CASE NO. 08-1037 N THE UNTED STATES COURT OF APPEALS FOR THE FOURTH CRCUT UNTED STATES SECURTES AND EXCHANGE COMMSSON, Plantffs-Appellees, PRATE NVESTOR LLC AND FRANK Defendants. PORTER STANSBERRY, Vo APPEAL FROM A FNAL JUDGMENT OF THE UNTED STATES DSTRCT COURT FOR THE DSTRCT OF MARYLAND 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. 20036 Telephone: (202) 861-1500 FLED JUL B _ ZOO8 US _our_otbopsed_ 4th Crcut Matthew J. Turner 14 West Mount Vernon Place Baltmore, Maryland 21201 Telephone: (410) 783-8410 Facsmle: (410) 783-8409 Facsmle: (202)861-1783 ORGNA Attorneys for Appe 11ants
DSCLOSURE OF CORPORATE AFFLATONS AND OTHER NTERESTS Only one form need be completed for a party even f the party s represented by more than one attorney. Dsclosures must be fled on behalf of all partes to a cvl or bankruptcy case, corporate defendants n a crmnal case, and corporate amc curae. Counsel has a contnung duty to update ths nformaton. Please fle an orgnal and three copes oft_hs form. No. Capton: Unted States Securtes and Exchange Commsson v. Agora, nc. Pursuant to FRAP 26.1 and Local Rule 26.1, Pratenvestor,LLC (name of party/amcus) who s appellant (appellant/appellee/amcus) makes the followng dsclosure:. 2. s party/amcus a publcly held corporaton or other publcly held entty? U'YEs Does party/amcus have any parent corporatons? tt"lyes 171No V-1 NO f yes, dentfy all parent corporatons, ncludng grandparent and great-grandparent corporatons: Agora, nc. s 10% or more of the stock ofa party/amcus owned by a publcly held corporaton or other publcly f yes, dentfy held entty? [23YES all such owners: Z] No. s there any other publcly held corporaton or other publcly held entty that has a drect fnancal nterest n the outcome of the ltgaton (Local Rule 26.1 (b))? V-1yes f yes, dentfy entty and nature of nterest: C'-YES 171No r7"lno s party a trade assocaton? (amc curae do not complete ths queston) f yes, dentfy all members of the assocaton, ther parent corporatons, and any publcly held companes that own 10% or more of a member's stock: -'-tyes. Does ths case arse out of a bankruptcy proceedng? 123NO f yes, dentfy any trustee and the members of any credtors' commttee: (sgnature) /Z- fz - o ::2- (date)
DSCLOSURE OF CORPORATE AFFLATONS AND OTHER NTERESTS Only one form need be completed for a party even f the party s represented by more than one attorney. Dsclosures must be fled on behalf of all partes to a cvl or bankruptcy case, corporate defendants n a crmnal case, and corporate ame curae. Counsel has a contnung duty to update ths nformaton. Please fle an orgnal and three copes of ths form. No. Capton: Unted States Securtes and Exchange Commsson v. Agora, nc. Pursuant to FRAP 26,1 and Local Rule 26.1, Frank Porter Stansberry (name of party/amcus) who s appellant (appellant/appellee/amcus) makes the followng dsclosure: l, 2. s party/amcus a publcly held corporaton or other publcly held entty? YBS Does party/amcus have any parent corporatons? 1";3YES No No f yes, dentfy all parent corporatons, ncludng grandparent and great-grandparent corporatons:, s 10% or more of the stock of a party/ameus owned by a publcly held corporaton or other publcly hold entty? r'7 YES 12] NO f yes, dentfy all such owners: s there any other publcly held corporaton or other publcly held entty that has a drect fnancal nterest n the outcome of the ltgaton (Local Rule 26.1 (b))? f] YES rt"jno f yes, dentfy entty and nature of nterest: s party a trade assocaton? (amc curae do not complete ths queston) 1"571 YES D No f yes, dentfy all members of the assocaton, ther parent corporatons, and any publcly held companes that own 10% or more of a member's stock: Y,s, Does ths case arse out of a bankruptcy proceedng? No fyes,dentfyany trusteeand themembers ofany credtors' commttee: (sgnature)
, TABLE OF CONTENTS PRELMNARY STATEMENT... 1 JURSDCTONAL STATEMENT... 4 SSUES PRESENTED... 5 STATEMENT OF THE CASE... 5 STATEMENT OF FACTS... 6 SUMMARY OF ARGUMENT... 15 STANDARD OF REVEW... 16 ARGUMENT... 17 The Publsher and Author engaged n no conduct "n connecton wth the purchase or sale of any securty" under 10(b)... 17 A. The Supreme Court requres fraud to "concde" wth the purchase or sale of a securty to satsfy the "n connecton wth" requrement... 17 B. The dstrct court gnored the O'Hagan test and msappled a test for fducares from SECv. Texas Gulf Sulphur... 22 C. The Supreme Court has consstently blocked efforts to extend the scope of 10(b) through the recognton of new dutes... 27 D The '34 Act, lke the '40 Act, must not be construed so "broadly" or "flexbly" as to mplcate consttutonal concerns... 30. Under ndependent appellate revew, the SEC has faled to prove, by clear and convncng evdence, that the Publsher and Author publshed materally-false statements wth actual malce... 37 A. Heghtened protectons are requred when the SEC seeks to mpose lablty on the bass of pure speech about a publc company... 38 B. The SEC dd not prove that the statements were materal and false... 40
Co 1. USEC's falure to correct the statements proves ther mmateralty... 40 2. The stock prce evdence s confounded by multple factors and does not establsh materalty... 41 3. The predcton of a rse n USEC's stock s protected opnon... 46 The record s devod of proof that the Publsher and Author had serous, subjectve doubts about the truth... 47 1. The dstrct court confused falsty wth fault... 48 2. An alleged falure to nvestgate a "bombastc" clam does not establsh actual malce... 51 3. Under Bose, an appeals court cannot overlook the consderable evdence negatng actual malce that the dstrct court gnored... 53. The permanent njuncton on the Publsher and Author's future speech consttutes a pror restrant n volaton of the Frst Amendment... 55 CONCLUSON... 57 REQUEST FOR ORAL ARGUMENT... 57 ADDENDUM... 59 CERTFCATE OF COMPLANCE... 60, m,
