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

United States Court of Appeals Fifth Circuit F I L E D In the March 19, 2007 United States Court of Appeals Charles R. Fulbruge III for the Fifth Circuit Clerk _______________

m 06-20856 _______________

REGENTS OF THE UNIVERSITY OF CALIFORNIA; WASHINGTON STATE INVESTMENT BOARD; SAN FRANCISCO CITY AND COUNTY EMPLOYEES’ RETIREMENT SYSTEM; EMPLOYER-TEAMSTERS LOCAL NUMBERS 175 AND 505 PENSION TRUST FUND; HAWAII LABORERS PENSION PLAN; STARO ASSET MANAGEMENT LLC; AMALGAMATED BANK, AS TRUSTEE FOR THE LONGVIEW COLLECTIVE INVESTMENT FUND; ROBERT V. FLINT; JOHN ZEGARSKI; MERVIN SCHWARTZ, JR.; STEVEN SMITH; ARCHDIOCESE OF MILWAUKEE; GREENVILLE PLUMBERS PENSION PLAN; NATHANIEL PULSIFER, AS TRUSTEE OF THE SHOOTERS HILL REVOCABLE TRUST,

Plaintiffs-Appellees,

VERSUS

CREDIT SUISSE FIRST BOSTON (USA), INC.; CREDIT SUISSE FIRST BOSTON LLC; PERSHING LLC; MERRILL LYNCH & COMPANY, INC.; MERRILL LYNCH PIERCE FENNER & SMITH, INC.;

Defendants-Appellants,

BARCLAYS PLC; BARCLAYS BANK PLC; BARCLAYS CAPITAL, INC.,

Appellants.

_________________________

Appeals from the United States District Court for the Southern District of Texas m H-01-3624 __________________________

Before JOLLY, SMITH, and DENNIS, Barges Transaction.” According to plaintiffs, Circuit Judges. Enron wanted to “sell” its interest in electri- city-generating barges off the coast of Nigeria JERRY E. SMITH, Circuit Judge: by the end of 1999 so that it could book reve- nue and meet stock analysts’ estimates for the Having been granted leave to pursue an in- calendar quarter. It could find no legitimate terlocutory appeal, see FED. R. CIV. P. 23(f), buyer, so it contacted Merrill Lynch and guar- defendants challenge an order certifying a sin- anteed that it would buy the barges back with- gle class of plaintiffs. Relying largely on Cen- in six months at a premium for Merrill Lynch. tral Bank, N.A. v. First Interstate Bank, N.A., 511 U.S. 164 (1994), and its progeny, we re- Six months later, Enron made good on its verse and remand. guarantee; an Enron-controlled partnership bought the barges from Merrill Lynch at a pre- I. mium. When Enron reported its results for The facts are difficult to detail but easy to 1999, instead of booking the transaction as a summarize. Plaintiffs allege that defendants loan, the characterization that Enron’s outside Credit Suisse First Boston (“Credit Suisse”), accountants state would have been appropriate Merrill Lynch & Company, Inc. (“Merrill had they known of the side-agreement to buy Lynch”), and Barclays Bank PLC (“Barclays back the barges, Enron booked the transaction Bank”) (collectively “the banks”) entered into as a sale and accordingly listed the revenue partnerships and transactions that allowed En- therefrom in its year-end financial statement. ron Corporation (“Enron”) to take liabilities off of its books temporarily and to book reve- Plaintiffs allege that the banks knew exactly nue from the transactions when it was actually why Enron was engaging in seemingly irra- incurring debt. The common feature of these tional transactions such as this. They cite cer- transactions is that they allowed Enron to mis- tain of the banks’ internal communications state its financial condition; there is no allega- they characterize as proving that the banks tion that the banks were fiduciaries of the were aware of the personal compensation En- plaintiffs, that they improperly filed financial ron executives received as a result of inflating reports on Enron’s behalf, or that they en- their stock price through the illusion of reve- gaged in wash sales or other manipulative ac- nue and that the banks intended to profit by tivities directly in the market for Enron securi- helping the executives maintain that illusion.1 ties.

For example, plaintiffs allege that Merrill 1 Plaintiffs quote from an e-mail between Mer- Lynch engaged in what they dub the “Nigerian (continued...)

