CASE NO IN THE UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT. UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiffs-Appellees,

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1 CASE NO N THE UNTED STATES COURT OF APPEALS FOR THE FOURTH CRCUT UNTED STATES SECURTES AND EXCHANGE COMMSSON, Plantffs-Appellees, PRATE NVESTOR LLC AND FRANK PORTER STANSBERRY, Defendants. V APPEAL FROM A FNAL JUDGMENT OF THE UNTED STATES DSTRCT COURT FOR THE DSTRCT OF MARYLAND REPLY BREF OF APPELLANTS-DEFENDANTS PRATE NVESTOR LLC AND FRANK PORTER STANSBERRY FOR REVERSAL OF THE DSTRCT COURT'S DECSON Bruce W. Sanford Lee T. Ells, Jr. Bruce D. Brown Laure A. Babnsk BAKER & HOSTETLER LLP 1050 Connectcut Avenue NW Washngton Square, Sute 1100 Washngton, D.C Telephone: (202) Facsmle: (202) Attorneys FLED JUL US Court of Appeals 4th Crcut Matthew J. Turner 14 West Mount Vernon Place Baltmore, Maryland Telephone: (410) Facsmle: (410) forappo_g_'nq_ c_d

2 TABLE OF CONTENTS ARGUMENT Secton 10(b)'s jursdctonal requrement of statements "n connecton wth the purchase or sale of any securty" s lackng n ths case... 1 A. The SEC's "vrtual certanty" test contans no cogent, lmtng prncple and does not comport wth the holdng n Lowe... 3 B, Msrepresentaton cases, as well as omsson cases, must satsfy O'Hagan's requrement that fraud "concde" wth stock transactons... 7 C. The reasonableness standard of Texas Gulf s ted to fducary duty D. mposng Texas Gulf lablty on the defendants would hold them to the same standard as ssuers and other full-fledged fducares The SEC's bref shows that ts clams aganst mpersonal nvestment advce sound under the '40 Act, not 10(b) Frst Amendment safeguards apply n ths case, and ndependent revew fals to show, by clear and convncng evdence, publcaton of a materally-false statement wth actual malce No No C. D New York Tmes and Bose protect the speech of the defendants The commercal speech doctrne s napplcable That purchasers of the Report bought USEC stock does not demonstrate ts materalty There s no evdence, let alone clear and convncng evdence, that the defendants publshed a false statement wth actual malce V. The njunctve relef, now stayed, would volate the Consttuton CERTFCATE OF COMPLANCE... 31

3 TABLE OF AUTHORTES CASES Bosphercs v. Forbes, 151 F.3d 180 (4th Cr. 1998) Bolger v. Youngs Drag Products Corp., 463 U.S. 60 (1983) Bose v. Consumers Unon of U.S., 466 U.S. 485 (1984) Brandenburg v. Oho, 395 U.S. 444 (1969) CFTC v. Vartul, 228 F.3d 94 (2d Cr. 2000)... 5, 6 n re Carter-Wallace nt'l Sec. Ltg., 150 F.3d 153 (2d Cr. 1998) Central Hudson Gas & Elec. Corp. v. Pub. Serv. Comm'n of New York, 447 U.S. 557 (1980) Cty of Monroe Emp. Ret. Sys. v. Brdgestone Corp., 399 F.3d 651 (6th Cr. 2005) Cty of Monroe Empl. Ret. Svs. v. Brdgestone Corp., 387 F.3d 468 (6th Cr. 2004) Commodty Trend Serv. v. CFTC, 233 F.3d 981 (7th Cr. 2000) County of Orange v. McGraw Hll Cos., nc., 245 B.R. 151 (C.D. Cal. 1999) Drks v. SEC, 463 U.S. 646 (1983)... 3, 7

4 Frst Equty Corp. v. Standard & Poor's, 690 F. Supp. 256 (S.D.N.Y. 1988) Flamm v. Eberstadt, 814 F.2d 1169 (7th Cr. 1987) Harte-Hanks Commc'ns v. Connaughton, 491 U.S. 657 (1989)... 5 Hnkle v. Rockvlle Motor Co., 278 A.2d 42 (Md. 1971) llnos v. Telemarketng Assocs., 538 U.S. 600 (2003)... 19, 20, 28 Lard v. ntegrated Resources, 897 F.2d 826 (5th Cr. 1990) Lane v. Random House, 985 F. Supp. 141 (D.D.C. 1995) Lorllard Tobacco Co. v. Rellv, 533 U.S. 525 (2001) Lowe v. SEC, 472 U.S. 181 (1985)... 2, 3, 18 Lubn v. Agora, 882 A.2d 833 (Md. 2005)... 22, 28 McGann v. Ernst & Young, 102 F.3d 390 (9th Cr. 1996) Nat'l Soc. of Prof. Engneers v. Unted States, 435 U.S. 679 (1978) Nat'1 Soc. of Prof. Engneers v. Unted States, 389 F. Supp (D.D.C. 1974)

5 Near v. Mnnesota, 283 U.S. 697 (1931) Overton v. Todman & Co., 478 F.3d 479 (2d Cr. 2007) R & W Tech. Servs. v. CFTC, 205 F.3d 165 (5th Cr 2000)... 6 Raab v. General Physcs Corp., 4 F.3d 286 (4th Cr. 1993) Relance ns. Co. v. Bah'on's, 442 F. Supp (S.D.N.Y. 1977) n Re Repub. Nat'l Lfe ns., 387 F. Supp. 902 (S.D.N.Y. 1975) Robertson v. Parks, 24 A. 4 (Md. 1892) SECv. Merrll Scott & Assoc., 505 F. Supp. 2d 1193 (D. Utah 2007)... 9 SEC v. Rana SEC Research, 8 F.3d 1358 (9th Cr. 1993) v. Smvth, 420 F.3d 1225 (1 lth Cr. 2005) SECv. Texas Gulf Sulfur Co., 401 F.2d 833 (2d Cr. 1968)... 9, 11 SEC v. Wall St. Publ'g nst., 591 F. Supp (D.D.C. 1984) SECv. Wall St. Publ'g nst., 664 F. Supp. 554 (D.D.C. 1986) v