TABLE OF AUTHORTES CASES AfflatedUte Ctzensof Utah v.unted States, Alexander v. Unted States, 406 U.S. 128 (1972)... 18 509 U.S. 544 (1993)... 55 Basc v. Levnson, 485 U.S. 224 (1988)... 40 Batson v. Shflett, 602 A.2d 1191 (Md. 1992)... 39 Bosphercs v. Forbes, 1.51 F.3d 180 (4th Cr. 1998)... 47 Blue Chp Stamps v. Manor Drug Stores, 421 U.S. 723 (1975)... 27, 35, 36 Bose Corp. v. Consumers Unon of U.S., 466 U.S. 485 (1984)... passm CBS v. Davs, 510 U.S. 1315 (1994)... 56 n re Carnaton Co., Securtes Exchange Act of 1934 Release No. 22214, 49 S.E.C. 377 (July 8, 1985)... 41 n re Carter-Wallace Sec. Ltg., 150 F.3d 153 (2d Cr. 1998)... 22, 23, 25 n re Cascade nt'l Sec. Ltg., 894 F. Supp. 437 (S.D. Fla. 1995)... 25 Celle v. Flpno Reporter Enters., 209 F.3d 163 (2d Cr. 2000)... 40 ooo 111
Charella v. Unted States, 445 U.S. 222 (1980)... 27, 28 Danel v. Dow Jones & Co., 137 Msc. 2d 94 (N.Y. Cty. Spec. Term 1987)... _... 30, 35 Drks v. SEC, 463 U.S. 646 (1983)... 27, 35 Edward J. DeBartolo Corp. v. Fla. Gulf Coast Buldn_ & Constr. Trades Councl, 485 U.S. 568 (1988)... 33, 34 Frestone v. Tme, 460 F.2d 712 (5th Cr. 1972)... 40 Frst Equty Corp. v. Standard & Poor's, 690 F. Supp. 256 (S.D.N.Y. 1988)... 39 Frst Equty Corp. v. Standard & Poor's, 869 F.2d 175 (2d Cr. 1989)... 30, 35, 39 Ftzgerald v. Penthouse nt'l, 776 F.2d 1236 (4th Cr. 1985)... 45 Fletcher v. San Jose Mercury News, 264 Cal. Rptr. 699 (Cal. Ct. App. 1989)... 51 Garrson v. Lousana, 379 U.S. 64 (1964)... 47, 53 Gnsburg v. Agora, 915 F. Supp. 733 (D. Md. 1995)... 30, 31, 39 Greenbelt Coop. Publ'g Ass'n v. Bressler, 398 U.S. 6 (1970)... 52, 53 Greenhouse v. MCG Captal Corp., 392 F.3d 650 (4th Cr. 2004)... 41, 42, 43 v
Gutter v. Dow Jones, 490 N.E.2d 898 (Oho 1986)... 30, 35, 39 Hart v. nternet Wre, 2002 U.S. App. LEXS 21310 (2d Cr. Oct. 10, 2002)... 29 Harte-Hanks Commc'ns v. Connaughton, 491 U.S. 657 (1989)....... 52 Herman & MacLean v. Huddleston, 459 U.S. 375 (1983)... 16 Hllson Partners Ltd. P'shp v. Adage, 42 F.3d 204 (4th Cr. 1994)... 46 Hustler Magazne v. Falwell, 485 U.S. 46 (1988)... 38 Levan v. Captal Ctes/ABC, Long Lowe Lubn 90 F.3d 1230 (1 lth Cr. 1999)... 39 v. Arcell, 618 F.2d 1145 (5th Cr. 1980)... 50 v. SEC, 472 U.S. 181 (1985)... 4, 31, 32, 33 v. Agora, 882 A.2d 833 (Md. 2005)... 20, 37, 56 Mandel v. Boston Phoenx, 456 F.3d 198 (1st Cr. 2006)... 40 Marne Bank v. Weaver, 455 U.S. 551 (1982)... 19 Near v. Mnnesota, 283 U.S. 697 (1931)... 56, 57 V
New York Tmes v. Sullvan, 376 U.S. 254 (1964)... 36, 38-40, 47, 57 Newton v. Nat'l Broad. Co., 930 F.2d 662 (9th Cr. 1990)... 39, 48, 54 Org. for a Better Austn v. Keefe, 402 U.S. 415 (1971)... 56 Phllps v. LC nt'l, 190 F.3d 609 (4th Cr. 1999)... 26 Pper v. Chrs-Craft ndus., 430 U.S. 1 (1977)... 17 Prtt v. Republcan Nat'1 Comm., 557 S.E.2d 853 (W. Va. 2001)... 39 Raab v. Gen. Physcs Corp., 4 F.3d 286 (4th Cr. 1993)... 46 Re_ents of the Unv. of Cal. v. Credt Susse Frst Boston, 482 F.3d 372 (5th Cr. 2007)... 21 Relance ns. Co. v. Barron's, 442 F. Supp. 1341 (S.D.N.Y. 1977)... 29, 33, 34 Reuber v. Food Chem. News, 925 F.2d 703 (4th Cr. 1991)... 38, 39 Robertson Ryan v. McCloske7, 666 F. Supp. 241 (D.D.C. 1987)... 40 v. Brooks, 34 F.2d 726 (4th Cr. 1980)... 52 SEC v. Captal Gans Research Bureau, 375 U.S. 180 (1963)... 28 v
l l l l l SEC v. Datroncs Eng'rs, 490 F.2d 250 (4th Cr. 1973)... 26 SEC v. Merchant Captal, 483 F.3d 747 (1 lth Cr. 2007)... 17 SEC v. Savoy ndus., 587 F.2d 1149 (D.C. Cr. 1978)... 22, 25 SEC v. Terrg's Tps, 409 F. Supp. 2d 526 (D. Vt. 2006)... 26 SECv. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cr. 1968)... passm SECv. Wall St. Publ'g nst., 664 F. Supp. 554 (D.D.C. 1986)... 29, 30 SECv. Zandford, 535 U.S. 813 (2002)... passm Santa Fe ndus. v. Green, 430 U.S. 462 (1977)... 27 St. Amant v. Thompson, 390 U.S. 727 (1958)... 47, 50, 52 Stonerdge nv. Partners v. Scentfc-Atlanta, 128 S. Ct. 761 (2008)... passm Sup't of ns. v. Bankers Lfe & Cas. Co., 404 U.S. 6 (1971)... 17 TSC ndus. v. Northwav, 426 U.S. 438 (1976)... 40 The Wharf (Holdngs) Ltd. v. Unted nt'l Holdngs, 532 U.S. 588 (2001)... 18 v
Thomson Newspaper Publ'g v. Coody, 896 S.W.2d 897 (Ark. 1995)... 50, 51 Tme v. Hll, 385 U.S. 374 (1967)... 38 Tme v. Pape, 401 U.S. 279 (1971)... 51 Unted nt'l Holdngs, nc. v. Wharf (Holdngs) Ltd., 210 F.3d 1207 (10th Cr. 2000)... 25 Unted States v. Cong. of ndus. Orgs., 335 U.S. 106 (1948)... 34 Unted States v. O'Hagan, 521 U.S. 642 (1997)... passm Vrgna Carolna Tools v. nt'l Tool Supply, 984 F.2d 113 (4th Cr. 1993)... 56 Washngton Post Co. v. Keogh, 365 F.2d 965 (D.C. Cr. 1966)... 53 Zweg v. Hearst, 594 F.2d 1261 (9th Cr. 1979)... 30 STATUTES 15 U.S.C. 17(j)(b)... 59 15 U.S.C. 77u(a)... 4 15 U.S.C. 78u(d)... 4 15 U.S.C. 80b-2(a)(11)... 31, 32 17 C.F.R. 240.10b-5... 59 28 U.S.C. 1291... 4,.. Vlll
MSCELLANEOUS BarbaraBlack,The Second Crcut'sApproach tothe 'nconnecton Wth' Requrement of Rule 10b-5,53 Brooklyn L. Rev. 539 (1987)... 22 S.Rep. 792,73d Cong., 2d Sess.8 (1934)... 24 Sack on Defamaton 5-89 (3d ed. 1999)... 51 x
