NO. 10-1261

In theIn theIn theIn theIn the

Supreme Court of the United StatesSupreme Court of the United StatesSupreme Court of the United StatesSupreme Court of the United StatesSupreme Court of the United States

CREDIT SUISSE SECURITIES (USA) LLC, ET AL.,Petitioners,

v.

VANESSA SIMMONDS, Respondent.

IN RE SECTION 16(b) LITIGATION

On Petition for a Writ of Certiorari to the UnitedStates Court of Appeals for the Ninth Circuit

BRIEF IN OPPOSITION TOPETITION FOR WRIT OF CERTIORARI*

Jeffrey I. Tilden Counsel of RecordJeffrey M. ThomasMark A. WilnerJessica E. LevinDavid M. SimmondsGORDON TILDEN THOMAS

& CORDELL L.L.P.1001 Fourth AvenueSuite 4000Seattle, WA 98154-1007(206) 467-6477jtilden@gordontilden.com

Attorneys for Respondent

Becker Gallagher · Cincinnati, OH · Washington, D.C. · 800.890.5001

May 12, 2011

William C. SmartIan S. BirkKELLER ROHRBACK L.L.P.1201 Third AvenueSuite 3200Seattle, WA 98101-3052(206) 623-1900

*This appeal relatesto the appealpreviously docketedas No. 10-1218

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QUESTION PRESENTED

Section 16(b) of the Securities Exchange Act of1934, 15 U.S.C. § 78p(b) (“Section 16(b)”), is the onlystatute enacted by Congress that directly targetsinsider trading. Congress designed Section 16(b) topromote the public’s interest in preserving theintegrity of United States financial markets. Section16(b) is a strict liability scheme. It requires statutoryinsiders to disgorge profits from short-swingtransactions in publicly-traded issuer securities.Congress gave exclusive enforcement authority ofSection 16(b) to issuers and their shareholders. It alsoprescribed a two-year statute of limitations.

Section 16(a) of the Securities Exchange Act of1934, 15 U.S.C. § 78p(a) (“Section 16(a)”), requiresstatutory insiders to disclose short-swing tradingactivity in reports filed with the United StatesSecurities and Exchange Commission. These reportingobligations are an integral part of Section 16enforcement. The information insiders are required todisclose constitutes the main source—typically theonly source—of information for the suits Congressauthorized shareholders to bring under Section 16(b).

The question presented is: does Section 16(b)’s two-year statute of limitations begin to run if the targetedinsider has failed to comply with its Section 16(a)reporting obligations?

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LIST OF PARTIES

Pursuant to Rule 14.1(b), below is a list of allparties in the court whose judgment is the subject ofthis petition:

Plaintiff/Respondent1. Vanessa Simmonds

Defendants/Petitioners (“Underwriters”)

1. Credit Suisse Securities (USA) LLC2. Goldman Sachs & Co.3. J.P. Morgan Securities Inc.4. Merrill Lynch, Pierce, Fenner & Smith

Incorporated5. Bank of America Corporation6. Robertson Stephens, Inc.7. Deutsche Bank Securities Inc.8. Morgan Stanley & Co. Incorporated9. Citigroup Global Markets, Inc.10. Bear, Stearns & Co., Inc.11. Lehman Brothers Inc.

Nominal Parties (“Moving Issuers”)1. Onvia, Inc.2. Finisar Corporation3. Ariba, Inc.4. Akamai Technologies, Inc.5. Intersil Corporation6. Avici Systems, Inc.7. Tivo, Inc.8. Selectica, Inc.9. Red Hat, Inc.10. Vignette Corporation11. Sycamore Networks, Inc.

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12. Silicon Laboratories Inc.13. Maxygen, Inc.14. The Street.com, Inc.15. Sonus Networks, Inc.16. Priceline.com Incorporated17. Martha Stewart Living Omnimedia, Inc.18. Audible, Inc.19. Capstone Turbine Corporation20. CoSine Communications, Inc.21. Perot Systems Corporation22. AsiaInfo Holdings, Inc.23. Saba Software, Inc.24. Digimarc Corporation25. InterNAP Network Services Corporation26. Packeteer Inc.27. Aspect Medical Systems, Inc.28. NaviSite, Inc.29. Oplink Communications, Inc.30. Occam Networks, Inc.

Nominal Parties (“Non-Moving Issuers”)1. Foundry Networks, Inc.2. Avanex Corporation3. Turnstone Systems, Inc.4. Silicon Image, Inc.5. Juniper Networks6. Kana Software, Inc.7. Interwoven, Inc.8. Openwave Systems, Inc.9. Informatica Corporation10. Critical Path, Inc.11. SourceForge, Inc.12. Concur Technologies, Inc.13. Palm, Inc.14. Brocade Communications Systems, Inc.15. Microtune, Inc.

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16. Extreme Networks, Inc.17. InsWeb Corporation18. Marvell Technology Group Ltd.19. Keynote Systems, Inc.20. Tibco Software Inc.21. Transmeta Corporation22. Airspan Networks, Inc.23. OmniVision Technologies, Inc.24. Immersion Corporation

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TABLE OF CONTENTS

QUESTION PRESENTED . . . . . . . . . . . . . . . . . . . . i

LIST OF PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . ii

TABLE OF CONTENTS . . . . . . . . . . . . . . . . . . . . . v

TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . vii

STATUTORY PROVISION INVOLVED . . . . . . . . 1

STATEMENT OF THE CASE . . . . . . . . . . . . . . . . 3

I. BACKGROUND ON SECTION 16 . . . . . . . 3

A. Congress Sought “to Curb the Evils ofInsider Trading” and Protect theIntegrity of United States FinancialMarkets Through Exclusive PrivateEnforcement of Section 16(b). . . . . . . 3

B. Section 16(b) Enforcement RequiresSection 16(a) Disclosure. . . . . . . . . . . 4

II. STATEMENT OF FACTS . . . . . . . . . . . . . . 7

A. Respondent’s Claim . . . . . . . . . . . . . . 7

B. Insiders’ Failure to Disclose Section16(a) Information . . . . . . . . . . . . . . . 10

C. Respondent’s Complaint and DistrictCourt Consolidation . . . . . . . . . . . . . 12

III. DECISION OF THE DISTRICT COURT . 13

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IV. DECISION OF THE NINTH CIRCUIT . . 13

REASONS FOR DENYING THE PETITION . . . 14

I. THERE IS NO RELEVANT SPLIT OFAUTHORITY BETWEEN THE SECONDAND NINTH CIRCUITS. . . . . . . . . . . . . . . 16

A. Both Litzler and Whittaker TollSection 16(b)’s Statute of LimitationsWhen the Insider Has Failed toReport Under Section 16(a). . . . . . . 16

B. The Failure to Disclose Section 16(a)Information Does Not End TollingUnder Either Litzler or Whittaker. . 19

II. TOLLING WHEN INSIDERS FAIL TODISCLOSE THEIR SHORT-SWINGTRADING ACTIVITIES DOES NOTCONFLICT WITH THIS COURT’SDECISIONS. . . . . . . . . . . . . . . . . . . . . . . . . 22