6 SECv. Zandford, 535 U.S. 813 (2002)... 7, 10, 11 Santa Fe ndus. v. Green, 430 U.S. 462 (1977)... 6 Semerenko v. Cendant Corp., 223 F.3d 165 (3d Cr. 2000) Stonerdge nv. Partners v. Scentfc-Atlanta, 128 S. Ct. 761 (2008)... 7 Sup't of ns. v. Bankers Lfe & Cas. Co., 404 U.S. 6 (1971)... 8 Taucher v. Raner, 237 F. Supp. 2d 7 (D.D.C. 2002)... 6 The Wharf (Holdngs) Ltd. v. Unted nt'l Holdngs, 532 U.S. 588 (2001)... 8, 18 Unted States v. Bell, 414 F.3d 474 (3d Cr. 2005) Unted States v. O'Hagan, 521 U.S. 642 (1997)... 7, 8 Unted States v. Raymond, 228 F.3d 804 (7th Cr. 2000) Unted States v. Cannstraro, 800 F. Supp. 30 (D. N.J. 1992)... 17, 18 V

7 STATUTES Fed. R. App. P. 32(a)(5), (6) Fed. R. App. P. 32(a)(7)(B) Fed. R. Cv. P. 65(d) MSCELLANEOUS Alan Abelson, Au Revor or Goodbye?, BARRON'S, July 14, , 4 Fnal Rule: Selectve Dsclosure and nsder Tradng, 2000 SEC LEXS 1672 (Aug. 15, 2000) S. Rep (July 7, 2006) v

8 , AROUMENT Secton 10(b)'s jursdctonal requrement of statements "n connecton wth the purchase or sale of any securty" s lackng n ths case. Remedal statutes, the SEC argues, are broad n scope, but the problem wth the SEC's approach n ths case s that t sees tself as untethered by any statutory constrants at all. For example, when ths acton began, the SEC ntally proposed an "nsde nformaton" standard that would set ths case apart from other pure speech about stocks that the government promsed to leave alone. Accordng to the SEC, "[a] Money magazne artcle about '10 Stocks to Buy Tomorrow'" would be protected because t was "based just on analyss of the companes," whereas the Report was sngled out for an enforcement acton because ts publshers "sad they had nsde nformaton about a specfc deal." JA4861. Wth the "nsde nformaton" standard now dscarded - the dstrct court explctly rejected t, JA158 - the SEC floats a new standard. The Report s covered by 10(b) because t was "vrtuauy certan" or "almost certan" that readers would buy USEC shares after purchasng the Report. Op.Br.2, 5, 18, f the test s "vrtual certanty," then the Money magazne artcle envsoned by the SEC on "10 Stocks to Buy Tomorrow" would also surely meet the test as regulated speech - lke the Report, the artcle tells a reader precsely whch stocks to buy and when to buy them.

9 However, the SEC's "vrtual certanty" standard for regulatng mpersonal nvestment advce has effectvely been rejected - by Lowe v. SEC, 472 U.S. 181 (1985). The Supreme Court planly understood that subscrbers would purchase or sell securtes based on the advce n Lowe, snce such advce conssted of specfc "buy" and "sell" recommendatons. But the Court stll read all of ths detaled "nvestment advce" out of "nvestment Advsers Act" because the advce was not provded n the context of a fducary relatonshp and regulatng t would thus create consttutonal concerns. The publcaton of mpersonal nvestment advce that readers could be expected to follow n some shape or form was protected by Lowe - and an entre ndustry has grown up around t. The ncongruty of protectng specfc nvestment advce ("vrtually certan" to be acted on by readers) from the '40 Act whle smultaneously subjectng t to the '34 Act (because t s "vrtually certan" to be acted on by readers) s self-evdent. Whether the Report cost $1,000 or $100 or was gven away for free as part of a promoton to attract new subscrbers s mmateral because the subsequent tradng by readers s tself mmateral. A reader's tradng does not trgger the '40 Act, nor should t trgger the '34 Act. The SEC's ever-shftng ratonales to explan why pure speech should be covered by 10(b) demonstrate the danger of turnng the securtes laws loose beyond ther jursdctonal mandate. There s no standard under 10(b) more

10 predctable, more pragmatc, more true to the precedent, and more consttutonallyapproprate than lmtng the statute's reach to fducares or to persons who buy and sell stocks. f the SEC beleves that partcular nvestment advce s unprotected under Lowe.'s readng of the bona fde publsher's exempton, then the '40 Act, the statute wrtten for nvestment advce, s the proper place for the government to look, not to 10(b), the statute coverng securtes transactons. A. The SEC's "vrtual certanty" test contans no cogent, lmtng prncple and does not comport wth the holdn_ n Lowe. n rejectng the SEC's theory of lablty n Drks v. SEC, 463 U.S. 646, 664 (1983), the Supreme Court wrote, "[]t s essental, we thnk, to have a gudng prncple for those whose daly actvtes must be lmted and nstructed" by the SEC's rules. The SEC's proposed "vrtual certanty" provdes no such gudance. t msunderstands the relatonshp between readers and publshers, nvtes substantal consttutonal concems, contans no practcal lmtatons, s found nowhere n 10(b) case law, and conflcts wth the controllng prncples n Lowe. The publcatons n Lowe offered "specfc recommendatons for buyng, sellng, or holdng stocks" and ncluded a "telephone hotlne" wth "current nformaton." 472 U.S. at 185 n.7. Lke the publshers n Lowe, the defendants expect ther subscrbers - or anyone who happens to come across one of ther recommendatons - to make use of ther advce. The Author's recommendatons are also often pcked up by other meda for the beneft (and potental tradng

11 decsons) of ther subscrbers, as was recently the case wth Barron's postve coverage of hs predctons regardng the Fanne Mac and Fredde Mac meltdowns. Alan Abelson, Au Revor or Goodbye?, BARRON'S, July 14, 2008, at 5. To predcate 10(b) jursdcton on the "vrtual certanty" that a reader mght purchase stocks based on the content of a publcaton s ncompatble wth Lowe and would strp away protectons t establshed for mpersonal nvestment advce. The protectons n Lowe dd not change dependng on the cost of the publcaton, the number of stocks recommended, or the bylne under whch the advce was publshed. Whether any of these factors made t more or less lkely that a reader would trade on the recommendatons was rrelevant. Obvously, trades took place. t may be "vrtually certan" that a reader may seek out a new therapy enthusastcally prased n a health column, but that does not gve the FDA jursdcton over the columnst as f she were a drug manufacturer, nor a state medcal board as f she were a prescrbng physcan. The SEC states that addressng the mplcatons for the publshng busness at large of ts theory n ths case can be deferred untl t sues a "bona fde" publcaton and clams that there s a "huge dfference" between the Report and other "reportng on or opnng about fnancal matters." Op.Br.4-5. The SEC has at varous tmes tred to explan that "huge dfference" n terms of whether the publcaton concerned "nsde nformaton" about corporate deals or