PRELMNARY STATEMENT Ths Court promptly ntervened over the SEC's objectons to stay the dstrct court's permanent njuncton (when the dstrct court declned to do so) to consder a queston of frst mpresson n ths crcut: whether 10(b) of the Securtes Exchange Act of 1934 (the "'34 Act") covers speech about stocks by persons who do not trade the securtes and who do not exercse fducary dutes. The controllng facts have never been n dspute. The SEC has sued an nvestment newsletter wrter and hs publsher for volaton of 10(b) n publshng nformaton about USEC, nc., a publc corporaton lsted on the New York Stock Exchange. Nether appellant Frank Porter Stansberry (the "Author") nor appellant Prate nvestor LLC (the "Publsher") traded n USEC shares for themselves, managed nvestments n USEC for ther subscrbers, or bore any fducary oblgatons to the publc. The defendants are not nvestment advsers, bankers, brokers, dealers, ssuers, underwrters, lawyers, or accountants. Unlke these lcensed and regulated actors n the securtes markets, whom 10(b) covers because of ther drect nvolvement n the buyng and sellng of stocks or ther fducary roles or specal professonal dutes to nvestors, the Publsher and Author smply publsh wrtngs about nvestments. They do not ssue certfed opnons or recommendatons. They are not requred to be lcensed. They offer no personalzed advce.
Secton 10(b) requres false statements to be "n connecton wth the purchase or sale of any securty." But here the SEC seeks to extend the statute to a clam that s no 3t "n connecton wth the purchase or sale of any securty" but "n connecton wth the purchase or sale" of nformaton. The allegaton the SEC makes n the complant - that the defendants' allegedly false statements "nduce[d] nvestors to pay [them]... for subscrptons," JA42 (emphass added), s a clam of common-law fraud n the sale of a publcaton, and "[s]ecton 10(b) does no tt ncorporate common-law fraud nto federal law." Stonerdge nv. Partners v. Scentfc-Atlanta, 128 S. Ct. 761, 771 (2008) (emphass added). Such clams are "already governed by functonng and effectve state-law guarantees." d. The falsty the SEC alleges bols down to whether a USEC offcal told the Author at the end of a one-hour telephone conversaton (the content of whch s otherwse not n dspute) to "watch the stock" the day before a superpower summt opened n Moscow, thereby ndcatng that USEC beleved t was on the verge of postve news regardng an already-antcpated government contract approval. Whether the Author erred n what he heard, he was not mstaken about the te between the summt and the contract - U.S. approval was announced just weeks after the summt, and USEC's stock rose on the news f not as dramatcally as the Author's nformed speculaton had predcted.
The SEC states that the broad, remedal powers of 10(b) cover ths case. t further clams that the falsty and fraud t alleged n the complant are not, n any event, protected forms of speech. But ths argument s a red herrng. The queston n ths appeal s not whether the speech of any partcular publsher or speaker s false or not but whether the SEC can clam to have jursdcton over all speech about stocks t clams to be untrue. Supreme Court authorty ndcates the SEC s exceedng the scope of 10(b). n recently rejectng so-called "scheme lablty" under 10(b) for vendors who allegedly asssted a corporaton n commttng fraud, the Court n Stonerd_e refused to apply 10(b) "beyond the securtes markets - the realm of fnancng busness - to purchase and supply contracts - the realm of ordnary busness operatons." Stonerdge, 128 S. Ct. at 770. The Court drew a brght lne between the "nvestment sphere" regulated by 10(b) and "the marketplace for goods and servces," d_._, at 774, where the statute dd not reach. Because the relatonshp between a publsher of non-personalzed advce and general news about stocks and a reader who consumes the nformaton exsts purely n ths "marketplace" of goods and servces, not n the "nvestment sphere," t lacks the necessary statutory mandate of beng "n connecton wth the purchase or sale of any securty." The federal statute specfcally coverng stock advce s the nvestment Advsers Act of 1940 (the "'40 Act"), but the SEC dropped ts threat to sue the defendants under
ths law and nstead chose to stretch the jursdctonal boundares of 10(b). Fnally, gven that ths case deals solely wth pure speech, a consttutonal component exsts to the proper constructon of the statute, as the Supreme Court recognzed n nterpretng the '40 Act. Se qe Lowev. SEC, 472 U.S. 181,205 n.50 (1985) ("[]n areas where legslaton mght ntrude on consttutonal guarantees, we beleve that Congress, whch has always sworn to protect the Consttuton, would err on the sde of fundamental consttutonal lbertes when ts legslaton mplcates those lbertes." (ctaton omtted)). To ths end, any doubts as to the proprety of applyng the statute here should be resolved n favor of avodng consttutonal questons. f, however, the statute were found to reach dsnterested speech on stocks and the fnancal markets, the smple labelng of speech as "false" or "fraudulent" by the SEC or prvate 10(b) plantffs would not end the nqury, t would onl2 be eg_t. Frst Amendment prncples requre the SEC to prove ts case through a heghtened evdentary standard - a standard that t cannot meet on ths record. Reversal of the judgment and permanent njuncton s warranted. JURSDCTONAL STATEMENT The dstrct court, whch had jursdcton pursuant to 15 U.S.C. 77u(a) and 15 U.S.C. 78u(d), entered ts fnal orders on October 3, 2007. The defendants noted a tmely appeal on November 29, 2007. Ths Court has jursdcton over the fnal orders of the dstrct court pursuant to 28 U.S.C. 1291.