Likewise, plaintiffs allege that, although each of intervening developments in appellate case- defendant may not have been aware of exactly law. The court justified its reconsideration, how each other defendant was helping Enron stating that it had to misrepresent its financial health, the defen- dants knew in general that other defendants the power to reconsider such interlocutory were doing so and that Enron was engaged in decisions, especially in light of the limited a long-term scheme to defraud investors and and much of it recent case law emerging on maximize executive compensation by inflating scheme liability. Moreover . . . at class revenue and disguising risk and liabilities certification, especially after such substan- through its partnerships and transactions with tial discovery as has been done here, the the banks. court may look behind the pleadings at evi- dence to determine whether a class should II. be certified. This suit followed Enron’s collapse in 2001. The first action was filed on October 22 of that The court determined that a “deceptive act” year; by December 12, 2001, the district court within the meaning of rule 10b-5(c)3 includes had consolidated over thirty actions relating to participating in a “transaction whose principal Enron securities and had designated the Re- purpose and effect is to create a false appear- gents of the University of California as the lead ance of revenues.” plaintiff. Years of discovery have ensued, and tens of millions of documents have been pro- The district court decided that rule 10b- duced. 5(a)’s prohibition of any “scheme . . . to de- fraud” gives rise to joint and several liability Early in the litigation, the banks filed mo- for defendants who commit individual acts of tions to dismiss, but the district court denied deception in furtherance of such a scheme. them in a December 19, 2002, opinion. The Implicit in that ruling is the conclusion that court reconsidered some of the issues relevant plaintiffs have alleged that just such a scheme to those motions in its opinion regarding class existed. certification, issued on June 5, 2006,2 in light The court’s theory of scheme liability con- siderably simplified finding commonality 1 (...continued) among the plaintiffs with respect to loss causa- rill Lynch employees “[A]t year-end (sic) when we tion. The court stated that “a reasonable ar- did this trade (the Nigerian barge transaction) . . . gument can be made that where a defendant Enron knew what were making at . . . the quarter and year (which had great value in their stock 2 price, not to mention personal compensation).” (...continued) Communications between Credit Suisse employees LEXIS 43146 (S.D. Tex. 2006). allegedly reveal similar scienter (“Osprey is a ve- 3 hicle enabling Enron to raise disguised debt which We follow securities law convention and refer appears as equity on Enron’s balance sheet . . . .”). to the relevant statute and rule as § 10(b) and rule 10b-5 rather than as, respectively, 15 U.S.C. § 78j- 2 See Regents of the Univ. of Cal. v. Credit 10(b) and 17 C.F.R. § 240.10b-5. Section 10(b) Suisse First Boston (USA), Inc., 2006 U.S. Dist. refers to § 10(b) of the Securities Exchange Act of (continued...) 1934.

knowingly engaged in a primary violation of pare a list of non-parties to whom they intend the federal securities laws that was in further- to assign responsibility and declared that de- ance of a larger scheme, it should be jointly fendants will bear the burden to prove non- and severally liable for the loss caused by the parties’ responsibility by a preponderance of entire overarching scheme, including conduct the evidence. of other scheme participants about which it knew nothing.” The district court certified a class of all per- sons who purchased Enron securities between The district court concluded that plaintiffs October 19, 1998, and November 27, 2001, are entitled to rely on the classwide presump- and were injured thereby. The class seeks tions of reliance for omissions and fraud on the damages of $40 billion, against which losing market.4 The court held that the Affiliated Ute defendants would be entitled to offset roughly presumption applies because the facts indicate $7 billion obtained by plaintiffs in previous that the banks had failed in their “duty not to settlements with former co-defendants. On engage in a fraudulent ‘scheme.’” The court November 1, 2006, a motions panel of this concluded, with respect to the fraud-on-the- court granted defendants leave to appeal the market presumption of reliance, that no pre- class certification order, and we sua sponte liminary finding of market efficiency or inves- expedited the appeal. tors’ reliance thereon need be made where plaintiffs plead under rule 10b-5(a) (forbidding III. deceptive devices, schemes, and artifices) and Plaintiffs point out that we are not bound 10b-5(c) (prohibiting deceptive acts, practices, by the motion panel’s decision to grant leave and courses of business) rather than under the to appeal; they urge that leave to appeal was more usual cause of action, rule 10b-5(b) (pro- improvidently granted.5 We disagree. scribing misrepresentation). This is a legally and practically significant A month after issuing its opinion on class class certification decision, and the motions certification, the district court, after reviewing panel properly allowed the appeal. The com- plaintiffs’ revised class definition and trial plan, mentary to rule 23(f) indicates that it is appro- issued its class certification order, dated July 5, priate to grant leave to appeal an adverse de- 2006. It determined that, although the propor- termination where (1) a “certification decision tionate liability provisions of the Private Secu- turns on a novel or unsettled question of law” rities Litigation Reform Act (“PSLRA”) are or (2) “[a]n order granting certification . . . generally problematic, there is no necessary may force a defendant to settle rather than in- conflict between the court’s theory of liability cur the costs of defending a class action and and that statute. See 15 U.S.C. § 78u-4(b)(4), run the risk of potentially ruinous liability.” (f)(2). The court ordered defendants to pre- FED. R. CIV. P. 23(f) advisory committee note.

4 See Affiliated Ute Citizens v. United States, 5 406 U.S. 128 (1972) (presumptive reliance for im- See United States v. Bear Marine Serv., 696 proper omissions); Basic Inc. v. Levinson, 485 F.2d 1117, 1120 n.6 (5th Cir. 1983) (stating that a U.S. 224 (1988) (adopting fraud-on-the-market merits panel is not bound by a motion panel’s dis- theory of reliance under certain conditions). cretionary grant of right to interlocutory appeal).