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

APPENDIX

Appendix A: Blank Section 16(a) Report Form (foldout exhibit) . . . . . . . . 1b

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TABLE OF AUTHORITIES

Cases

Am. Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974) . . . . . . . . . . . . . . . . . . . . . 15

Blau v. Albert, 157 F. Supp. 816 (S.D.N.Y. 1957) . . . . . . . 15, 27

Capitol First Corp. v. Todd, No. 04-6439 (MLC), 2006 WL 3827329 (D.N.J.Dec. 27, 2006) . . . . . . . . . . . . . . . . . . . . . . . 14, 15

Carr-Consol. Biscuit Co. v. Moore, 125 F. Supp. 423 (M.D. Pa. 1954) . . . . . . . . . . 15

Dreiling v. Am. Express Travel Related Servs. Co.,Inc., 351 F. Supp. 2d 1077 (W.D. Wash. 2004) . . . . 15

Dreiling v. Am. Online, Inc., No. C05-1339JLR, 2005 WL 3299828 (W.D.Wash. Dec. 5, 2005) . . . . . . . . . . . . . . . . . . . . . 14

Dreiling v. Kellett, No. C01-1528P (Dkt. 114) (W.D. Wash. Feb. 14,2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 25

Foremost-McKesson, Inc. v. Provident Sec. Co., 423 U.S. 232 (1976) . . . . . . . . . . . . . . . 3, 5, 6, 25

Gollust v. Mendell, 501 U.S. 115 (1991) . . . . . . . . . . . . . . . . . 4, 5, 13

viii

Grossman v. Young, 72 F. Supp. 375 (S.D.N.Y. 1947) . . . . . . . . 15, 27

Kern County Land Co. v. Occidental PetroleumCorp., 411 U.S. 582 (1973) . . . . . . . . . . . . . . . . . . . . 3, 5

Klein v. Salvi, No. 02 Civ. 1862 (AKH), 2004 WL 596109(S.D.N.Y. Mar. 30, 2004), aff’d, 2004 WL2931121 (2d Cir. 2004) . . . . . . . . . . . . . . . . . . . . 4

Lampf, Pleva, Lipkind, Prupis & Petigrow v.Gilbertson, 501 U.S. 350 (1991) . . . . . . . . . . . . . 22, 23, 24, 25

Litzler v. CC Invs., L.D.C., 362 F.3d 203 (2d Cir. 2004) . . . . . . . . . . . . passim

Merck & Co. v. Reynolds, 130 S. Ct. 1784 (2010) . . . . . . . . . . . . . . . . 23, 24

Morales v. Executive Telecard, Ltd., No. 95 Civ. 10202(KMW), 1998 WL 314734(S.D.N.Y. June 12, 1998) . . . . . . . . . . . . . . . . . 15

Morales v. Quintel Entm’t, Inc., 249 F.3d 115 (2d Cir. 2001) . . . . . . . . . . . . . . . 19

Reliance Elec. Co. v. Emerson Elec. Co., 404 U.S. 418 (1972) . . . . . . . . . . . . . . . . . . . 3, 26

Rosen ex rel. Egghead.com, Inc. v. BrookhavenCapital Mgmt., Co., Ltd., 179 F. Supp. 2d 330 (S.D.N.Y. 2002) . . . . . . . . 15

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

Roth v. Reyes, 567 F.3d 1077 (9th Cir. 2009) . . . . . . . . . . 19, 23

Segen v. Comvest Venture Partners, LP, No. Civ.A. 04-822 JJF, 2005 WL 1320875 (D.Del. June 2, 2005) . . . . . . . . . . . . . . . . . . . . . . 14

Shattuck Denn Mining Corp. v. La Morte, No. 67 Civ. 3222, 1974 WL 373 (S.D.N.Y. Mar.8, 1974 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Tristar Corp. v. Freitas, 867 F. Supp. 149 (E.D.N.Y. 1994), rev’d on othergrounds, 84 F.3d 550 (2d Cir. 1996) . . . . . . . . 25

Tyco Int’l Ltd. v. Kozlowski, No. MDL 02-1335-B, Civ. 03-CV-1339-PB, 2005WL 927014 (D.N.H. Apr. 21, 2005) . . . . . . . . . 15

Whittaker v. Whittaker Corp., 639 F.2d 516 (9th Cir. 1981) . . . . . . . . . . . passim

Statutes

15 U.S.C. § 77m . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

15 U.S.C. § 78i(e) . . . . . . . . . . . . . . . . . . . . . . . . . . 24

15 U.S.C. § 78r(c) . . . . . . . . . . . . . . . . . . . . . . . . . 24

15 U.S.C. § 78p(a) [Section 16(a)] . . . . . . . . . . passim

15 U.S.C. § 78p(b) [Section 16(b)] . . . . . . . . . . passim

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15 U.S.C. § 78aa . . . . . . . . . . . . . . . . . . . . . . . . . . 13

28 U.S.C. § 1291 . . . . . . . . . . . . . . . . . . . . . . . . . . 13

28 U.S.C. § 1658(b) . . . . . . . . . . . . . . . . . . . . . . . . 24

Rules

Fed. R. Civ. P. 12 . . . . . . . . . . . . . . . . . . . . . . . . . . 13

S. Ct. R. 12(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Regulations

17 C.F.R. § 240.16a-1(a)(4) . . . . . . . . . . . . . . . . . . 19

17 C.F.R. § 240.16a-1(a)(2) . . . . . . . . . . . . . . . . . . . 7

Other Authorities

Stephen J. Choi & A.C. Pritchard, Should Issuersbe on the Hook for Laddering? An EmpiricalAnalysis of the IPO Market ManipulationLitigation, 73 U. CIN. LAW REV. 179 (2004) . . . 9

Donald C. Cook & Myer Feldman, Insider TradingUnder the Securities Exchange Act, 66 HARV. L.REV. 385 (1953) . . . . . . . . . . . . . . . . . . . . . . . . 27

J. Griffin et al., Why are IPO Investors Net BuyersThrough Lead Underwriters?, 85 J. FIN. ECON.518 (2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Interpretive Release on Rules Applicable to InsiderReporting and Trading, 46 Fed. Reg. 48147-01(Oct. 1, 1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

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Tim Loughran & Jay Ritter, Why Don’t Issuers GetUpset About Leaving Money on the Table inIPOs?, 15 REV. FIN. STUD. 413 (2002) . . . . . . . . 9

Tim Loughran & Jay Ritter, Why Has IPOUnderpricing Changed Over Time?, 33 FIN.MGMT. 5 (Autumn 2004) . . . . . . . . . . . . . . . . . . 9

Xiaoding Lui & Jay R. Ritter, Corporate ExecutiveBribery: An Empirical Analysis (Dec. 4, 2007),available at http://bear.warrington.ufl.edu/ritter/work_papers/BriberyDec42007.pdf . . . . . 9