SSUES PRESENTED 1. Whether 10(b) reaches the speech of the Publsher and the Author who dd not trade n USEC stock and who owe no fducary or specal dutes to the publc or to the securtes marketplace. 2. Whether, f 10(b) apples, the SEC has met the dual consttutonallymposed burdens of provng, by clear and convncng evdence, the publcaton of a materally-false statement of fact wth actual malce. 3. whether, f 10(b) apples, the permanent njunctve relef volates the Frst Amendment to the Unted States Consttuton. STATEMENT OF THE CASE The SEC sued the Publsher and Author under 10(b) and Rule 10b-5 thereunder. JA15-38, 39-60. They fled a Moton to Dsmss, whch the dstrct court dened. JA3 [8], 61. The Publsher and Author sought certfcaton of the statutory queston of law that s now the focus of ths appeal. JA5134]. The dstrct court dened certfcaton. JA84-85. The Publsher and Author moved for leave to fle a Moton for Summary Judgment, whch the dstrct court dened. JA6152], JA89-95. The case was tred before the dstrct court. Nearly 28 months later, the court found the Publsher and the Author lable, ssued cvl penaltes, dsgorged ther profts, and enjoned them from future volatons. JA147-97. The dstrct
court rescnded ts Judgment Order and entered an Amended Judgment Order and Permanent njuncton. JA198-207. The Publsher and Author fled a moton to stay the njuncton pendng appeal, whch the dstrct court dened. JA13[127], 209. The Publsher and Author pettoned ths Court for a stay. App.Dkt.35. The SEC opposed, and ths Court granted the relef. JA5864-65. STATEMENT OF FACTS The followng facts are n the jont pretral stpulatons. The Author s the edtor-n-chef of Porter Stansberry's nvestment Advsory ("the Newsletter"), whch s publshed monthly and owned by the Publsher. JA117-18. n addton to the Newsletter and other fnancal publcatons, the Publsher also publshes an e- mal servce to ts subscrbers called the "Blast." JA120-21. The Publsher s a lmted-lablty company wholly-owned by Agora, nc., a Maryland corporaton based n Baltmore that has been n the publshng busness for over 20 years and whch publshes dozens of newsletters n felds rangng from nvestment and health advce to travel and lesure actvtes. JA 117-18. n 2002, Agora had approxmately 448,000 pad subscrbers. JA 117-18. On May 2, 2002, the Author ntervewed the drector of nvestor relatons for
USEC, the world's largest processor of uranum for power plants. JA 118-19.1 n February, USEC had negotated wth ts Russan suppler Tenex a new marketbased prcng agreement that requred approval by both the Unted States and Russa. JA119. USEC told the Unted States government n Aprl that Russa had approved the new terms. JA123-24. As of May 2, Amercan approval had not been announced, but USEC had asked the Unted States government to place the prcng agreement on the agenda of the May 23-26 summt between Presdents Bush and Putn. JA119. ndeed, on Aprl 16, USEC rased wth Bank of Amerca a potental connecton between the approval of the prcng agreement and the summt. JA120. After the Author and the USEC executve, Steven Wngfeld, spoke by telephone for approxmately an hour on May 2 (Mar Major-Sosas, USEC's new manager of nvestor relatons, was also present), the Author prepared a publcaton recommendng nvestment n USEC (the "Report") and a promotonal e-mal offerng the Report for sale to subscrbers (the "E-mal"). JA118, 120. n the E- mal, whch descrbed the reasons for nvestng n the company but whch dd not dentfy USEC by name, the Author stated that "[]nvestors n ths company are gong to make a fortune - for reasons that can detal for you here. And, best of all, because of my source - a senor company executve - can tell you 1 All dates unless specfed are n 2002.
EXACTLY WHEN the deal wll be fnalzed and announced to the publc. The deal wll close on May 22nd, only a few days from now." JA120. The E-mal also contaned the followng cautonary language: "[T]here's one more thng have to remnd you about. can't guarantee that the stock wll pop. Nobody can guarantee the actons of the stock market." JA120. On the evenng of May 13, the Publsher and the Author publshed the E- mal to subscrbers on the "Blast" servce. JA120. They offered the Report, whch dentfed USEC as the company posed for postve news, for sale for $1,000. JA121. On the mornng of May 14, just hours after publcaton, the Author sent both the Report and E-mal to Wngfeld. JA121. Wngfeld had earler receved from the Author a password and user name to the Publsher's webste. JA123. Wngfeld dd not contact the Author to rase any concerns about the two publcatons. JA121. USEC dd not ssue a press release denyng or commentng upon the contents of the E-mal or the Report. JA121. Nether the Publsher nor the Author owned or traded USEC stock or offered personalzed nvestment advce n volaton of the '40 Act. JA124. They sold 1,217 copes of the Report. JA122. They receved 215 refund requests and honored them all. JA123. The Author and the Publsher publshed sx follow-up reports on USEC. JA123. The Author sent Wngfeld copes of the May 30 and June 18 reports the day they were publshed. JA123. On May 22, the approval of
the USEC-Tenex prcng agreement was not announced. JA123. t was announced approxmately three weeks later, on June 19. JA124. The follown_ facts are uncontroverted and were ntroduced at tral. The new prcng agreement wth Tenex would, accordng to a USEC press release on Aprl 24, "provde [USEC] strong future benefts." JA4000. USEC offcals were at ths tme speakng wth certanty about approval for the prcng agreement. On Aprl 25, USEC told nvestors n a conference call that t was "look[ng] forward" to approval of the agreement n the "near future" and that "sgnals from the U.S. government ndcate that approval s near." JA4097. The Washngton Post reported on Aprl 29 that USEC beleved the approval would "come soon." JA4050. On May 10, USEC told the newspaper n Paducah, Kentucky where ts plant s located that t was "confdent" of the agreement's approval. JA4066. The Wall Street Journal, on May 14, quoted Wngfeld sayng "[t]he new prcng agreement wll mprove our earnngs" and notng that he saw the approval "com[ng] along soon." JA4070. At the same tme that USEC offcals were publcly antcpatng approval of the prcng agreement wth Tenex, artcles were appearng about a new arms treaty wth the Russan government. The Wall Street Journal, for example, ndcated on May 8 that the Bush-Putn summt was expected to produce a major deal to cut the two natons' nuclear arsenals. JA4244.
