Regents of the University of California v. Credit Suisse First Boston (USA), Inc.

Plan; Fund; Laborers Pension context, Hawaii immigration Additionally, in LLC; Amal Management Asset courts to Staro need for particular there is Bank, as Trustee gamated Reque choices. See congressional defer Fund; Here, Longview Investment Collective at 309. na-Rodriguez, 190 Flint; Zegarski; Mer John certain excludable Robert V. to make chose Congress Smith; Jr.; Schwartz, discretionary relief un Steven vin eligible aliens Milwaukee; Greenville of of 212(c), expansion Archdiocese § der Silva, Plan; Nathaniel Pension by Francis and Plumbers required provision, Pulsifer, Trustee of the Shooters whom those for extended has been Plaintiffs-Ap Trust, compara has a Hill Revocable deportability of ground inadmissibility. pellees, does not Vo ground ble for whom category limited fall into this expansion required courts equal therefore no 212(c),

§ and there FIRST BOSTON SUISSE CREDIT violation. protection (USA), INC.; First Suisse Bos- Credit LLC; LLC; Pershing Merrill

ton Inc.; Merrill Lynch Company, & III. CONCLUSION Inc.; Smith, Lynch & Pierce Fenner 212(c) terms, only to applies § itsBy Defendants-Appellants, aliens; it awas excludable limited class of it to be required judicial extension Barclays PLC; Barclays Bank As deportees. available to made PLC; Barclays Capital, Sanchez, supra, we La Paz held in De Inc., Appellants. We § 212 even further. decline to extend termi- it with its construe consistent must No. 06-20856. judicial nology, lest administrative Appeals, States Court United remedy become waiver extension Fifth Circuit. which to the statute even less moored crime UUV does originated. Vo’s March of inadmissibili- comparable ground have a 212(a). ineligi- He ty is therefore under 212(c) waiver, petition and his for a

ble is DE- BIA’s decision

for review of the

NIED. OF OF the UNIVERSITY

REGENTS

CALIFORNIA; Washington In- State City Board; San Francisco

vestment County Employees’ Retirement

System; Local Employer-Teamsters Trust and 505 Pension

Numbers 175 Lerach, Coughlin,

Coughlin (argued), Robbins, Stoia, Geller, San Rudman & CA, Francisco, Plaintiffs-Appellees. for Scott, Braff, Jeffrey T. Marc David H. Tomaino, Leeuw, & Michael T. Sullivan De Abrams, Cromwell, City, Barry York New Houston, TX, Abrams, Bickley, Scott & Appellants. A. Clary (argued), Julie

Richard W. McAtee, Cravath, North, Darin P. Swaine Moore, City, George York W. New & Bramblett, Jr., Hensley, Noel M.B. Boone, Dallas, TX, Lawrence Haynes & Volker, Finder, Haynes L. & Odean David Houston, TX, Boone, Ap- Suisse Credit Pershing, LLC. pellants Beck, Gunn, David Michael J. David Post, Beck, Stanley Redden & Sec- Russell (ar- TX, rest, Houston, Stuart J. Baskin S, Hakki, Washer, Adam gued), Herbert S. Sterling, City, New York & Shearman Co., Lynch & Inc. and Merrill Merrill Smith, Inc. Lynch Fenner & Pierce Brill, Siegel, David Jonathan Laura W. Manella, Ange- Irell & Los Steinsapir, P. Ass’n, LLC, les, CA, Clearing House Industry Financial Markets & Securities U.S., Ass’n and Chamber Commerce Amici Curiae. Gen., Morales, Atty. Aus-

David S. Asst. Gens., tin, TX, Atty. for State Amicus Cu- riae. DENNIS, JOLLY, SMITH and

Before Judges. Circuit SMITH, Judge: E. Circuit JERRY Isaacson, pursue an Having granted been leave to Lerach, Alan Eric William S. 23(f), interlocutory appeal, see Fed.R.CivP. Daley, Hodges, J. Joseph David Helen Lerach, challenge certifying an order Burkholz, defendants Coughlin, Spencer Alan Relying largely Robbins, plaintiffs. Stoia, Geller, single Di- class Rudman & San Bank, Svetcov, N.A. v. First Interstate CA, Patrick J. Central ego, Sanford Bank, N.A., S.Ct. nership bought barges from Merrill (1994), progeny, Lynch 128 L.Ed.2d 119 and its premium. at a When Enron re- ported we reverse and remand. its results for instead of book- ing loan, the transaction as a the charac- I. terization that Enron’s outside accountants state would have been appropriate had The facts are difficult to easy detail but they known of the side-agreement buy to summarize. allege Plaintiffs that defen- barges, back the Enron booked the trans- (“Credit dants Credit Suisse First Boston action as a sale accordingly listed the Suisse”), Lynch Merrill Company, & Inc. revenue year-end therefrom its financial (“Merrill Lynch”), Barclays Bank PLC statement. Bank”) (“Barclays (collectively “the banks”) entered partnerships into Plaintiffs allege that the banks knew Corpora- transactions allowed Enron exactly why Enron was engaging in seem- (“Enron”) tion to take liabilities off of its ingly irrational transactions such as this. temporarily books and to book revenue They cite certain of the banks’ internal from the transactions when it actually was communications they characterize as prov- incurring debt. The common feature of ing that the banks were aware of the allowed En- these transactions that they personal compensation Enron executives ron to misstate its financial condition; received inflating result of their stock allegation there is no that the banks were price through the illusion of revenue and plaintiffs, fiduciaries of the im- that the banks profit by intended to help- properly reports filed financial on Enron’s ing the executives maintain that illusion.1 behalf, they engaged or that in wash sales Likewise, plaintiffs that, allege although manipulative other directly activities in each defendant not have been aware the market for Enron securities. of exactly how each other defendant was helping misrepresent Enron to its financial

For example, plaintiffs allege that Mer- health, in general defendants knew Lynch rill engaged in what they dub the that other doing defendants were so and “Nigerian Barges Transaction.” Accord- engaged Enron was in a long-term ing plaintiffs, Enron wanted to “sell” its scheme to defraud investors and maximize interest in electricity-generating barges off compensation by executive inflating reve- Nigeria the coast of by the end of 1999 so nue and disguising risk and liabilities that it could book revenue and meet stock through partnerships its and transactions analysts’ estimates for the quar- calendar with the banks. ter. It legitimate buyer, could find no so it Lynch contacted Merrill and guaranteed II. buy it barges would back within

six at a premium months for Merrill This suit collapse followed Enron’s in Lynch. 2001. The first action was filed on Octo- later,

Six months good Enron made year; by ber of that December guarantee; its part- Enron-controlled the district court had consolidated over quote 1. Plaintiffs from an personal compensation).” e-mail between mention Commu- (sic) Lynch employees Merrill year-end employees "[A]t nications between Credit Suisse (the Nigerian when we barge did this trade allegedly (“Osprey reveal similar scienter ais transaction) ... Enron knew what enabling disguised were vehicle Enron to raise (which making quarter year at ... appears equity debt which as on Enron’s bal- great sheet_”). price, had value in their stock not to ance plaintiffs conclusion that relating to Enron securities thirty actions just a scheme existed. of the such Regents designated and had plain- the lead University of California theory of scheme The court’s ensued, discovery have tiff. Years of finding commonali- considerably simplified have been documents of millions of tens respect with to loss ty among produced. that “a court stated rea- causation. The made that where argument can be filed sonable the banks Early litigation, in the pri- in a knowingly engaged a defendant dismiss, the district court but motions to the federal securities 19, 2002, mary violation of opin- in a December denied them larger in furtherance of a laws that was of the reconsidered some ion. The court scheme, jointly severally be in should opin- motions its relevant to those issues certification, caused the entire liable for the loss issued on regarding class ion scheme, including conduct of overarching 5, 2006,2 intervening devel- light June which it participants scheme about other caselaw. The court opments appellate reconsideration, nothing.” it knew stating that justified its had plain- concluded that The district court reconsider such interlocu- power rely on the classwide tiffs entitled decisions, light especially

tory for omissions and presumptions of reliance law much of it recent case limited and The court held that fraud on the market.4 liability. Moreover emerging on scheme presumption applies be- Ute Affiliated certification, after especially ... at class indicate that the banks had cause the facts discovery as has been such substantial in a “duty engage in their not to failed ” here, may look behind done the court The court conclud- fraudulent ‘scheme.’ to determine pleadings evidence ed, fraud-on-the-mar- respect to the be certified. whether a class should reliance, pre- that no ket efficiency or liminary finding of market “deceptive that a The court determined need made investors’ reliance thereon 5(c)3 rule meaning act” within 10b— 10b-5(a) plead under rule where in a “transaction participating includes devices, schemes, (forbidding deceptive effect is to principal purpose and whose 10b-5(c) artifices) (prohibiting de- and and of revenues.” appearance create a false acts, and courses of busi- ceptive practices, that rule 10b- The district court decided ness) than under the more usual rather 5(a)’s ... prohibition “scheme 10b-5(b) action, (proscribing rule cause of joint and several gives defraud” rise to misrepresentation). commit indi- liability for defendants who issuing opinion on A month after its in furtherance of deception vidual acts of certification, court, after class the district Implicit ruling in that such a scheme. States, v. United 4. See Ute Regents Cal. v. Credit 2. See the Univ. Citizens Affiliated Inc., 1456, (USA), 128, 2006 WL L.Ed.2d 741 First S.Ct. Suisse Boston 406 U.S. LEXIS 43146 (1972) U.S. Dist. improper (presumptive reliance for (S.D.Tex.2006). Levinson, omissions); Inc. v. Basic (1988) L.Ed.2d 194 and law convention 3. We follow securities theory (adopting of reli fraud-on-the-market and rule as to the relevant statute refer conditions). certain ance under as, 10(b) respec- § rather than and rule 10b-5 78j 10(b) § 17 C.F.R. tively, and 15 U.S.C. — § refers to 240.10b-5. Section Exchange Act of 1934. of the Securities plaintiffs’ reviewing question revised class definition unsettled of law” or or- “[a]n granting trial der plan, may issued its class certification certification ... a force order, defendant to settle rather than July dated 2006. It incur the determined defending costs of a that, class action and run although proportionate liability potentially the risk of liability.” ruinous provisions of the Private Litiga- Securities 23(f) (“PSLRA”) advisory Fed.R.Civ.P. committee tion Reform Act generally are note. problematic, necessary there is no conflict theory

between the court’s that, Plaintiffs contend if even we are 78u-4(b)(4), that statute. See 15 U.S.C. entitled to address defendants’ merits- (f)(2). The court ordered defendants to arguments, based arguments those prepare non-parties a list of to whom sufficiently intertwined with the facts to assign responsibility intend to and de- against counsel interlocutory appeal before clared defendants will bear the bur- complete factual record is established. prove non-parties’ responsibility by den to Plaintiffs reason that the banks have not a preponderance yet of the evidence. been “cowed” into settling, nor are be; they likely to the district court has The district court certified class of all procedural afforded fairness to all parties; persons purchased who Enron securities panel and the should defer judgment to its 19, 1998, between October and November by declining to hear appeal until after 27, 2001, injured thereby. and were the district court has entered a final judg- billion, damages class seeks .against of $40 ment. losing which defendants would be entitled The fact that yet banks have not roughly to offset billion obtained $7 persuaded been to settle is no reason to previous settlements with for- 23(f) decline a rule appeal; it means 1, 2006, mer co-defendants. On November litigation that the continues. As we have panel a motions granted this court de- recognized, class certification be the fendants leave to appeal the class certifica- backbreaking decision that places “insur order, tion sponte expedited we sua pressure” mountable defendant appeal. settle, even where the defendant has a good chance of succeeding on the merits. III. Tobacco, See Castano v. Am. point Plaintiffs out that we are not (5th Cir.1996). Here, where bound the motion panel’s decision to nearly seek hold the banks liable grant leave to appeal; they urge that leave entirety of stemming securities losses from was appeal improvidently granted.5 We collapse, pressure Enron settlement disagree. acute, appears be particularly so it is appropriate provide appellate review be a legally practically signifi- This is may fore settlement by be coerced an er decision, cant class certification and the roneous class certification decision. panel properly motions appeal. allowed the 23(f) commentary The Moreover, to rule indicates although legal un- issues appropriate grant that it is leave to derlying the in- certification decision are appeal an adverse determination where plaintiffs’ tertwined with the merit of theo- a “certification ry liability, decision turns on a novel or legal of these broad issues Serv., United panel's discretionary grant right States v. Bear Marine of to inter- (5th Cir.1983) (stating 1120 n. 6 locutory appeal). panel that a merits is not bound motion scope of They point out that the particular on murrer. contingent especially