12 l announcements, whether t had a "purpose" other than gvng nvestment advce, and how much t costs to subscrbe. Here, the SEC asserts that the "vrtual certanty" test s met smply because readers pad $1,000 for the Report. But there s no practcal (or consttutonal) way to classfy speakers for purposes of 10(b) based on the cost of the publcaton and what the SEC beleves to be the lkely use of the speech. A publsher's proft motve on the sale of nformaton s consttutonally-protected. Harte-Hanks Commc'ns v. Connaughton, 491 U.S. 657, 667 (1989). The "vrtual certanty" test would also nevtably entangle the government n mproper content dscrmnaton. The SEC nssted at tral, for example, that nvestment columns n amcus curae The Baltmore Sun are dfferent from the advce n the Report because "you don't buy [the Sun] to read the nvestment column... that's not why t's dstrbuted... that s not why t s publshed." JA1447. Ths awkward effort to justfy why one publcaton s legtmate and one s not places the SEC dangerously close to - f not squarely n - the regulatory role the Supreme Court rejected for t n Lowe. The two cases the SEC ctes n support of the "vrtual certanty" argument were decded under the Commodty Exchange Act ("CEA"). Op.Br.35. Both nvolve advertsements for computerzed tradng software that the Second Crcut held was not even "speech" under the Frst Amendment. CFTC v. Vartul, 228 F.3d 94, 111 (2d Cr. 2000). Usng software for an "automatc tradng system" on

13 a computer, d :, at 112, s smply not analogous to evaluatng nvestment advce n a publcaton - and then takng the extra step of contactng a broker to purchase a stock] As noted n a successful challenge to CFTC regstraton requrements: The Wall Street Journal, Barrons, and Money Magazne... all have specfc columns provdng nvestment advce and, unless they are wastng ther tme, hope that ther readers wll use t. To refuse to see the dfference between the broker who gves advce to her clent and the publsher of a newsletter s to gnore the cases... that dscuss the dstncton between a professonal's advce to a clent and a wrter's advce to whoever wll read her and use t. Taucher v. Raner, 237 F. Supp. 2d 7, 14 (D.D.C. 2002). The assurance from the SEC that 10(b) does not "reach 'pure speech' dsconnected from the harm to nvestors or the markets," Op.Br.48, equally fals to provde a cogent lmtaton on ts powers. Lke the "vrtual certanty" test, makng the reach of 10(b) coextensve wth any "harm" to nvestors caused by speech - a standard whch of course would apply to prvate actons by nvestors themselves - would, needless to say, "not be easly contaned." Santa Fe ndus. v. Green, 430 U.S. 462, 478 (1977). Such an elastc concept has no place among Supreme Court precedent repeatedly blockng SEC efforts to extend the scope of 10(b) for other The attempt to draw an analogy between the CEA and 10(b) also fals because the defendants n the two cases the SEC ctes met the defnton of"commodtes tradng advsers" under the CEA. Vartul, 228 F.3d at 104; R & W Tech. Servs. v. CFT CC, 205 F.3d 165, 176 (5th Cr 2000). The approprate analogy s thus between the CEA and the nvestment Advsers Act- the statute the SEC dd not use here. 6

14 altrustc reasons. Br To mantan the jursdctonal constrants Congress created, the "gudng prncple," Drks_ 463 U.S. at 664, for the "n connecton wth" requrement s a defendant's tradng actvty or fducary breach. B. Msrepresentaton cases, as well as omsson cases, must satsfy O'Hagan's requrement that fraud "concde" wth stock transactons. The SEC dsputes the applcablty of the Supreme Court test requrng a stock trade to "concde" wth or "consummate" an alleged fraud n order to satsfy the "n connecton wth" element. t argues that the test does not apply to fraud by msrepresentaton cases and that the defendants have msconstrued the test. Nether argument has mert. n SECv. Zandford, 535 U.S. 813, (2002), the Supreme Court affrmed that to satsfy the "n connecton wth" element of 10(b) there must be fraudulent conduct that "concde[s] wth" and "requre[s] the sale of securtes." The Supreme Court offered ths sweepng summary of ts "n connecton wth" cases: "As n Bankers Lfe, Wharf, and O'Hagan, the SEC complant [n Zandford] descrbes a fraudulent scheme n whch the securtes transactons and breaches of fducary duty concde. Those breaches were therefore 'n connecton wth' securtes sales... " d. at 825. Lablty under 10(b) can be establshed over "msstatements" as well as by "omssons by one who has a duty to dsclose." Stonerdge nv. Partners v. Scentfc-Atlanta, 128 S. Ct. 761,769 (2008). Unted States v. O'Ha_an, 521 U.S.

15 642, 656 (1997) was a duty to dsclose case. Wharf and Bankers Lfe were msrepresentaton cases. See The Wharf(Holdngs) Ltd. v. Unted nt'l Holdngs, 532 U.S. 588, 591,594, 596 (2001) (oral promses relatng to the sale of an opton were "msrepresentaton[s]" because there was no ntent to honor the assurances); Sup't of ns. v. Bankers Lfe & Cas. Co., 404 U.S. 6, 8 n.1 (1971) (defrauded party's board was deceved nto authorzng a sale of Treasury bonds by the "msrepresentaton that the proceeds would be exchanged for a certfcate of depost of equal value"). t s clear from Zandford that the asserton that fraud under 10(b) must "concde" wth securtes transactons apples to "n connecton wth" jursprudence gong back to Bankers Lfe. t s also clear that ths lne of precedent ncludes both affrmatve msrepresentaton cases and falure to dsclose cases. The SEC's effort to skrt around the "concdng" requrement on the grounds that t only apples to falure to dsclose cases s drectly rebutted by the Supreme Court. Nether the Supreme Court, nor the defendants, treats the "concdng" test as f t lterally were a temporal requrement that a msrepresentaton or falure to dsclose must actually occur at the same precse moment as the purchase or sale of a securty. n some nstances, such as n O'Hagan, that may be true. But n others, not. For example, n Bankers Lfe, the msrepresentaton to the nsurance