Xiaoding Lui & Jay R. Ritter, The EconomicConsequences of IPO Spinning, 23 REV. FIN.STUD. 2024 (2010) . . . . . . . . . . . . . . . . . . . 11, 12

Jay Ritter, Money Left on the Table in IPOs byFirm (Mar. 19, 2008), available athttp://bear.warrington.ufl.edu/ritter/moneyonthetablebyfirm.pdf . . . . . . . . . . . . . . . . . . . . . 9

Peter Romeo & Alan Dye, SECTION 16 (3d ed.2008) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 20

Marc I. Steinberg & Daryl L. Landsdale, Jr., TheJudicial and Regulatory Constriction of Section16(b) of the Securities Exchange Act of 1934, 68NOTRE DAME L. REV. 33 (1992) . . . . . . 25, 26, 27

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STATUTORY PROVISION INVOLVED

15 U.S.C § 78p(a), (b)Section 16 of the Securities

Exchange Act of 1934

Section 16. Directors, officers, and principal stockholders

(a) Disclosures required

(1) Directors, officers, and principalstockholders required to file

Every person who is directly or indirectly thebeneficial owner of more than 10 percent ofany class of any equity security (other than anexempted security) which is registered pursuantto section 78l of this title, or who is a directoror an officer of the issuer of such security, shallfile the statements required by this subsectionwith the Commission.

* * *

(3) Contents of statements

A statement filed--

(A) . . . shall contain a statement of theamount of all equity securities of such issuer ofwhich the filing person is the beneficial owner;and

(B) . . . shall indicate ownership by the filingperson at the date of filing, any such changes in

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such ownership, and such purchases and salesof the security-based swap agreements as haveoccurred since the most recent such filing undersuch subparagraph.

* * *

(b) Profits from purchase and sale of securitywithin six months

For the purpose of preventing the unfair useof information which may have been obtainedby such beneficial owner, director, orofficer by reason of his relationship to theissuer, any profit realized by him from anypurchase and sale, or any sale and purchase, ofany equity security of such issuer . . . within anyperiod of less than six months . . . shall inure toand be recoverable by the issuer, irrespective ofany intention on the part of such beneficialowner, director, or officer in entering intosuch transaction . . . . Suit to recover suchprofit may be instituted at law or in equity inany court of competent jurisdiction by theissuer, or by the owner of any security of theissuer in the name and in behalf of the issuer ifthe issuer shall fail or refuse to bring such suitwithin sixty days after request or shall faildiligently to prosecute the same thereafter; butno such suit shall be brought more thantwo years after the date such profit wasrealized.

(Emphasis added).

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STATEMENT OF THE CASE

I. BACKGROUND ON SECTION 16

A. Congress Sought “to Curb the Evilsof Insider Trading” and Protect theIntegrity of United States FinancialMarkets Through Exclusive PrivateEnforcement of Section 16(b).

Section 16(b) of the Securities Exchange Act of 1934(“the Act”) is the only federal statute enacted byCongress specifically “to curb the evils of insidertrading.” Reliance Elec. Co. v. Emerson Elec. Co., 404U.S. 418, 422 (1972). The statute “imposes a strictprophylactic rule with respect to [statutory] insider,short-swing trading.” Foremost-McKesson, Inc. v.Provident Sec. Co., 423 U.S. 232, 251 (1976). Statutoryinsiders include officers, directors, and shareholderswith more than a 10 percent interest in the issuingcompany. 15 U.S.C. § 78p(b). The latter may beformed by a “group” that collectively owns more than10 percent of an issuer’s securities. Roth v. Jennings,489 F.3d 499, 510-16 (2d Cir. 2007).

Statutory insiders are “presumed to have access toinside information.” Foremost-McKesson, 423 U.S. at243. When they profit from trades in publicly-tradedissuer stock within any six month period (“short-swingtrading”), the insiders must disgorge their profits tothe issuer. 15 U.S.C. § 78p(b); Kern County Land Co.v. Occidental Petroleum Corp., 411 U.S. 582, 595(1973).

Congress did not give the United States Securitiesand Exchange Commission (“SEC”) any role in

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enforcing Section 16(b). Gollust v. Mendell, 501 U.S.115, 122 (1991). Congress permitted only privateenforcement and relies on private attorneys tospearhead that effort:

Congress left enforcement of section 16(b) casesto shareholders and consequently to theattorneys who find such cases and represent theshareholders who consent to be plaintiffs. TheSEC was given no role in enforcing section16(b). Thus, section 16(b) can be enforced andthe market’s integrity can be protected, only ifattorneys are willing to invest the time andenergy, and assume the risk, that is involved ininvestigating numerous SEC filings in thesearch to uncover insiders who make impropershort swing profits, and filing lawsuits againstthose unwilling to return such profits.

Klein v. Salvi, No. 02 Civ. 1862 (AKH), 2004 WL596109, at *10 (S.D.N.Y. Mar. 30, 2004), aff’d, 2004WL 2931121 (2d Cir. 2004).

B. Section 16(b) Enforcement RequiresSection 16(a) Disclosure.

Section 16(a) is integral to Section 16(b)enforcement. Section 16(a) requires insiders topublicly disclose their short-swing securitiestransactions in order to combat the practices Congressenacted Section 16(b) to prevent. 15 U.S.C. § 78p(a).As described by the SEC:

Section 16 . . . was designed to provide thepublic with information on insider securitiestransactions and holdings and to deter insiders

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from profiting on short term tradingtransactions in the securities of theircorporations on the basis of undisclosedinformation. The section was enacted primarilyin response to abuses, described in detail in thelegislative history of the Exchange Act, whereinsiders with advance knowledge of facts whichwould produce a rise or fall in the market valueof securities of their companies bought and soldsuch securities as the circumstances warrantedto their personal advantage. On occasion,insiders actually manipulated the market priceof their stock by causing a corporation to followfinancial policies calculated to produce suddenchanges in market prices in order to obtainshort swing profits. To combat these practices,Congress enacted Section 16 to require reportsof securities transactions by insiders and toprovide for the recovery of any short swingprofits.

Interpretive Release on Rules Applicable to InsiderReporting and Trading, 46 Fed. Reg. 48147-01 (Oct. 1,1981) (footnotes omitted); see also Gollust, 501 U.S. at121 (describing purpose of Section 16(b) as ensuring“maintenance of fair and honest markets” throughelimination of profits from insider, short-swingtrading); Foremost-McKesson, 423 U.S. at 243-44(same); Kern County Land, 411 U.S. at 592 (same;setting out legislative history).

The “reports” to which the SEC refers arecommonly known as “Section 16(a) reports.” “Thedisclosures and reports of § 16(a) are an integral partof the context of § 16 within which § 16(b) must beread.” Whittaker v. Whittaker Corp., 639 F.2d 516, 528

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(9th Cir. 1981). The information in Section 16(a)reports is the “main source of information for suitsCongress has empowered [shareholders] to bring”under Section 16(b). Id.; see also Litzler v. CC Invs.,L.D.C., 362 F.3d 203, 207 (2d Cir. 2004) (“Theprophylaxis of Section 16 works by imposing anabsolute duty of disclosure” through Section 16(a)reporting). The drafters of Section 16(b) “clearlythought” that the Section 16(a) disclosurerequirements also “would afford indirect protectionagainst some potential misuses of insider information.”Foremost-McKesson, 423 U.S. at 255-56, 257 n.31(citing legislative history).