not 23(f).”6 is “bridled Rule developed in the our review likely to be further facts to consider the gives They urge rise to un- us refuse This case district court. concerning interpre- concerning arguments law banks’ questions settled prohibition and the the merits with the class tation of entanglement of decision, abetting liability under that aiding well as the district as certification They that we should theory “deceptive act” statute.7 contend court’s of the un- accept issues the district court’s view underlying finding its common liability as valid for derlying Both of the Ad- theories of predominate. of reliance here, appeal. are met so of this visory purposes criteria Committee 23(f) ap- to consider the rule proceed we limited, scope of our review is peal. quite it is not so circumscribed but may say. Although we not con IV. independent inquiry legal an into the duct de class certification We review though factual merit of this case as we or “recogni for abuse of discretion cisions Federal reviewing were a motion under essentially factual basis of the tion of the 12(b)(6) or we Rule of Civil Procedure inquiry and of the district certification may arguments implicate address manage and con power court’s inherent action insofar plaintiffs’ merits of cause of pending litigation.... trol Whether mer arguments implicate as those also legal correct applied district its of the class certification decision. reaching decision on class standard its 23(f) Rule states that court of “[a] certification, however, legal question ais an appeals may permit in its discretion Citgo novo.” Allison v. that we review de appeal from an order of a district court (5th Corp., 151 F.3d Petroleum granting denying class action certifica omitted). Cir.1998) (citations Where a dis if made application tion under this rule analysis an premises legal trict court its days entry of the to it within ten after law, understanding governing erroneous 23(f). order.” Fed.R.CivP. The text of Unger discretion. See has abused its plain the rule makes that the sole order (5th Inc., Amedisys Cir. may is the certifica appealed be class 2005). Albeit with the best of intentions tion; “no other issues raised.” effort, the district and after herculean Bell, an 422 F.3d at 314. The fact that understand court arrives at erroneous certification issue is relevant both class rise to its ing gives of securities law that merits, however, preclude and the does presumptions of application of classwide review of that issue. reliance. all, re- Supreme After Court has

V. designate fused to class certification deci- subject to in- juris- sions as collateral orders scope first consider the our We review, precisely terlocutory appellate the banks of re- diction. Plaintiffs accuse 23(f) general- “the determination appeal as a de- because class packaging this rule Bank, Inc., S.Ct. 422 F.3d 7. See Cent. 511 U.S. at 114 6. Bell v. Ascendant Solutions review, 307, (5th Cir.2005) (declining (holding provide 314 1439 that does not interlocutory appeal, on a district court’s de- aiding abetting liability). preclude plaintiffs' expert cision to from testi- fying efficiency). as to market

381 inquiry” considerations that are en- ler to establish the “no merits ly involves rule) legal in factual and issues addressed in which meshed the cases district cause of ac- had comprising wide-ranging inqui- the courts conducted Livesay, v. Coopers Lybrand part tion.” & ries into the merits of claims as of the 463, 469, 2454, 57 437 U.S. 98 S.Ct. class certification decision without refer- (1978) (internal L.Ed.2d 351 citations ence to the criteria for class certification.10 omitted). analysis suggests, “The under Rule 23 As the Bell rule cited above requirements prohibition against must focus on the of the into looking the merits rule, findings applies only and if made connection inquiries, such not to evalu- requirements overlap findings with those overlap ations the merits that con- merits, that will have to be made on the requirements sideration of the for class Bell, 23(f) overlap such is coincidental.” certification. appeal, Id. a rule can, must, Unger, 422 at 311. See also 401 F.3d this court fact review the theory F.3d merits of the district court’s of lia- bility they insofar as also concern issues Our circuit’s conclusion review relevant to certification.11 class analysis legal supporting of the factual and appropriate the district court’s decision is VI. enjoys on review of class certification widespread app courts of Two of acceptance arguments appeal the banks’ au eals,8 Supreme implications and neither the Court have considerable for the sub- thority Fifth legal plaintiffs’ complaint. nor the Circuit caselaw that stantive merit of First, proposition cite for the no the district court’s definition of “de- inquiry act” permitted ceptive application merits is to the cont underlies its (which rary.9 Miller and Eisen cited Mil- classwide of reliance on fraud Offering Litig., Jacquelin, 8.See In re Initial Pub. Sec. 9. See Eisen v. Carlisle & 24, (2d Cir.2006); 156, 178, 2140, Gariety F.3d v. Grant 40 L.Ed.2d 732 LLP, (4th Int’l, Thornton 368 F.3d Cir. (1974); Mackey v. Miller 452 F.2d 2004); Merrill, Pierce, Lynch, Newton v. Fen (5th 1971). Cir. Smith, Inc., (3d ner & F.3d Cir.2001) (quoting W. 5 James et al., Moore Offering Litig., 10. See In re Initial Pub. Sec. § 23.46[4]: "[B]e- Moore's Federal Practice (citations omitted). 471 F.3d at 24 a cause determination of certification re quest invariably involves examination of some Langbecker Sys. Corp., 11. See v. Elect. Data legal underlying plain factual and issues (5th Cir.2007) (consid- 306-07 action, consider the tiffs' cause ering scope of ERISA within the plaintiffs’ substantive elements of case 23(f) appeal stating of a rule context Machs., Inc., ”); Bridgeport .... Szabo "[ajlthough federal courts cannot assess the (7th Cir.2001) (“The propo 675-76 stage, merits of the case at the certification judge accept that a sition district must all of claims, rigor must evaluate with de- complaint's allegations deciding when fenses, applicable relevant facts and substan- certify whether to cannot be found in class meaningful tive law in order to make a deter- nothing Rule 23 and has to recommend it certification issues.... mination of deciding .... Before whether to allow a case rulings mer- Courts should not confuse on the judge proceed action ... a class its of claims with the class certification deci- legal inqui make whatever factual and should However, sion. ... the district court's necessary under 23 ... and if ries Rule legal rulings are essential to its con- threshold the considerations under Rule some 23(b)(3) may maintained as a clusion that this case overlap ... ... then the merits action”) (citations quota- class and internal judge preliminary inquiry must make a into merits.”). omitted). tion marks Likewise, theory adjudication its broad ods for the fair and efficient on the market. 23(b)(3). liability certify controversy.” allows it to of “scheme” Rule We were single requirements class of whose losses respec- refer to these two by caused in common the scheme rather tively “predominance” the and “superi- certify than whose losses to subclasses ority” criteria.13 actions of individual were caused the theory The district court’s of lia arguments defendants. Both of these are bility implicates primarily predomi certification, highly to class also relevant requirement. nance To succeed on a claim only but we address the definition of “de- fraud, plaintiff prove of securities must act,” ceptive dispositive because it is of this “(1) misrepresentation a material or omis appeal. (2) defendant, by sion scienter on the of “decep- The district court’s definition (3) (4) defendant, reliance, part of the and integral tive act” is to its conclusion that diligence by plaintiff pursue due to his requirements for class certification are good or her own interest with care and met. Federal Rule Civil Procedure (5th Unger, faith.” n. 2 F.3d 23(a) requires plaintiffs seeking class certi- Cir.2005) (citations omitted). plaintiff A satisfy fication to four criteria that we prove not must the fraud oc (1) previously summarized as numer- proximately curred but that it his caused (3) osity, commonality, typicality, and Pharms., Broudo, losses. See Dura Inc. v. (4) representativeness.12 Because no de- 336, 346, seriously challenges fendant whether these (2005). L.Ed.2d 577 met, prima requirements are we do facie further. discuss them conception Without its broad 23(a) requirements liability acts,” Once the rule “deceptive the district satisfied, be certified if “[1] class court could not have found that the entire questions rely court finds that the of law or fact class was entitled to on Basic’s fraud- pre- theory, common to the members of the class on-the-market because the market any questions affecting only may presumed dominate over rely not be to on an omis individual members, ^[2] that a class sion or misrepresentation in a disclosure to superior action is to other available meth- it legally which was not entitled.14 The light See id. at 307. of fraud-on-the-market reliance in Gariety, Central Bank. See 368 F.3d at 369. Steering 13. See Committee Exxon Mobil that, principle rely The presumptively, (5th Cir.2006). Corp., 461 F.3d the market must be entitled to disclosure conduct, about true nature of defendants' LLP, Gariety 14. v. Grant Thornton applies manipulation setting in the as well as (4th Cir.2004) (remanding class deception (pro- § in the context. See certification decision for consideration of hibiting employment any “manipulative improperly predicated whether it was on aid- deceptive device” in connection with the ing abetting guise under the securities). purchase registered or sale of As primary liability). plaintiffs’ attempt Supreme respect Court has said with distinguish Gariety ground on the that it in- 14(e) (de- Exchange of the Securities Act thinly unpersuasive. volved a traded stock 10), claring aspect it identical in relevant Although arguably were securities at issue provides 'manipulative' "[t]he use of the term thinly presumption too traded to warrant the (an emphasis guidance of an market those who must efficient issue addressed in opinion, types determine which another section of the see id. at 367- of acts are reached statute; 68), plaintiffs provide explana- suggest no alternative does not a deviation why Gariety tion court also remanded from the section’s facial and concern ” Burlington with instruction to consider the .... disclosure Schreiber v.

383 aiding abetting give that the market not rise to liabili- likely correct plaintiffs and that ty.16 was efficient It is essential for us to ensure that for Enron securities fact that in that conclusion is the misapply aiding- inherent court does not district price publicly reflected all the market and-abetting liability guise under the But the factual available information.15 liability, through overly broad that the market relied on probability act[s],” “deceptive definition of and there- not omissions does banks’ behavior and/or by give rise to an erroneous classwide are entitled to the mean that presumption of fraud on the market. presumption of reliance. legal condi- efficiency

Market was not the sole VII. required plain- in Basic tion that the Court proceed We to the merits of this limited qualify for the prove tiffs to existed to 23(f) all appeal. respect rule With for the had presumption; the defendant classwide efforts, diligent district court’s its determi- misrepresen- and material public to make presumption that the nation Ute Affiliated Basic, at 248 n. tations. See applies to facts of this is incorrect. case 978. If the banks’ actions were 108 S.Ct. Ute, the Court considered Affiliated immaterial, misrepre- or not non-public, required a group whether of investors was right the market had no sentative because affirmatively prove reliance where (in words, other the banks rely on them bought that bank officers their re- duty), owed no the banks should be able disclosing stricted stock without the bank’s presumption. Gariety, See defeat secondary creation of a market which 369. profit. the stock would be resold for See presumption a classwide Without 133-39, 406 U.S. at 92 S.Ct. 1456. The reliance, plaintiffs prove would have to allegations Court ruled that the investors’ individual reliance on defendants’ conduct. misrepresentation not un- were based fraud class action cannot be certified “[A] 10b-5(b), rule but instead der what is now when individual reliance will be an issue.” “ ‘device, on a ‘course of business’ or a Castano, Because, as we 84 F.3d at 745. operated or artifice’ that as a scheme misapplies explain, will the district court 10b-5(a) fraud” under what are now rule presumption, Ute the fraud- Affiliated (c). Id. at 92 S.Ct. 1456. The presumption on-the-market is that, determined unlike mere Court potentially available duty had a agent, transfer these bankers “decep Accordingly, meaning case. secondary the existence of this to disclose critical to certifica tive act” is classwide 152-53, plaintiffs. Id. at market to the tion; reliance or falls classwide stands 1456. S.Ct. with it. premised on a Where presumptions reliance Erroneous misrep failure to disclose rather than on a Supreme were at the heart of the Court’s resentation, proof of reliance is “positive concern when it ruled that does Bank, Inc., 1, 8, Cent. 511 U.S. at 114 S.Ct. N. U.S. (1985). abetting (explaining aiding and lia- L.Ed.2d 1 bility permit to “circumvent would generally Macey 15. See Jonathan R. and Geof- requirement,” a "defen- the reliance because Miller, Finance, frey any showing P. Bad Economics: Good liable without dant could be Analysis plaintiff upon Theo- aider and abet- An Fraud-on-the-Market relied actions”). ry, tor’s statements (1990). 42 Stan. L.Rev. prerequisite recovery not a .... duty This omitted their engage obligation withholding to disclose and the fraudulent scheme.19 Neither Smith nor requisite of a fact material establish any authority other this circuit’s cases is element of causation in fact.” Id. at 153— proposition. for that 54, Basic, 92 S.Ct. 1456. In 485 U.S. at detail, As explain we will more 243, 978, 108 S.Ct. the Court later summa “deception” within meaning thusly: rized the rule of Ute Affiliated requires that a defendant fail satisfy to a duty a material infor “[W]here to disclose duty to disclose material information to a mation had been ... breached the neces plaintiff. Merely pleading that defendants sary plaintiffs’ injury nexus between the fulfill duty by failed to means of a and the defendants’ wrongful conduct had act, scheme or an rather than a mis been established.” statement, leading plain does not entitle For us to invoke the Affiliated employ tiffs to Ute presump Affiliated presumption of an Ute reliance on omis Smith, tion. In this court discussed (1) sion, plaintiff a allege must a case the first element of the Abell test recount primarily on based omissions or non-disclo above; ed straight Smith stands for the sure and demonstrate that the defen proposition forward that a brought case duty dant owed him a of disclosure.17 The 10b-5(a) (c) under rule likely is more to satisfy conjunc case at bar does not primarily be based than omission is a tive test. 10b-5(b), case under rule which requires affirmatively that a defendant make a