When the Author ntervewed Wngfeld on May 2, they covered the broad bascs of USEC's busness, ncludng the approval of the market-based prcng agreement. JA279-80 (Wngfeld); JA635, 638 (Author). They also spoke of the upcomng summt. JA280 (Wngfeld); JA638-39 (Author). About hs conversaton wth the Author, Wngfeld stated n a May 14 memorandum (wrtten at the request of USEC lawyers), "n response to questons about the Bush and Putn summt meetng n May, sad that we hoped somethng postve about our deal would come out of that meetng." JA280, 3204. He also wrote that he told the Author that USEC "expected the agreement to be approved by the government n the near term." JA3204. Under the headng "Thoughts on R," Major-Sosas recorded n her notes from ths tme perod, "Whle we can't drectly lnk our [a]greement to the [a]rms control treaty, t would be only logcal to acknowledge that ndeed the two governments have a commtted nterest n seeng that our agreement proceeds [wth] success." JA3277. Presdent Bush announced the new arms treaty wth the Russans on May 13. JA4023. USEC's share prce started the mornng at $6.85. JA4176. A rse n the stock prce began later that day, after the Bush announcement but pror to publcaton of the E-mal and the Report, whch ddn't occur untl 6:30 p.m. JA3168. The ncrease n share prce contnued through May 22, the ex-dvdend date for the stock, when the shares closed at $8.20. JA4176. 10
As USEC's share prce clmbed, news reports attrbuted the movement to a connecton between the treaty and the prcng agreement. On May 15, for example, the Nghtly Busness Report on PBS concluded from the rse of USEC's stock over the prevous two days that "The U.S. and Russa have now agreed on a nuclear arms reducton treaty and that could mean lftng prce controls on enrched uranum, and that's what the company deals n." JA480, 5179. Also on May 15, n an artcled enttled, "USEC Up 10%: US-Russa Arms Deal Contnues To Boost Stock," The Wall Street Journal quoted an analyst who suggested that "[t]he hope s clearly that - as part of these other talks between the Russa [sc] and the U.S. - the governments wll fnally approve the tentatve agreements USEC has wth ts Russan tradng partner." JA4072. The stock's rse was also ted to the expectaton that the company, as the exclusve processor of decommssoned Russan warheads, would beneft from the treaty tself. Major-Sosas was quoted tellng Bloomberg News that the treaty was "good for the nuclear ndustry as a whole." JA4074. Accordng to Bloomberg's May 20 artcle enttled "USEC Shares Clmb n Wake of U.S.-Russa Weapons Agreement," she sad, "Lookng at our stock prce, t's havng a bg effect even though we are not drectly related to anythng that's gong on n ths treaty." JA4074. A Washngton Post headlne on the same day read, "U.S.-Russa Arsenal Reducton Pact Lfts USEC Shares." JA4076. 11
A May 17 memorandum from Wngfeld to USEC's CEO on the clmb n the company's share prce dd not menton the Report, the E-mal, the Author, or the Publsher. JA3205-07. Nor were they mentoned n any of the many news accounts reportng on the stock's rse. Around the same tme that the Author publshed the E-mal and the Report, Forbes magazne publshed an artcle by Nobel Prze-wnnng economst Joseph Stgltz suggestng that USEC should be renatonalzed. JA4790-93. The Forbes artcle was maled to subscrbers for delvery between May 11 and May 13. JA146. On May 15, The Gartman Letter, a newsletter specalzng n energy companes, attrbuted the rse n USEC's stock prce on May 14 to the Stgltz artcle and speculaton that USEC shares would be repurchased at a premum by the government. JA146, 4788. On May 18, the newsletter Personal Fnance advsed ts readers to purchase USEC shares. JA146, 4776. The Author dd not wrte about USEC n the Newsletter because USEC dd not ft the profle of the technology leaders the Newsletter featured. JA600. nstead, he publshed the E-Mal and the Report n the "Blast" servce, whch was publshed several tmes a week. JA1258. Because he was not coverng USEC n the Newsletter that bears hs name, he publshed under a company pen name, Jay McDanel. JA2972-78. The Publsher had ntroduced the pen name n the September 22, 2001 edton of the "Blast" and used t regularly. JA561, 3897. The 12
Author also ncluded a lnk n the Report to a Yahoo webste where subscrbers could check USEC's SEC flngs, ncludng ts eght percent dvdend and other fundamentals that he found appealng n the event USEC shares dd not sgnfcantly rse after the prcng agreement was approved. JA886, 1315-17, 3110. The E-mal began wth the headlne "Double your money on May 22rd wth ths 'super nsder' tp" and provded detals about the unnamed company, ts lne of busness, ts fundamentals, ts pendng prcng agreement wth the Russans, the upcomng May 23-26 summt, and the ndcaton from a hgh-rankng nsder that the Russan deal would be approved on May 22. JA2972-78. "Ths s the knd of nsder nformaton that could make you a lot of money," the Author wrote. JA2972-73. The Report concluded: " consder ths a safe speculaton. t's hard to magne nvestors gettng hurt wth ths stock at ts current prce - you're buyng at roughly half of book value and you're gettng pad 8% a year to wat untl the Russan supply deal gets worked out. Hopefully, f my source s rght, t won't take long..." JA3112 (emphass n orgnal). On May 17, the Author edted the E-mal to account for the rse n USEC's shares leadng up to the Bush-Putn summt. JA780-81. Because the stock had already ncreased n prce, he no longer predcted a doublng. JA3113-17. n a May 17 e-mal to Jody Madron, an ndependent contractor workng for the 13
Publsher, the Author remarked that when the Report s updated, "the stock wll probably be near $9.00... so there's stll a 55% gan to be had... f the deal goes through as we expect." JA3177. After the May 22 announcement dd not come, Madron wrote to George Rayburn, who also worked for the Publsher, "[W]thout havng verfed myself, can't magne that [the Author] put anythng false n the promo or the report." JA3395. A May 24 e-mal from Rayburn sad, "Fnally got n touch wth [the Author] and he stll beleves ths stock wll rse." JA6152, Ex. C]. The Author contacted Wngfeld agan n late May and ntervewed hm a second tme as he contnued to follow the stock. JA331. Hs fnal publshed report on USEC was on November 5. JA123. By March 21, 2005, the frst day of tral, USEC stock had almost trpled snce the Publsher and Author recommended the company. JA237, 242. The sngle dspute s what was sad at the end of the May 2 conversaton that everyone agrees touched upon the prcng agreement and the upcomng summt. JA279-80 (Wngfeld), 638-39 (Author). The Author testfed that Wngfeld told hm before hangng up to "watch the stock on May 22." JA636, 640-41,774, 783, 808, 1318. To the Author, ths statement ndcated that USEC beleved the prcng agreement would be approved and announced before the summt. JA639-41,774, 783,807-09, 1318. Consstent wth that understandng, the Author wrote n the Report, "A USEC senor executve has assured me that the new Russan agreement 14
