No. 13-317

IN THE SUPREME COURT OF THEUNITED STATES

______________

HALLIBURTON CO. AND DAVID LESAR,Petitioners,

v.ERICA P. JOHN FUND, INC., FKA ARCHDIOCESE OF

MILWAUKEE SUPPORTING FUND, INC.,Respondent.

_________

On Writ of Certiorari To The United States Court ofAppeals For The Fifth Circuit

______

BRIEF AMICI CURIAE OF AARP ANDNORTH AMERICAN SECURITIES ADMINISTRATORSASSOCIATION, INC., IN SUPPORT OF RESPONDENT

_______________________________

JOSEPH BRADY JAY E. SUSHELSKY*General Counsel AARP FOUNDATION

RICK FLEMING LITIGATION

A. VALERIE MIRKO

CHRISTOPHER STALEY MICHAEL SCHUSTER

NORTH AMERICAN SECURITIES AARPADMINISRATORS ASSOCIATION 601 E Street, NW750 First Street, NE Washington, DC 20049Suite 1140 Tel. (202) 434-2060Washington, DC 20002 jsushelsky@aarp.orgTel. (202) 737-0900 *Counsel of Record

for Amici Curiae AARP

i

TABLE OF CONTENTS

TABLE OF AUTHORITIES ......................................iii

INTEREST OF AMICI CURIAE ................................ 1

SUMMARY OF ARGUMENT..................................... 3

ARGUMENT ............................................................... 5

I. THE FRAUD-ON-THE-MARKET

PRESUMPTION MAKES 10b-5 PRIVATE

SECURITIES FRAUD CLASS ACTIONS A VIABLE

REMEDY FOR DEFRAUDED INVESTORS ............... 5

II. PRIVATE SECURITIES LITIGATION SERVES A

CRUCIAL ROLE IN ENFORCING SECURITIES

LAWS, MAINTAINING INVESTOR CONFIDENCE,AND COMPENSATING VICTIMS OF FRAUD............ 7

A. Defrauded Investors Have RecoveredTheir Losses as a Result of This Court’sEmphasis on the Importance of PrivateSecurities Litigation in Maintaining theIntegrity of the Markets and Deterringand Redressing Securities Fraud .......... 10

B. Congress Has Also Expressed ItsContinued Support for theImportant Role Private SecuritiesLitigation Plays in DeterringFraud, Compensating Victims,and Promoting Market Integrity ........... 17

ii

III. RULE 10b-5 REPRESENTS INVESTORS’ ONLY

SOURCE OF REDRESS BECAUSE OF FEDERAL

LIMITATIONS ON SECURITIES FRAUD CLAIMS

BASED ON STATE LAW ...................................... 21

CONCLUSION.......................................................... 24

iii

TABLE OF AUTHORITIESCases

Allyn v. Dually,725 So. 2d 94 (Miss. 1998).............................. 23

Amgen Inc. v. Conn. Ret. Plans & Trust Funds,133 S.Ct. 1184 (2013) ................................. 6, 19

Basic, Inc. v. Levinson,485 U.S. 224 (1988) .................................passim

Bateman Eichler, Hill Richards, Inc. v. Berner,472 U.S. 299 (1985) ........................................ 10

Blue Chip Stamps v. Manor Drug Stores,421 U.S. 723 (1975) .................................. 10, 22

Dunn v. Borta,369 F.3d 421 (4th Cir. 2004) .......................... 23

Dura Pharms., Inc. v. Broudo,544 U.S. 336 (2005) .......................................... 5

In re Global Crossing Sec. & ERISA Litig.,225 F.R.D. 436 (S.D.N.Y. 2004) ............... 14, 15

In re WorldCom, Inc. Sec. Litig.,388 F. Supp. 2d 319 (S.D.N.Y. 2005) ............. 16

J.I. Case Co. v. Borak,377 U.S. 426 (1964) ........................................ 22

iv

Kaufman v. i-Stat Corp.,754 A.2d 1188 (N.J. 2000) ........................ 23, 24

Merrill Lynch, Pierce, Fenner &Smith, Inc. v. Dabit,547 U.S. 71 (2006) .............................. 11, 12, 22

Mirkin v. Wasserman,858 P.2d 568 (Cal. 1993) ................................ 24

Regents of the Univ. of Cal. v.Credit Suisse First Bos. (USA), Inc.,482 F.3d 372 (5th Cir. 2007) ......................... 14

Santa Fe Indus., Inc. v. Green,430 U.S. 462 (1977) ........................................ 22

SEC v. WorldCom, Inc.,273 F. Supp. 2d 431 (S.D.N.Y. 2003) ............. 16

Schleicher v. Wendt,618 F.3d 679 (7th Cir. 2010) .......................... 20

State v. Marsh & McLennan Cos., Inc.,292 P.3d 525 (Or. 2012).................................. 23

Stoneridge Inv. Partners, LLC v.Scientific-Atlanta, Inc.,552 U.S. 148 (2008) .................................. 11, 19

Tellabs, Inc. v. Makor Issues & Rights, Ltd.,551 U.S. 308 (2007) .................................. 12, 18

v

Statutes

Private Securities Litigation Reform Act (PSLRA),15 U.S.C. § 78u-4 (2012)..........................passim

Securities Exchange Act of 1934,15 U.S.C. § 78j(b) (§10(b)) .......................passim

Securities Litigation Uniform Standards Act(SLUSA), 15 U.S.C. §§ 77p(b),78bb(f) (2012)...........................................passim

Unif. Sec. Act § 410(a)(2) (1956) ............................... 23Unif. Sec. Act § 509(b) (2002) & comments.............. 23

Rules & Regulations

17 C.F.R. § 240.10b-5 (2013)..............................passim

Fed. R. Civ. P. 23(b)(3) ............................................ 5, 6

Legislative Materials

Common Sense Legal Reforms Act of 1995,H.R. 10, 104th Cong. § 204(c) (1995) ............. 19