16 company's board took place before t sold the Treasury bonds, but the fraudulent conduct "concded" wth, or depended upon, the securtes transacton because, wthout the transacton, there would have been no fraud. Smlarly, n SECv. Texas Gulf Sulfur Co., 401 F.2d 833 (2d Cr. 1968), the company's press release was obvously publshed pror to any securtes tradng by nvestors based on t, but the statements and the trades "concded" for purposes of 10(b) because the tradng was needed to complete the fraudulent conduct. 2 Thus, the fact that readers bought the stock after publcaton of the Report s not what dsconnects the alleged fraud from "the purchase or sale of any securty." Rather, t s that the alleged fraud was consummated and concluded when the Report was sold and the reader pad $1,000. f there was a fraudulent scheme, no subsequent securtes transactons were necessary to t, as nether the Publsher nor the Author derved any beneft from such tradng. ndeed, the defendants would have commtted fraud f not a sngle purchaser of the Report bought USEC shares, or f the Report named a fcttous company wth a fcttous tcker symbol, because they stll would have "defrauded" readers of the cost of the publcaton. 2 A case the SEC ctes, Op.Br.33, shows that the "concdng" test s not a temporal test. n SECv. Merrll Scott & Assoc., 505 F. Supp. 2d 1193, (D. Utah 2007), a money manager's "msrepresentatons" to hs nvestors that ther assets would be safe f they nvested n a Ponz scheme and that ther money would be managed as promsed for a specfc rate of return occurred well before the broker began sphonng money from the nvestors' accounts.

17 Addressng the embezzlement hypothetcal from O'Hagan, the SEC compares the use of the funds from the theft wth the use of the nformaton n the Report. Op.Br But the proper analogy s between the embezzler's use of the stolen cash and the defendants' use of the allegedly defrauded proceeds from the sale of the Report. n both cases, to quote the SEC, there s no "obvous mmedate relatonshp" between the wrongdoer's use of the "money obtaned" by the fraud and a later securtes transacton - and thus the "n connecton wth" requrement s not met. Moreover, had any readers sued the defendants for common-law fraud (an avenue open to them though no such actons were brought), they would have had standng regardless of whether they bought USEC stock. And they would have been lmted n ther recovery of damages to the prce of the Report - $1,000. See Hnkle v. Rockvlle Motor Co., 278 A.2d 42, 44 (Md. 1971) (measure of damages s out-of-pocket loss, calculated as value of object as represented less actual value at tme of sale, where other damages too speculatve); Robertson v. Parks, 24 A. 411 (Md. 1892) (refusng to award damages for captal losses despte stock purchase nduced by promse of 20 percent returns). The lmtaton of damages to the cost of the Report n a hypothetcal common-law fraud acton renforces that the alleged fraud was successfully acheved when the purchase of the publcaton was complete and thus dd not "concde wth" or "requre," Zandford, 535 U.S. at 10

18 820-21, the purchase or sale of any securty. C. The reasonableness standard of Texas Gulf s ted to fducary duty. Texas Gulf establshes a reasonableness standard: the statements by the ssuer n that case were covered by 10(b) because they "would cause reasonable nvestors to rely thereon," and "so relyng, cause them to purchase or sell a corporaton's securtes." 401 F.2d at 860. The SEC stpulated that the defendants dd not trade USEC shares, and nowhere does t argue that the Publsher and Author have fducary or specal dutes to ther readers or the publc. The SEC nonetheless defends the dstrct court's extenson of the Texas Gulf rule to ths case, clamng that the defendants "merely dentfy a number of Secton 10(b) cases n whch the defendants were traders or fducares and then erroneously suggest" that Texas Gulf s therefore lmted to such persons. The defendants dd not "merely dentfy" a few random 10(b) cases - they addressed the very cases on whch the dstrct court reled to extend the Texas Gulf rule. Br None of the SEC's addtonal cases presents anythng new. McGann v. Ernst & Young, 102 F.3d 390, 396 (9th Cr. 1996), and Semerenko v. Cendant Corp.,223 F.3d 165, (3d Cr. 2000), Op.Br.23, are just further cases nvolvng accountants, who have long been subject to 10(b) because of the dutes created by ther "specal relatonshp wth the nvestng publc." Overton v. Todman & Co., 478 F.3d 479, 485 (2d Cr. 2007). The defendants agree that "any 11

19 person" n theory can be covered by 10(b) "regardless of who he s or what t s," Op.Br.24, but the cases show that such a person must be dong at least one of two thngs: tradng n stocks or breachng a fducary or specal duty. Wthout ether of those factors, a msstatement may be subject to other clams - such as common law fraud - but t s not "n connecton wth the purchase or sale of any securty." The SEC's dscusson of the cases on whch the dstrct court reled, Op.Br.27-29, s an exercse n avodance of the central truth of those cases: all of the defendants were ether tradng securtes or volatng a duty. SECv. Rana Research, 8 F.3d 1358 (9th Cr. 1993), descrbed as nvolvng a press release from a "fnancal consultant" who was "nether a fducary or a trader," Op.Br.26, s anythng but. Ths "consultant" was n fact a broker who was tryng to take over a publc company, who had made a jont-offer for ts stock wth an nvestment bank, whose employees had purchased the stock, and who used the press release as a way to "pressure[]" the company nto acceptng hs offer. See App.Dkt.40 at 3-4. Tradng a stock based on a statement by an ssuer, as n n re Carter-Wallace nt'l Sec. Ltg., 150 F.3d 153, 156 (2d Cr. 1998), by an nvestment advser, as n Lard v. ntegrated Resources, 897 F.2d 826, 835 (5th Cr. 1990), or by any other fducary, meets a reasonableness standard because such actors are under a duty to speak the truth to nvestors whenever they choose to speak. The SEC has recognzed, n a related context, that mpersonal nvestment advce does not meet 12