Plaintiffs contend that, even if we are en- ceed to consider the rule 23(f) appeal. titled to address defendants’ merits-based ar- guments, those arguments are sufficiently in- IV. tertwined with the facts to counsel against in- We review class certification decisions for terlocutory appeal before a complete factual abuse of discretion in “recognition of the es- record is established. Plaintiffs reason that the sentially factual basis of the certification in- banks have not yet been “cowed” into settling, quiry and of the district court’s inherent power nor are they likely to be; the district court has to manage and control pending litigation. . . . afforded procedural fairness to all parties; and Whether the district court applied the correct the panel should defer to its judgment by de- legal standard in reaching its decision on class clining to hear this appeal until after the dis- certification, however, is a legal question that trict court has entered a final judgment. we review de novo.” Allison v. Citgo Petro- leum Corp., 151 F.3d 402, 408 (5th Cir. 1998) The fact that the banks have not yet been (citations omitted). Where a district court persuaded to settle is no reason to decline a premises its legal analysis on an erroneous un- rule 23(f) appeal; it means only that the litiga- derstanding of governing law, it has abused its tion continues. As we have recognized, class discretion. See Unger v. Amedisys Inc., 401 certification may be the backbreaking decision F.3d 316, 320 (5th Cir. 2005). Albeit with the that places “insurmountable pressure” on a de- best of intentions and after herculean effort, fendant to settle, even where the defendant has the district court arrives at an erroneous un- a good chance of succeeding on the merits. derstanding of securities law that gives rise to See Castano v. Am. Tobacco, 84 F.3d 734, its application of classwide presumptions of 746 (5th Cir. 1996). Here, where plaintiffs reliance. seek to hold the banks liable for nearly the en- tirety of securities losses stemming from the V. Enron collapse, settlement pressure appears to We first consider the scope of our jurisdic- be particularly acute, so it is appropriate to tion. Plaintiffs accuse the banks of repackag- provide appellate review before settlement ing this rule 23(f) appeal as a demurrer. They may be coerced by an erroneous class certifi- point out that the scope of our review is “brid- cation decision. led by Rule 23(f).”6 They urge us to refuse to consider the banks’ arguments concerning the Moreover, although the legal issues under- interpretation of § 10(b) and the prohibition of lying the certification decision are intertwined aiding and abetting liability under that statute.7 with the merit of plaintiffs’ theory of liability, They contend that we should accept the dis- these broad legal issues are not especially con- tingent on particular facts likely to be further 6 developed in the district court. This case gives Bell v. Ascendant Solutions Inc., 422 F.3d rise to unsettled questions of law concerning 307, 314 (5th Cir. 2005) (declining to review, on the entanglement of the merits with the class interlocutory appeal, a district court’s decision to certification decision, as well as the district preclude plaintiffs’ expert from testifying as to court’s theory of “deceptive act” liability un- market efficiency). derlying its finding that common issues of re- 7 See Cent. Bank, 511 U.S. at 177 (holding that liance predominate. Both of the Advisory § 10(b) does not provide for aiding and abetting Committee criteria are met here, so we pro- liability).

trict court’s view of the underlying theories of factual and legal analysis supporting the dis- liability as valid for purposes of this appeal. trict court’s decision is appropriate on review of class certification enjoys widespread accep- The scope of our review is limited, but it is tance in the courts of appeals,8 and neither the not quite so circumscribed as plaintiffs say. Supreme Court authority nor the Fifth Circuit Although we may not conduct an independent caselaw that plaintiffs cite for the proposition inquiry into the legal or factual merit of this that no merits inquiry is permitted is to the case as though we were reviewing a motion contrary.9 Miller and Eisen (which cited Mil- under Federal Rule of Civil Procedure 12(b)(6) ler to establish the “no merits inquiry” rule) or 56, we may address arguments that impli- addressed cases in which district courts had cate the merits of plaintiffs’ cause of action in- conducted wide-ranging inquiries into the mer- sofar as those arguments also implicate the its of claims as part of the class certification merits of the class certification decision. decision without reference to the criteria for class certification.10 As the Bell rule cited Rule 23(f) states that “[a] court of appeals may in its discretion permit an appeal from an order of a district court granting or denying 8 See In re Initial Pub. Offering Sec. Litig., 471 class action certification under this rule if ap- F.3d 24, 41 (2d Cir. 2006); Gariety v. Grant plication is made to it within ten days after en- Thornton LLP, 368 F.3d 356, 366 (4th Cir. 2004); try of the order.” FED. R. CIV. P. 23(f). The Newton v. Merrill, Lynch, Pierce, Fenner &Smith, text of the rule makes plain that the sole order Inc., 259 F.3d 154, 166 (3d Cir. 2001) (quoting that may be appealed is the class certification; 5 JAMES W. MOORE ET AL., MOORE’S FEDERAL “no other issues may be raised.” Bell, 422 PRACTICE § 23.46[4]: “[B]ecause the determina- F.3d at 314. The fact that an issue is relevant tion of a certification request invariably involves to both class certification and the merits, how- some examination of factual and legal issues un- ever, does not preclude review of that issue. derlying the plaintiffs’ cause of action, a court may consider the substantive elements of the plaintiffs’ After all, the Supreme Court has refused to case . . . .”); Szabo v. Bridgeport Machs., Inc., 249 designate class certification decisions as col- F.3d 672, 675-76 (7th Cir. 2001) (“The proposi- tion that a district judge must accept all of the com- lateral orders subject to interlocutory appellate plaint’s allegations when deciding whether to certi- review, preciselybecause “the class determina- fy a class cannot be found in Rule 23 and has noth- tion generally involves considerations that are ing to recommend it . . . . Before deciding whether enmeshed in the factual and legal issues com- to allow a case to proceed as a class action . . . a prising the plaintiff’s cause of action.” Coop- judge should make whatever factual and legal in- ers & Lybrand v. Livesay, 437 U.S. 463, 469 quiries are necessary under Rule 23 . . . and if (1978) (internal citations omitted). “The anal- some of the considerations under Rule 23(b)(3) . . ysis under Rule 23 must focus on the require- . overlap the merits . . . then the judge must make ments of the rule, and if findings made in con- a preliminary inquiry into the merits.”). nection with those requirements overlap find- 9 ings that will have to be made on the merits, See Eisen v. Carlisle & Jaquelin, 417 U.S. such overlap is only coincidental.” Bell, 422 156, 178 (1974); Miller v. Mackey Int’l, 452 F.2d F.3d at 311. See also Unger, 401 F.3d at 320. 424, 427 (5th Cir. 1971). 10 See In re Initial Pub. Offering Sec. Litig., Our circuit’s conclusion that review of the (continued...)

