were held by Banc of America Securities,

the Jains sent the shares to their personal broker at

Hambrecht & Quist (““H & Q”).! H & Q deposited the

Family Trust shares in the Jains’ personal account.

H & Q then sent the Jains a draft letter of authori-

zation that would “gift” the GRAT split shares to the

Jains. After the Jains filled out these forms and re-

turned them to H & Q, the shares were deposited in-

to the personal trading accounts of the Jains. The

Jains held and controlled these shares, for example

by voting on them, until 2000, when it is alleged this

“transfer error’ was discovered. The Family Trust

shares were reconveyed to the trust in May 2000. An

InfoSpace paralegal who was responsible for track-

ing shares noticed a discrepancy in the Jains’ ac-

count. (Haberly Dep. at 14-15.) However, Mr. Jain

states that he initiated the request that InfoSpace

undertake an internal investigation to determine

what stock was held in each account, thereby identi-

fying the transfer error. As a result of the investiga-

tion, the split shares were transferred back to the

GRATs in December 2000.

The Jains claim that the transfers were innocent

1 The record is confused regarding whether Nationsbanc or

Banc of America was the holder at the time.

A-65

mistaken deposits. Mr. Jain states that he mistaken-

ly believed that the Jain Trusts maintained accounts

at H & Q. The Jains declare that they did not know

that signing the letters of authorization would effect

a gift of shares from the GRATs to their personal

trading accounts. Because they did not read their

brokerage statements, the Jains claim they were not

aware of the transfers.

ANALYSIS

The parties stipulated to presenting the issues in

this case before the Court on cross-motions for sum-

mary judgment. (Dkt. No. 50.)\Summary judgment is

not warranted if a material issue of fact exists for

trial. *1219 Warren v. City of Carlsbad, 58 F.3d 439,

441 (9th Cir.1995), cert. dented, 516 U.S. 1171, 116

S.Ct. 1261, 134 L.Ed.2d 209 (1996). The

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