Section 16(a) reports contain, inter alia, short-swing trading and group membership details. Thereports require statutory insiders to disclose:

• The identity of the reporting person.

• Whether the reporting person is an officer,director, or 10 percent shareholder.

• Whether the reporting person is filingindividually or as part of a “group.”

• The dates of the reported short-swing trades.

• The amounts, prices, and nature of thesecurities acquired, disposed of, or beneficiallyowned.

See Appendix A (blank Section 16(a) report); 15 U.S.C.§ 78p(a). Section 16(a) reports allow the examiningshareholder to discover and isolate the dates of thetrades at issue, mathematically compute the short-

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swing profits to be disgorged, identify the statutoryinsiders as individuals or groups, and pinpoint theshares in which the insiders have or share “a direct orindirect pecuniary interest.” 17 C.F.R. § 240.16a-1(a)(2). Without Section 16(a) reports, outsiders, likeRespondent, have no access to this specific short-swingprofit and other claim-related information.

None of the targeted insiders in these cases filedSection 16(a) reports. Nor have they ever publiclydisclosed Section 16(a) information in any othermanner.

II. STATEMENT OF FACTS

A. Respondent’s Claim

The investment bank Petitioners (“Underwriters”)that served as lead underwriters of initial publicofferings (“IPOs”) of nominal party issuers (“Issuers”)reaped extraordinary profits through short-swing,insider trading of Issuer IPO stock. From 1998through 2000, the stock market experienced a surge of“hot” IPOs. In these IPOs, demand for stock farexceeded the supply offered, resulting in significantlyhigher aftermarket prices. SEC and other governingbody rules require underwriters to make a completedistribution of IPO shares at the IPO price.Underwriters are prohibited from deriving financialgain from increases in aftermarket prices of hot IPOstocks. They cannot allocate shares to themselves, andshares allocated after trading commences at a higherprice must be distributed at the IPO price.

Underwriters distributed IPO shares to the marketand controlled who received hot IPO allocations. In

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doing so, they distributed what were essentiallyinstant, risk-free profits. For example, an investorreceiving an IPO allocation of Issuer SourceForge, Inc.stock (formerly VA Linux) at its IPO price of $30 pershare on the morning of December 9, 1999, realized aten-fold profit when VA Linux shares opened for publictrading later that morning at $299 per share.

Underwriters, together with Issuer insiders, sharedin these profits. Underwriters demanded kickbacks ofprofits from customers who received allocations of hotIPOs and “flipped” (immediately sold) the shares atsignificantly higher aftermarket prices. Underwritersdisguised their profit-sharing arrangements becausethey were illegal. In a complaint filed againstUnderwriter Credit Suisse First Boston (“CSFB”), theSEC explained:

In exchange for shares in “hot” IPOs, CSFBwrongfully extracted from certain customers alarge portion of the profits those customersmade by flipping their IPO stock. From at leastApril 1999 through June 2000, CSFB employeesallocated shares of IPOs to over 100 customerswho were willing to funnel between 33 and 65percent of their profits to CSFB. The profitswere channeled to CSFB in the form of excessbrokerage commissions generated by thecustomers in unrelated securities trades thatthe customers generally affected solely to satisfyCSFB’s demands for a share of the IPO profits.

To increase the profit potential of hot IPOs,Underwriters and Issuer insiders engaged in what theSEC refers to as “laddering.” They agreed tounderprice hot IPO shares—to the detriment of the

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1 Academics refer to underpricing as “money left on thetable”—money issuers could have raised in an IPO. TimLoughran & Jay Ritter, Why Has IPO Underpricing Changed OverTime?, 33 FIN. MGMT. 5, 6 (Autumn 2004). The targeted insidersin this appeal profited substantially from the conducted alleged.The 54 IPOs at issue generated over $7 billion in proceeds forIssuers, but left over $15 billion “on the table.” This makes themamong the most egregious examples of IPO underpricing. Seegenerally Jay Ritter, Money Left on the Table in IPOs by Firm(Mar. 19, 2008), available at http://bear.warrington.ufl.edu/ritter/moneyonthetablebyfirm.pdf. The phenomenon ofintentionally underpricing IPOs has generated a tremendousamount of recent scholarship, essentially all of which supports thethesis underlying Respondent’s Section 16(b) claim. See generallyXiaoding Lui & Jay R. Ritter, Corporate Executive Bribery: AnEmpirical Analysis (Dec. 4, 2007), available athttp://bear.warrington.ufl.edu/ritter/work_papers/BriberyDec42007.pdf; J. Griffin et al., Why are IPO Investors Net BuyersThrough Lead Underwriters?, 85 J. FIN. ECON. 518 (2007);Stephen J. Choi & A.C. Pritchard, Should Issuers be on the Hookfor Laddering? An Empirical Analysis of the IPO MarketManipulation Litigation, 73 U. CIN. LAW REV. 179 (2004); TimLoughran & Jay Ritter, Why Don’t Issuers Get Upset AboutLeaving Money on the Table in IPOs?, 15 REV. FIN. STUD. 413(2002). These articles cite, and are cited by, many otherssupporting the same or related propositions.

IPO issuer—and required recipients of IPO allocationsto “ratchet up” the stock price in the aftermarket bybuying additional shares at progressively higherprices.1 This conduct is prohibited.

Issuer insiders also personally benefited fromunderpricing and laddering schemes. Issuer insidersallocated underpriced IPO shares to themselves,friends, and family members. Like Underwriters,laddering allowed insiders to profit from sales atinflated prices.

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Underwriters and Issuer insiders worked togetherto underprice IPOs and drive up aftermarket stockprices as part of a common objective that involvedacquiring, holding, and disposing of Issuer shares.They thereby formed groups that collectively ownedmore than 10 percent of an issuer’s stock, establishingthe Underwriters’ status as statutory insiders underSection 16(b). As statutory insiders, Underwritersprofited from short-swing transactions in Issuershares. Pursuant to Section 16(b), these insiders mustdisgorge the profits generated from the short-swingpurchases and sales of Issuer shares in which they hada direct or indirect pecuniary interest.

B. Insiders’ Failure to Disclose Section16(a) Information

Underwriters do not, and cannot, point to anyevidence that they have ever disclosed Section 16(a)information. Underwriters have never filed Section16(a) reports. They assert each IPO at issue here wasfully “challenged” in the IPO litigation. Pet. at 8.However, no other litigation, including the IPOlitigation, has addressed or released Respondent’sSection 16(b) claims. Underwriters also do not, andcannot, point to any evidence that the IPO or otherlitigation revealed the targeted insiders’ short-swingprofits and other information required to be disclosedin Section 16(a) reports.