above suggests, the prohibition against looking because it is dispositive of this appeal. into the merits applies only to such inquiries, not to evaluations of the merits that overlap The district court’s definition of “deceptive with consideration of the requirements for act” is integral to its conclusion that the re- class certification. Id. In a rule 23(f) appeal, quirements for class certification are met. this court can, and in fact must, review the Federal Rule of Civil Procedure 23(a) requires merits of the district court’s theory of liability plaintiffs seeking class certification to satisfy insofar as they also concern issues relevant to four criteria that we have previously summa- class certification.11 rized as (1) numerosity, (2) commonality, (3) typicality, and (4) representativeness.12 VI. Because no defendant seriously challenges Two of the banks’ arguments on appeal whether these prima facie requirements are have considerable implications for the substan- met, we do not discuss them further. tive legal merit of plaintiffs’ complaint. First, the district court’s definition of “deceptive act” Once the rule 23(a) requirements are satis- underlies its application of the classwide pre- fied, a class may be certified if “[1] the court sumption of reliance on fraud on the market. finds that the questions of law or fact common Likewise, its broad theory of “scheme” liability to the members of the class predominate over allows it to certify a single class of plaintiffs any questions affecting only individual mem- whose losses were caused in common by the bers, and [2] that a class action is superior to scheme rather than to certify subclasses whose other available methods for the fair and effi- losses were caused by the actions of individual cient adjudication of the controversy.” Rule defendants. Both of these arguments are also 23(b)(3). We refer to these two requirements highly relevant to class certification, but we respectively as the “predominance” and “supe- address only the definition of “deceptive act,” riority” criteria.13

The district court’s theory of liability im- 10 plicates primarily the predominance require- (...continued) ment. To succeed on a claim of securities 471 F.3d at 24 (citations omitted). fraud, a plaintiff must prove “(1) a material 11 See Langbecker v. Elect. Data Sys. Corp., misrepresentation or omission by the defen- 476 F.3d 299, 306-07 (5th Cir. 2007) (considering dant, (2) scienter on the part of the defendant, the scope of ERISA liability within the context of (3) reliance, and (4) due diligence by the plain- a rule 23(f) appeal and stating that “[a]lthough fed- tiff to pursue his or her own interest with care eral courts cannot assess the merits of the case at and good faith.” Unger, 401 F.3d at 322 n.2 the certification stage, they must evaluate with (5th Cir. 2005) (citations omitted). A plaintiff rigor the claims, defenses, relevant facts and ap- must prove not only that the fraud occurred plicable substantive law in order to make a mean- but that it proximately caused his losses. See ingful determination of the certification issues . . . . Courts should not confuse rulings on the merits of claims with the class certification decision . . . . However, the district court’s threshold legal rulings 12 See id. at 307. are essential to its conclusion that this case may be 13 maintained as a class action”) (citations and inter- See Steering Committee v. Exxon Mobil nal quotation marks omitted). Corp., 461 F.3d 598, 600 (5th Cir. 2006).

Dura Pharms., Inc. v. Broudo, 544 U.S. 336, market for Enron securities was efficient and 346 (2005). that inherent in that conclusion is the fact that the market price reflected all publicly available Without its broad conception of liability for information.15 But the factual probability that “deceptive acts,” the district court could not the market relied on the banks’ behavior have found that the entire class was entitled to and/or omissions does not mean that plaintiffs rely on Basic’s fraud-on-the-market theory, are entitled to the legal presumption of reli- because the market may not be presumed to ance. rely on an omission or misrepresentation in a disclosure to which it was not legally enti- Market efficiency was not the sole condi- tled.14 The plaintiffs are likely correct that the tion that the Court in Basic required plaintiffs to prove existed to qualify for the classwide presumption; the defendant had to make public 14 and material misrepresentations. See Basic, See Gariety v. Grant Thornton LLP, 368 F.3d 356, 369 (4th Cir. 2004) (remanding class 485 U.S. at 248 n.27. If the banks’s actions certification decision for consideration of whether were non-public, immaterial, or not misrepre- it was improperly predicated on aiding and abetting sentative because the market had no right to liability under the guise of primary liability). The rely on them (in other words, the banks owed plaintiffs’ attempt to distinguish Gariety on the no duty), the banks should be able to defeat ground that it involved a thinly traded stock is un- the presumption. See Gariety, 368 F.3d at persuasive. Although the securities at issue were 369. arguably too thinly traded to warrant the presump- tion of an efficient market (an issue addressed in Without a classwide presumption of reli- another section of the opinion, see id. at 367-68), ance, plaintiffs would have to prove individual plaintiffs provide no alternative explanation why reliance on defendants’ conduct. “[A] fraud the Gariety court also remanded with instruction to class action cannot be certified when individual consider the presumption of fraud-on-the-market reliance will be an issue.” Castano, 84 F.3d at reliance in light of Central Bank. See Gariety, 368 745. Because, as we will explain, the district F.3d at 369. court misapplies the Affiliated Ute presump- The principle that, to rely presumptively, the tion, the fraud-on-the-market presumption is market must be entitled to disclosure about the true the only presumption potentially available in nature of defendants’ conduct, applies in the man- this case. Accordingly, the meaning of “de- ipulation setting as well as in the deception context. ceptive act” is critical to classwide certifica- See § 10(b) (prohibiting the employment of any tion; classwide reliance stands or falls with it. “manipulative or deceptive device” in connection with the purchase or sale of registered securities). Erroneous presumptions of reliance were at As the Supreme Court has said with respect to § 14(e) of the Securities Exchange Act (declaring it identical in relevant aspect to § 10), “[t]he use of 14 (...continued) the term ‘manipulative’ provides emphasis and Burlington N. Inc., 472 U.S. 1, 8 (1985). guidance to those who must determine which types 15 of acts are reached by the statute; it does not sug- See generally Jonathan R. Macey and Geof- gest a deviation from the section’s facial and pri- frey P. Miller, Good Finance, Bad Economics: An mary concern with disclosure . . . .” Schreiber v. Analysis of the Fraud-on-the-Market Theory, 42 (continued...) STAN. L. REV. 1059, 1077 (1990).