Assuming arguendo mis plain leading representation.20 Smith, primarily tiffs’ case we improper concerns omissions,18 never reached the prong second banks were not fiduciaries test, that, Abell and were not because we determined obligated otherwise to the if plaintiffs. They omission, even there had plaintiffs any any did not owe been (be duty presumption to disclose the nature of reliance of the was rebutted transactions. agrees plaintiff The district court cause the would have behaved any the banks specific duty, identically lacked had he been aware of the omit but, information). caselaw, citing Smith, our finds that ted See 845 F.2d at presumption applies because the banks 1364. Co., 4381143, *27, 17. See Abell v. Potomac Regents, Ins. 858 F.2d 2006 WL 1104, (5th Cir.1988) (explaining that the (citing U.S. Dist. LEXIS at *102 Smith presumption applies (5th Ute Ayres, where "the v. 1363 & n. 8 Affiliated Cir.1988)). defendant has failed to disclose informa relating tion whatsoever to material facts duty about which the defendant has a to the may misleading 20. The statement for the disclose”), plaintiff vacated on other reason that the defendant has "omitt[ed] Abell, grounds Fryar sub nom. U.S. necessary state a material fact in order to (1989). 106 L.Ed.2d 584 made, light make the statements in the made, circumstances under which were Corp., 18. See Finkel v. misleading,” allege not but a Docutel/Olivetti cause of ac- (5th Cir.1987) ("Cases 10b-5(b), involv- plaintiff tion under rule still must ing primarily implicate allege failure to disclose something. that a defendant said 10b-5; Smith, 240.10b-5(b); the first and third subsections of Rule 17 C.F.R. 845 F.2d at involving 10b-5(b) primarily cases (stating misstatement or that a rule "claim al- necessary ways failure to state a fact upon to make state- rests an affirmative statement of sort, misleading implicate ments made not the sec- some reliance on which is an essential subsection.”) (citation omitted). ond plaintiff prove”). element must circuit, a two-pronged and Smith The banks launch attack the law of this Abell is ruling respect on the district court’s contrary. When deter- is not to the First, they argue the market. owed no to fraud on (correctly) that the banks mined properly that the was never gener- other than the duty to the overly established: The district court’s in fraudulent duty engage al (that “deceptive definition of act” led it is, broad duty hot to schemes or acts inexorably mistaken conclusion that law), the district court should break the “misrepre- banks’ actions constituted apply have declined to Ute Affiliated legal- sentations” on which the market was Instead, presumed it what presumption. Second, ly presumed rely. to the banks only that reli- plaintiffs alleged: had that, plaintiffs assert even if the did estab- ance, specific, defining a element which is presumption, lish the it was rebutted ac- violation, legal had in fact of the relevant cording to this court’s standards.21 Be- occurred.

cause court in ruling the district erred established, the presumption had been we is logic The of Ute Affiliated that, do not address whether it was rebutted. rely plaintiff where a is entitled to on him of someone who owes the disclosures Basic, at U.S. S.Ct. duty, prove him to “how he requiring accepted the Court the fraud-on-the-mar if material infor would have acted omitted theory presume ket that courts could reli mation had been disclosed” is unfair. Ba ance where individuals who had traded sic, It 485 U.S. at 108 S.Ct. 978. is “in integrity shares did so reliance on the rely expect plaintiff natural to to on the market, price by of the set but because duty him a candor of one who owes misrepresenta material [defendant’s] disclosure, it fair and is to force one who tions, fraudulently price [al had been duty prove plain that the breached his presumption is founded tered].” however, Here, rely. tiff where did so hypothesis that “the market economic plaintiffs expectation had no that the transposed buyer, is between seller and provide banks would them with informa ideally, and transmits information to the tion, expect that the there is no reason processed in the form of the mar investor relying on their candor. plaintiffs were acting ket .... The market is price only put it is sensible to Accordingly, investor, informing of the unpaid agent proof to their individu given him that all the information available ally banks’ omissions. relied on the it, is worth the the value stock Id. at price.”

market S.Ct. F.R.D. (citing Litig., In re LTV Sec. VIII. (N.D.Tex.1980)). 134, 143 Having determined that the Affili qualify presumption, To for the inapplicable, ated is we Ute however, only plaintiff de must not indicate proceed to review the district court’s efficient, that a market but also must termination that Basic’s fraud-on-the-mar not; allege public made presumption applies. It does that the defendant ket i.e., misrepresentations; type material predicates ruling its on an erroneous 10(b). market § of fraud on which an efficient interpretation of (5th Cir.2001). Inc., Inc., 267 F.3d 400 Sys., gen Greenberg v. 21. See Crossroads (5th Cir.2004); F.3d 657 v. Zona Nathenson presumed rely.22 These uncertainty Court has left some in this regard. have not such fraud. Though conclusively the Court foreclos- conception The district court’s application secondary ed the “deceptive liability is inconsistent with act” 10(b), § secondary under stated that Supreme Court’s decision that 10 actors such as investment ac- banks and give aiding abetting does not rise primary countants can be liable as viola-

liability. An deceptive act cannot be with Id. tors some circumstances. meaning in the where the actor never, 114 S.Ct. 1439. The Court has duty no Presuming plain has to disclose. however, precisely delineated the bound- true, allegations tiffs’ to be Enron commit ary secondary between liabili- accounts, ty. noted, misstating ted fraud its As the district court but lower so, courts struggled to do and our the banks aided abetted that fraud circuit not previously has announced a engaging transactions to make it conclusively standard that governs this plausible; they more En duty owed no to case. ron’s shareholders. Although plaintiffs try to reconcile 10(b) give Section does not rise to cases, Eighth the the and Ninth Circuits aiding and abetting liability.23 In Central split respect have with scope to the of

Bank, the emphasized Court that securi primary liability secondary for actors.24 ties fraud is area of the law The district adopts a rule advocated certainty that demands predictability. and by the Exchange Securities and Commis Secondary neither; liability brings instead (“SEC”), in an amicus curiae brief sion gives rise confusion about the extent Circuit, before the Ninth pri under which secondary obligations actors’ and invites mary liability anyone attaches who en vague conflicting and in proof standards of in a gages principal “transaction whose Bank, divers courts. See Cent. 511 U.S. at purpose and effect is create a false 188, 114 Unfortunately, S.Ct. 1439. appearance agree revenues.”25 We (summariz- Greenberg, 22. See Compare Simpson 364 F.3d at 661 v. AOL Time Warner Inc., 1040, (9th Cir.2006) ing prerequisites for the 452 F.3d Basic as 1048 ("[T]o "(1) be liable follows: violator of public [T]he defendant made 10(b) § participation for in a (2) 'scheme to de- misrepresentations, material the defen- fraud,’ engaged the defendant must have in dant’s shares were traded in an efficient mar- principal purpose conduct that had the and ket, (3) and traded shares be- creating appearance effect of a false of fact in misrepresentations tween the time the were cert, scheme.”), petition furtherance of the revealed”). made and the time truth was (Oct. 19, 2006) (No. 06-560) with In re filed Gariety, (remanding See also 368 F.3d at 369 Commc’ns, Inc., Charter Litig., Sec. the class certification decision for consider- 987, (8th Cir.2006) ("[A]ny 992 defendant ation of whether improp- factor had been affirmatively who does not make or cause to erly by application satisfied the erroneous omission, be made fraudulent statement or aiding abetting liability). and directly engage manipu- or who does not trading practices, lative securities is at most Bank, 177, 23. Cent. 511 U.S. at 114 S.Ct. guilty aiding abetting and cannot be (declaring “prohibits 1439 that section any subpart held liable under or making of a material misstatement cert, 10b—5.”), petition (July Rule filed (or omission) manipu- or the commission of a 2006) (No. 06-43). proscription lative act. The does not include giving person aver, manip- aid to a who commits 25. As defendants the district court’s test act.”) (citations omitted). deceptive ulative or actually in this case is even broader than the

387 Fe Indus. v. Santa deception.” lation or pro the SEC’s Eighth Circuit bound) Green, is (by which we are posed test (1977). fit the contours of within