20 ths standard. When the draft of Regulaton FD, whch govems selectve dsclosures, was publshed for comment, t dd not exclude dsclosures from ssuers to the meda or nvestment newsletters. The SEC revsed the language to cover dsclosures only to certan partes: broker-dealers, regstered nvestment advsers, regstered nvestment companes, and holders of an ssuer's securtes who mght be expected to trade on the dsclosure: We have narrowed the coverage of the fnal regulaton. The regulaton s desgned to address the core problem of selectve dsclosure made to those who would reasonablv be expected to trade securtes on the bass of the nformaton or provde others wth advce about securtes tradng. See Fnal Rule: Selectve Dsclosure and nsder Tradng, 2000 SEC LEXS 1672, at *23 (Aug. 15, 2000). The SEC carved out nvestment newsletters because ther advce s not "reasonably" connected to securtes tradng. Thus, Steven Wngfeld's statements to the Author were not covered by Regulaton FD. The content of an ntervew that the SEC deems unconnected to securtes tradng for the purposes of Regulaton FD can hardly be found connected wth securtes, tradng under 10(b). The evdence from readers of the Report shows just how far removed ths case s from the concerns about corporate and fducary conduct that anmated Texas Gulf.. None of the subscrbers testfed that they had a fducary relatonshp wth the defendants. None stated that they receved personalzed nvestment 13

21 advce. None sad that they beleved that the Report was actually publshed by USEC tself-.e., by an ssuer wth fducary dutes. They knew that they bought the Report from an ndependent publsher (and many of them asked for and receved full refunds from the publsher). There s no bass here for "reasonable" relance as there was n Texas Gulf, where an ssuer, who has a duty to speak the full truth Whenever t decdes to speak, made statements to the market. Nothng n the rejecton of 10(b) jursdcton turns on whether the Report and E-mal were part of a regular stream of recommendatons the defendants made to ther readers or were "one-tme" publcatons as the SEC nssts. Op.Br.3. Nor does t depend on the exstence of an ongong publsher-reader relatonshp, d. at 2, though one certanly exsted here. JA4550 (Customer Actvty Chart). The defendants are not a seekng a specal exempton as members of"the press" from a law of general applcablty. d. at Secton 10(b) does not apply because the statute does not cover speech about stocks n the absence of securtes tradng or fducary volatons by the defendant - regardless of who s speakng. D. mposng Texas Gulf lablty on the defendants would hold them to the same standard as ssuers and other full-fledged fducares. n the face of the consderable authorty holdng that publshers have no fducary dutes to readers or to the publc, the SEC steers away from explctly _ askng ths Court to establsh such dutes. But the lablty the SEC seeks to mpose would effectvely do the same thng. Because ths case nvolves an alleged 14

22 msrepresentaton, as opposed to slence n volaton of a duty to dsclose, 3 and because defendants dd not trade n USEC stock, to place them under the Texas Gulf rule would be to treat them as smlarly-stuated to all-purpose fducares, such as ssuers. Equatng the dutes of publshers of mpersonal nvestment advce wth the dutes of General Electrc or BM would expand 10(b) beyond ts statutory - and consttutonal - boundares. ssuers have a fducary oblgaton to speak the full truth regardless of whether the company or ts offcers are tradng n the company's stock. See Raab v. General Physcs Corp., 4 F.3d 286, 288 (4th Cr. 1993) ("The securtes laws requre General Physcs to speak truthfully to nvestors."); Cty of Monroe Empl. Ret. Svs. v. Brd_estone Corp., 387 F.3d.468, 491 (6th Cr. 2004) (notng that a corporaton has a "duty to speak truthfully as to the topcs on whch t [speaks]"); Flamm v. Eberstadt, 814 F.2d 1169, 1178 (7th Cr. 1987) ("[A publc corporaton] who speaks must tell the truth about mportant matters. The frm may be slent, leavng nvestors to take ther chances, but may not le... "). Thus, the duty the SEC seeks to mpose on the Publsher and Author s a duty to the publc to speak the full truth whenever they speak. Ths s precsely the 3 A duty to dsclose may arse when "there s nsder tradng, a statute requrng dsclosure, or... an naccurate, ncompete or msleadng pror dsclosure." Ct_jLy f Monroe Emp. Ret. Sgs. v. Brd_estone Corp., 399 F.3d 651,669 (6th Cr. 2005) (quotatons and ctaton omtted). 15

23 type of full-blown fducary oblgaton rejected n SECv. Wall St. Publ'g nst., 664 F. Supp. 554, (D.D.C. 1986), rev'd on other _, 851 F.2d 365 (D.C. Cr. 1988), and Relance ns. Co. v. Barron's, 442 F. Supp. 1341, 1353 (S.D.N.Y. 1977). Br The duty rejected n Wall Street was not a duty of dsclosure, Op.Br.31, but a broader duty relatng to msrepresentatons when the publsher "undertook to supply nformaton" about securtes. 664 F. Supp. at The SEC calls ths part of the opnon "erroneous" and "unrevewed" on appeal, Op.Br. 16, 40, but the party who chose not to appeal ths holdng was the SEC. Courts have also rejected affrmatve dutes for ndependent credt ratng agences. n dsmssng 10(b) counts aganst Standard & Poor's and A.M. Best, a federal court concluded: [PlantfFs] ctaton of cases whch call for complete and accurate nformaton for nvestors as one of the basc objectves of Secton 10(b)... s napproprate absent a duty on the part of ether S & P or Best to nqure nto the truth of the nformaton they publsh... The mere fact that S & P and Best made recommendatons does not n ths case ental a duty to nqure. n Re Repub. Nat'l Lfe ns., 387 F. Supp. 902, (S.D.N.Y. 1975). Congress passed the Credt Ratng Agency Reform Act n 2006 to gve the SEC authorty to prohbt "unfar, coercve, or abusve" practces by credt ratng agences. Pub. L. 4 See also SECv. Wall St. Publ'g nst., 591 F. Supp. 1070, 1074 (D.D.C. 1984) (SEC allegatons aganst magazne concern "materal msrepresentatons"). 16