the heart of the Supreme Court’s concern and the withholding of a material fact establish when it ruled that § 10(b) does not give rise to the requisite element of causation in fact.” Id. aiding and abetting liability.16 It is essential for at 153-54. In Basic, 485 U.S. at 243, the us to ensure that the district court does not Court later summarized the rule of Affiliated misapply aiding-and-abetting liability under the Ute thusly: “[W]here a duty to disclose mate- guise of primary liability, through an overly rial information had been breached . . . the broad definition of “deceptive act[s],” and necessary nexus between the plaintiffs’ injury thereby give rise to an erroneous classwide and the defendants’ wrongful conduct had presumption of fraud on the market. been established.”

VII. For us to invoke the Affiliated Ute pre- We proceed to the merits of this limited sumption of reliance on an omission, a plaintiff rule 23(f) appeal. With all respect for the dis- must (1) allege a case primarily based on omis- trict court’s diligent efforts, its determination sions or non-disclosure and (2) demonstrate that the Affiliated Ute presumption applies to that the defendant owed him a duty of disclo- the facts of this case is incorrect. In Affiliated sure.17 The case at bar does not satisfy this Ute, the Court considered whether a group of conjunctive test. investors was required to prove reliance affir- matively where it alleged that bank officers Assuming arguendo that plaintiffs’ case pri- bought their restricted stock without disclos- marily concerns improper omissions,18 the ing the bank’s creation of a secondary market banks were not fiduciaries and were not other- in which the stock would be resold for profit. wise obligated to the plaintiffs. They did not See 406 U.S. at 133-39. The Court ruled that owe plaintiffs any duty to disclose the nature the investors’ allegations were not based on of the alleged transactions. The district court misrepresentation under what is now rule 10b- agrees that the banks lacked any specific duty, 5(b), but instead on a “‘course of business’ or but, citing our caselaw, the court finds that the a ‘device, scheme or artifice’ that operated as a fraud” under what are now rule 10b-5(a) and (c). Id. at 153. The Court determined that, 17 See Abell v. Potomac Ins. Co., 858 F.2d unlike a mere transfer agent, these bankers had 1104, 1119 (5th Cir. 1988) (explaining that the Af- a duty to disclose the existence of this second- filiated Ute presumption applies where “the defen- ary market to the plaintiffs. Id. at 152-53. dant has failed to disclose any information whatso- ever relating to material facts about which the de- Where liability is premised on a failure to fendant has a duty to the plaintiff to disclose”), disclose rather than on a misrepresentation, vacated on other grounds sub nom. Fryar v. Abell, “positive proof of reliance is not a prerequisite 492 U.S. 914 (1989). to recovery. . . . This obligation to disclose 18 See Finkel v. Docutel/Olivetti Corp., 817 F.2d 356, 360 (5th Cir. 1987) (“Cases involving 16 See Cent. Bank, 511 U.S. at 180 (explaining primarily a failure to disclose implicate the first that aiding and abetting liability would permit and third subsections of Rule 10b-5; cases involv- plaintiffs to “circumvent the reliance requirement,” ing primarily a misstatement or failure to state a because a “defendant could be liable without any fact necessary to make statements made not mis- showing that the plaintiff relied upon the aider and leading implicate the second subsection.”) (citation abettor’s statements or actions”). omitted).

presumption applies because the banks omitted Smith, 845 F.2d at 1364. their duty not to engage in a fraudulent scheme.19 Neither Smith nor any other of this Abell is the law of this circuit, and Smith is circuit’s cases is authority for that proposition. not to the contrary. When it determined (cor- rectly) that the banks owed no duty to the As we will explain in more detail, “decep- plaintiffs other than the general duty not to en- tion” within the meaning of § 10(b) requires gage in fraudulent schemes or acts (that is, the that a defendant fail to satisfy a duty to dis- duty not to break the law), the district court close material information to a plaintiff. Mere- should have declined to apply the Affiliated ly pleading that defendants failed to fulfill that Ute presumption. Instead, it presumed what duty by means of a scheme or an act, rather the plaintiffs had only alleged: that reliance, than by a misleading statement, does not which is a specific, defining element of the rel- entitle plaintiffs to employ the Affiliated Ute evant legal violation, had in fact occurred. presumption. In Smith, this court discussed only the first element of the Abell test recount- The logic of Affiliated Ute is that, where a ed above; Smith stands for the straightforward plaintiff is entitled to rely on the disclosures of proposition that a case brought under rule someone who owes him a duty, requiring him 10b-5(a) or (c) is more likely to be based pri- to prove “how he would have acted if omitted marily on omission than is a case under rule material information had been disclosed” is un- 10b-5(b), which requires that a defendant af- fair. Basic, 485 U.S. at 245. It is natural to firmativelymake a misleading representation.20 expect a plaintiff to rely on the candor of one In Smith, we never reached the second prong who owes him a duty of disclosure, and it is of the Abell test, because we determined that, fair to force one who breached his duty to even if there had been an omission, any pre- prove that the plaintiff did not so rely. Here, sumption of reliance was rebutted (because the however, where the plaintiffs had no expecta- plaintiff would have behaved identically had he tion that the banks would provide them with been aware of the omitted information). See information, there is no reason to expect that the plaintiffs were relying on their candor. Ac- cordingly, it is only sensible to put plaintiffs to 19 their proof that they individually relied on the Regents, 2006 U.S. Dist. LEXIS 43146, at *102 (citing Smith v. Ayres, 845 F.2d 1360, 1363 banks’ omissions. & n.8 (5th Cir. 1988)). VIII. 20 The statement may be misleading for the rea- Having determined that the Affiliated Ute son that the defendant has “omitt[ed] to state a ma- presumption is inapplicable, we proceed to re- terial fact necessary in order to make the state- view the district court’s determination that Ba- ments made, in the light of the circumstances under sic’s fraud-on-the-market presumption applies. which they were made, not misleading,” but to al- It does not; the court predicates its ruling on lege a cause of action under rule 10b-5(b), a plain- an erroneous interpretation of § 10(b). tiff still must allege that a defendant said some- thing. See 17 C.F.R. § 240.10b-5(b); Smith, 845 The banks launch a two-pronged attack on F.2d at 1363 (stating that a rule 10b-5(b) “claim the district court’s ruling with respect to fraud always rests upon an affirmative statement of some sort, reliance on which is an essential element on the market. First, they argue that the pre- plaintiff must prove”). sumption was never properly established: The