too broad The Court had al L.Ed.2d 10(b). Ernst & ready “manipulation” discussed Ernst: “Use of ‘manipulative’ the word starting point is appropriate Bank, significant. It is and was virtu especially of the statute. See Cent. text 172-73, ally a term of art when used in connection 1439. Decisions at S.Ct. U.S. a limit statutory place text It in interpreting the with securities markets. connotes that can be as- possible definitions designed to tentional or willful conduct in the SEC’s cribed to the words contained by controlling investors deceive or defraud thereunder.26 It is promulgated rule artificially affecting price of securi or the limits that the statute losing sight of Ernst, ties.” Ernst & U.S. rule, ascribing, natu- places on S.Ct. 1375. ral, the words of dictionary definitions to further refined that definition The Court rule, court and like- that the district by stating “[manipulation] gen- refers gone awry.27 minded courts sales, erally practices, such as wash Bank was informed by a series Central orders, rigged prices, matched construing the statute of decisions by artificially intended to mislead investors narrowly defining scope of “fraud” Fe, Santa activity.” affecting market In Ernst & of securities. the context 476, Finally, at 97 S.Ct. 1292. when U.S. Ernst, 1375, 185, 197, at 96 S.Ct. 425 U.S. scope decep- for evaluating the 668, example, the Court 47 L.Ed.2d in the context tive omissions of disclosure notion that securities rejected the SEC’s stated, trading, insider the Court “When negligently; it has fraud can be committed upon fraud is non- allegation based significantly more knowing. to be Even disclosure, there can be no fraud absent a case, later purposes of this the Court v. Chiarella United duty speak.” § language gives that “the stated States, 222, 234, 1108, 445 U.S. 100 S.Ct. Congress pro that meant to no indication (1980). L.Ed.2d 348 involving manipu hibit conduct not 63 Circuit's; Hochfelder, adopt v. Simpson did not 26. See Ernst & Ernst Ninth Instead, 185, 214, 1375, proposed SEC’s rule wholesale. 47 L.Ed.2d 668 plain “[i]t court there made it that is not (”[D]espite the Rule the broad view of enough a in which the defen- case, transaction scope by the in this its [SEC] advanced purpose deceptive a dant was involved had granted power the Com- cannot exceed the effect; the defendant’s own conduct con- 10(b).”). Congress § by under mission tributing to the transaction or overall scheme deceptive purpose have had a and ef- must 1048; Simpson, at SEC v. 27. See Simpson, F.3d at 1048. This dis- fect.” 452 H-04-1054, 778640, at Hopper, No. 2006 WL tinction, however, purposes of is irrelevant for *11, LEXIS at *37 2006 U.S. Dist. appeal, the defendants’ scienter this because 24, 2006); (S.D.Tex. Parmalat Sec. Mar. In re entering into the transactions would be a in (S.D.N.Y. Litig., F.Supp.2d 504 376 plaintiffs. of fact across all the common issue Dexia, S.A., Quaak 2005); F.Supp.2d applied We that the Ninth Circuit note also (D.Mass.2005); re Cross In Global recounted above to "scheme” the definition Litig., F.Supp.2d ing, 336- Ltd. Sec. Because, "deceptive well act.” Id. as as (S.D.N.Y.2004); Hauspie re Lernout & however, analysis ultimately predicated our (D.Mass. Litig., F.Supp.2d Sec. rule, any distinc- on the statute instead of 2003). of the rule is imma- tion between subsections terial to our discussion. Circuit, Ninth, Eighth unlike the prices inflated for shares or services from thinly capitalized correctly companies looking has taken these decisions collec- “ generate liquidity they so go public, could tively ‘deceptive’ to mean conduct in return for which it agree- extracted side a involves either misstatement or a failure companies ments that the pay would back to disclose one who has a duty the value of the inflation buying adver- Charter, disclose.” 443 F.3d at 990. That tising displayed from AOL to be at Home- quoted the technical definition of Charter, store’s AOL-based website. Like “manipulation” from Santa Fe and stated Homestore would then payments list its “any defendant who does not make or companies capital other investments affirmatively cause to be made fraudu- but would advertising characterize its in- omission, lent statement or or who does come from recurring them as revenue. directly engage manipulative securi- See id. trading practices, guilty ties is at most Although the defendants were dismissed aiding abetting and cannot be held because did not meet the standard for any subpart liable under of Rule liability that announced, the Ninth Circuit 10b-5.” Id. at 992. promulgated the court very standard By holding the court in Charter similar to the one the instant liability against found that there was no urge us to adopt. The court concluded: set-top vendors of cable boxes who had [Cjonduct by a defendant that had the sold their boxes to Charter inflated principal purpose and effect of creating prices subject agreement to a kickback appearance deceptive false transac- whereby they would direct the value of the part tions as of a scheme to defraud is price inflation back to Charter the form conduct that employs uses or a deceptive of advertising purchases. See id. at 989- 10(b). device within the meaning of 90. The vendors were to have Furthermore, such conduct be in known doing that Charter was this to falsi- purchase connection with the or sale of fy its by depreciating accounts ex- its if it part securities of a scheme to penses, investments, capital as from the misrepresent public financial informa- purchase boxes, set-top of the but was tion where the complete scheme is not booking advertising the increased fees as until misleading information is dis- recurring revenue. See id. In other seminated into the securities market. words, the court dismissed case on Finally, plaintiff a presumed to facts extraordinarily similar to the facts have relied on this scheme to defraud if present that are here.28 misrepresentation', a necessarily which The Ninth resulted from Circuit came to a the scheme and the defen- different therein, dant’s conduct conclusion. In was disseminated Simpson, the defunct com (Homestore.com) into an efficient market and was pany re- “bought revenue” flected in price. the market by in engaging type the same of round-trip transactions that took in place Charterand Id. at 1052. See also In re Parmalat Sec. to have occurred here. Litig., F.Supp.2d 481-90 (S.D.N.Y.2005). Simpson, 452 F.3d at paid 1043-44. It (11th Eighth analysis Cir.2001); support The Circuit's Wright finds v. Ernst & prior in LLP, several in (2d Cir.1998); cases other circuits that Young 152 F.3d 169 Anix primary liability had refused to extend to sec- Co., ter v. Home-Stake Prod. 77 F.3d 1215 actors, ondary albeit in non-transactional sce- (10th Cir.1996). Int’l, narios. See Ziemba v. Cascade Court, in in part The Ninth Circuit relied on a law its other cases interpreting questioned 10(b), device, § review article that had the as- has established that a such that a defendant could be liable sertion scheme, “deceptive” as a is not unless it only for its own statements because duty involves breach of some of candid a forbids the use of “device” and disclosure.30 rule 10b-5 condemns those who act “indi- reason, defining “deceptive” by For this rectly.”29 reasoning What this overlooks is referring dictionary to the same the Court Supreme appeared that the Court had to to approach used define “device”'—-the tak- scope limit the than “deception” rather Parmalat, by en scope of “device.” F.Supp.2d approvingly by cited Supreme Court has defined “device” the district court a quo improperly to —is dictionary referring point- but has authority dictionary substitute the of the edly “deceptive” refused to define Likewise, Supreme for that of the Court. “[Djevice” way except through caselaw: plaintiffs’ reference the common law “(t)hat devised, means which is or formed fruitless; meaning “deceptive” is where contrivance; invention; by design; a an Supreme authoritatively Court has scheme; often, project; a scheme to de- pertinent language construed the ceive; artifice,” stratagem; and “con- giving plaintiffs’ statute rise to the cause “(a) in pertinent part thing trivance” action, meaning the common law scheme, in contriving; contrived or used language is irrelevant. turn, plan, or artifice.” “contrive” in Although of our some securities cases “(t)o devise; pertinent part is defined as have considered the (t)o common law where ... plan; plot design; fabricate ... ” Supreme placed gloss Court has no Ernst & invent ... .... scheme terms, Ernst, the relevant none of this court’s 425 U.S. at 199 n. S.Ct. decisions has contradicted either the fun- (citing WEBSTER’S INTERNATIONAL DICTIO- (2d ed.1934)). principle just damental stated or the Su- Having established NARY (and meaning relying preme interpretation “decep- of “device” on it Court’s scienter), requires to hold that tive.”31 Because “device” is modified ("The Simpson, (citing 29. See 452 F.3d at 1049 Rob S.Ct. 2199 securities transaction Prentice, Locating duty ert That "Indistinct” and the breach of thus coincide .... A mi- "Virtually Primary sappropriator Nonexistent” Line Between who trades on the basis of ma- terial, short, 10(b), information, Secondary Liability nonpublic gains Under Section (1997)). advantageous position through 75 N.C. L.Rev. de- his market ception; he deceives the source of the infor- See, Chiarella, 234-35, e.g., simultaneously 30. 445 U.S. at 100 mation and harms members ("When allegation investing public.”) quoted S.Ct. 1108 an of fraud is of the We take the nondisclosure, upon "deception” based there can be no statements to mean that occurs duty speak misappropriator duty fraud absent a .... We hold where the breaches his source, (collec- duty § that a to disclose under does not to his the act/scheme/omission "device”) possession nonpublic tively trading security from the mere arise of is the of the information.”). market See also United States without disclosure. 642, 655, O'Hagan, v. 521 U.S. 117 S.Ct. 2199, Docutel/Olivetti, ("Because 138 L.Ed.2d 724 v. 31.See Finkel 817 356, (5th Cir.1987) deception misappropriation (referring essential to 359 to the com theory feigning fidelity determining § involves to the source mon law and re Sklar, information, causation); fiduciary quires of if the v. discloses to transaction Shores 462, (5th 1981) plans nonpublic May source that he information, to trade on the 647 F.2d 469 n. 5 Cir. banc) (en ‘deceptive (citing there and of Torts for is no device' the Restatement 10(b) violation.”); 656, requires § proposition thus no id. at that securities fraud illegal they manipulation.34 can if it is whether constituted “deceptive,” no device be They not. did meaning deceptive not within Similarly, may the rule statute. because Manipulation requires that a de statute, not be broader than the this con- directly in fendant act the market for the meaning “deceptive of clusion as to security. Supreme relevant Court has “in- precludes interpretation device” dictionary of the word cited a definition directly” accepted that contradicts the but, time, at attached the the same has meaning “deception.”32 that, law, fraud caveat as used securities art.” “virtually it is a term of Ernst & The district court’s definition of Ernst, 21, n. 425 U.S. at 199 & 96 S.Ct. “deceptive sweeps broadly; acts” thus too precise not Although the Court has in which the en the transactions banks ly beyond providing term a few defined the gaged encompassed were not within the sales, examples such as wash matched or proper meaning phrase. of that Enron ders, rigged prices, and then-District shareholders, duty had a to its but the in an Judge Higginbotham, influential not. banks did The transactions which Fe, opinion shortly issued after Santa ex engaged the banks most aided abet haustively analyzed meaning of “ma by making misrepre ted Enron’s deceit its “[f|rom nipulation” and concluded that plausible.33 sentations more The banks’ study, following emerges: definition transactions, participation regard practices marketplace in the which have purpose less of the or effect of those trans im creating the effect of either the false actions, give primary did not rise to liabili pression activity that certain market is 10(b). ty under occurring activity in fact when such is supply unrelated to actual and demand or IX. tampering price manipu with the itself are lative.” Hundahl v. United Benefit Life Having determined the banks’ al- (N.D.Tex. Co., F.Supp. Ins. leged were “misrepresenta- actions not 1979). “deceptive tions” in the sense of acts” on Hundahl, may which an pre- Judge Higginbotham efficient market rely, carefully sumed to proceed emphasized activity we to consider that such causation); wrongdoing”). agree loss Huddleston Herman & We with the court in MacLean, (5th 547 n. Cir. Parmalat that whether the banks would have Mar.1981) (citing authority Unit A Prosser guilty aiding abetting, been had their requirement Bank, scienter in securities place actions taken before Central is not fraud), grounds, vacated on other particularly important; if have commit- (1983). 103 S.Ct. 74 L.Ed.2d 548 well, ted a violation as the fact that their could conduct also be characterized as Bank, 32. See Cent. 511 U.S. at aiding abetting would not save them. See (establishing that rule 10b-5 not Parmalat, F.Supp.2d at 493. What is 10(b)). scope exceed the important pleaded primary that the banks have committed the 79, Armstrong McAlpin, 33. See employing "deceptive violation of a device.” (2d 1983) (explaining Cir. that before Central Bank, aiding abetting securities fraud re Fe, 10(b); 473, § "(1) 34. See Santa 430 U.S. at quired proof of a securities law violation (stating (2) language S.Ct. 1292 that by "the of primary wrongdoer, knowledge a of the 10(b) gives Congress by person sought charged, no indication that violation to be prohibit any involving person sought meant to conduct ... that to be not charged substantially manipulation deception”). assisted in place take could not outside the market lation” is consistent with the dictionary’s security the relevant and retain the title of does not that it mean is coextensive with manipulation; conduct that affects it; art, “manipulation” is a term of marketplace indirectly can violate applies only to conduct that place takes if only deception. it constitutes Id. at directly within the market for the relevant 1359, Circuit, Eighth 1362. Like the we security. adopt Judge Higginbotham’s reasoning holding requires Our in Shores some- full, in and definition and we are aware of case, explanation. what more In that we no circuit that recognizes broader defini- adopted the “fraud-created-the-market” Charter, tion. See 443 F.3d at 992 n. 2. theory, whereby actors who an introduced argue Plaintiffs that this is fore- course security otherwise unmarketable into the Burlington closed to us Schreiber v. market means of fraud are deemed Inc., 1, 6-7,