H.R. Rep. No. 104-369 (1995)(Conf. Rep.) ..................................................... 18

S. Rep. No. 104-98 (1995).................................... 17, 21S. Rep. No. 105-182 (1998)........................................ 21

vi

Testimony Before the Subcomm. on Fin. Servs.& Gen. Gov’t of the H. Comm. onAppropriations, 113th Cong. 5 (2013)(statement of Mary Jo White,Chair, U.S. SEC) .............................................. 8

Miscellaneous

3 Ex-Officials of Global Crossing areFined in SEC Settlement, NY Times(Apr. 13, 2005), http://www.nytimes.com/2005/04/12/business/worldbusiness/12iht-global.html ............................................ 15

Luis A. Aguilar, Commissioner, U.S. SEC,Address at the Council ofInstitutional Investors Spring Meeting:Facilitating Real CapitalFormation (Apr. 4, 2011).......................... 11, 12

Barbara Black, Eliminating Securities FraudClass Actions Under The Radar, 2009Colum. Bus. L. Rev. 802 (2009).......... 11, 15, 20

Brief For Former Members of Congress, SeniorSEC Officials, and Congressional Counselas Amici Curiae Supporting Neither Party... 20

Brief of the United States as Amicus CuriaeSupporting Respondents,Merck & Co., Inc. v. Reynolds,130 S. Ct. 1784 (2010) (No. 08-905) ................. 9

vii

Bruce Carton, SEC to Receive 2%Budget Increase in FY 2014,Far Below 26% Requested Increase,Compliance Week (Jan. 14, 2014), http://www.complianceweek.com/sec-to-receive-2-budget-increase-in-fy-2014-far-below-26-requested-increase/article/329305/.................................... 8

Lisa L. Casey, Class Action Criminality,34 Iowa J. Corp. L. 153 (2008) ......................... 7

John C. Coffee, Jr., Reforming the SecuritiesClass Action: An Essay on Deterrenceand Its Implementation, 106Colum. L. Rev. 1534 (2006) ...................... 13, 14

James D. Cox & Randall S. Thomas, Mapping theAmerican Shareholder LitigationExperience: A Survey of EmpiricalStudies of the Enforcement of theU.S. Securities Law, 6 European Company& Fin. L. Rev. 164 (2010) ......................... 12, 13

James D. Cox & Randall S. Thomas,SEC Enforcement Heuristics: An EmpiricalInquiry, 53 Duke L.J. 737 (2003)......... 9, 12, 14

Julie Creswell & Nomi Prins, The Emperorof Greed, Fortune, June 24, 2002 .................. 15

viii

Paul Davidson, Budget Deal Puts Squeeze onFinancial Regulators,USA Today, Jan. 15, 2014http://www.usatoday.com/story/money/business/2014/01/14/spending-bill-financial-regulators/4480599/.................... 8

Donald C. Langevoort,Basic at Twenty: Rethinking Fraud on theMarket, 2009 Wis. L. Rev. 151 (2009) ........... 19

Donald C. Langevoort,Judgment Day for Fraud-on-the-Market?:Reflections on Amgen and theSecond Coming of Halliburton(Geo. Pub. L. & Legal Theory Research PaperNo. 13-058, 2013), available at,http://scholarship.law.georgetown.edu/facpub/1226..................................... 6, 18, 19, 20

NERA Econ. Consulting, Recent Trends inSecurities Class Action Litigation:2013 Full-Year Review (Jan. 21, 2014) ......... 16

Pet’rs’ Br. ............................................................. 22, 23

Elisse B. Walter, Commissioner, U.S. SEC,Remarks Before the FINRA Institute atWharton Certified Regulatory andCompliance Professional (CRCP) Program(Nov. 8, 2011)........................................ 9, 12, 14

John M. Wunderlich, “Uniform” Standards forSecurities Class Actions,80 Tenn. L. Rev. 167 (2012) ........................... 22

1

INTEREST OF AMICI CURIAE1

AARP is a nonpartisan, nonprofit organizationwith a membership that helps people turn theirgoals and dreams into real possibilities, strengthenscommunities and fights for the issues that mattermost to families such as healthcare, employment andincome security, retirement planning, affordableutilities and protection from financial abuse. AARPis greatly concerned about fraudulent, deceptive andunfair business practices, many of whichdisproportionately harm older people and disrupttheir retirement security. AARP thus supports lawsand public policies designed to protect older peoplefrom such business practices and to preserve thelegal means for them to seek redress. Among theseactivities, AARP advocates for improved access tothe civil justice system and supports the availabilityof the full range of enforcement tools, including classactions.

A significant percentage of the investingpublic in the United States’ markets is comprised ofmembers of the age fifty and older population. Olderpersons are frequent targets of financial fraudbecause they often have significant assets and theylook for investment opportunities that willsupplement Social Security and other sources ofretirement income. As a result, AARP has elevatedthe importance of combating securities fraud andgiven this issue a high priority by commenting on

1 In accordance with this Court’s Rule 37.6, no party’s counselwrote this brief in whole or in part and no person other thanamici or their counsel made a monetary contribution intendedto fund the preparation or submission of the brief. The parties’letters consenting to the filing of this brief have been lodgedwith the Clerk of the Court.

2

legislative and regulatory proposals that addressinvestment fraud, filing amicus briefs in casesinvolving the securities laws, and supporting effortsto enhance the remedies of defrauded investors.

The North American SecuritiesAdministrators Association, Inc. (“NASAA”) is thenon-profit association of state, provincial, andterritorial securities regulators in the United States,Canada, and Mexico. It has sixty-seven (67)members, including the securities regulators in allfifty (50) states, the District of Columbia, PuertoRico, and the U.S. Virgin Islands. Formed in 1919,NASAA is the oldest international organizationdevoted to protecting investors from fraud and abusein the offer and sale of securities.