24 The SEC beleved that t "dd not possess suffcent authorty to regulate credt ratng agences wthout congressonal acton." S. Rep (July 7, 2006). n a smlar ven, f the SEC s concerned that regulaton of nvestment advce beyond the '40 Act s warranted, t must seek authorty from Congress. The defendants are not "confused," Op.Br.30, about the dfference between fraud based on msrepresentaton and fraud based on slence n the face of a duty to dsclose. They have not, contrary to the SEC's clam, d, at 31, dentfed ths case as the latter. t s the SEC's asserton that "only fraud through slence requres a breach of a fducary or other duty" that s confusng because t suggests that fducary breaches are rrelevant to msrepresentaton cases. d. at 30. Often, n fact, fraud by msrepresentaton does requre a breach of fducary duty, as n Carter-Wallace, where ssuers made false statements but were not contemporaneously tradng. A more precse statement would be that "only fraud through slence requres a breach of a duty to dsclose." The SEC suggests that the lack of fducary or specal duty s not fatal to ts clams because, ctng a treatse, t states that "lablty for msrepresentatons flows absent a fducary or other duty." d..._. at 31. But the SEC fals to menton that the very secton of the treatse t ctes s enttled "Msrepresentatons and Omssons When Defendant Trades" (emphass added), and the sngle case the treatse footnotes for the quoted statement s Unted States v. Cannstraro, 800 F. Supp. 30, 17

25 84 (D. N.J. 1992) - where the defendants were heavly engaged n tradng stock. The law on ths front s clear. Lablty for msrepresentaton can flow absent fducary duty when the defendant s tradng. See Wharf, 532 U.S. at The SEC's bref shows that ts clams aganst mpersonal nvestment advce sound under the '40 Act, not 10(b). The SEC does not explan ts decson, ader threatenng the defendants under the '40 Act, to proceed nstead solely under 10(b). Br.3-4, But n ts long dscusson of the '40 Act and Lowe, the SEC shows tself to be very much nterested n tryng to convnce ths Court that the Report and the E-mal would not be protected under the '40 Act's bona fde publsher's exempton because they were not "general and regular." Op.Br At best, ths concerted effort only proves that the SEC should have tred to make ts case under the statute specfcally coverng nvestment advce - the '40 Act. The suggeston that the Supreme Court n Lowe approved usng 10(b) aganst fnancal wrters smlarly-stuated to the Publsher and Author s wthout mert. The Court's reference, Op.Br.39, was specfcally to authors who engaged n "the practce of 'scalpng'" - secretly purchasng stocks before recommendng them and proftng from the rse n prce by sellng them subsequent to publcaton. Lowe, 472 U.S. at 209 n.56. The use of 10(b) aganst such persons was wholly approprate because they were tradng stocks. The Court's explct recognton of the role of 10(b) n "scalpng" cases proves defendants' pont - 10(b) s the 18

26 SEC's tool to polce mproper tradng. The '40 Act regulates nvestment advce. f Congress ntended for 10(b) to cover persons who smply rendered mpersonal stock recommendatons, that ntent certanly would have come up at some pont n the legslatve hstory of the statute Congress passed sx years later to deal explctly wth nvestment advce (and whch also ncludes ts own ant- fraud rules) - the '40 Act. That there s slence on ths subject speaks volumes.. Frst Amendment safeguards apply n ths case, and ndependent revew fals to show, by clear and convncng evdence, publcaton of a materally-false statement wth actual malce. The SEC argues that actual malce protectons and ndependent appellate revew have no role n ths case because "fraud" s not protected by the Frst Amendment. Op.Br The queston s not whether fraudulent speech s consttutonally-protected. t s well-establshed that fraud, lke lbel, s actonable. But labelng a statement "lbelous" does not abolsh Frst Amendment protectons, but rather _ them. Therefore, when the SEC attempts to mpose lablty on the bass of pure expresson, t must prove ts clams consstent wth Frst Amendment safeguards. A. New York Tmes and Bose protect the speech of the defendants. The SEC's prncpal argument as to why the speech n ths case should be treated dfferently from other types of expresson s ts clam that allegatons of "fraud" nullfy consttutonal concerns. Op.Br.47. llnos v. Telemarketng 19

27 Assocs., 538 U.S. 600, 617 (2003), cted by the SEC, Op.Br.16, however, could not be more clear: "Smply labelng an acton one for 'fraud,' of course, wll not carry the day." See also Commodty Trend Serv. v. CFTC, 233 F.3d 981,993 (7th Cr. 2000) ("[T]he government cannot label certan speech as fraudulent so as to deprve t of Frst Amendment protecton.") Thus, even f 10(b) apples to these facts, the protectons sheldng the Publsher and Author when the SEC seeks to assert lablty over ther allegedly fraudulent speech are the very ones dentfed by the Supreme Court n Telemarketng Assocs.: a requrement of clear and convncng proof from the government, New York Tmes "actual malce" rules, and ndependent revew of the entre record under Bose. 538 U.S. at The SEC argues that the lesser standards t wants to mpose allow "abundant breathng space for speech" and that heghtened standards would provde "only neglgble (f any) addtonal breathng space." Op.Br.47, 50. The Supreme Court dsagrees. t s the "exactng proof requrements" artculated above that are the ones that, n the Supreme Court's words, "have been held to provde suffcent breathng room for protected speech." Telemarketng Assocs., 538 U.S. at 620. Wthout them, 10(b) s unconsttutonal as appled to the defendants. The SEC attempts to dstance ths case from New York Tmes on the grounds that the falsty alleged n the Report and E-mal s non-reputatonal. 20

28 Op.Br.49. What bnds together the progeny of New York Tmes, however, s not smply preventng end-runs around actual malce protectons through other torts nvolvng harm to reputaton, but a recognton that consttutonal safeguards are needed whenever lablty s sought over the alleged falsty of speech on publc ssues. The New York Tmes rules apply here, as they appled to the common-law fraud acton over nvestment losses stemmng from naccurate fnancal reportng n Frst Equty Corp. v. Standard & Poor's, 690 F. Supp. 256, 258 (S.D.N.Y. 1988) (Mukasey, J.) because t s "consstent wth well-establshed Frst Amendment prncples requrng a plantff to demonstrate actual malce when seekng to mpose lablty.., for publcaton of a non-defamatory falsehood." See also County of Orange v. McGraw Hll Cos., nc., 245 B.R. 151, (C.D. Cal. 1999) (actual malce appled to alleged errors n bond ratngs). B. The commercal speech doctrne s napplcable. The SEC argues n the alternatve that the Report and the E-mal do not deserve the consttutonally-mandated heghtened standard of proof of New York Tmes and Bose because they are commercal speech. Op.Br.48. Ctng Central Hudson Gas & Elec. Corp. v. Pub. Serv. Comm'n of New York, 447 U.S. 557, 562 (1980), the dstrct court held that the publcatons had "no purpose other than to 'propos[e] a commercal transacton'" and were "enttled to lesser protecton under the Frst Amendment than the pure speech nvolved n Sullvan." JA