wll be approved just pror to the upcomng Bush-Putn summt. n fact, he sad 'watch the stock on May 22.'" JA3111. Wngfeld denes makng the remark. JA299, 501. Major-Sosas testfed that Wngfeld dd not make the remark. JA526. On cross-examnaton, she sad she ddn't recall hm sayng that. JA540. SUMMARY OF ARGUMENT The Publsher and Author cannot be held lable under 10(b) because they dd not engage n conduct "n connecton wth the purchase or sale of any securty." The dstrct court gnored the approprate test for the "n connecton wth" requrement n Unted States v. O'Hagan, 521 U.S. 642, 656 (1997), whch requres fraud to "concde" wth or be dependent upon the purchase or sale of a securty, and nstead t msappled a test from SECv. Texas Gulf Sulphur Co., 401 F.2d 833,860 (2d Cr. 1968) relatng to fducares. The Author and Publsher, however, are not fducares and owe no dutes to the publc or the securtes marketplace. The Supreme Court has consstently blocked attempts to recognze new fducary dutes under 10(b). The only tme the Court has read a securtes statute n the context of non-personalzed nvestment advce, t nterpreted the law narrowly to avod consttutonal concerns, and the same should be done here. f the statute were construed to apply to dsnterested speech about securtes, under a tradtonal 10(b) analyss, the SEC cannot prove that the E- mal and the Report were ether materally false or publshed wth scenter. The 15
evdentary weakness of the government's case s only amplfed by the heghtened standard of revew n cases nvolvng pure speech. That standard requres a revewng court to conduct an ndependent revew of the entre record to determne whether the SEC has proven by clear and convncng evdence that the Publsher and Author publshed materally-false statements of fact wth actual malce. Fnally, especally where the dstrct court concedes that the defendants publsh many wrtngs that deserve "heghtened" and "substantal Frst Amendment protecton," se e JA148, 174, the permanent njuncton consttutes a pror restrant that volates the Consttuton. To establsh STANDARD OF REVEW a clam under 10(b) and Rule 10b-5, the SEC must show that a defendant: () msrepresented or omtted a materal fact, () n connecton wth the purchase or sale of any securty, () wth scenter. Herman & MacLean v. Huddleston, 459 U.S. 375, 382 (1983). 2 On appeal, a 10(b) case would typcally be revewed under the same standard as all cvl cases. ssues of law, such as the meanng of the "n connecton wth" requrement, are revewed d_eenov o, whle 2 Snce "[t]he scope of Rule 10b-5 s coextensve wth the coverage of 10(b)... we use 10(b) to refer to both the statutory provson and the Rule." SECv. Zandford, 535 U.S. 813, 816 n.1 (2002). 16
ssues of fact, such as whether the SEC proved scenter and materal falsty, are revewed for clear error. See SECv. Merchant Captal, 483 F.3d 747, 754 (1 lth Cr. 2007). However, n ths case, f the Court determnes that 10(b) covers the publshed speech of a defendant who dd not breach fducary dutes or trade stock, then applcaton of the statute would rase substantal Frst Amendment concerns. n ths nstance, the statutory requrement of materal falsty and the.scenter or fault element would call for a heghtened standard of revew under Bose Corp. v. Consumers Unon of U.S., 466 U.S. 485 (1984). ARGUMENT. The Publsher and Author engaged n no conduct "n connecton wth the purchase or sale of any securty" under 10(b). Whether the allegatons aganst the defendants are "n connecton wth the purchase or sale of any securty" under 10(b) s a queston of law subject to d ee novo revew. Sup't of ns. v. Bankers Lfe & Cas. Co., 404 U.S. 6, 13 (1971). A. The Supreme Court requres fraud to "concde" wth the purchase or sale of a securty to satsfy the "n connecton wth" requrement. "n connecton wth the purchase or sale of any securty" s "lmtng language." Pper v. Chrs-Craft ndus., 430 U.S. 1, 38 (1977). Only two classes of defendants have been found by the Supreme Court to meet the "n connecton wth" requrement n 10(b) - those who mproperly traded n securtes and those who breached fducary dutes to nvestors (and some who dd both). See Bankers 17
l l Lfe, 404 U.S. at 8 (tradng of securtes and breach of fducary duty); Afflated Ute Ctzens of Utah v. Unted States, 406 U.S. 128, 153 (1972) (breach of fducary duty); O'Hagan, 521 U.S. at 647, 656 (tradng of securtes and breach of fducary duty); The Wharf (Holdngs) Ltd. v. Unted nt'l Holdngs, 532 U.S. 588, 596 (2001) (tradng of securtes); Zandford, 535 U.S. at 823 (breach of fducary duty). The Publsher and the Author are n nether of these categores. As sellers of newsletters ther subscrbers, who dd not trade n USEC stock, who do not buy and sell shares for and who have n o_o fducary or specal dutes to the readng publc or to nvestors, the Publsher and the Author lack the requste nexus to the "securtes markets - the realm of fnancng busness" to be sued under 10(b). Stonerdge, 128 S. Ct. at 770. Supreme Court precedent makes t clear that conduct s "n connecton wth the purchase or sale of any securty" only f the completon of a fraudulent act or a breach of a fducary duty requred or depended upon the purchase or sale of a stock. O'Hagan, 521 U.S. at 656 (fraud would not have exsted wthout mproper securtes transactons and was "consummated" by the tradng); Zandford, 535 U.S. at 820-21,823 (fraudulent acts and securtes transactons by a "broker who has a fducary duty" to clents "were not ndependent events" as "each sale was made to further [a] fraudulent scheme" that "concded wth" and "requre[d] the sale of securtes" (emphass added)). 18
As O'Hagan states, the "n connecton wth" element s satsfed n the case because "the fducarg's fraud s consummated, not when the fducary gans the confdental nformaton, but when, wthout dsclosure to hs prncpal, he uses the nformaton to purchase or sell securtes. The securtes transacton and the breach of dut2 thus concde." 521 U.S. at 656 (emphass added). On the other hand, the Court states, quotng the Solctor General's bref, a person who steals from a bank to buy securtes does not fall under 10(b) because "'the fraud would be complete as soon as the [bank's] money was obtaned'" and was thus - n the Supreme Court's own words - "suffcently detached from a subsequent securtes transacton that 10(b)'s 'n connecton wth' requrement would no tt be met." at 656-57 (ctaton omtted) (emphass added). Ths statutory lmtaton s necessary because, wthout t, any strng of allegatons of common-law fraud n whch a securty at some pont s bought or sold - no matter how superfluous or rrelevant the securtes transacton s to the carryng out of the fraud tself- would be federalzed under 10(b). That, the Supreme Court has sad on numerous occasons, s not the purpose or functon of the statute. "Congress, n enactng the securtes laws, dd not ntend to provde a broad federal remedy for all fraud." Marne Bank v. Weaver, 455 U.S. 551,556 (1982); see also Zandford, 535 U.S. at 820. Even assumng, for the sake of argument, that every allegaton aganst the 19 d.