NASAA’s members are responsible forregulating securities transactions under state law,and their principal activities include registering localsecurities offerings, licensing the brokers andinvestment advisers who sell securities or provideinvestment advice, and initiating enforcementactions to address fraud and other misconduct.NASAA’s members are intimately familiar with theinvestment offerings and sales abuses confrontingtheir state residents on a daily basis.

NASAA supports all of its members’ activitiesand it appears as amicus curiae in important casesinvolving securities regulation and investorprotection. Recognizing that private actions are anessential complement to governmental enforcementof the securities laws, NASAA and its members alsosupport the rights of investors to seek redress incourt for investment-related fraud and abuse.NASAA and its members have an interest in thisappeal because it will profoundly affect the ability of

3

investors to seek redress in cases whereunscrupulous companies and individuals seek tocloak their fraudulent acts.

The resolution of this case will have asignificant impact on the integrity of the securitiesmarkets and the remediation of securities fraud inthose markets. This is of particular concern at thistime, to both AARP and NASAA, given the entry ofmany first-time investors into the market and theresponsibility for retirement investing that retireesand employees have had to assume as a result of theshift in the retirement plan paradigm from definedbenefit pension plans (under which employers bearthe risk of loss) to defined contribution pension plans(under which plan participants bear the risk of loss).

SUMMARY OF ARGUMENT

Private securities fraud litigation initiatedunder Rule 10b-5 is essential to protect the integrityof the securities markets for investors, maintaininvestor confidence in the markets, and compensateinvestors who have been victims of fraud.Overturning or substantially modifying the Court’sholding in Basic, Inc. v. Levinson, 485 U.S. 224(1988), would contravene Congress’ and the Court’scontinually expressed support for such litigation bysignificantly undermining innocent investors’ abilityto recover their losses, resulting in a loss ofconfidence in the U.S. markets.

Basic serves to aid plaintiffs in securitiesfraud cases seeking class certification under Rule 23by providing them the fraud-on-the-marketpresumption to demonstrate reliance as a class andsatisfy Rule 23’s predominance requirement.Overturning or substantially modifying Basic’s

4

presumption would abandon more than 25 years ofthe Court’s precedent and erect a substantial hurdleto certification that would essentially foreclosesecurities fraud plaintiffs’ use of the class actionvehicle.

Given federal limitations on state law-basedsecurities fraud claims, Rule 10b-5 class actions thatutilize Basic’s presumption remain one of the fewviable means by which victims of securities fraudcan hope to gain significant recovery. Moreover,Congress, in its attempts to address perceivedabuses in securities fraud litigation with theadoption of the PSLRA and SLUSA, continued torecognize the importance of Rule 10b-5 class actionsand determined that the provisions of the PSLRAand the SLUSA struck the proper balance betweenperceived vexatious litigation and the important roleplayed by securities fraud class actions, leavingBasic’s presumption intact. Overruling orsignificantly modifying Basic would disrupt thedelicate balance these statutes created and wouldimplement a hurdle that Congress chose not toenact.

Therefore, as a result of the important roleplayed by Rule 10b-5 in protecting investors andensuring confidence and integrity in the markets,the unavailability of alternative remedies understate law, and Congress’s determination to addressvexatious litigation without dismantling the fraud-on-the-market presumption, the Court should notabandon its ruling in Basic.

5

ARGUMENT

Overturning the Court’s ruling in Basic willcreate an insurmountable hurdle to the privatesecurities actions that Congress and the Court haveembraced under Section 10(b), and that the SECimplemented through Rule 10b-5, which have provento be powerful tools in deterring securities fraud andcompensating securities fraud victims.

I. THE FRAUD-ON-THE-MARKET PRESUMPTION

MAKES 10b-5 PRIVATE SECURITIES FRAUD

CLASS ACTIONS A VIABLE REMEDY FOR

DEFRAUDED INVESTORS.

Basic’s fraud-on-the-market presumptionmakes private enforcement of the securities lawspossible by making class action litigation feasible.Rule 10b-5 prohibits issuers from making materialmisrepresentations in connection with the sale orpurchase of securities. See 17 C.F.R. § 240.10b-5(b)(2013). To enforce this rule, an individual defraudedinvestor first must establish that he or she relied onthe issuer’s misrepresentation. See Dura Pharms.,Inc. v. Broudo, 544 U.S. 336, 341 (2005). To enforcethis rule as a class, however, a putative class ofdefrauded investors must first meet therequirements of Federal Rule of Civil Procedure23(b)(3) by establishing that common questions oflaw or fact predominate over any questions affectingonly individuals. See Fed. R. Civ. P. 23(b)(3).Unlike any of the other factors in a Rule 10b-5 claim,reliance is usually specific to each member of theclass, and requiring an individual showing ofreliance for each plaintiff makes class certificationimpossible. Recognizing the importance of the classaction vehicle in private enforcement of Rule 10b-5,the Court in Basic established the fraud-on-the-

6

market presumption. The presumption relievesplaintiffs from the necessity of proving relianceindividually and permits plaintiffs to establishreliance as a group, provided they establish certainpredicate facts, thereby establishing that commonquestions predominate as required by Rule 23(b)(3).Basic, 485 U.S. at 241.