Northern 472 U.S. 105 S.Ct. guilty manipulation, of plaintiff and a can 2458, (1985), 86 L.Ed.2d and Shores. plead that he relied on integrity Schreiber, In disagree. We 472 U.S. at market rather than on individual fraudu- only 105 S.Ct. the Court declared Shores, lent disclosures. 647 F.2d at 469- that manipulation, its definition of insofar 70 & n. 8. We lawyers determined that as it had defined that term Ernst & secondary and other actors involved in Ernst, is consistent with both the dictio- preparing the fraudulent statements that nary and the Judge common law. So is facilitated introduction of the otherwise Higginbotham’s. security unmarketable could be liable for Hundahl, Judge In Higginbotham thor plaintiff security purchaser’s loss. See oughly analyzed history the common law of id. the term and “manipu concluded that the preclude Shores does not the decision we primarily lation” cause of action was con reach in case. The basis of the fraud- keeping cerned with free markets clear of theory created-the-market is that interference but not does reach all conduct directly fraudster interfered with the mar- might deception constitute or breach by introducing ket something that is not Hundahl, fiduciary duty. objectively like the others: unmarket- F.Supp. at 1359-62. The Court security able being has no business Schreiber, 472 U.S. at 105 S.Ct. qualitatively there.35 This is different Fe, citing Santa adopted similar limited from what the banks are to have construction to determine that not all done, namely engage in transactions else- fiduciary duty breaches of state law consti manipulation gave misleading impression tuted where purposes of the fed eral securities laws. The fact that of the value of Enron securities that were Supreme “manipu Moreover, definition already Court’s on the market.36 Abell, fact, established, (explaining pre-Basic, 35. See 858 F.2d at 1122 bar. Finkel Shores, presumption that under “the ap- test of ‘not entitled to that the fraud-on-the-market promot- plies allegations deceptive [is met] be marketed' where the omissions enterprise patently ers knew the meaning itself was “deceptive” within the limited worthless”). that we have Id. at described above. concept manipu- We did not broaden Likewise, argument, plaintiffs' 36. At oral plaintiffs’ counsel con lation. citation of SEC v. Docutel/Olivetti, 813, 819, Zandford, tended that in Finkel v. (5th Cir.1987), (2002), expanded F.2d 356 this court 153 L.Ed.2d 1 misses the mark. De- case, ception, the fraud-on-the-market from in that need as occurred activity Shores to reach like the circumstances case coincide with a defendant’s in the however, liability happened Ultimately, when the rule of manipulation Shores the bogus security was introduced into the must be either overinclusive or underinclu- market; secondary lawyers and other ac- what Hundahl called sive so as to avoid having were rendered liable for con- resulting tors terrorem settlements” from “in spired to achieve that end.37 the wake of, expense difficulty even merito- however, Bank, conspiracy is no of Central riously, defending litigation. this kind of 10(b) § theory liability, a viable of longer Hundahl, F.Supp. at 1363.39 Strict aspect of Shores has been over- so 10(b) § against inputting construction of ruled.38 aiding abetting liability secondary “deceptive actors under the rubric of acts” today’s contradicts Nothing decision gives type rise to the “schemes” Applying the Hundahl precedent. our certainty sought that the Court in Central manipulation, definition of we conclude may exaggerate Bank. The banks alleged to that the banks’ actions are not length parade of horribles type manipulative be the devices on present wherein defendants are continual- may legally which an efficient market be ly put taken out of and back into endless presumed rely because the banks did hoe, on, shifting, securities cases based ad directly not act in the market for Enron perceptions fact-based influ- securities. by plaintiffs’ pleading. enced skill at artful X. may But fact that the banks be on to something might serious be best demon- Supreme did in As Court Central in Simpson, strated the fact that Bank, may taking worth into account attempted F.3d at the court to distin- policy certain considerations determine guish addressing Charter as an arms- our interpretation plau- whether length subject transaction not sibly Congress. accords with the will of i.e., liability, ruling consistent with its do, all, escape liability Defendants after If own. there is a distinct difference be- hardly praisewor- conduct that was culpability tween the of defendants’ actions thy. According plaintiffs, defendants cases, pleadings based on the those two pulled plug could have on the Enron fraud; apparent likely it is not to us and is be- they profited instead from it while yond understanding good-faith fi- large people eventually numbers of lost an aggregate professionals sum in nancial are attempting the tens of billions of who liability. dollars. to avoid securities; manipu- sweep away recog market for the relevant nale would decisions lation must so coincide. nizing that defendant be found liable in private conspiring action for to violate Shores, ("[Plaintiff's] 37. See 647 F.2d at 469 10b-5.”). and Rule proof will burden of be to show that knowingly conspired bring defendants secu- 39.Again quote Judge Higginbotham, we find- rities onto the which were not market entitled Hundahl, ing F.Supp. his words in marketed.'') added). (emphasis to be 1363, applicable to this case: "This suit is Squadron, Ellenoff, 38. See Dinsmore v. hardly variety. Ples of the strike ent, Sorkin, (2d & They substantial [were] shareholders. Sheinfeld Cir.1998); GlenFed, Litig., In re Inc. Sec. represented by distinguished and able coun- Cir.1995). (9th See also Cent. precedential sel. It is the force of the rule Bank, 511 U.S. at 201 n. 114 S.Ct. 1439 here addressed.” J., (Stevens, ("The dissenting) Court's ratio First, say not to that the instant matter take comfort in two This is observations. availability in the presumptions should be decided accord with this broad in this policy preferences. legal mention area means that the merit of court’s We that, only likely con- securities cases is somewhat policy demonstrate even less disaster, than that of other cases to sidering scope contingent the of the Enron only on facts that have Congress promote incompletely was not irrational been developed in fi- at plain legal standards for actors the time of class certification. Second, Castaño, by in limiting secondary nancial markets lia- we observed said, bility. Eighth F.3d at As the Circuit has class certification is often practically dispositive litigation like impose liability To for securities fraud case at bar. If the certification decision is party length on one to an arm’s business entangled so with the merits as to make transaction in goods or services other interlocutory appeal dispositive of the sub- than party securities because that knew litigation, stantive it incidentally but or should have known that the other perhaps happily likely legal more that the party would use the transaction to mis- merit practical outcome of securities lead investors in its stock would intro- cases will coincide. potentially duce far-reaching duties and engaged day- uncertainties for those in however, recognize, We that our ruling to-day dealings. business Decisions of legal coincide, particular- merit not magnitude should be made Con- ly in the aggrieved minds of former Enron gress. shareholders who have lost billions of dol- Charter, lars in a fraud allege 443 F.3d at 992-93. was aided and bar, abetted the defendants at

XI. justice notions of play. and fair ac-We necessity knowledge that the establishing interpretation a classwide courts’ presumption of in gone reliance securities class could have in a different might actions makes substantial merits review on direction and have established liabil- 23(f) appeal ity a rule A for the actions the alleged inevitable. classwide banks are Indeed, presumption of reliance is not crucial undertaken. one of our sis- certification, prima to class it ter circuits—the estab- Ninth —believes that facie applied lishes a critical did. We have Supreme element of the substantive “provides requisite guidance ascribing tort. Reliance Court’s in- limited terpretation viewing causal connection between a defendant’s to the words of misrepresentation injury.” the statute as the Congress’s result of Basic, balancing of competing provide 108 S.Ct. 978. desires to plaintiffs’ remedy for some for Where several interactions securities fraud with- opening with the out un- alleged supply floodgates nearly market are joint frequently unpredictable basis for their reliance on defendants’ limited and liabil- conduct, ity secondary carefully we must examine actors the securities leg metaphorical triangle: third of that the markets. legal nature of defendants’ interactions summary, pre- Ute Affiliated

with the market. sumption ap- of classwide reliance cannot

If, here, Likewise, court, probably as is ply case here. the district al- legally appropriate intentions, in- misapplied examination makes beit with the best of terlocutory appeals presumption; securities cases the fraud-on-the-market merits, practically dispositive we misrepre- facts do constitute case) in who act in concert with market volved sentations on which efficient securities in rely. publicly-traded issuers of may presumed be to investing public to defraud the schemes in certified Because no class be cannot be held liable as violators 10(b) presump- case without classwide they or Rule 10b-5 unless of Section reliance, analysis of reliance tion of our (1) directly public misrepresenta- make We decline to disposes appeal. of this (2) tions; shareholders a owe the issuer’s whether, actions address had defendants’ disclose; directly duty “manipu- the mar- misrepresentations been on which late” the market for the issuer’s securities rely, they presumed ket was would have sales or through practices such as wash together as a appropriately grouped been so, majority the doing matched orders. unitary giving rise to common is- scheme aligns Eighth this court with the Circuit1 the among sues of loss causation class array and immunizes a broad of undeni- Likewise, from ad- members. we abstain ably conduct from civil fraudulent of the district dressing manageability the 10(b), effectively giving under Section sec- implement proportion- the plan court’s ondary impu- license to scheme with actors the liability provisions ate PSLRA. nity, long they keep quiet.2 as as a class is RE- certifying The order below, I I Although, explain as cannot VERSED and REMANDED further majority’s cramped The motion inter- proceedings appropriate. agree as with the stay pretation statutory trial DENIED. The man- language the of sec- 10(b), view, my majority date shall issue forthwith. com- tion a significant reaching mits error even DENNIS, Judge, concurring Circuit this issue. Because the issue on which the judgment: majority today— opinion bases its decision significant question and unsettled about judgment reversing I concur in the scope primarily liability under Sec- order, I district court’s certification but do unnecessary tion to a determina- —is grounds so on different from those as- tion whether the have satisfied signed by majority. respectfully I dis- prerequisites maintaining a class agree majority with the as to the issues action under Federal Rule of Civil Proce- upon which it Although decides the case. dure it we should not consider on this ultimately I that agree the certification interlocutory appeal of class certification. reversed, order I do not must believe necessarily that prevents plain- the law have, however, The investment banks prosecuting tiffs from this case as a class raised two substantial issues that are relat- action, and, below, explain as I I would inquiry. ed to the district court’s Rule 23 remand the case the district court for The argue banks are not further consideration whether crite- pre- entitled to fraud-on-the-market ria for certification have been satisfied. sumption of reliance because have not majority today secondary requirements satisfied the of this holds court’s (such actors in- Greenberg Sys- investment banks decision Crossroads Commc’ns, Litig., worthy,” significance 1. See In re Charter Inc. Sec. but brushes the its (8th Cir.2006). 443 F.3d 987 decision to their conduct aside immunize noting "[ujltimately, ... the rule of liabil- majority ity 2. The notes that the investment must be either overinclusive or underinclu- "hardly praise- supra, banks' conduct was at 392. sive.” (5th tems, Inc., Cir.2004),3 364 F.3d 657 certification and rule on the merits of plaintiffs’ and that the district court erred when it Unger claims. See v. Amedisys, Inc., (5th Cir.2005) concluded that defendant found to (“Class knowingly violated the securities laws hearings certification should not be jointly severally could be held liable on the mini-trials merits of the class or plaintiffs’ in for all losses connection claims.”); individual see also Eisen v. Car multi-year Enron’s fraudulent 156, 177, lisle & Jacquelin, 417 U.S. 94 view, Greenberg, my scheme. is incon 2140, S.Ct. 40 L.Ed.2d (noting 732 prior precedents sistent with of the Su that courts preliminary cannot “conduct a preme Court and this court insofar as it inquiry into the of a merits suit” on class purports to relieve securities defendants of certification). rebutting the burden of the fraud-on-the- clear, though, It is that a district court presumption. market the latter point, On cannot certify a class action unless it finds however, I conclude that the district court that the have satisfied all of the by construing broadly joint erred too 23(a) requirements of Rule and of one of provision several of the Pri 23(b). the three subsections of Rule To Litigation vate Securities Reform Act of obligation, fulfill that necessary it is often (the “PSLRA”), 1995 15 I U.S.C. 78u-4. for the go “beyond district court to

would remand the case to the district court claims, pleadings” and “understand de whether, applying to determine the correct fenses, facts, relevant applicable sub standard, legal damages common issues stantive law order to make a meaningful predominate continue to over individual determination of the certification issues.” issues and whether the case can be tried in Co., 734, Castano v. Am. Tobacco 84 F.3d a manageable fashion. (5th Cir.1996). addition, 744 to the extent that issues relevant to the ultimate

I. merits of the case are also necessary to the district court’s determination of one or inquiry Our interlocutory appeal 23(f)4 23, requirements more of the of Rule under Rule determining is limited to can, must, district court whether the consider those certify- district court erred ing stage. the case as a issues at the class certification class action. See Bell v. Solutions, Bell, Inc., 311-12;, Ascendant F.3d at see F.3d also In re (5th Cir.2005) 23(f) Pub. (stating Offering Litig., that Rule Initial Sec. 471 F.3d “ (2d Cir.2006) (“[Tjhere permits party ‘appeal only the issue is no reason certification; of class no obligation other issues to lessen a district court’s ”) (quoting be raised’ Bertulli Indep. every make a determination that Rule 23 Pilots, Ass’n requirement Cont’l certifying is met before (5th Cir.2001)). just We are not permitted to class because of some or even full go beyond necessary the issues overlap requirement class of that with a merits rely appeals may also seek Plaintiffs on the A court of in its discretion Affiliated presumption Ute of reliance. See permit appeal an from an order of a district Affiliated States, Ute Utah v. United Citizens of granting denying class action certi- (1972). 31 L.Ed.2d 741 I application rule if fication under this disagree majority's do not with the conclusion days entry made to it within ten after of the that the Ute does not Affiliated stay appeal proceedings order. An does not apply supra, in this case. See at 383-85. judge in the district court unless the district 23(f) provides: appeals 4. Fed.R.Civ.P. or the court so orders.