district court’s overly broad definition of “de- plaintiffs have not alleged such fraud. ceptive act” led it inexorably to the mistaken conclusion that the banks’ actions constituted The district court’s conception of “decep- “misrepresentations” on which the market was tive act” liability is inconsistent with the Su- legally presumed to rely. Second, the banks preme Court’s decision that § 10 does not give assert that, even if the plaintiffs did establish rise to aiding and abetting liability. An act the presumption, it was rebutted according to cannot be deceptive within the meaning of this court’s standards.21 Because the district § 10(b) where the actor has no duty to dis- court erred in ruling that the presumption had close. Presuming plaintiffs’ allegations to be been established, we do not address whether it true, Enron committed fraud by misstating its was rebutted. accounts, but the banks only aided an abetted that fraud by engaging in transactions to make In Basic, 485 U.S. at 245, the Court ac- it more plausible; they owed no duty to En- cepted the fraud-on-the-market theory that ron’s shareholders. courts could presume reliance where individu- als who had traded shares did so “in reliance Section 10(b) does not give rise to aiding on the integrity of the price set by the market, and abetting liability.23 In Central Bank, the but because of [defendant’s] material misrep- Court emphasized that securities fraud liability resentations, that price had been fraudulently is an area of the law that demands certainty [altered].” The presumption is founded on the and predictability. Secondary liability brings economic hypothesis that “the market is trans- neither; instead it gives rise to confusion about posed between seller and buyer, and ideally, the extent of secondary actors’ obligations and transmits information to the investor in the invites vague and conflicting standards of processed form of the market price . . . . The proof in divers courts. See Cent. Bank, 511 market is acting as the unpaid agent of the in- vestor, informing him that given all the infor- mation available to it, the value of the stock is 22 worth the market price.” Id. at 246 (citing In (...continued) ing prerequisites for the Basic presumption as fol- re LTV Sec. Litig., 88 F.R.D. 134, 143 (N.D. lows: “(1) [T]he defendant made public material Tex. 1980)). misrepresentations, (2) the defendant’s shares were traded in an efficient market, and (3) the plaintiffs To qualify for the presumption, however, a traded shares between the time the misrepresenta- plaintiff must not only indicate that a market is tions were made and the time the truth was re- efficient, but also must allege that the defen- vealed”). See also Gariety, 368 F.3d at 369 (re- dant made public and material misrepresenta- manding the class certification decision for con- tions; i.e., the type of fraud on which an effi- sideration of whether factor (1) had been improp- cient market may be presumed to rely.22 These erly satisfied by the erroneous application of aiding and abetting liability). 21 23 See Greenberg v. Crossroads Sys., Inc., 364 Cent. Bank, 511 U.S. at 177 (declaring that F.3d 657 (5th Cir. 2004); Nathenson v. Zonagen section 10(b) “prohibits only the making of a ma- Inc., 267 F.3d 400 (5th Cir. 2001). terial misstatement (or omission) or the commission of a manipulative act. The proscription does not 22 See Greenberg, 364 F.3d at 661 (summariz- include giving aid to a person who commits a man- (continued...) ipulative or deceptive act.”) (citations omitted).

U.S. at 188. Unfortunately, the Court has left of revenues.”25 We agree with the Eighth Cir- some uncertainty in this regard. cuit that the SEC’s proposed test (by which we are not bound) is too broad to fit within the Though the Court conclusively foreclosed contours of § 10(b). the application of secondary liability under § 10(b), it stated that secondary actors such as The appropriate starting point is the text of investment banks and accountants can be liable the statute. See Cent. Bank, 511 U.S. at 172- as primary violators in some circumstances. 73. Decisions interpreting the statutory text Id. at 191. The Court has never, however, place a limit on the possible definitions that precisely delineated the boundary between pri- can be ascribed to the words contained in the mary and secondary liability. As the district SEC’s rule promulgated thereunder.26 It is by court noted, the lower courts have struggled losing sight of the limits that the statute places to do so, and our circuit has not previously an- on the rule, and by ascribing, natural, diction- nounced a standard that conclusively governs ary definitions to the words of the rule, that this case. the district court and likeminded courts have