Without Basic’s fraud-on-the-marketpresumption, private securities class actions will notbe a viable remedy for victims of fraud in casesalleging affirmative misrepresentations becauseindividual issues would always predominate overcommon issues due to the individualized nature ofRule 10b-5’s reliance component. See Amgen Inc. v.Conn. Ret. Plans & Trust Funds, 133 S.Ct. 1184,1193 (2013) (“Absent the fraud-on-the-market-theory, the requirement that Rule 10b-5 plaintiffsestablish reliance would ordinarily precludecertification of a class action seeking money damagesbecause individual reliance issues would overwhelmquestions common to the class.” (citing Basic, 485U.S. at 242)); see also Donald C. Langevoort,Judgment Day for Fraud-on-the-Market?:Reflections on Amgen and the Second Coming ofHalliburton 27 (Geo. Pub. L. & Legal TheoryResearch Paper No. 13-058, 2013), available athttp://scholarship.law.georgetown.edu/facpub/1226[hereinafter Judgment Day] (“[W]ithout classcertification there will be no practicable mechanismto address demonstrable harm from securitiesfraud.”). However, the class action mechanism isessential for most investors to vindicate their rights–without it, recovery for Rule 10b-5 fraud would beimpossible as a practical matter. Most investors’individual losses are often minimal compared to thetotal harm to all investors from one fraud. As aresult, defrauded investors face a collective action

7

problem–although each individual would benefitfrom litigation to hold the violator accountable forshareholder losses, few have the incentive toinvestigate and bring an individual claim becausethe costs would dwarf the expected return to theindividual investor. See Lisa L. Casey, Class ActionCriminality, 34 Iowa J. Corp. L. 153, 163 (2008).The class action device solves this problem bypermitting groups of investors to share litigationcosts on a large scale. The class action device alsoprovides incentive to plaintiffs’ attorneys toprosecute cases of fraud, and lends feasibility to thehandling of such cases. Attorneys must devotesignificant time, “financial resources and humancapital” to the development of complex securitiescases. Id. at 164. Class actions permit claimsaggregation to the point that the class and potentialinvestor return are “large enough to attractexperienced plaintiffs' attorneys willing to representinjured shareholders on a contingent fee basis.” Id.at 163. Without this incentive, defrauded investorswould not be able to afford representation and wouldnot be able to take action to recover losses.

II. PRIVATE SECURITIES LITIGATION SERVES A

CRUCIAL ROLE IN ENFORCING SECURITIES

LAWS, MAINTAINING INVESTOR CONFIDENCE,AND COMPENSATING VICTIMS OF FRAUD.

Private securities fraud class action lawsuitsare an essential means of protecting the integrity ofthe securities markets for investors, maintaininginvestor confidence in the markets, andcompensating investors that have been victims offraud. As a federal agency dependent on the annualappropriations cycle, the SEC must fulfill its broadmandate with limited resources that are “notsufficient to permit the SEC to examine regulated

8

entities and enforce compliance with the securitieslaws in a way that investors deserve and expect.”Testimony Before the Subcomm. on Fin. Servs. &Gen. Gov’t of the H. Comm. on Appropriations, 113thCong. 5 (2013) (statement of Mary Jo White, Chair,U.S. SEC). Most recently, the SEC was allocated$324 million less than it requested in 2014. SeeBruce Carton, SEC to Receive 2% Budget Increase inFY 2014, Far Below 26% Requested Increase,Compliance Week (Jan. 14, 2014), http://www.complianceweek.com/sec-to-receive-2-budget-increase-in-fy-2014-far-below-26-requested-increase/article/329305/. According to the SEC, its budgetdoes not enable it to adequately enforce the federalsecurities laws:

This proposed level falls short of what weneed to fulfill our responsibilities toinvestors and our markets . . . It will limitour ability to bolster our enforcement andexaminations programs, implement ournew duties regarding derivatives, privatefund advisers and municipal advisers, andinvest in critical technology for marketoversight and law enforcement. It isparticularly frustrating considering thatfunding for the SEC does not contribute tothe federal deficit.

Paul Davidson, Budget Deal Puts Squeeze onFinancial Regulators, USA Today, Jan. 15, 2014,http://www.usatoday.com/story/money/business/2014/01/14/spending-bill-financial-regulators/4480599/(quoting SEC spokesman).

The Commission selectively employs itslimited resources by necessity, and does not have theresources to fully meet any of its goals without

9

private investor vigilance. See Elisse B. Walter,Commissioner, U.S. SEC, Remarks Before theFINRA Institute at Wharton Certified Regulatoryand Compliance Professional (CRCP) Program(Nov. 8, 2011) [hereinafter Walter Remarks]. In fact,private litigation fills an enforcement void created bythe SEC’s limitations, and there is very little overlapbetween private and public enforcement actions.James D. Cox & Randall S. Thomas, SECEnforcement Heuristics: An Empirical Inquiry, 53Duke L.J. 737, 777 (2003) [hereinafter EnforcementHeuristics] (finding only 15% of settled class actionshave parallel SEC action). This is particularly trueas to restitution because the SEC rarely prioritizesmaking securities fraud victims whole. WalterRemarks, supra (SEC cannot choose targets bymagnitude of investor losses); EnforcementHeuristics, supra, at 778 (statistical analysis showsinvestors’ provable losses unrelated to SEC choice ofenforcement targets; instead agency focusesresources on small capitalization firms in financialdistress).

The Commission therefore recognizes thatprivate securities litigation is an “essentialsupplement” to SEC enforcement actions. Brief ofthe United States as Amicus Curiae SupportingRespondents at 1, Merck & Co., Inc. v. Reynolds, 130S. Ct. 1784 (2010) (No. 08-905) (recognizing theimportance of private securities litigation as asupplement to criminal and civil enforcementactions); see also Walter Remarks, supra (it is“critical to investors, our securities markets, and oureconomy overall that these laws remain fullyenforceable [by the public]”). The courts havelikewise recognized the importance of privatelitigation, see infra Section II.A, and Congress has

10

relied on private litigation to help ensure robustanti-fraud enforcement, see infra Section II.B.