Respondent—through an extensive investigation onthe part of her attorneys—nevertheless “piece[d]together” the framework of a Section 16(b) claim “from

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2 This stands in stark contrast to how Congress designed Section16 to operate. “Section 16 compels disclosure through a [Section16(a) report] that is so clear that an insider’s short-swing profitswill be discovered without any investigation other than theputting together of two and two. The prophylaxis of Section 16works by imposing an absolute duty of disclosure upon insiders,officers, and the other parties covered by its obligations.” Litzler,362 F.3d at 208 (citation omitted) (emphasis added).

disparate sources of information.”2 Litzler, 362 F.3d at208. One source of information included academic andfinancial research and literature published in just thelast few years. See supra note 1. These articlesposited, albeit only generally, what Respondentdetermined was coordinated conduct amongUnderwriters and Issuer insiders to obtain huge, risk-free profits by disguising their beneficial ownership inIssuer securities traded on the short-swing. See id.Their uniform conduct gives rise to the Section 16(b)violations on which these cases are based. Thetargeted insiders’ actual short-swing trading details,however, remain publicly unknown to this day. Thisis for one reason only: the insiders have continued toconceal this core Section 16(a) information.

Financial economists have continued their quest tounderstand the IPO underpricing phenomenon longafter Respondent researched, investigated, and filedher Section 16(b) claims. In the May 2010 edition ofOxford University’s The Review of Financial Studies,Professors Xiaoding Liu and Jay R. Ritter note thattheir analysis of underwriters’ allocation ofunderpriced “hot” IPO shares to issuer insidersbetween 1996 and 2000, which were later “spun” forquick profit, has been a long and painstaking process“mainly due to the lack of data.” Xiaoding Lui &

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3 There were hundreds of IPOs in which the Underwritersengaged in the same misconduct. The 55 cases Respondent filedrepresent the clearest and most egregious examples.

Jay R. Ritter, The Economic Consequences of IPOSpinning, 23 REV. FIN. STUD. 2024, 2025 (2010)(emphasis added). Professors Liu and Ritter hadpreviously presented their conclusions in September2009 at the Harvard Law School Forum on CorporateGovernance and Financial Regulation. Theirconclusions fully support the analytical framework ofthe Section 16(b) complaints Respondent filed twoyears earlier.

C. Respondent’s Complaint and DistrictCourt Consolidation

Respondent issued demands to each Issuer asrequired by Section 16(b). None of the statutoryinsiders, however, had filed Section 16(a) reports—the“main source of information for suits Congress hasempowered [shareholders] to bring” under Section16(b). Whittaker, 639 F.2d at 528. Respondent,therefore, had no access to the short-swing trading andgroup membership details.

Respondent commenced litigation when no Issuerfiled suit within 60 days after her demand. She filed55 lawsuits in the United States District Court for theWestern District of Washington (Seattle) in October2007. All 55 suits alleged Section 16(b) violationsstemming from the uniform business practices adoptedand repeatedly employed by the 11 Underwriterdefendants as described above.3 The district court’ssubject matter jurisdiction was based on Section 27 of

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4 Respondent voluntarily dismissed one of the 55 cases after theissuer involved was taken private and, as a result, Respondentlost standing to maintain the Section 16(b) action. See Gollust,501 U.S. at 125-26 (explaining Section 16(b) standingrequirements).

the Securities Exchange Act of 1934, 15 U.S.C. § 78aa.The district court reassigned all the actions to a singlejudge and coordinated the cases for pretrial purposes.

III. DECISION OF THE DISTRICT COURT

Underwriters filed an omnibus Federal Rule ofCivil Procedure 12 motion to dismiss. They assertedthat Respondent’s claims were time barred byoperation of Section 16(b)’s two-year statute oflimitations. Although the beneficiaries of anyrecovery, 30 of the then 54 issuers (“Moving Issuers”)4

also filed a joint motion to dismiss. LikeUnderwriters, Moving Issuers asserted thatRespondent’s claims were time barred. They alsoasserted, however, that Respondent served factuallyinadequate pre-suit demands. On March 12, 2009, thedistrict court granted the motions on both statute oflimitations and pre-suit demand grounds, and enteredjudgment against Respondent.

IV. DECISION OF THE NINTH CIRCUIT

Respondent appealed the district court decision tothe Ninth Circuit Court of Appeals, invoking thecourt’s appellate jurisdiction under 28 U.S.C. § 1291.The Ninth Circuit reversed the statute of limitationsdismissal. Following its long-standing Whittakerprecedent, the Ninth Circuit held that the two-yearstatute of limitations in Section 16(b) does not begin to

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5 Moving Issuers, like Underwriters, argued for dismissal onstatute of limitations grounds at the Ninth Circuit. However,Moving Issuers, unlike Underwriters, have not petitioned thisCourt for a writ of certiorari on this issue. Nor have MovingIssuers joined in Underwriters’ petition. See S. Ct. R. 12(4).

run until the insider discloses its transactions in aSection 16(a) report.5

Despite the insiders’ noncompliance with Section16(a)’s reporting obligations, the Ninth Circuitaffirmed the district court’s ruling that Respondent’sdemand was insufficient and that Respondent couldnot argue demand futility. The Ninth Circuit also, suasponte, “converted” those dismissals “withoutprejudice” to dismissals “with prejudice”—and did notpermit leave to amend on remand. The propriety ofthe Ninth Circuit’s decision on pre-suit demand issuesis the subject of Respondent’s separately-filed Petitionfor Writ of Certiorari that this Court placed on thedocket April 7, 2011, as No. 10-1218.

REASONS FOR DENYING THE PETITION

The Ninth Circuit decision does not represent thefirst time a federal court has addressed whether thefailure to report under Section 16(a) tolls the two-yearlimitations period in Section 16(b). Numerous federalcourts throughout the country have considered theissue. See, e.g., Litzler v. CC Invs., L.D.C., 362 F.3d203, 207 (2d Cir. 2004); Whittaker v. Whittaker Corp.,639 F.2d 516 (9th Cir. 1981); Capitol First Corp. v.Todd, No. 04-6439 (MLC), 2006 WL 3827329 (D.N.J.Dec. 27, 2006); Dreiling v. Am. Online, Inc., No. C05-1339JLR, 2005 WL 3299828 (W.D. Wash. Dec. 5,2005); Segen v. Comvest Venture Partners, LP, No.

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6 The one exception is the Carr-Consolidated Biscuit district courtcase from 1954. However, as noted by the Ninth Circuit 27 yearslater, the court in Carr-Consolidated Biscuit relied on a theoryabout statutes of limitations that was subsequently “discarded”and “renounced” by courts including this Court. Whittaker, 639F.2d at 529 (citing Am. Pipe & Constr. Co. v. Utah, 414 U.S. 538,556-59 (1974)). Other courts have similarly declined to followCarr-Consolidated Biscuit on the issue. See, e.g., Capitol FirstCorp., 2006 WL 3827329 at *11.