Although plaintiffs try to reconcile the cas- es, the Eighth and Ninth Circuits have split with respect to the scope of primary liability for secondary actors.24 The district court 25 As defendants aver, the district court’s test in adopts a rule advocated by the Securities and this case is actually broader even than the Ninth Exchange Commission (“SEC”), in an amicus Circuit’s; Simpson did not adopt the SEC’s pro- curiae brief before the Ninth Circuit, under posed rule wholesale. Instead, the court there made which primary liability attaches to anyone who it plain that “[i]t is not enough that a transaction in engages in a “transaction whose principal pur- which the defendant was involved had a deceptive pose and effect is to create a false appearance purpose and effect; the defendant’s own conduct contributing to the transaction or overall scheme must have had a deceptive purpose and effect.” Simpson, 452 F.3d at 1048. This distinction, how- 24 Compare Simpson v. AOL Time Warner Inc., ever, is irrelevant for purposes of this appeal, be- 452 F.3d 1040, 1048 (9th Cir. 2006) (“[T]o be lia- cause the defendants’ scienter in entering into the ble as a primary violator of § 10(b) for participa- transactions would be a common issue of fact tion in a ‘scheme to defraud,’ the defendant must across all the plaintiffs. have engaged in conduct that had the principal pur- pose and effect of creating a false appearance of We note also that the Ninth Circuit applied the fact in furtherance of the scheme.”), petition for definition recounted above to “scheme” as well as cert. filed (Oct. 19, 2006) (No. 06-560) with In re to “deceptive act.” Id. Because, however, our an- Charter Commc’ns, Inc., Sec. Litig., 443 F.3d alysis is ultimately predicated on the statute instead 987, 992 (8th Cir. 2006) (“[A]ny defendant who of the rule, any distinction between subsections of does not make or affirmatively cause to be made a the rule is immaterial to our discussion. fraudulent statement or omission, or who does not 26 directly engage in manipulative securities trading See Ernst & Ernst v. Hochfelder, 425 U.S. practices, is at most guilty of aiding and abetting 185, 214 (1976) (“[D]espite the broad view of the and cannot be held liable under § 10(b) or any sub- Rule advanced by the [SEC] in this case, its scope part of Rule 10b-5.”), petition for cert. filed (July cannot exceed the power granted the Commission 7, 2006) (No. 06-43). by Congress under § 10(b).”).

gone awry.27 er trading, the Court stated, “When an allega- tion of fraud is based upon nondisclosure, Central Bank was informed by a series of there can be no fraud absent a duty to speak.” decisions construing the statute and narrowly Chiarella v. United States, 445 U.S. 222, 234 defining the scope of “fraud” in the context of (1980). securities. In Ernst & Ernst, 425 U.S. 185 at 197, for example, the Court rejected the The Eighth Circuit, unlike the Ninth, has SEC’s notion that securities fraud can be com- correctly taken these decisions collectively to mitted negligently; it has to be knowing. Even mean that “‘deceptive’ conduct involves either more significantly for purposes of this case, a misstatement or a failure to disclose by one the Court later stated that “the language of who has a duty to disclose.” Charter, 443 § 10(b) gives no indication that Congress F.3d at 990. That court quoted the technical meant to prohibit any conduct not involving definition of “manipulation” from Santa Fe manipulation or deception.” Santa Fe Indus. and stated that “any defendant who does not v. Green, 430 U.S. 462, 473 (1977). The make or affirmatively cause to be made a Court had already discussed “manipulation” in fraudulent statement or omission, or who does Ernst & Ernst: “Use of the word ‘manipula- not directly engage in manipulative securities tive’ is especially significant. It is and was vir- trading practices, is at most guilty of aiding tually a term of art when used in connection and abetting and cannot be held liable under with securities markets. It connotes intention- § 10(b) or any subpart of Rule 10b-5.” Id. at al or willful conduct designed to deceive or de- 992. fraud investors by controlling or artificially af- fecting the price of securities.” Ernst & Ernst, By this holding the court in Charter found 425 U.S. at 199. that there was no liability against vendors of set-top cable boxes who had sold their boxes The Court further refined that definition by to Charter at inflated prices subject to a kick- stating that “[manipulation] refers generally to back agreement whereby they would direct the practices, such as wash sales, matched orders, value of the price inflation back to Charter in or rigged prices, that are intended to mislead the form of advertising purchases. See id. at investors by artificially affecting market activ- 989-90. The vendors were alleged to have ity.” Santa Fe, 430 U.S. at 476. Finally, when known that Charter was doing this to falsify its evaluating the scope of liability for deceptive accounts by depreciating its expenses, as capi- omissions of disclosure in the context of insid- tal investments, from the purchase of the set- top boxes, but was booking the increased ad- vertising fees as recurring revenue. See id. In 27 See Simpson, 452 F.3d at 1048; SEC v. other words, the court dismissed the case on Hopper, No. H-04-1054, 2006 U.S. Dist. LEXIS facts extraordinarily similar to the facts that 17772, at *37 (S.D. Tex. Mar. 24, 2006); In re are present here.28 Parmalat Sec. Litig., 376 F. Supp. 2d 472, 504 (S.D.N.Y. 2005); Quaak v. Dexia, S.A., 357 F. Supp. 2d 330, 342 (D. Mass. 2005); In re Global 28 Crossing, Ltd. Sec. Litig., 322 F. Supp. 2d 319, The Eighth Circuit’s analysis finds support in 336-37 (S.D.N.Y. 2004); In re Lernout & Hauspie several prior cases in other circuits that had refused Sec. Litig., 236 F. Supp. 2d 161, 173 (D. Mass. to extend primary liability to secondary actors, 2003). (continued...)