Consequently, the resolution of the issuespresented in this case will have immediate andpotentially serious repercussions for the civilenforcement of securities law violations in thiscountry, especially as they relate to Rule 10b-5. Asfinancial crimes abound and alternative forums foraggrieved investors remain limited, it is especiallyimportant that the federal courts remain open tovictims of fraud and serve as a viable forum wherefraud victims can seek meaningful remedies.Overturning or substantially modifying the fraud-on-the-market presumption in Basic would essentiallyclose the courthouse doors to victims of securitiesfraud by removing victims’ ability to enforce thesecurities laws through private litigation.

A. Defrauded Investors Have RecoveredTheir Losses as a Result of This Court’sEmphasis on the Importance of PrivateSecurities Litigation in Maintaining theIntegrity of the Markets and Deterringand Redressing Securities Fraud.

The Court has long recognized the vitalimportance of legitimate private securities litigationto the federal enforcement regime for securitiesfraud. See, e.g., Bateman Eichler, Hill Richards, Inc.v. Berner, 472 U.S. 299, 310 (1985) (observing that“implied private actions provide ‘a most effectiveweapon in the enforcement’ of the securities laws”);Blue Chip Stamps v. Manor Drug Stores, 421 U.S.723, 730 (1975) (stating that “private enforcement”of Rule 10b-5 is “a necessary supplement toCommission action”). The Court has describedprivate securities fraud actions as “a prominent

11

feature of federal securities regulation.” StoneridgeInv. Partners, LLC v. Scientific-Atlanta, Inc., 552U.S. 148, 165 (2008). The Court noted theimportance of private securities fraud actions inBasic itself: “[j]udicial interpretation andapplication, legislative acquiescence, and thepassage of time have removed any doubt that aprivate cause of action exists for a violation of § 10(b)and Rule 10b-5, and constitutes an essential tool forenforcement of the 1934 Act’s requirements.” Basic,485 U.S. at 230-31. Since the Court’s decision toimplement the fraud-on-the-market presumption inBasic, the Court has been unwavering in its supportfor and recognition of the important role played byprivate securities fraud litigation in maintaining theintegrity of the markets, deterring securities fraud,and compensating victims of fraud. See BarbaraBlack, Eliminating Securities Fraud Class ActionsUnder The Radar, 2009 Colum. Bus. L. Rev. 802, 808(2009).

The Court specifically recognized that “[t]hemagnitude of the federal interest in protecting theintegrity and efficient operation of the market fornationally traded securities cannot be overstated.”Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit,547 U.S. 71, 78 (2006). Investor confidence in theintegrity of the securities markets is crucial to thecapital formation system of our economy. See Basic,485 U.S. at 235 n.12. Investor confidence requiresboth “confidence that the laws will be obeyed andthat, when they’re not, that the fraudsters will bemade to pay.” Luis A. Aguilar, Commissioner, U.S.SEC, Address at the Council of InstitutionalInvestors Spring Meeting: Facilitating Real CapitalFormation (Apr. 4, 2011) [hereinafter AguilarRemarks]. Private securities litigation performs asignificant role in maintaining investor confidence in

12

the integrity of our markets by enforcing themandatory disclosure required by the securitieslaws, a role that is particularly important in light ofthe recent financial crisis. See Dabit, 547 U.S. at 78(noting the importance of Rule 10b-5). If the Courtstymies investors’ efforts to hold corporate actorsaccountable for their frauds, investor confidence inthe integrity of our markets will suffer, andinvestors will likely be far less willing to participatein our securities markets. See Aguilar Remarks,supra (discussing empirical evidence that disclosurebenefits companies and the “economy as a whole”).

The Court has also recognized the importantrole of private securities fraud actions in deterringfraud, another fundamental goal of the securitieslaws, by supplementing criminal and civil actionsbrought by the various government entities. SeeTellabs, Inc. v. Makor Issues & Rights, Ltd., 551U.S. 308, 313 (2007) (“This Court has longrecognized that meritorious private actions toenforce federal antifraud securities laws are anessential supplement to criminal prosecutions andcivil enforcement actions brought, respectively, bythe Department of Justice and the Securities andExchange Commission.”). Many instances ofsecurities fraud go unpunished because “the volumeof violations is too great for the SEC to detect andinvestigate all possible wrongdoing.” EnforcementHeuristics, supra, at 762. As former CommissionerElisse B. Walter has remarked, “even with idealresource availability, the Commission cannot bringevery case.” Walter Remarks, supra. However, the“frequency and magnitude of sanctions areimportant in the deterrence of deceptive financialreporting.” James D. Cox & Randall S. Thomas,Mapping the American Shareholder LitigationExperience: A Survey of Empirical Studies of the

13

Enforcement of the U.S. Securities Law, 6 EuropeanCompany & Fin. L. Rev. 164, 173 (2010).

Private securities actions are thereforeessential deterrents to securities law violationsbecause they increase the frequency of sanctions andthe financial penalties paid by companies that breakthe law. Additionally, government agencies aregenerally strangers to the transactions that give riseto allegations of private securities fraud. Privateparticipants in allegedly fraudulent transactionsthus have an informational advantage overgovernment agencies and are significantly morelikely to detect and blow the whistle on fraud thanthe Commission. Id. at 198 (SEC is first to detectonly 6% of revealed corporate frauds). Privateinvestors, of course, also have stronger incentives toprosecute certain alleged frauds because they standto profit from any recovery.

Finally, private securities class actions are thedefrauded investor’s primary mechanism forcompensation. Statistics show that “privateenforcement . . . dwarf[s] public enforcement,” andthus private litigants are much more successful interms of recovery than the Commission. John C.Coffee, Jr., Reforming the Securities Class Action:An Essay on Deterrence and Its Implementation,106 Colum. L. Rev. 1534, 1542-43 tbls. 2 & 3 (2006).In fact, “even in major scandals where the[Commission] has brought its own action, thedamages paid in securities class actions are usually(but not always) a multiple of those paid to the[Commission].” Id. at 1543.