Civ.A. 04-822 JJF, 2005 WL 1320875 (D. Del. June 2,2005); Tyco Int’l Ltd. v. Kozlowski, No. MDL 02-1335-B, Civ. 03-CV-1339-PB, 2005 WL 927014 (D.N.H. Apr.21, 2005); Dreiling v. Am. Express Travel RelatedServs. Co., Inc., 351 F. Supp. 2d 1077 (W.D. Wash.2004); Rosen ex rel. Egghead.com, Inc. v. BrookhavenCapital Mgmt., Co., Ltd., 179 F. Supp. 2d 330(S.D.N.Y. 2002); Morales v. Executive Telecard, Ltd.,No. 95 Civ. 10202(KMW), 1998 WL 314734 (S.D.N.Y.June 12, 1998); Shattuck Denn Mining Corp. v. LaMorte, No. 67 Civ. 3222, 1974 WL 373 (S.D.N.Y. Mar.8, 1974); Blau v. Albert, 157 F. Supp. 816 (S.D.N.Y.1957); Carr-Consol. Biscuit Co. v. Moore, 125 F. Supp.423 (M.D. Pa. 1954); Grossman v. Young, 72 F. Supp.375 (S.D.N.Y. 1947); Dreiling v. Kellett, No. C01-1528P(Dkt. 114) (W.D. Wash. Feb. 14, 2003) (denyingdefendants’ summary judgment motion).

With only one exception,6 each of these courtsreached the same conclusion as the Ninth Circuit did:the statute of limitations for Section 16(b) claims doesnot begin to run if Section 16(a) information has notbeen disclosed. As discussed below, the Ninth andSecond circuits are not split on the issue, and thesubstantially uniform holdings of all the above federal

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cases are not in conflict with any decision from thisCourt.

I. THERE IS NO RELEVANT SPLIT OFAUTHORITY BETWEEN THE SECONDAND NINTH CIRCUITS.

A. Both Litzler and Whittaker TollSection 16(b)’s Statute of LimitationsWhen the Insider Has Failed toReport Under Section 16(a).

The Second Circuit in Litzler and the Ninth Circuitin Whittaker are not divided in any way material tothis litigation. Both cases hold that the two-yearlimitations period in Section 16(b) is tolled when thetargeted insider has failed to file the required Section16(a) report. Compare Litzler, 362 F.3d at 207-08 (“Wenow hold that tolling of the limitations period inSection 16(b) . . . is appropriate when a defendant hasfailed to comply with the reporting requirements ofSection 16(a). . . . We hold that the incentives ofSection 16 are best served if tolling is triggered bynoncompliance with the disclosure requirements ofSection 16(a) . . . .”), with Whittaker, 639 F.3d at 530(“[W]e hold that an insider’s failure to disclose coveredtransactions in the required § 16(a) reports tolls thetwo year limitations period for suits under § 16(b) torecover profits connected with such a non-disclosedtransaction.”). See also Peter Romeo & Alan Dye,SECTION 16 § 9.03[3][b] at 872 n.107 (3d ed. 2008)(citing Litzler, Whittaker, and many other cases forsame proposition).

Both courts also apply similar rationales to supporttheir holdings. Both read Sections 16(a) and 16(b) as

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a whole, and agree that Congress’ purpose in enactingSection 16 would be frustrated if targeted insiderscould escape Section 16(b) liability by failing to complywith their Section 16(a) reporting obligations. TheSecond Circuit in Litzler reasoned:

• “[T]o allow an offending investor to escaperesponsibility under Section 16(b) by violatingthe provisions of Section 16(a) would manifestlyfrustrate the purpose of Congress.” Litzler, 362F.3d at 207 (citation and quotation omitted).

• “Section 16 compels disclosure (through a Form4 [Section 16(a) report]) that is so clear that aninsider’s short-swing profits will be discoveredwithout any investigation other than theputting together of two and two.” Litzler, 362F.3d at 208.

• “The prophylaxis of Section 16 works byimposing an absolute duty of disclosure uponinsiders.” Id.

• “We hold that the incentives of Section 16 arebest served if tolling is triggered bynoncompliance with the disclosurerequirements of Section 16(a).” Id.

The Ninth Circuit in Whittaker similarly reasoned:

• A rule allowing insiders to “escape liability bynot reporting as required under Section 16(a)”would “thwart[]” Congress’ purpose in enactingSection 16 to “curb insider trading.” Id. at 528.

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• The “short [two-year] limitations period [forSection 16(b) claims] is understandable only inthe context of the insider’s duty to make promptdisclosure” in Section 16(a) reports. Id.

• Section 16(a) reports are the “main source ofinformation for the suits Congress hasempowered [shareholders] to bring.” Insiderscould “insulate their transactions . . . by failingto file §16(a) reports and waiting for the twoyear time limit to pass” thereby “nullif[ying]”“Congress’ creation of these shareholder’derivative suits.” Id.

• Section 16 imposes “absolute accountabilitywithin clearly demarcated boundaries,” and the“goal of clear boundaries is served by alimitations period which can be mechanicallycalculated from objective facts.” Id. at 529.

Petitioners argue that Litzler implies that areasonable failure to file Section 16(a) reportswarrants avoiding tolling. Pet. at 16 (citing Litzler,362 F.3d at 208 n.5). This position, however, was notthe holding of the Second Circuit. It was not evendictum of the court. It was a side-comment addressingwhat the “author of th[e] opinion” (Judge Jacobs)“would have preferred to say.” Litzler, 362 F.3d at 208n.5. Even then, Judge Jacobs based his passingeditorial on concern that “long-settled transactionsmight hang forever over honest persons.” Id.(emphasis added). Petitioners’ conduct was anythingbut “honest.” Petitioners engaged in SEC-prohibited,bad-faith kickback schemes that unlawfully concealedtheir beneficial ownership in issuer securities by

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7 For this reason, Petitioners’ fear that the Ninth Circuit decisioncreates a risk of “indefinite” tolling is unfounded. Pet. at 1. Allany insider needs to do to stop tolling is comply with the statutoryobligation and file a Section 16(a) report. The report can be filedat any time and does not constitute an admission of liability. Thereport also may be filed, without prejudice, reserving all rights theinsiders would claim in this case. For example, filing a Section16(a) report is not an admission of membership in a Section 13(d)group. Nor does it concede beneficial ownership. See 17 C.F.R.§ 240.16a-1(a)(4); Morales v. Quintel Entm’t, Inc., 249 F.3d 115,129 (2d Cir. 2001). As the Ninth Circuit held in Roth, even aninsider’s alleged “false” claim of exemption in a Section 16(a)report does not change the fact that filing the report ends tolling.Roth, 567 F.3d at 1081, 1083-84.

conducting short-swing trades through customeraccounts.