issue.”)-5 token, any “questions of law or fact common to the By the same such necessarily scope within the predominate are also of the class over issues members interlocutory appeal of our review on any questions affecting individual certify a decision to class. 23(b)(3). a district court’s members.” Fed.R.Civ.P. With- however, court, this court Like the district states, majority that finding, out relevant to the merits can consider issues district court could not have concluded only to the extent plaintiffs’ claims to a that the were entitled class- necessary to de- that such consideration is reliance, presumption of and individu- wide proposed whether the class satis- termine al issues of reliance would overwhelm the requirements of Rule 23. See fies issues, common, rendering classwide class (“[A] at 41 Offering, Initial Pub. Thus, major- inappropriate. treatment any aspect judge district should not assess ity variously characterizes the district unrelated to a Rule 23 re- merits 10(b) ruling scope court’s on the of Section added). quirement.”) (emphasis “integral” or “critical” to its view, majority’s In the one of the issues certification class decision.

that this court can review on this interlocu- majority to opinion The labors create tory appeal is the district court’s conclu- impression relationship of a between secondary that a actor can be held sion the district court’s decision securities 10(b) liable as a violator of Section 10(b) can a claim plaintiffs state Section participation and Rule 10b-5 for its in a against secondary a actor who did not defraud, though to it does not scheme even make affirmative misstatements and misrepresentation make a or public direct plaintiffs the issue whether the are enti- duty According a to the speak.6 rely tled to on the fraud-on-the-market majority, the district court’s determination Levinson, presumption of Basic Inc. v. 485 violate secondary actors can Section 978, 10(b) U.S. 99 L.Ed.2d 194 by engaging in “de- and Rule 10b-5 (1988). majority, According to the because making public mis- ceptive” acts without public did not make representation having duty speak banks misstate- 23(b)(3)’s implicates requirement duty Rule that ments and had no to disclose vis-a-vis important deceptive It is to note that the factual find- and Rule 10b-5 based on acts not ings made the district court at the class involving public a direct misstatement or a stage binding certification are not on the trier duty speak when it denied certain defen- Offering, of fact at trial. Initial Pub. 10(b) dants’ motions to dismiss Section (''[T]he at as to a Rule determination against Corp. claims them. See In re Enron requirement only purposes is made Sec., Litig., Derivative & ERISA binding class certification and is not on the (S.D.Tex.2002). F.Supp.2d In 590-94 its facts, trier of even if that trier is the class certification, opinion on class the court recon- judge.”); Unger, at certification 401 F.3d (and to) ultimately sidered adhered earlier its (stating that "the court's determination for light developments views in of recent in the (or purposes may class certification be revised law, noting power case that it had "the factfinder”); wholly rejected) by the ultimate interlocutory reconsider such decisions.” See Thornton, LLP, Gariety v. Grant Sec., Corp. re In Enron Derivative & ERISA (4th Cir.2004) ("The findings made for H-01-3624, Litig., No. 2006 U.S. Dist. LEXIS resolving a class action certification motion (S.D. 2006). at *155 n. 84 Tex. June serve the court determination of its not, however, The district court did indicate requirements whether the of Rule 23 have any point that it believed that its decision demonstrated.”). been any specific on that issue relevant was initially 6. The district court held that second- requirement of Rule 23. ary actors can be liable under Section shareholders, Enron’s their participation simply joint immunized because their Enron fraudulent transactions that scheme to defraud affected the market any independent purpose lacked business only through public Enron’s statements. 10(b); beyond is the reach of Section be- majority’s leap to reach and resolve cause the banks’ conduct is not actionable dispute this strictly a question —which 10(b), plaintiffs under Section cannot about the substantive reach of Section reliance; invoke a classwide stage certification overlooks —at and because reliance cannot presumed key Regardless fact: of whether basis, on a classwide individual issues of court ultimately agrees with the district predominate reliance over common issues. sum, court that the banks’ upshot majority’s actions are rea- soning “deceptive” is that are not entitled to acts within meaning maintain a class action because the con- 10(b), Section those actions affected the duct for which seek to recover'—to market via public Enron’s misrepresenta- majority’s example, take Merrill Thus, tions. this court can determine Lynch’s alleged conduct in connection with whether the are entitled to the the so-called “Nigerian Barges Transac- fraud-on-the-market presumption without tion”—is not actionable under Section delving into the district court’s decision 10(b). that the banks’ conduct is by covered Sec- reasoning

With the that underlies the 10(b). tion Viewed in light, there is majority’s manner, view set out in this little doubt that in this case the element of apparent becomes any that link between causation, reliance, transaction can be the district liability ruling court’s and its by satisfied the market’s reliance on En- application of the pre- fraud-on-the-market public representations ron’s of its financial sumption tangential is at ques- best. The health its statements about and/or tion of subject whether the can banks be question. transactions in Simpson 10(b) liability Section making pub- without Inc., AOL Time Warner lic misrepresentations byis no means nec- (9th Cir.2006) (“[A] plaintiff may be essarily applicability related to the presumed to have relied on scheme to th[e] fraud-on-the-market presumption of reli- defraud if a misrepresentation, which nec- Although ance. it is true that the fraud- essarily resulted from the scheme and the presumption on-the-market requires that therein, defendant’s conduct was dissemi- there a public misrepresentation be upon nated into an efficient market and was case, which the can rely, market in this reflected in price.”); the market In re there certainly public were misrepresenta- Parmalat Litig., F.Supp.2d Sec. tions that arose out of the allegedly banks’ (S.D.N.Y.2005) (applying fraud-on-the- Enron; fraudulent transactions with market presumption against to claims sec- rub, of course—and the banks’ ondary actors though only even issuer argument why they subject are not public misrepresentations made to the Enron, Section that not —is market). Accordingly, this court can as- banks, conveyed misrepresenta- sess whether a classwide of tions to According the market. to the applies reliance banks, this case without first they because public made no state- ments, considering the district are, worst, court’s merits rul- aiders and abet- ing on the scope liability. tors of Enron’s fraud. of Section The coun- ter asserting, among I would things, other that therefore find that the latter issue allegedly banks’ beyond fraudulent conduct is is permissible scope of our 12(b)(6) Rule effort to recast its Mylan’s Rule limited, interlocutory review under challenge to class certi- arguments as 23(f). ground that a class of fication on the course, is, correct majority lacks antitrust stand- purchasers direct in no engaged the banks sense—if some Mylan’s argu- That no avail. ing, is to 10(b), the reach Section conduct within standing may dis- to antitrust ment as against cannot prevail then the thereby the class as a whole pose of plaintiffs’ But action. them in a class purchasers a lawsuit direct preclude circum- under such inability proceed Rule beyond purpose goes well to do with the nothing would stances 23(f) because it is unrelated review on an individual reliance prove need to The fact requirements. the Rule decides, on a com- this court basis. When challenge disposi- Mylan’s would basis, majority mon, as the does classwide is not unlike a of the class action tive alleged conduct today, that the banks’ the merits of variety of issues of law on law, it is as a matter of non-actionable very na- because of the a class action actually claim that we dubious to then commonality; review of is- ture of such of reli- only that individual finding issues 23(f) Rule expand interlocu- sues would issues. over common predominate ance any review tory review to include majority’s individual reasoning, Under in a motion to raised dismiss question predominate; do questions of reliance dispose of a lawsuit may potentially irrelevant, rather, simply be- reliance is a whole. This result as to class as can, or a plaintiff no individual cause mix the inappropriately issue would basis, the banks en- establish class with the merits of a class certification actionable conduct. gaged case, interlocutory do not warrant which 23(f). to Rule What pursuant a review that the of mere fact resolution The 23(f) of Rule is purposes matters for putative a class against issue merits definition, cer- would, the the issue is related to class by preclude whether can .... simply a class action tification itself maintenance of of that not sufficient to warrant review omitted). (internal citation Id. interlocutory appeal. Under issue on an po- between the banks’ relationship rule, any Rule the resolution of such 10(b) liability and cer- 12(b)(6) fair tential Section class then become issue would 23(f) this case is no closer than the The D.C. tification in game for Rule review. standing antitrust relationship between rejected just such “but-for” Circuit has 23(f) Lora- In In and class described appeals. Rule re: certification approach to majority’s claims to zepam. Despite the Clorazepate Liti Lorazepam & Antitrust above, 98, 107 (D.C.Cir.2002), contrary, explained as I wheth- the gation, 289 F.3d 23(f) give can to a the banks’ conduct rise grant appeal a Rule er court refused to 10(b) any action under circum- that the Section petitioner’s despite the assertions decided stances not be order members lacked antitrust need plaintiff class enti- pas In a determine whether standing to maintain the suit. Basic’s reli- to this tled to sage particularly pertinent is invoke 23(f) sufficiently ance, case, and it is therefore explained that Rule that, any class action related to of Rule 23’s every issue permit does not review interlocutory to warrant re- requirements would against plaintiffs, if resolved view. destroy the class action:

II. Denver, N.A., Bank Interstate 511 U.S. 164, 114 S.Ct. 128 L.Ed.2d 119 Even were it appropriate for this court (1994).8 to consider whether banks’ can conduct constitute violation Such a narrow interpretation of Section 10(b) 10b-5, of Section and Rule the ma- 10(b) compelled is neither justified nor by jority errs defining the term “decep- Supreme Court precedent. The majority’s 10(b) tive” in Section in an unduly restric- hinges conclusion entirely almost on its tive fashion. that a determination court considering the Based on language gathered inap- from reach of Section give cannot the term posite Supreme decisions, Court the ma- (in “deceptive” phrase “manipulative or jority opinion concludes that Supreme contrivance”) deceptive device or its com Court has “deceptive” defined in a manner understood, monly or dictionary, meaning,9 departs both plain from the meaning Supreme because the Court has told us 10(b)’s of the word and reduces Section that a defendant acts deceptively only if it prohibition flexible “directly or indirect- makes a misrepresentation or remains si ly” using or employing “deceptive de- lent in the face of a duty to disclose. The