Unfortunately, the SEC is ineffective atmaking defrauded investors whole because of itsinstitutional shortcomings and because of the nature

14

of financial fraud. First, the SEC must carefullyprioritize enforcement actions because it faceschronic resource constraints, and the Commissiontypically does not choose enforcement targets basedon the magnitude of individual losses. See supraSection II; Walter Remarks, supra. Furthermore,the Congressional mandate and funding for theCommission allows it to prosecute only the mostflagrant abuses of securities laws and limitsavailable monetary remedies. The SEC can orderviolators of securities laws to disgorge ill-gottenprofits and can levy fines, but it cannot seekdamages; thus, “while the agency can requirewrongdoers to give up the benefits they havereceived from violations, it cannot necessarily makethe victims whole.” Walter Remarks, supra. In fact,“it is the nature of financial fraud violations that theharm caused as a consequence of misrepresentingthe firm’s performance or financial position is oftengreater than any profit violators take home.”Enforcement Heuristics, supra, at 756.

Therefore, although the SEC is authorized toreturn disgorged funds and some fines to investors,and although these funds may be substantial insome cases, the amounts collected to be returned toinvestors “can pale when compared to the harmproximately caused by the defendants’ violation.” Id.Thus, while the Commission may seek monetaryrelief, its remedies are designed primarily to deterviolations by making them unprofitable, rather thanto make investors whole. And with good reason: thedamages in major securities fraud cases can andoften do run into the billions of dollars. See, e.g.,Regents of the Univ. of Cal. v. Credit Suisse FirstBos. (USA), Inc., 482 F.3d 372, 379 (5th Cir. 2007);In re Global Crossing Sec. & ERISA Litig., 225F.R.D. 436, 460 (S.D.N.Y. 2004); see also Coffee,

15

supra, at 1555 (cataloguing settlement amounts inmajor securities fraud cases). Accordingly, theprimary means of compensating injured investorsremains the private cause of action under Rule 10b-5.

Though the Court has relied on the deterrenceeffect of private securities fraud class actions morethan it has cited its compensation component, seeBlack, supra, at 814-15, the importance of classlitigation to investor compensation has not been loston the lower courts. In fact, without privatelitigation investors would have recovered little, evenin the wake of some of the most significant financialfrauds of our time. For instance, when GlobalCrossing filed for bankruptcy in 2002, the company“wiped out $2.5 trillion in market value.” JulieCreswell & Nomi Prins, The Emperor of Greed,Fortune, June 24, 2002. Global Crossing chair GaryWinnick treated the company as his personal “cashcow” and “cashed in $735 million of stock over fouryears–including $135 million Global Crossing issuedto his private company–while receiving $10 millionin salary and bonuses and other payments to theholding company.” Id. Investors in Global Crossingclaimed to have lost over $35.5 billion as a result ofthe company’s fraud. In the subsequent SECenforcement action, a handful of company executiveswere fined $100,000 each, while Global Crossing andGary Winnick paid absolutely nothing. 3 Ex-Officialsof Global Crossing are Fined in SEC Settlement,N.Y. Times (Apr. 13, 2005),http://www.nytimes.com/2005/04/12/business/worldbusiness/12iht-global.html. As a result of a classaction lawsuit, however, investors recovered a $245million settlement, including $30 million fromWinnick personally. In re Global Crossing Sec. &ERISA Litig., 225 F.R.D. at 447. While the recovery

16

through the private lawsuit was small in comparisonto investors’ losses, it was vastly more than what theSEC recovered.

More recently, WorldCom shareholders lost anestimated $200 billion as a result of “perhaps thelargest accounting fraud in history, with thecompany’s income overstated by an estimated $11billion [and] its balance sheet overstated by morethan $75 billion.” SEC v. WorldCom, Inc., 273 F.Supp. 2d 431, 431 (S.D.N.Y. 2003). The SECrecovered $750 million in its enforcement action,some of which was ultimately distributed todefrauded investors. Id. at 435. The penaltyrecovered by the SEC was only a small fraction ofinvestor losses resulting from the fraud: theWorldCom district court recognized thatcompensation of victims is “a ‘distinctly secondarygoal’ of S.E.C. actions” and the SEC could notdetermine the size of the penalty based on theshareholder losses to be compensated. Id. at 434(quoting SEC v. Fischbach Corp., 133 F.3d 170, 175(2d Cir. 1997)). However, through class litigation,investors ultimately recovered $6.133 billion. In reWorldCom, Inc. Sec. Litig., 388 F. Supp. 2d 319, 322(S.D.N.Y. 2005). The WorldCom settlementsrepresent the second-largest class action settlementof all time. NERA Econ. Consulting, Recent Trendsin Securities Class Action Litigation: 2013 Full-YearReview 30 (Jan. 21, 2014). Investor recoveriesvaried under the settlement, which went “a long waytoward making bondholders whole.” In reWorldCom, 388 F. Supp. 2d at 339. Stockholdersrecovered $0.56 per share. Id. at 340. Bothcategories of defrauded WorldCom investors wouldhave recovered little, if anything, without access toinvestor class actions.

17

B. Congress Has Also Expressed ItsContinued Support for the ImportantRole Private Securities Litigation Playsin Deterring Fraud, CompensatingVictims, and Promoting MarketIntegrity.