B. The Failure to Disclose Section 16(a)Information Does Not End TollingUnder Either Litzler or Whittaker.

The only difference between the Second Circuitopinion in Litzler and the Ninth Circuit opinion inWhittaker is how tolling ends. That difference,however, is not material to this litigation. In theNinth Circuit, tolling ends when the insider files aSection 16(a) report. Whittaker, 639 F.2d at 530 (“Thetwo-year period for § 16(b) begins to run when thetransactions are disclosed in the insider’s § 16(a)report.”). At that point, a claimant has two years tobring suit even if the insider is alleged to have “falselyreported” or filed an “improper disclosure” underSection 16(a). Roth v. Reyes, 567 F.3d 1077, 1081,1083-84 (9th Cir. 2009).7

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8 Respondent and leading Section 16 commentators believe theNinth Circuit Whittaker decision provides the better approach asto when tolling ends. Romeo & Dye, supra, § 9.03[3][b] at 873.Whittaker is more consistent with insiders’ obligation to reportshort-swing trading to the SEC. Id. Whittaker also provides aclear rule for district courts to carry out before expensive andtime-intensive litigation on the merits. The Second Circuitapproach could require uncertain, lengthy, and costly fact-intensive pretrial litigation and trials just to resolve a statute oflimitations “actual notice” defense.

In the Second Circuit, tolling ends either when theinsider files a Section 16(a) report or when the“claimant or (depending on the circumstances) thecompany gets actual notice that a person subject toSection 16(a) has realized specific short-swingprofits that are worth pursuing.” Litzler, 362 F.3d at208 (emphasis added). The Second Circuitunderscored that “actual notice” in this context meansthe plaintiff received “notice tantamount to a Form 4[Section 16(a) report].” Id. The Litzler court providedthree examples that would not suffice as “tantamount”to a Section 16(a) filing: “mere inquiry notice”;“circumstances in which a person would or should haverealized the non-compliance”; and “the ability of ashareholder or company to piece together thesubstance of a Form 4 [Section 16(a) report] fromdisparate sources of information.” Id. The court alsosummarized two district court cases holding other SECfilings (Forms 144, 10-Q, and 13D) likewise would notprovide equivalent Section 16(a) disclosure. Id. at 208n.6. In sum, the Second Circuit decision in Litzlerholds that the Section 16(b) two-year time periodbegins to run when the plaintiff gets actual notice ofSection 16(a) information, including the “specific short-swing profits” trading details.8

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9 Underwriters repeatedly refer to notice of the “underlying facts.”See, e.g., Pet. at 2, 18. Underwriters, however, never describe the“facts” ostensibly revealed or identify the “notice” allegedlycontaining those “facts.” This is not the proper test under Litzlerin any event, as discussed above. Actual notice, under Litzler,refers to actual notice of a Section 16(a) report equivalent,disclosing the specifics of the short-swing trading details.Underwriters and Issuer insiders have never disclosed these“underlying facts.”

10 Consideration of such evidence would be inappropriate on aRule 12 motion to dismiss in any event, as the Second Circuit inLitzler recognized. The Second Circuit remanded the case forfurther proceedings, including potentially “trial.” Litzler, 362 F.3dat 208. The alleged “actual notice” was based on a letter from ashareholder to the corporate board. Id. at 205. The parties agreedthat whatever notice this letter provided would be imputed to thebankruptcy trustee who had substituted in as the plaintiff. Id. at205-06. The court indicated the district court would have toevaluate any “particulars recited” in the notice and the reliabilityof the “source” from which it came in order to assess whether theshareholder letter was truly “tantamount to” an insider’s Section16(a) report. Id. at 208.

Underwriters have no evidence that Respondenthas (or ever had) actual notice of the Section 16(b)insiders’ “specific short-swing profits.” Litzler, 362F.3d at 208 (emphasis added). Petitioners state theIPO litigation revealed “the facts underlying theSection 16(b) claims.” Pet. at 18.9 The implication ofthis argument is that the IPO litigation revealed theinsiders’ “specific short-swing profits” or other Section16(a) information sufficient to end tolling underLitzler. This is not true. Underwriters cite noevidence in the district court or Ninth Circuit recordthat reveals any Section 16(a) information, much less“specific short-swing profits” or a notice “tantamountto” a Section 16(a) report. Nor is there any.10

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Underwriters also lack evidence that Respondentherself (or her attorneys) received any notice from theIPO litigation. Respondent was not a shareholderwhen the IPO litigation complaints were filed. Shewas not a member of the proposed class covered by theIPO litigation. Petitioners offer nothing even remotelyakin to the type of evidence that would constituteactual notice of Section 16(a) information as describedin Litzler.

In sum, the fundamental holding of both the SecondCircuit in Litzler and the Ninth Circuit in Whittaker isto toll the two-year statute of limitations for Section16(b) claims when the targeted insiders have failed tocomply with their Section 16(a) reporting obligations.These Circuits diverge only on a narrowpoint—whether tolling ends only when the insider filesa Section 16(a) report (Whittaker), or whether tollingends either when the Section 16(a) report is filed orwhen the plaintiff has otherwise received actual noticeof all Section 16(a) information (Litzler). It is difficultto envision any case where the difference betweenthese two tests would actually matter. Regardless, thedifference has no bearing here. Section 16(a) reportshave not been filed, nor has Section 16(a) informationbeen disclosed in any other manner.

II. TOLLING WHEN INSIDERS FAIL TODISCLOSE THEIR SHORT-SWINGTRADING ACTIVITIES DOES NOTCONFLICT WITH THIS COURT’SDECISIONS.

Review of the Ninth Circuit’s statute of limitationsdecision also is not warranted on the ground that thedecision conflicts with this Court’s opinions in Lampf,

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11 This discussion was dictum as noted above. The Court did notanalyze whether the “statute of repose” label was proper or, moreimportantly, whether it was intended to be used in the wayUnderwriters argue. In one sense, the label fits: once a Section16(a) report is filed, the two-year period in Section 16(b) serves asan outside limit that cuts off untimely claims—even if the Section16(a) filing contains false or improper disclosures. See, e.g., Roth,567 F.3d at 1081, 1083-84. As the Ninth Circuit has held,however, this still is consistent with Whittaker. Id.

Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501U.S. 350 (1991), and Merck & Co. v. Reynolds, 130 S.Ct. 1784 (2010). There is no conflict. Neither Lampfnor Merck is a Section 16 case. Neither case holds thatSection 16(b)’s two-year statute of limitations can orshould operate as a statute of repose when thetargeted insiders, as here, have failed to comply withSection 16(a)’s reporting obligations. Lampf’sdiscussion of Section 16(b) is dictum, limited to asingle footnote to explain why Section 16(b) is uniqueand therefore of no value to the Court’s analysis.Lampf, 501 U.S. at 360 n.5. Merck does not evenmention Section 16(b).

In Lampf, this Court rejected application ofequitable tolling to the time limit for claims arisingunder Section 10(b) of the Securities Exchange Act of1934. Section 10(b) did not contain a limitationsperiod, unlike other provisions in the Act. The Courttherefore looked to other causes of action in the Actthat included some variation of a one-year discoveryperiod coupled with a three-year period of repose.Section 16, as the Court noted, was different.Although the Court called Section 16(b)’s two-yearlimitations period a “statute of repose,”11 the Court did“not find § 16(b) to be an appropriate source from

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which to borrow a limitations period” because Section16(b) “differs in focus from § 10(b) and from the otherexpress causes of action.” Lampf, 501 U.S. at 360 n.5.