vice or contrivance”7 to a much cir- more majority opinion relies primarily on Chiar prohibition cumscribed that applies only to States, ella v. United 445 U.S. specific misrepresentations or omissions (1980), S.Ct. 63 L.Ed.2d 348 breach of an duty affirmative to speak. United v. O’Hagan, States Having arrived at this narrow definition of (1997), 138 L.Ed.2d 724 acts, deceptive majority opinion then support this narrow view of the that, statutory finds because banks did not make language. The majority’s view is not im misrepresentations or have a duty to plausible Chiarella, speak, statements in Section does not reach their —some conduct, O’Hagan, and other imposing liability cases can be on them read would be indistinguishable together to support from type majority’s posit of aiding and abetting liability barred ion10 —but neither compelling, and the Denver, Central Bank N.A. v. First passages upon which the majority relies 10(b) 7. prohibits any common, Section "manipu- also 9. to the dictionary Reference defini contrivance, is, lative” device or but I incidentally, do not tion the approach that the majority take issue opinion's with Supreme the conclu- Court has used to define the words "device,” sion that the banks’ "manipulative,” conduct in this and "contrivance.” "manipulative,” case was not 185, as that Hochfelder, term is See Ernst & Ernst v. 425 U.S. 10(b). supra, 20-21, used in Section 1375, See at 390. 199 & 96 nn. S.Ct. 47 L.Ed.2d (1976). 668 Although 8. commonly this issue is framed as whether imposed can be unsurprising consistent It is Supreme that the Court’s decision, with the Central Bank generally speak Central Bank misrepresenta- decisions relatively omissions, itself establishes little the about tions or typically as 10(b). reach of plaintiffs Section through in that means which fraudulent conduct alleged only case that Central Bank aided and Judge reaches the market. Kaplan As re- 10(b); Parmalat, abetted a violation Section "[A]ny marked deceptive in device plaintiffs did claim that the practice, not involving bank was or manipu- other than one liable aas violator trading of the activity, logically requires statute. lative Bank, 191, Central U.S. at somebody 511 114 misrepresent S.Ct. 1439 something or omit at ("Respondents that Central point, though concede Bank did some even could device manipulative not deceptive commit a or act entail misrepresentation.” more than the 10(b).”). Parmalat, meaning within the F.Supp.2d at 497. above, itself did not Central Bank noted establishing that the Su- fall far short 10(b)’s because the question limited Section reach this has Court preme practices exclu- the defen “deceptive” only prohibition in that case asserted or omissions. misrepresentations sively aiding amounted dant’s conduct Moreover, from other language abetting. O’Hagan purport- nor Neither Chiarella affirmatively indi opinions of the Court’s engage can never person that a ed to hold not “deceptive” conduct need cates that conduct, through “deceptive” action in misrepresenta of a always be in the form In speech than or nondisclosure. rather Indus., Fe or an omission. See Santa tion cases, person held that a the Court those 462, 475-76, Green, vio- Inc. v. 430 U.S. non-public information who trades on (explain if breaches a only he 51 L.Ed.2d 480 lates Section S.Ct. disclose, the source of the either to cases all “includ duty prior ing that Court’s to the party the other information or to deception,” and did not element of ed some 654-56, 521 U.S. at O’Hagan, trade. See ... that a breach proposition “support Chiarella, 2199; U.S. 117 S.Ct. stockholders, majority fiduciary duty by cases, however, 1108.11 Those misrepresentation, any deception, without trading insider defen- dealt nondisclosure, violates the statute and —the or prosecuted only in those cases were dants added). Rule”) (emphasis i.e., silence, their failure to dis- their not, has Supreme Court Because material infor- they possessed close that maintains, narrowly majority opinion in the market that other investors mation capture “deceptive” the term defined of those cases possess. Neither did misrepresentations or omis- only direct multi-party of a allegations involved sions, disput- this court must construe contrast, Here, by to defraud. scheme technically and statutory language “not ed engaged in assert that the banks flexibly to effectuate its restrictively, but whereby they struc- with Enron scheme Zandford, purposes.” remedial SEC wholly fraudulent and entered into tured S.Ct. designed for the that were transactions (2002) (internal marks falsifying quotation Enron’s financial purpose of L.Ed.2d sole omitted). O’Hagan or Nothing light Chiarella of this canon of inter- results. that Section majority forecloses the conclusion I for the pretation, see no basis that is not “deceptive” can reach conduct strict, reading, and I opinion’s narrow or omis- misrepresentation form of a court, the Ninth agree with the district cases, one, that involve like this sion Circuit, Kaplan, and the SEC that Judge defraud. large-scale schemes to 10(b)’s directly or prohibition on Section any “deceptive device indirectly employing Court’s oth- Supreme Nor do secondary actors contrivance” can reach fraudulent con- establish that er decisions who, scienter, in fraudulent engage beyond the of Section duct is reach inflate an transactions that are used to the market simply because it affects Simpson, See issuer’s financial results. another misrepresentations of through the (“If conduct a defendant’s As 452 F.3d at 1050 in the fraudulent scheme. participant cases, however, 232, ("[N]ot eveiy instance of 100 S.Ct. 1108 was 11. Also central to those ac entering constitutes fraudulent that financial unfairness court's observation the Chiarella 233, 10(b).”); tivity id. at unequal under the basis of into a transaction on information, unfair, ("[N]either Congress nor the Com perhaps is not in- while adopted parity-of-informa ever has a deceptive any in sense mission herently fraudulent or rule.”). Chiarella, tion 445 U.S. at those words. See of illegitimate or role in an transaction has to cases like this one involving a scheme to principal purpose and effect creating of 10b-5(a) (c). defraud under Rule or appearance false fact Enron, further *71, 2006 WL at defraud, ance of a scheme to then the U.S. Dist. LEXIS at *287-88. On defendant is using or employing decep appeal, plaintiffs proffer several addi- tive device within the meaning tional reasons why Greenberg does not 10(b).”); Enron, 2006 WL at mandate reversal. assert Plaintiffs that *42-44, 2006 U.S. Dist. LEXIS (1) Greenberg does not apply to cases like (adopting *167-74 SEC view “that de one, this alleged where the scheme de- ceptive act includes a transaction whose fraud stems from the fraudu- defendants’ principal purpose and effect is to create a lent efforts to conceal from the market appearance revenues, false which can be information that would that show the is- words”) accomplished by acts as well byas suer is actually not meeting the market’s (internal quotation omitted); marks Par (2) expectations; Greenberg should not be malat, F.Supp.2d at 502-03.12 read to plaintiffs saddle with the burden of showing that the alleged misrepresenta-

III. tions actually changed the price market securities; (3) the issuer’s Greenberg’s investment banks also assert that requirements have, event, district court erred failing apply been sat- this isfied in court’s decision in this case. Greenberg v. Cross- Inc., (5th Systems, roads 364 F.3d 657 I agree with that this court Cir.2004), to determine whether plain- cannot Greenberg use the defen- relieve proceed tiffs could under the fraud-on-the- burden, dants of the to them in allocated theory. market In Greenberg, a panel Basic subsequent and in decisions of this this court held that plaintiffs who seek to court, of rebutting the fraud-on-the-market invoke the fraud-on-the-market presump- presumption. itself, In Basic Supreme tion of reliance must show both that the Court unmistakably was that clear the de- misrepresentations made to the market fendant has the burden of rebutting the i.e., were “non-confirmatory,” did presumption of reliance: simply confirm the market’s expecta- tions, misrepresentations and that the ac- Any showing that severs the link be- tually affected the price market tween alleged misrepresentation and question. securities See id. at 665-66.13 (or price either paid) received by the plaintiff,

In its opinion, June his decision to at a the district trade fair apply price, declined to market will Greenberg to sufficient rebut case. The district court the presumption concluded that of reliance. For exam- Greenberg applies only ple, to cases if under Rule [defendants] could show 10b-5(b) involving misrepresentations, not privy “market makers” were to the truth Although courts that required those have found that showing This inis addition to 13. requirements Section can reach Basic's type conduct of the show that material, public there misrepresenta- were developed here different formu- tions; (2) the question securities in traded in lations of liability, the standard for see market; (3) an plaintiffs efficient the Simpson, 452 agree F.3d at 1048 & n. I question traded the in securities in between majority any the that such distinctions the misrepresentations date of the and the are not relevant to this interlocutory appeal. date on which the truth was disclosed the supra, at n. 386-87 25. Greenberg, market. See at F.3d (or or his decision paid) by plaintiff, the here with merger discussions the

about price[.]” at fair market to trade the market Combustion, that and thus by affected been would not have price (quoting at 661-62 Greenberg, 364 F.3d causal con- the misrepresentations, 978) their Basic, 108 S.Ct. at 485 U.S. the basis could be broken: (internal nection (alterations citations original) in been trans- the had finding that omitted). fraud parts In IV and V and footnote price would be through market mitted however, Greenberg pan- the opinion, itsof gone. that it is and found changed course el affirmative burden actually plaintiffs’ the 978; Basic, see show, applica- to the prerequisite as a (“Arising out S.Ct. 978 id. at also that the defen- presumption, tion fairness, policy, public of of considerations moved actually misrepresentation dant’s judicial econo- well as as probability, security ques- in of price market the the also useful devices my, presumptions tion: proof of between allocating the burdens plaintiffs cannot was are satisfied that import of Basic We The clear parties.”). of reliance trigger presumption In Ameri- the court. Fine v. not lost on this offering of decrease simply evidence King Corp., 919 can Solar negative (5th Cir.1990), following the release of recognized price court that in this does not pre- Such evidence rebut Basic’s information. the defendant could “(1) price the stock’s by showing: raise an inference that sumption reliance re- actually by an earlier not affect the was affected the did that nondisclosures To raise (2) positive information. that the Plaintiffs lease price, market or a decline in stock through at the an inference purchased have the stock would false, positive state- price the informa- that an earlier had known price same (3) disclosed; actually price, a stock’s that the ment affected that was not tion false must show actually knew the information Plaintiffs increase was re- causing the market.” not disclosed to statement that was causing the de- lated to the statement decisions, in- court’s more recent This crease. professed at least cluding Greenberg, have 665; (referring to id. at 663 Id. at see also burden-shifting ap- fidelity to Basic’s in fraud-on-the- plaintiffs’ “burden court described proach. Greenberg, In price to show that stock’s market case the fraud-on-the-market allegedly false actually affected was follows: statement”). theory, reliance on the state- Under this mistakenly Greenberg appears if rebuttably presumed ment (1) this earlier decision relied on court’s can defen- show Inc., 267 F.3d 400 Zonagen misrepresen- Nathenson public made material dant (5th Cir.2001), (2) authority for its deci- as the tations, shares were the defendant’s defendants of the market, to relieve securities sion traded an efficient rebutting fraud-on-the-mar- between the burden plaintiffs traded shares Nathenson, panel presumption. made ket misrepresentations were time “where the facts this court held that was revealed. and the time the truth by the district court considered pre- properly may The Defendants rebut question did that the information reflect sumption by “[a]ny showing severs the stock then the price affect the misrepre- link between the deny fraud-on- properly price received district sentation and either the recovery.” Nathenson, the-market based demonstrate that the market in re- moved not, at 415. F.3d Nathenson did sponse how- to the alleged misrepresentation. ever, purport expressly convert the de- Because the Greenberg panel’s decision rebutting fendant’s burden of the fraud-on- to reallocate the in burdens fraud-on-the- presumption' by, the-market example, for— market Basic, cases conflicts not only with showing that alleged misrepresentation the but also with earlier court, decisions of this had no effect on the price market of the Fine, such as I would follow those deci security a burden on the plaintiff to —into sions and hold that the defendant retains show that the misrepresentation did affect Basic’s, the burden of rebutting presump price security. Rather, the pan- the See, tion of reliance. e.g., Modica Tay v. el in simply Nathenson determined that a lor, (5th Cir.2006) 465 F.3d district court did not err it when found (“ panel ‘When opinions appear conflict, the allegations of the plaintiffs’ com- we are bound to follow the opin earlier plaint affirmatively ”) demonstrated that the ion.’ (quoting H&D Tire & Auto. misrepresentations question in Hardware, af- did not Inc. Inc., Pitney Bowes price (5th fect the of the issuer’s stock. Id. at Cir.2001)); Unger, 401 cf. words, 417-18. (“[I]t other the F.3d at 322 n. 4 is the Supreme in affirmatively pleaded Nathenson them- job Basic, Court’s to overrule in ab the selves out of the pre- fraud-on-the-market sence of outright conflict with the Private Thus, sumption. Nathenson sup- lends no (cita Securities Litigation Act.”) Reform port to the omitted). view that securities tion The banks do not appear can invoke the pre- fraud-on-the-market have satisfied that burden on the record sumption if only they first affirmatively before us.14 Greenberg purports require Rather, also that the 267 F.3d at 419. ef- statement’s plaintiffs establish that the defendant’s false fect on price the market will show when "non-confirmatory” i.e., statement was falsity of the statement is later disclosed — simply it did preex- not confirm market's and the price market declines. See id. about, isting expectations example, This makes sense: if the expects market size of the quarterly earnings issuer’s share, earnings per, $1.00 then the share —before presumption ap- fraud-on-the-market can price might response not move in to a false ply. Greenberg, See at 665-66. Ac- public confirming statement that the issuer cording panel, Greenberg to the the market (even per $1.00 earned though share the is- rely allegedly cannot "confirmatory” false share). per $.50 suer in fact lost The lack statements because "confirmatory informa- not, however, movement does mean that the already digested tion has been the market false had no statement actual effect on the change will not cause a stock price. share Had truthfully the issuer dis- Id..; price.” ("Because see also id. at 666 per $.50 closed its loss share ato market upon of reliance is based actual share, expected earnings per $1.00 price, movement of the stock confirmatory declined, price share would have rather than information cannot be basis fraud- remaining steady; "confirmatory” the false claim.”). on-the-market actually statement price affected the share requirement This appears Greenberg from keeping artificially high in a situation where misinterpretation on a based of this court’s a truthful statement would have caused earlier decision in Nathenson. price The Nathen- share to decline. As the Nathenson that, panel son stated "special suggested, certain cir- the effect that the false state- cumstances,” such provides when an issuer ment had price on the share in such a case false information that confirms the market’s can falsity be shown when the state- expectations, the market can rely on those ment is price disclosed and the share de- statements, false though even the market clines. id. price may change Thus, at the time of the appears false there to be no basis Nath- Nathenson, "confirmatory” statement. See Greenberg's enson or otherwise for conclusion