Since the Court’s decision in Basic, Congresshas taken steps to cure what it viewed as abuses inprivate securities class actions by enacting thePSLRA, 15 U.S.C. § 78u-4 (2012), and the SLUSA,15 U.S.C. §§ 77p(b), 78bb(f) (2012). Even whilerestricting private securities class actions to correctperceived abuses, Congress made clear that itrecognized the important role played by privatesecurities litigation in deterring fraud andcompensating victims: “[t]he SEC enforcementprogram and the availability of private rights ofaction together provide a means for defraudedinvestors to recover damages and a powerfuldeterrent against violations of the securities laws.”S. Rep. No. 104-98, at 8 (1995). Congress alsorecognized the important role such actions play inmaintaining investor confidence in our markets andensuring market integrity:

Private securities litigation is anindispensable tool with which defraudedinvestors can recover their losses withouthaving to rely upon government actions.Such private lawsuits promote public andglobal confidence in our capital marketsand help to deter wrongdoing and toguarantee that corporate officers, auditors,directors, lawyers and others properlyperform their jobs.

18

H.R. Rep. No. 104-369, at 31 (1995) (Conf. Rep.).The Court itself has also recognized that even inlight of the limitations placed on private securitiesfraud actions in the PSLRA, Congress hascontinually embraced class actions as an effectivetool to ensure a robust regime of securitiesregulation. See Tellabs, 551 U.S. at 321 n.4(“Nothing in the PSLRA . . . casts doubt on theconclusion ‘that private securities litigation is anindispensable tool with which defrauded investorscan recover their losses—a matter crucial to theintegrity of domestic capital markets.” (quotingDabit, 547 U.S. at 81)).

There is no doubt that the PSLRA and SLUSAgreatly limited fraud victims’ ability to maintainprivate class actions. See infra Section III.Nevertheless, even during the height of privatesecurities litigation reform when Congress took upthe issue of alleged vexatious litigation, Congress didnot limit or eradicate Basic’s fraud-on-the-marketpresumption, though some argued doing so wouldhave solved the problems that Congress hoped toaddress with the adoption of the PSLRA andSLUSA.

Defendants in private securities class actionshave argued that the PSLRA has “frozen the outerlimits of fraud-on-the-market class actions,”Judgment Day, supra, at 5, which they contendprevents courts from expanding such actions becausesuch expansion is for Congress to decide. This line ofreasoning is a two way street, however. Id. If thePSLRA prevents the Court from expanding privatesecurities fraud class actions, the PSLRA should alsoprevent the Court from constricting privatesecurities class actions by overturning doctrines—such as the fraud-on-the-market-presumption—that

19

were staples of law left unchanged by Congress. Seeid. As the Court has noted, “[i]t is appropriate for usto assume that when § 78u-4 [the PSLRA] wasenacted, Congress accepted the § 10(b) private causeof action as then defined but chose to extend it nofurther.” Stoneridge, 552 U.S. at 166 (emphasisadded). In 1995 when Congress adopted the PSLRA,the fraud-on-the-market presumption was anaccepted part of the private cause of action under §10(b). Initial versions of the PSLRA even includedprovisions that would have abandoned the fraud-on-the-market presumption. Common Sense LegalReforms Act of 1995, H.R. 10, 104th Cong. § 204(c)(1995); see also Donald C. Langevoort, Basic atTwenty: Rethinking Fraud on the Market, 2009 Wis.L. Rev. 151, 153 (2009). However, Congress“rejected calls to undo the fraud-on-the-marketpresumption of classwide reliance endorsed inBasic.” Amgen, 133 S.Ct. at 1201.

Had Congress wanted to jettison the fraud-on-the-market presumption, it could have acteddirectly, as the PSLRA was “about fraud-on-the-market litigation.” Judgment Day, supra, at 6 n.17.Instead, Congress chose to accept the presumptionas part of the § 10(b) and Rule 10b-5 private right ofaction “as then defined.” Stoneridge, 552 U.S. at 166.It follows that Congress, not the Court, shoulddetermine the presumption’s continued viability, asProfessor Langevoort convincingly argues:

Indeed, the structure of the PSLRA makesno sense except when read as a politicalcompromise that preserves the foundationof the fraud-on-the-market class actionwhile making it harder for plaintiffs tobring, plead and prove a successful claimthrough a variety of reforms. So it occupies

20

the field, in a way that disappointed boththe most insistent champions and the moststrident critics of private securitieslitigation. When this happens, the naturalconservative judicial move is to defer.

Judgment Day, supra, at 6; see also Black, supra, at805 (“Radical change of an important investorprotection mechanism, however, is such animportant policy matter affecting our securitiesmarkets that the debate should take place in thenational spotlight.”); Schleicher v. Wendt, 618 F.3d679, 686 (7th Cir. 2010) (Easterbrook, J.) (indicatingthat it is up to Congress to further define the limitsof private securities actions).

Some former members of Congress argue inthis case that the Court should not weigh heavily thefact that Congress rejected a provision that wouldhave overturned the Basic presumption. See Brieffor Former Members of Congress, Senior SECOfficials, and Congressional Counsel as AmiciCuriae Supporting Neither Party at 2-3. Theseamici also, however, note that Congress waspresented with provisions that would have codifiedthe Basic presumption—provisions that were alsoleft on the drafting room floor. Congress left thefraud-on-the-market presumption undisturbed, andthis Court should defer to that judgment.

21

III. RULE 10b-5 REPRESENTS INVESTORS’ ONLY

SOURCE OF REDRESS BECAUSE OF FEDERAL

LIMITATIONS ON SECURITIES FRAUD CLAIMS

BASED ON STATE LAW.

Congressional limitations on private securitiesclass actions in the PSLRA and particularly inSLUSA have effectively limited the forums in whichaggrieved investors can seek relief. In adopting thePSLRA, Congress sought to prevent the filing of“frivolous ‘strike’ suits alleging violations of theFederal securities laws in the hope that defendantswill quickly settle to avoid the expense of litigation.”S. Rep. No. 104-98, at 4 (1995). To address thisprimary concern, Congress, in the PSLRA,significantly limited private securities litigation by“creat[ing] a carefully tailored safe harbor forforward-looking statements,” changing the way inwhich lead plaintiffs are chosen, and devisingstricter pleading standards, among other things. Seeid. at 5-7.