Publsher and Author s true, the "fraud" was "consummated" or "complete" when readers subscrbed to and pad for the Report. O'Hagan, 521 U.S. at 656. No "subsequent securtes transacton" by any subscrber was requred to carry out the alleged fraud. d. at 657. The defendants receved the same payment for each Report regardless of whether a reader ever purchased USEC stock. The unanmous Maryland Court of Appeals, lookng at the very same publcatons n a subpoena enforcement proceedng, emphaszed that the Report "dd no tt propose that ts readers should buy ther shares [n USEC] from Agora." Lubn v. Agora, 882 A.2d 833,848 (Md. 2005) (holdng that regulators faled to make a heghtened showng as requred by the Frst Amendment when seekng the Publsher's subscrber lsts) (emphass added). 3 The SEC's complant recognzes that the defendants' newsletters allegedly "nduce[d] nvestors to pay [them]... for subscrptons," not stocks. JA42 (emphass added). The dstrct court conceded as much when t wrote that readers "were nduced" to pay not for a stock but a "stock tp" and that the Author's statements were ntended to "nduce the recpents" of the E-mal to "pay $1000" - for the Report. JA148, 170. The defendants sold a 3 The defendants repeatedly brought Lubn to the dstrct court's attenton, but the court never cted t. JA12[118, Ex. 1 at 5], 131127, Ex. 1 at 1, 2, 9, 12], 131131 at 9-10]. 20
publcaton about USEC, not securtes n USEC. The demarcaton n Stonerdge between the securtes markets and the ordnary commercal sphere s a lne that s consstent wth the Court's polcng of the "n connecton wth" requrement to ensure 10(b) does not extend beyond fraudulent acts that concde wth or depend upon the actual "purchase or sale" of a securty. The SEC justfes ts attempts to expand the statute on the grounds that, regardless of the defendants' lack of tradng and fducary dutes n ths case, "les" about stocks are not protected speech. But even awardng the SEC all nferences about the evdence (presumptons whch t does not enjoy n ths appeal), f every "le" about a stock s now deemed "n connecton wth the purchase or sale of any securty," then the statutory lmtatons mposed by Congress n 10(b) wll smply no longer exst. See Regents of the Unv. of Cal. v. Credt Susse Frst Boston, 482 F.3d 372, 383-84, 386 (Sth Cr. 2007) (rejectng 10(b) clams aganst banks that partnered wth Enron because they were not "fducares" to the plantffs and "owed no dut[es]"). Although Stonerd_e was not decded on the "n connecton wth" requrement, 4 the Court cted wth approval to a law revew artcle explanng the 4 The rulng n Stonerdge turned on the lack of relance, an element requred n a prvate 10(b) acton, as the allegedly deceptve conduct by the defendants was not communcated to the publc. 21
role of"n connecton wth" n lmtng the scope of the statute. Stonerdge, 128 S. Ct. at 770. mmedately pror to the passage the Court ctes, the artcle states: [T]he lack of the requste connecton goes to the queston of federal jursdcton. Thus, even though there may be a securty nvolved, the alleged msconduct may not have occurred n a securtes transacton. Rather, properly analyzed, the plantff's allegatons consst of... commercal fraud and, hence, are outsde the scooe of federal securtes fraud jursdcton. n ths stuaton, the "n connecton wth" requrement s necessary to lmt Rule 10b-5 jursdcton so that the rule does not encompass all of common-law fraud. Barbara Black, The Second Crcut's Approach to the 'n Connecton Wth' Requrement of Rule 10b-5, 53 Brooklyn L. Rev. 539, 540-41 (1987) (emphass added). The SEC's allegatons aganst the Publsher and Author are clams of commercal fraud that are outsde the scope of federal securtes fraud jursdcton. B. The dstrct court gnored the O'Hagan test and msappled a test for fducares from SECv. Texas Gulf Sulphur. n an opnon subsequent to O'Hagan, the Supreme Court summed up ts "n connecton wth" cases gong back to Bankers Lfe as each nvolvng "fraudulent scheme[s] n whch the securtes transactons and breaches of fducary duty concde." Zandford, 535 U.S. at 825 (emphass added). The dstrct court, however, dd not apply ths test. n fact, t dd not even acknowledge ts exstence. nstead, the court looked to n re Carter-Wallace Sec. Ltg., 150 F.3d 153 (2d Cr. 1998) and SEC v. Savoy ndus., 587 F.2d 1149 (D.C. Cr. 1978), for the prncple that the statutory nexus wth securtes tradng s present when a statement "would 22
cause reasonable nvestors to rely thereon," and "so relyng, cause them to purchase or sell a corporaton's securtes." JA172. n ctng ths language, the dstrct court faled to see the obvous lmtatons of the context n whch the statement was made. The language comes from Texas Gulf, 401 F.2d at 860, where the Second Crcut held that the defendant, a publc company, could be sued under 10(b) on the bass of a statement n a corporate press release. The queston n Texas Gulf was not whether the statement of a non-ssuer (such as the Publsher or the Author) was covered by 10(b), but rather what knd of statement fro_. mm an ssuer was covered. The court decded that press releases and other knds of statements from ssuers apart from offcal SEC flngs fell under the statute. To reach ths concluson, the Second Crcut looked to the legslatve hstory. Accordng to the court, the law could be volated by a false corporate press release regardless of whether nsders were tradng stock at the tme because Congress ntended to protect the nvestng publc [from]... msleadng statements promulgated for or on behalf of corporatons... [T]he Commsson has been charged by Congress wth the responsblty of polcng all msleadng corporate statements... [T]herefore, when materally msleadng corporate statements... have been uncovered, the courts... have broadly construed the statutory phrase "n connecton wth the purchase or sale of any securty." Texas Gulf, 401 F.2d at 860-61 (emphass added). The Second Crcut s abundantly clear - after revewng the legslatve hstory - that t ted ts readng of the statute to wrongful corporate (.e., fducary) behavor. Texas Gulf has 23
naturally been appled to other types of fducares n the securtes market. When such persons choose to speak to nvestors, they are approprately covered by 10(b). On the other hand, no legslatve hstory shows that Congress ntended to apply 10(b) n the unbrdled way now advocated by the SEC - to statements made by non-fducares who are not themselves otherwse engaged n a fraud that requres the "purchase or sale of any securty." To the extent that the legslatve hstory touches upon publshers at all, lawmakers were only concerned about the scalpng or promotng of stocks by wrters who were pretendng to gve "mpartal, dsnterested dscusson of the stock market" when they were actually tradng for themselves or recevng payments from ssuers and not dsclosng ether actvty. See S. Rep. 792, 73d Cong., 2d Sess. 8 (1934). The securtes laws clearly cover these practces, and the SEC contnues to pursue such cases vgorously- and would stll be able to do so after a reversal of the dstrct court n ths appeal. See SECv. Calandra (settlement wth MarketWatch columnst) (avalable at http://www.sec.gov/news/press/2005-3.htm). What Congress planly dd no_at envson n 1934 was the regulaton of publshers who were smply gvng "mpartal, dsnterested" news or commentary. Applyng Texas Gulf to a non-fducary, non-tradng defendant who has no dutes to the market therefore clashes wth the legslatve hstory and wth the Second Crcut's reasonng. The dstrct court offered no judcal support for 24