404 Congress was suggests that PSLRA of the

IV. that could unfairness about the concerned that the district argue The banks of.the tradition- application from the result any defen- that erroneously determined many liability rule and several joint al knowingly violated to have found dant 104-369, at 37 H.R.Rep. No. cases. and jointly held could be laws securities 730, (1995) (Conf.Rep.), 1995 U.S.C.C.A.N. the losses caused all of severally for liable (“Under law, single a defen- current 736 overarching fraudulent entire by Enron’s liable to be 1% who has been found dant that without assert The banks scheme. damages 100% of the pay forced to be conclusion, the district legal this erroneous 104-98, case.”); at 20 No. S.Rep. in the pro- that found not have court could (“Un- 679, (1995), 699 23(b)(3)’s 1995 U.S.C.C.A.N. predo- satisfied Rule posed class liability, defen- joint and each manageability der several requirement or minance 23(b)(3)’s damages all of the award- superiority re- liable for dant is Rule aspect of Thus, a defendant plaintiff. to the ed quirement.15 the harm only 1% of responsible for found PSLRA, of the the enactment Before dam- pay 100% the required be to of could 10(b) actions rule in Section general unfair- perceived ages.”). To combat to have found violated that defendants was PSLRA, ness, Congress part of jointly were or Rule 10b-5 Section 78u-4(f), re- which 15 U.S.C. enacted all of the severally liable for and liabili- joint and several placed existing Musick, See, Peeler & Gar e.g., damages. liabili- proportionate of ty regime one Wausau, U.S. Ins. 508 rett v. Employers of liability joint ty limited and several and 2085, 194 292, 124 L.Ed.2d the se- knowingly violate who defendants joint (1993) “share that violators (noting 78u-4(f)(2)(A) 15 curities laws. U.S.C. wrong under remedial liability for that “against any defendant provides courts”); by the federal scheme established in a (10th judgment final is entered whom a Bendis, 916, 927 TBG, F.3d v. 36 Inc. damages liable action shall be for private v. Par Cir.1994); Thompson & Co. G.A. if fact (5th severally only the trier of Cir.1981); jointly and tridge, 963 covered that such specifically determines Licht, 395, 411 F.Supp. Ross of knowingly committed violation (S.D.N.Y.1967).16 history person legislative Proportionate Liability Under “confirmatory” nev- bution statements can that false Se- Securities Laws proceeding under a fraud- Federal support a claim er Multidefendant Litigation Securities the Private curities theory. on-the-market After 1995, 50 SMU L.Rev. Litigation Act Reform of in de- (1996) ("[I]f factors to be considered Among the were co-defendants 339-40 23(b)(3)’s action, superiority termining whether Rule adjudged in a federal securities liable requirement are "the difficulties satisfied the total plaintiffs were to recover entitled management in the likely subject encountered defen- be judgment from 23(b)(3). al., dants.”); action.” Fed.R.Civ.P. et The Devil Is of class Stuart Grant M. Application PSLRA’s in the Details: Pilz, Liability Is so Bryce Proportionate Provisions Amy & C. J. St. Eve 16. See also They May Uncertainty Be Fraught With Allocation Private The Fault Provisions of PLI/Corp. Vagueness, Void Litigation Act 1995—A Securities Reform 1995], Courts, (2005) ("[Until found each defendant Litigants Roadmap N.Y.U. laws prior violated federal securities (stating J.L. & Bus. PSLRA, required pay amount of the full recognized im could "[c]ourts to the regardless plaintiff, any judgment theory joint plied several claims”); vio- was the that defendant Marc whether and Rule Section 10b-5 violators.”). Olive, many merely one Christopher lator Steinberg & D. Contri- I. the securities laws.” If no knowing viola- on knowing joint violators and several lia- found, tion is the provides statute that the bility for all of the damages by caused defendant “shall be liable solely for the fraudulent scheme as a whole: portion judgment that corresponds The Court finds that a argu- reasonable to the percentage of responsibility of that ment can be made that where a defen- 78u-4(f)(2)(B). § [defendant].” Id. dant knowingly engaged in a primary that, The banks assert under these stat- violation the securities law federal utory provisions, a defendant who know- that was in a larger furtherance of ingly violates Section can jointly be scheme, it should jointly be and several- severally and only liable for the damages ly liable the loss by caused the entire for caused by conduct in which that defendant scheme, overarching including conduct knowingly participated. more, Anything other scheme participants about the argue, banks would run afoul of the which it Indeed, kneio nothing. express requirement PSLRA’s that plaintiff the joint and several liability in the statute “prov[e] must that the act or omission is a meaningless concept if it is limited the defendant alleged to violate this chap- to a defendant’s own wrongdoing. This ter caused the loss for which the plaintiff Court acknowledges that previous- it has seeks to damages,” § recover id. 78u- ly questioned whether liability for con- 4(b)(4), and would be tantamount to impos- duct caused all the partici- scheme ing liability for conspiracy to violate Sec- pants compatible with the “knowing” 10(b). tion See Squadron, Dinsmore v. requirement 78u-4(f)(2)(A). § under Ellenojf, Plesent, Sorkin, & Sheinfeld Nevertheless, the Court observes that (2d Cir.1998) that, (stating the PSLRA not only replaced joint and Bank, post-Central there is no cause of several liability with proportionate liabil- for action conspiracy to violate Section ity except the when conduct was “know- 10(b)). As the it, then, banks would have ing”, but established right contribu- they even if were found to have knowingly 78u-4(f)(8) tion under provide 10(b), violated Section they could be held remedy unfairness, for and, with a simi- jointly severally and liable only those result, lar judgment reduction for- damages that specif- suffered 78u-4(f)(2)(A) mula embodied in [sic]. ically as a result of the transactions Accordingly this Court concludes that which the banks participated with Enron. Lead Plaintiff may pursue its claims for The plaintiffs, hand, on the other assert joint and against several liability those that alleged because the conduct of the Defendants found to be viola- banks, Enron, and others part was all aof scheme, tors as a whole. single scheme, fraudulent any knowing vio- Enron, *55-56, WL at lator can jointly held severally lia- U.S. Dist. (em- LEXIS ble at *222-23 harm caused the other scheme added) (internal phasis omitted).17 citation participants. In considering whether the proposed text of The joint PSLRA’s and sev- class satisfied requirements eral liability Rule provision not, own, does on its 23(b)(3), the rejected district court resolve this 78u-4(f)(2)(A) issue. Section argument banks’ and determined that purport does not the scope define permits PSLRA courts to broadly impose joint rather, and several liability; that pro- 17. The district correctly Enron, court also noted *55, that issue. See 2006 WL there is a paucity of authority addressing 2006 U.S. Dist. LEXIS at *222. liability for joint several ited can be on who limits places simply

vision specif- directly by the liability. damages caused and several joint subject however, participated indi- in which history, ic transactions legislative statute’s Therefore, po- if the intended Enron. Congress cates several at trial joint proving scope of could succeed tential single, it was under to a over- the same remain amounted conduct would 104- H.R.Rep. (as to, No. opposed law. scheme pre-PSLRA arching fraudulent (“The at 737 U.S.C.C.A.N. assert, separate at of a number the banks and joint full Report imposes schemes), they Conference fraudulent and distinct law, on current liability, as under damages several to recover permitted should be viola- knowing engage who defendants knowing any severally from jointly and laws.”); S.Rep. No. securities tions joint and violator, scope of that and the at 701 104-98, 1995 U.S.C.C.A.N. at to limited not be liability should several (same). by that defen- directly caused damages the in the scheme.18 de- practice participation dant’s pre-PSLRA the Under to found above, any defendant scribed however, that the correct, The banks 10(b) 10b-5 or Rule Section have violated a liability for joint several and scope of of for all severally liable jointly and was 10(b) be must Section knowing violation of no by plaintiff; suffered damages 10(b) reach of Section by the informed por- on what made based was distinction fundamental it seems particular, itself. caused were damages plaintiffs tion of and jointly cannot be that a defendant to, any specific defendant’s by, or traceable unless that plaintiff severally liable Inc., TBG, at 927 conduct. fact, is, liable primarily defendant strictly cases is Rule 10b-5 (“Liability in words, assuming In other plaintiff. that never allocated and is joint and several knowingly the banks jury finds that that deciding defendants among individual 10(b) al- their through Section violated Ross, F.Supp. claim.”); plaintiffs in a scheme with Enron participation leged liability several (finding joint and investors, they can be Enron’s to defraud partic- “the because claim for Section of for all severally liable jointly and held essential was defendant of each ipation by any losses suffered the scheme-related is no and there the scheme of success by way in some harmed who was investor 5 Alan see guilt”); also apportion way to conduct, cannot the banks but their Lowenfels, D. & Bromberg Lewis R. in- any of for the losses responsible held on Securities Bromberg & Lowenfels primarily are not to whom vestors (2d § 8.48 Fraud and Commodities Fraud 10(b). liable under Section any ed.) to have found (“[A]ny person ac- class securities In a multi-defendant insig- whatsoever, matter how no one, presumably where such as tion nificant, liable could be aby harmed were of investors thousands miscon- by all the caused damages total by dif- acts committed different number of duct.”). to be appears Accordingly, there of several period over a defendants ferent assertion the banks’ support for no will have been every plaintiff years, not lim- liability must be joint several any brief, plain- In their scheme. fraudulent whether to decide court does not need 18. This jointly can be severally that a defendant concede jointly tiffs could be any defendant damages by only actions of for the damages severally caused liable liable prove all participates. plaintiffs could not by if the in which a scheme others caused single part they allege was conduct by every harmed defendant. example, For 114 S.Ct. 1439. Under the district particular defendant, if a previ- who was court’s open-ended interpretation of the ously uninvolved scheme, with the joint first PSLRA’s and several liability provi- participated sion, structured or however, in a fraudulent a defendant’s viola- knowing transaction to falsely inflate tion of the Enron’s finan- securities laws could cial near results the end of peri- the class increase the damages for which it can be od, liable, that defendant could not but be held could also liable make that defendant under responsible any Section for the damages investors who (the purchased Enron who were harmed price exclusively stock which the con- others, duct already been and to whom that inflated defendant defendants) could not fraudulent acts of otherwise be other liable at This, all. before view, in my transaction. exceeds the permissible Since those investors bounds purchased of primary liability their stock before under the defendant Section 10(b) and engaged in amounts to conduct, impermissible fraudulent they imposition of 10(b) conspiracy could not liability. state a Section claim Dinsmore, it, against 135 F.3d at 841. because they would unable be show either that the defendant’s conduct Because the district court’s class certifi- caused them purchase Enron stock at cation based, decision was in part, this on (the price inflated reliance, element of error, legal I would reverse the decision causation) or transaction or that it caused certify the class on ground only this (the any them harm element of loss causa- remand the case to district court to tion). To make the defendant jointly and whether, consider in light of the proper severally liable for the damages of those interpretation of the joint PSLRA’s would, therefore, investors effectively ex- several liability provision, the proposed pand the underlying defendant’s Section class still satisfies the predominance and 10(b) liability to encompass plaintiffs who superiority requirements 23(b)(3). of Rule could not otherwise state a against claim it.19 It would CONCLUSION simply be inconsistent elements of a Section claim to I Consequently, concur in the judgment hold a knowing jointly violator and several- reversing the district court’s certification ly liable for damages any plaintiff to order, but I do so only for the reasons whom it is not primarily liable under Sec- assigned I herein. would remand the case 10(b).20 tion to that court for additional consideration of whether, in light of this opinion,

That the fraud in this case this case meets requirements Rule 23’s have been the result of a class single, overarch- certification. ing scheme to defraud does not alter this conclusion. After Bank, Central a defen-

dant can be liable under Section

if it commits a primary violation of the Bank,

statute. See Central 511 U.S. at expressly point jointly 19. concede severally liable to investors briefs, their state that no defendant purchased who Enron stock after its fraudu- can damages be liable for from before the lent conduct and before the disclosure of the date 10(b). which it violated Section truth, even if those investors were also harmed the conduct participants of other example given, if the defendant in the scheme. knowingly 10(b), violated Section could

Case Details

Case Name: Regents of the University of California v. Credit Suisse First Boston (USA), Inc.

Court Name: Court of Appeals for the Fifth Circuit

Date Published: Mar 19, 2007

Citation: 482 F.3d 372

Docket Number: 06-20856

Court Abbreviation: 5th Cir.