Following the adoption of the PSLRA,Congress enacted SLUSA in an attempt to close aperceived loophole in the PSLRA that increased thenumber of private securities class actions being filedin state court, see S. Rep. No. 105-182, at 3-4(1998)—specifically, to address the concern that“securities class action lawsuits [had] shifted fromFederal to state courts” as a means of circumventingthe PSLRA. See 15 U.S.C. §§ 77p(b), 78bb(f)(findings set forth in Pub. L. 105-353, 112 Stat. 3227,§ 2). With certain exceptions, SLUSA provides thatno class action based upon state law may bemaintained in any state court on behalf of more thanfifty class members. See id. §§ 77p(b), 78bb(f). Withthe enactment of SLUSA, Congress effectively closedthe state courthouse doors to private securities fraud

22

class actions. See John M. Wunderlich, “Uniform”Standards for Securities Class Actions, 80 Tenn. L.Rev. 167, 168-69 (2012).

The need to ensure that investors havemeaningful remedies in federal court is all the moreimportant when state law does not provide analternative remedy. This is especially true forsecurities fraud cases in light of the fact that “federallaw, not state law, has long been the principalvehicle for asserting class-action securities fraudclaims.” Dabit, 547 U.S. at 88. Furthermore, theCourt has observed that the disadvantages posed bya restrictive interpretation of federal securities lawcan be “attenuated” where adequate remedies areavailable under state law. See Blue Chip Stamps,421 U.S. at 738 n.9 (weighing fact that class actionin state court was an alternative remedy); see alsoSanta Fe Indus., Inc. v. Green, 430 U.S. 462, 478(1977) (state cause of action under corporate law wasa factor in determining whether to recognize federalcause of action); J.I. Case Co. v. Borak, 377 U.S.426, 429 (1964) (noting that if federal jurisdiction islimited and state law affords no relief, then the“whole purpose” of the statutory provision might befrustrated). Conversely, where state law does notoffer a significant alternative forum for plaintiffs’claims—as is the case after the enactment ofSLUSA—there is a correspondingly greaterjustification and need for the federal courts to affordrelief for victims of securities fraud.

In this case, Petitioners contend that statecourts have “roundly rejected” the fraud-on-the-market theory. See Pet’rs’ Br. 11. Petitioners go on:“State courts, of course, are not bound by Basic, andthus it is a marked critique that they haveoverwhelmingly refused to adopt its fraud-on-the-

23

market approach.” Id. at 24. While most states havenot adopted the fraud-on-the-market presumption,their failure to do so is not a “marked critique” of thetheory. Many states have not embraced Basic’spresumption because there is no need—reliance isnot an element of most state law securities fraudclaims. See Unif. Sec. Act § 410(a)(2) (1956); Unif.Sec. Act § 509(b) (2002); see also Unif. Sec. Act. § 509cmt. 4 (2002) (“Unlike the current standards onimplied rights of action under Rule 10b-5, neithercausation nor reliance has been held to be anelement of a private cause of action under theprecursor to Section 509(b).”); Dunn v. Borta, 369F.3d 421, 432 (4th Cir. 2004) (“The ‘by means of’clause . . . is not intended as a requirement that thebuyer [of a security] prove reliance on the untruestatement or the omission.” (quoting Louis Loss,Commentary on the Uniform Securities Act 148(1976))). Additionally, private state law securitiesfraud claims generally require some form of privitybetween the buyer and seller of the securities atissue. See Unif. Sec. Act § 509 cmt. 3 (2002). Theexistence of any such privity requirement wouldnegate the need for a state to adopt the fraud-on-the-market-theory as the action would be between thebuyer and a direct seller—a transaction in which themarket plays no direct role.

In states where the fraud-on-the-markettheory could be applicable under state law, somestate courts have embraced it. See State v. Marsh &McLennan Cos., Inc., 292 P.3d 525, 532-37 (Or.2012); Allyn v. Dually, 725 So. 2d 94, 101 & n.3(Miss. 1998). And while some states have declined toextend Basic to common-law fraud, they did so inpart because Basic’s presumption remainedavailable under federal or state law. See, e.g.,Kaufman v. i-Stat Corp., 754 A.2d 1188, 1192 (N.J.

24

2000) (“plaintiff already had an adequate remedyunder federal securities law”); Mirkin v. Wasserman,858 P.2d 568, 572 (Cal. 1993) (“[p]laintiffs alreadyhave remedies under the federal and state securitieslaws”).

Petitioners’ attempt to undermine Basic’sfraud-on-the-market presumption by citing statecourts’ refusal to accept the doctrine is whollyunpersuasive given that (1) state securities fraudclaims generally do not require plaintiffs to provereliance; (2) a state law privity requirement rendersthe presumption inapt; and (3) where applicable,some state courts have adopted the fraud-on-the-market theory. The states’ experience with Basic’sapproach thus lends no support to Petitioners’arguments.

CONCLUSION

For all of the foregoing reasons, amicirespectfully submit that the Court should affirm thedecision of the Fifth Circuit and deny Petitioners’call to overturn or substantially modify Basic.

25

Respectfully submitted,

Joseph Brady Jay E. Sushelsky*General Counsel AARP FoundationRick Fleming LitigationA. Valerie MirkoChristopher Staley Michael SchusterNorth American Securities AARPAdministrators Association 601 E Street, NW750 First Street, NE Washington, DC 20049Suite 1140 Tel. (202) 434-2060Washington, DC 20002 jsushelsky@aarp.orgTel. (202) 737-0900 *Counsel of Record

for Amici Curiae AARP

Dated: February 5, 2014