m, extendng Texas Gulf to the Publsher and Author. t smply stated that t does not "read" the precedent to lmt extenson of the Texas Gulf rule n ths way- hardly a rngng endorsement for a hstorc expanson of 10(b) to broad new classes of defendants. JA174. t s revealng that all of the cases the dstrct court ctes, JA172-73, ncludng those that follow Texas Gulf, nvolve partes who were tradng n stocks, had fducary responsbltes to nvestors, reportng oblgatons to the SEC, or specal dutes to the markets (such as accountants), or who provded personalzed advce: n Carter-Wallace, 150 F.3d at 156, the "n connecton wth" requrement was fulflled because the defendant company, an ssuer (wth fducary dutes to nvestors) made allegedly false statements about ts products n an advertsement n a medcal journal. n Savoy ndus., 587 F.2d at 1171, a plan by an nvestor to gan control of Savoy by flng msleadng statements wth the SEC n a Schedule 13D (whch the defendant was requred to fle as the buyer of the stock) satsfed the "n connecton wth" requrement. n Unted nt'l Holdngs, nc. v. Wharf (Holdngs) Ltd., 210 F.3d 1207, 1221 (10th Cr. 2000), allegedly msleadng statements made n negotatons for the grant of an opton by the defendant to the plantff were actonable because the grant consttuted the sale of a securt2 between the partes - and thus met the "n connecton wth" requrement. n n re Cascade nt'l Sec. Ltg., 894 F. Supp. 437, 442-44 (S.D. Fla. 1995) (ctaton omtted) (emphass added), the court's holdng that audtors have a "specal duty to dsclose" by vrtue of ther "'specal relatonshp of trust vs-a-vs the publc'" creates the context n whch t found "n connecton wth" satsfed by the audtor's work wth an ssuer who made allegedly false statements n a Form 10-K flng to the SEC. 25
n SECv. Terry's Tps, 409 F. Supp. 2d 526, 533 (D. Vt. 2006), the actons of onlne fnancal advsors, who offered auto-tradng servces as well as personalzed nvestment advce, could be found to meet the "n connecton wth" requrement. n ts "n connecton wth" jursprudence, the Supreme Court has never endorsed or cted Texas Gulf's test of consderng whether a publshed statement "would cause reasonable nvestors to rely thereon," and "so relyng, cause them to purchase or sell a corporaton's securtes." Ths Court, t s hardly surprsng, has reled on Texas Gulf only where a defendant ether dealt n securtes or breached a fducary duty. See Phllps v. LC nt'l, 190 F.3d 609, 613-14 (4th Cr. 1999) (statements by CEO to publc related to merger); SECv. Datroncs Eng'rs, 490 F.2d 250, 254 (4th Cr. 1973) (statements by corporaton to shareholders related to stock sales). As extended by the dstrct court, the rule of Texas Gulf lacks any lmtng prncple. t would authorze 10(b) suts over any publshed statement or any spoken words to whch an nvestor may have been exposed - even n the absence of any fducary dutes runnng from the speaker to the nvestor. Fnally, the dstrct court's holdng that the "n connecton wth the purchase or sale of any securty" requrement s met whenever a speaker's actons "affected the prce of the stock," JA173, creates a standard nowhere found n the text of the statute. t s also drectly contradcted by the Supreme Court. See Stonerdge, 128 S. Ct. at 771 (notng that 10(b) "does not reach all commercal transactons that are fraudulent and affect the prce of a securty n some attenuated way"). 26
Co The Supreme Court has consstently blocked efforts to extend the scope of 10(b) through the recognton of new dutes. The Supreme Court has halted expanson of 10(b) when the SEC and prvate plantffs have tred to create new dutes under the law or otherwse wden ts reach. n Drks v. SEC, 463 U.S. 646, 664 (1983), the Court rejected the SEC's argument for the extenson of fducary oblgatons and possble 10(b) lablty to all persons who receve nsde nformaton from corporate nsders because such an approach would have "no lmtng prncple." See also Santa Fe ndus. v. Green, 430 U.S. 462, 478 (1977) (rejectng 10(b) theory advanced by mnorty shareholders as "not be[ng] easly contaned"); Blue Chp Stamps v. Manor Drug Store ss, 421 U.S. 723,743 (1975) (lmtng standng for actons under 10(b) to purchasers and sellers n order to avod the burdens of "vexatous ltgaton"). Smlarly, n Charella v. Unted States, 445 U.S. 222 (1980), the Court overturned the 10(b) convcton of a Wall Street prnter who bought stocks based on advance knowledge of corporate takeovers. The statute dd not apply because the prnter had no "duty to dsclose" hs tradng actvtes to nvestors. d. at 230-31. The Court explaned, "He was not ther agert, he was not a fducarg, he was not a person n whom the sellers had placed ther trust and confdence. He was, n fact, a complete stranger who dealt wth the sellers only through mpersonal market transactons." d. at 232-33 (emphass added). As the Court further reasoned: 27
We cannot affrm pettoner's convcton wthout recognzng a general duty between all partcpants n market transactons.... Formulaton of such a broad duty, whch departs radcall7 from the establshed doctrne that duty arses from a s pecfc relatonshp between two partes... should no_._tt be undertaken absent some ex plct evdence of congressonal ntent. d... at 233 (emphass added). Snce the SEC stpulated that the Publsher and Author nether traded nor offered personalzed advce, see JA124, ths Court "cannot affrm" the judgment below "wthout recognzng" a new "general duty" between meda companes and consumers of news and nformaton that "departs radcally" from "the establshed doctrne." Charella, 445 U.S. at 233. Moreover, "[f]ormulaton of such a broad duty" as the SEC demands here should not be undertaken "absent some explct evdence of congressonal ntent." d. The chef statutory argument from the SEC - that 10(b) s construed "flexbly to effectuate ts remedal purpose," Zandford, 535 U.S. at 819 - does not supply such "explct evdence." No mplct, let alone express, evdence exsts n the legslatve hstory that Congress ntended to subject all statements about stocks to SEC jursdcton under 10(b). Rather, Congress was concerned about statements by fducares and by ssuers, underwrters, brokers, dealers, etc. - the people of the securtes busness who may commt fraud "n connecton wth the purchase or sale" of securtes. Se e Texas Gulf, 401 F.2d at 860-61; see also SEC v. Captal Gans Research Bureau, 375 U.S. 180, 186 (1963) ('34 Act part of effort to "elmnate certan abuses n the securtes ndustry" (emphass added)). 28