Underwriters (and Judge Smith’s concurringopinion below) mischaracterize Section 16 as a“companion” provision with similar “relevantlanguage” to the other statutes of limitations in theAct. Pet. 19, 21. This Court correctly viewed Section16 as unique. The other causes of action in the Actcontain limitations language that materially differsfrom Section 16(b). See, e.g., Merck, 130 S. Ct. at 1790(quoting 28 U.S.C. § 1658(b); id. at 1795 (discussing 15U.S.C. §§ 78i(e), § 77m); Lampf, 501 U.S. at 360(quoting 15 U.S.C. §§ 78i(e), § 78r(c), § 77m). Mostsignificantly, the other limitations provisions includeexpress discovery rules where the focus is on theplaintiff (whether the plaintiff, or a reasonablydiligent plaintiff, discovered certain facts supportingthe cause of action). Id.; see also Merck, 130 S. Ct. at1793-98 (describing how discovery rule operates);Lampf, 501 U.S. at 358-64 (same). Section 16 containsits own, differently worded, two-year time limit, nodiscovery rule, and, instead, a unique disclosureobligation where the focus is on the defendant(whether the targeted insider disclosed its short-swingtransactions in a required Section 16(a) report).

Lampf held that tolling was “unnecessary” forSection 10(b) claims in light of the discovery rule.Lampf, 501 U.S. at 363. Section 16(b) has no similardiscovery rule that would render tolling “unnecessary.”For this reason, district courts and commentators haveconcluded that Lampf does not prevent tolling of theSection 16(b) statute of limitations when the insiderhas failed to comply with its Section 16(a) disclosure

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obligation. See, e.g., Tristar Corp. v. Freitas, 867 F.Supp. 149, 154 n.4 (E.D.N.Y. 1994) (“Lampf does notpreclude the Court from concluding that tolling is stillavailable under section 16(b).”), rev’d on other grounds,84 F.3d 550 (2d Cir. 1996); Kellett, No. C01-1528P, slipop. at 9 (further noting that no court has ever readLampf to eliminate Section 16(b) tolling, includingcases that adopted Whittaker after Lampf wasdecided); Marc I. Steinberg & Daryl L. Landsdale, Jr.,The Judicial and Regulatory Constriction of Section16(b) of the Securities Exchange Act of 1934, 68 NOTREDAME L. REV. 33, 59-60 (1992).

Underwriters argue Congress could have been moreexplicit in tying Section 16(b)’s limitations period tothe filing of Section 16(a) reports. Pet. at 21.However, the two subsections are part of the samestatute, and the statute of limitations in Section 16(b)is grammatically linked to the disclosure obligation inSection 16(a). The limitations provision appears in thesecond sentence of Section 16(b) and reads: “no suchsuit shall be brought more than two years after thedate such profit was realized.” (Emphasis added).“Such” profit means “any profit realized by” “suchbeneficial owner, director, or officer” (the first sentenceof Section 16(b)), and “such” beneficial owner, director,or officer is defined in Section 16(a)(1) in setting outthe scope of the disclosure obligation—i.e., whichpersons are required to filed Section 16(a) reports. Inshort, contrary to Underwriters’ interpretation,Sections 16(a) and (b) must be read together. See alsoForemost-McKesson, 423 U.S. at 234 n.1 (notingSection 16(a) defines the insiders whose trading isregulated by Section 16(b)). Yet Underwriters’interpretation of the Section 16(b) time limit would

26

require the Court to sever Section 16(a)’s disclosureobligation from the statute.

Section 16 must be read as a whole to effectuate itspurpose. Reliance Elec., 404 U.S. at 424 (Section 16(b)must be construed in manner “that best serves thecongressional purpose of curbing short-swingspeculation by corporate insiders”); see also Whittaker,639 F.2d at 528 (“The disclosures and reports of § 16(a)are an integral part of the context of § 16 within which§ 16(b) must be read.”). The short, two-yearlimitations period makes sense only in the context ofthe insider’s obligation to make prompt disclosuresunder Section 16(a). Whittaker, 639 F.2d at 528; seealso Steinberg & Landsdale, supra, 68 NOTRE DAME L.REV. at 59 (Section 16(b) “logically affords a remedythat presumes that the subject insider timely filed thereports mandated” by Section 16(a)). Thecongressional intent, as described by the Court inReliance Electric, “would be thwarted if insiders couldescape liability by not reporting” as Section 16(a)requires. Whittaker, 639 F.2d at 528. Underwriters’interpretation would provide insiders with a massivefinancial incentive not to file Section 16(a) reports:

“It would be a simple matter for theunscrupulous to avoid the salutary effect ofSection 16(b) which provides a remedy for therecovery of short term profits, simply by failingto file [Section 16(a) reports] and therebyconcealing from prospective plaintiffs theinformation they would need to adequatelyprotect their interests. Such a construction

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would reward the violation of the statute andwould manifestly frustrate congressionalintent.”

Id. (quoting Blau, 157 F. Supp. at 819) (citingGrossman, 72 F. Supp. at 378-79).

“Only by full compliance with Section 16(a) canthe security holders be charged with adequatenotice of the transaction.” Such shareholdersare likely to be outsiders, minority holders.Their main source of information for the suitsCongress has empowered them to bring likelywill be the required § 16(a) reports. If insiderscould insulate their transactions from thescrutiny of outside shareholders by failing to file§ 16(a) reports and waiting for the two yeartime limit to pass, then Congress’ creation ofthese shareholders’ derivative suits would benullified.

Id. (quoting Donald C. Cook & Myer Feldman, InsiderTrading Under the Securities Exchange Act, 66 HARV.L. REV. 385, 414 (1953)) (footnote omitted); see alsoLitzler, 362 F.3d at 207 (same); Steinberg &Landsdale, supra, 68 NOTRE DAME L. REV. at 59(same).

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CONCLUSION

For the foregoing reasons, Respondent respectfullyrequests that this Court deny the Underwriters’petition.

Respectfully submitted,

Jeffrey I. Tilden Counsel of RecordJeffrey M. ThomasMark A. WilnerJessica E. LevinDavid M. SimmondsGORDON TILDEN THOMAS &CORDELL L.L.P.1001 Fourth Avenue, Suite 4000Seattle, Washington 98154-1007Telephone: (206) 467-6477jtilden@gordontilden.com

William C. SmartIan S. BirkKELLER ROHRBACK L.L.P.1201 Third Avenue, Suite 3200Seattle, Washington 98101-3052Telephone: (206) 623-1900

Attorneys for Respondent

APPENDIX

i

APPENDIX

TABLE OF CONTENTS

Appendix A: Blank Section 16(a) Report Form (foldout exhibit) . . . . . . . . 1b

1b

APPENDIX A

Blank Section 16(a) Report Form

[See foldout, next 2 pages]