29 The SEC and the dstrct court msapply the commercal speech doctrne, whch courts have developed to evaluate the consttutonalty of laws regulatng partcular types of advertsng. See Central Hudson (electrcal power); LorUard Tobacco Co. v. Relly, 533 U.S. 525 (2001) (tobacco). Secton 10(b) s not a law regulatng advertsng per se, and the commercal speech doctrne s thus a poor analytcal ft for ths case. Even more mportant, the Report s not an advertsement. t proposed n._2o commercal transacton between readers and the defendants. A reader wshng to nvest n USEC had to contact a broker to buy shares. The dstrct court erred n rulng that merely recommendng an tem avalable for purchase (from a thrd party) turns fully-protected speech nto commercal speech. A newspaper column revewng a new car model, for example, does not become "commercal speech" because a reader can buy the new model from a neghborhood dealer. The court's holdng thus drectly conflcts wth a large and well-establshed body of law fully protectng speech on a range of commercal products n the marketplace, ncludng securtes. See, e._g_.,bose v. Consumers Unon of U.S., 466 U.S. 485,487 (1984) (stereo speakers); Bosphercs v. Forbes, 151 F.3d 180, 182 (4th Cr. 1998) (securtes). n tryng to dstngush Lubn v. Agora, 882 A.2d 833 (Md. 2005), the SEC emphaszes that when the Maryland court refused to apply the commercal speech 22

30 doctrne, t was "addressng _ the Specal Report," not the E-mal (Op.Br.49 n.8) - a tact concesson that there s no bass to argue that the Report, whch proposed no transacton between the defendants and readers, s commercal speech. As for the E-mal, t s an advertsement, and there s no doubt that the FTC and state agences have jursdcton to enforce false advertsng laws f, for example, a publsher advertses a newsletter as coverng ntematonal securtes, and the newsletter dscusses only domestc stocks. But courts have refused to apply the commercal speech doctrne to advertsements that, lke the E-mal, mrror statements contaned n the advertsed publcaton. Thus, n Lane v. Random House, 985 F. Supp. 141,152 (D.D.C. 1995), the court heldthat an advertsement for a book on the Kennedy assassnaton was not commercal speech: "[T]he challenged advertsement s not about laundry detergent; t cannot be dvorced from the book.., and the book s protected speech." See also Bolger v. Youngs Drug Products Corp., 463 U.S. 60, 67 n. 14 (1983) (notng that advertsement for relgous book cannot be regulated as commercal speech). n any event, the E-mal, whch does not name USEC, cannot by the SEC's own test meet the "n connecton wth" requrement because no one could trade (let alone be "vrtually certan" to trade) on a publcaton that does not dentfy a stock. 23

31 C. That purchasers of the Report bought USEC stock does not demonstrate ts materalty. The SEC's clams on materalty merely echo ts arguments on the "n connecton wth" requrement: that because readers of the Report purchased shares n USEC, the Report must have been materal. The government makes ths asserton whle at the same tme gnorng, as the dstrct court dd before t, the large volume of nformaton enterng the market about USEC n the weeks leadng up to the Moscow summt, from USEC's own statements and the statements of Presdent Bush to the fervent speculaton n the daly and fnancal press about the mpact of superpower deal-makng at the summt on the pendng prcng agreement between USEC and Tenex. Br The subscrber testmony on whch the SEC bases ts case for materalty shows that readers readly understood that the defendants were not ther fducares and therefore that they needed to flter and evaluate the Report n that lght - or, as one subscrber put t, " don't rely on Mr. Stansberry to tell me when to get up n the mornng or go to bed or go to the bathroom. Hs contenton was that the stock was gong to double... and t was up to us to decde when to buy, whether to buy, how much to buy." JA (emphass added). Almost all of the readers performed some ndependent research on USEC. Some dd so on the nternet. See, e..,ja , Some called brokers. See, e.., JA Some called USEC tself. See, e.., JA Some bought optons (when the Author 24

32 sad not to). See, e._g_.,ja One subscrber found the stock attractve wthout the clam of "nsder" nformaton based smply on the nformaton "about the company tself' n the Report. JA2526. The SEC does not contest Dr. Comment's opnon that the publcaton of a specfc day for the announcement of the contract approval - May 22 - could not have altered the total mx of nformaton. Op.Br.56; Br But t does dspute hs related pont that f anythng n the Report was materal t was management's vew that a "te" exsted between the summt and the prcng agreement. The SEC calls t "mplausble" that such a te could have been true, as Dr. Comment beleves t s, because approval dd not come untl "weeks after" the summt. Op.Br.56. But n the world of nternatonal geopoltcs (wth a nuclear twst), that t only took weeks after the summt to announce the sgnng of the agreement s close to a mracle. The SEC tres to dscount the evdence supportng the truth of the "te," ncludng the Bank of Amerca and Wngfeld memoranda, by sayng that these documents could not have affected the total mx of nformaton avalable because they were not publcly crculated. Op.Br.54 n. 13. But the defendants dd not reference the memoranda to prove ther mpact on nvestors n the market. They referenced them to prove truth. Br.45. The gst of the SEC's remanng argument s that ths Court should not look too deeply nto the record. The dentfcaton of numerous confoundng factors by 25

33 the defendants mpactng the movement n the prce of USEC stock s "only one pece of evdence bearng on materalty," accordng to the SEC, and the dstrct court has provded a "reasonable explanaton" for ts contrary fndngs. Op.Br.55. The dstrct court's "reasonable explanaton" faled to even menton the only expert to testfy on materalty at tral (Dr. Comment), much less counter hs testmony that the rse n the stock's prce was attrbutable to nformaton other than n the E- mal or Report. Br Under ether a clear error or ndependent revew analyss, the dstrct court's fndngs on materalty are nsuffcently supported to be sustaned. D. There s no evdence, let alone clear and convncng evdence, that the defendants publshed a false statement wth actual malce. The SEC follows the dstrct court's lead n treatng the fault component of ts clam almost as an afterthought. t asserts that the dstrct court's "factual fndngs would easly wthstand ndependent revew under Bose," Op.Br.50 n. 11, wthout actually examnng how ths Court would assess the record under such a comprehensve analyss. Nor does the SEC attempt to dstngush the facts and outcome n Bose tself, whch the defendants dscussed n detal specfcally to show how a revewng court conducts ndependent appellate revew and reles on ts own nferences from the evdence when those of the lower court are mproper, as s the case here. Br

34 The SEC denes that the dstrct court "confused proof of falsty wth proof of fault" only by referencng the court's conclusory fndngs that the Author knew attempt to show that "clear and convncng" evdence exsts to support the dstrct court's leap n logc, Op.Br.59, and thus smply embraces the court's error. Furthermore, the SEC asserts that the defendants gnore evdence of"red flags" and "deceptve ntent" n the record, Op.Br. 19, 59 - but then s unable to back up that clam wth any facts. V. The nunctve relef, now stayed, would volate the Consttuton. what he prnted was false and by argung that he therefore "affrmatvely led about what Wngfeld told hm." Op.Br.57 (emphass n orgnal). The SEC makes n_o_o The SEC does not argue that the stay of the njunctve relef pendng appeal was granted n error. n fact, the govemment proceeds wth ts clams for njunctve relef wthout acknowledgng ths Court's nterventon and the potental mplcatons of that nterventon on the SEC's case. The SEC characterzes the njuncton as merely a proscrpton aganst "the repetton of conduct that has been found to be llegal." Op.Br.6. f that were true, the Author and Publsher would be enjoned specfcally from republshng what they have already publshed. That s no t the case here. The njuncton nstead takes the broadest approach t could by enjonng the defendants n the very language of Rule 10b-5 tself. JA t s precsely the sort of"obey the 27

35 l l l law" njuncton that a majorty of the federal appeals courts have held mpermssble under the specfcty requrement of Fed. R. Cv. P. 65(d). See, e.g., SECv. Smyth, 420 F.3d 1225, 1233 n.14 (1 lth Cr. 2005). n nether of ts efforts to dstngush Lubn, Op.Br.42, 49, does the SEC address the nsurmountable problem Lubn creates for an "obey the law" njuncton - the dstrct court and the unanmous Maryland Court of Appeals dsagree about what "the law" s as t pertans to consttutonal protecton for the Report and E-mal, hghlghtng exactly why there s such a strong presumpton aganst pror restrants. t s no defense of the consttutonalty of the njuncton to argue that the dstrct court has smply prohbted "fraudulent speech" whch s "not protected by the Frst Amendment." Op.Br Once agan, the SEC puts the cart before the horse. The Supreme Court would no more allow a court to enjon future "fraudulent speech" n the abstract than t permtted the lower court n Near v. Mnnesota to ban future publcaton of a "defamatory newspaper." 283 U.S. 697, 706 (1931); Br.56. See also Telemarketng Assocs., 538 U.S. at 612 (notng that the Court has "three tmes consdered prophylactc statutes desgned to combat fraud by mposng pror restrants... [and] [e]ach tme, the Court held the prophylactc measures unconsttutonal"). The njunctve relef n Nat'l Soc. of Prof. Engneers v. Unted States, 435 U.S. 679, 697 (1978), Op.Br.60, nvolved conduct - the restrant of trade - and the 28

36 removal of specfc language from a code of ethcs and polcy statements whch created that restrant by mplyng that compettve bddng was unethcal. See also 389 F. Supp. 1193, 1216 (D.D.C. 1974). t was not a sweepng, open-ended restrcton on pure speech as s the case here. The detaled njunctons n Unted States v. Raymond, 228 F.3d 804, 808 n.2 (7th Cr. 2000) and Unted States v. Bel._l, 414 F.3d 474, 477 n.3 (3d Cr. 2005), Op.Br.60, covered specfc commercal speech nctng volaton of the tax laws that was unprotected under Brandenburg v. Oh 2o, 395 U.S. 444, 447 (1969). See Raymond, 228 F. 3d at 815; Bel l, 414 F.3d at 481. n contrast, the broad njuncton n ths case s not lmted to the precse content of the E-mal and the Report and reaches all of the speech of the defendants, who publsh wrtngs that the dstrct court concedes deserve "substantal Frst Amendment protecton." JA 148. Those "substantal Frst Amendment protectons" are reduced to a nullty under the court's permanent njuncton. The njuncton volates the Consttuton. 29

37 Respectfully /s/laure submtted, A. Babnsk Bruce W. Sanford Lee T. Ells, Jr. Bruce D. Brown Laure A. Babnsk BAKER & HOSTETLER LLP 1050 Connectcut Avenue NW, Ste Washngton, D.C Telephone: (202) Facsmle: (202) Matthew J. Turner 14 West Mount Vernon Place Baltmore, Maryland Telephone: (410) Facsmle: (410) Attorneys 30 for Appellants

38 CERTFCATE OF COMPLANCE Ths bref comples wth the type-volume lmtaton of Fed. R. App. P. 32(a)(7)(B) because ths bref contans 6997 words, excludng the parts of the bref exempted by Fed. R. App. P. 32(a)(7)(B)(). Ths bref comples wth the typeface requrements of Fed. R. App. P. 32(a)(5) and the type style requrements of Fed. R. App. P. 32(a)(6) because ths bref has been prepared n a proportonally-spaced typeface usng Mcrosoft Word 2003 n 14-pont Tmes New Roman font. 25th day of July, /s/laure Laure A. Babnsk A. Babnsk

39 hereby CERTFCATE OF SERVCE certfy that on ths 25th day of July, 2008, caused two copes of the foregong Reply Bref of Appellants'-Defendants for Reversal of the Dstrct Court's Decson, whch was also fled va CM/ECF and sent to the Clerk of Court by FedEx Overnght ths same day, to be served va CM/ECF and FedEx Overnght on: Mchael Conley, Esq. Mark Pennngton, Esq. Securtes and Exchange Commsson 100 F Street NE Washngton, D.C Attorneys for Appellees /s/laure Laure A. Babnsk A. Babnsk