The Ninth Circuit came to a different con- seminated into the securities market. Final- clusion. In Simpson, the defunct company ly, a plaintiff may be presumed to have re- (Homestore.com) “bought revenue” by engag- lied on this scheme to defraud if a misrepre- ing in the same type of round-trip transactions sentation, which necessarily resulted from that took place in Charter and are alleged to the scheme and the defendant’s conduct have occurred here. Simpson, 452 F.3d at therein, was disseminated into an efficient 1043-44. It paid inflated prices for shares or market and was reflected in the market services from thinly capitalized companies price. looking to generate liquidity so they could go public, in return for which it extracted side Id. at 1052. See also In re Parmalat Sec. Lit- agreements that the companies would pay ig., 376 F. Supp. 2d 472, 481-90 (S.D.N.Y. back the value of the inflation by buying ad- 2005). vertising from AOL to be displayed at Home- store’s AOL-based website. Like Charter, The Ninth Circuit relied in part on a law re- Homestore would then list its payments to the view article that had questioned the assertion other companies as capital investments but that a defendant could be liable only for its would characterize its advertising income from own statements because § 10(b) forbids the them as recurring revenue. See id. use of a “device” and rule 10b-5 condemns those who act “indirectly.”29 What this rea- Although the defendants were dismissed be- soning overlooks is that the Supreme Court cause they did not meet the standard for liabil- had appeared to limit the scope of “deception” ity that the Ninth Circuit announced, the court rather than the scope of “device.” promulgated a standard very similar to the one the instant plaintiffs urge us to adopt. The The Supreme Court has defined “device” by court concluded: referring to a dictionary but has pointedly re- fused to define “deceptive” in any way except [C]onduct by a defendant that had the prin- through caselaw: “[D]evice” means “(t)hat cipal purpose and effect of creating a false which is devised, or formed by design; a con- appearance in deceptive transactions as part trivance; an invention; project; scheme; often, of a scheme to defraud is conduct that uses a scheme to deceive; a stratagem; an artifice,” or employs a deceptive device within the and “contrivance” in pertinent part as “(a) meaning of § 10(b). Furthermore, such thing contrived or used in contriving; a conduct may be in connection with the pur- scheme, plan, or artifice.” In turn, “contrive” chase or sale of securities if it is part of a in pertinent part is defined as “(t)o devise; to scheme to misrepresent public financial in- plan; to plot . . . (t)o fabricate . . . design; in- formation where the scheme is not com- vent . . . to scheme . . . .” Ernst & Ernst, 425 plete until the misleading information is dis- U.S. at 199 n.20 (citing WEBSTER’S INTERNA-

28 (...continued) 29 albeit in non-transactional scenarios. See Ziemba See Simpson, 452 F.3d at 1049 (citing Robert v. Cascade Int’l, 256 F.3d 1194, 1205 (11th Cir. Prentice, Locating That “Indistinct” and “Virtu- 2001); Wright v. Ernst & Young LLP, 152 F.3d ally Nonexistent” Line Between Primary and Sec- 169 (2d Cir. 1998); Anixter v. Home-Stake Prod. ondary Liability Under Section 10(b), 75 N.C. L. Co., 77 F.3d 1215 (10th Cir. 1996). REV. 691, 731 (1997)).

TIONAL DICTIONARY (2d ed. 1934)). Having tion, the common law meaning of that lan- established the meaning of “device” (and re- guage is irrelevant. lying on it to hold that § 10(b) requires scien- ter), the Court, in its other cases interpreting Although some of our securities cases have § 10(b), has established that a device, such as considered the common law where the Su- a scheme, is not “deceptive” unless it involves preme Court has placed no gloss on the rel- breach of some duty of candid disclosure.30 evant terms, none of this court’s decisions has contradicted either the fundamental principle For this reason, defining “deceptive” by re- just stated or the Supreme Court’s interpreta- ferring to the same dictionary the Court used tion of “deceptive.”31 Because “device” is to define “device”SSthe approach taken by the modified by “deceptive,” no device can be il- court in Parmalat, 376 F. Supp. 2d at 502, legal if it is not deceptive within the meaning and approvingly cited by the district court of the statute. Similarly, because the rule may a quoSSis improperly to substitute the author- not be broader than the statute, this conclusion ity of the dictionary for that of the Supreme as to the meaning of “deceptive device” pre- Court. Likewise, plaintiffs’ reference to the cludes an interpretation of “indirectly” that common law meaning of “deceptive” is fruit- contradicts the accepted meaning of “decep- less; where the Supreme Court has authorita- tion.”32 tively construed the pertinent language of the statute giving rise to the plaintiffs’ cause of ac- The district court’s definition of “deceptive acts” thus sweeps too broadly; the transactions in which the banks engaged were not encom- 30 See, e.g., Chiarella, 445 U.S. at 234-35 passed within the proper meaning of that (“When an allegation of fraud is based upon non- phrase. Enron had a duty to its shareholders, disclosure, there can be no fraud absent a duty to but the banks did not. The transactions in speak. . . . We hold that a duty to disclose under which the banks engaged at most aided and § 10(b) does not arise from the mere possession of abetted Enron’s deceit by making its misrepre- nonpublic market information.”). See also United States v. O’Hagan, 521 U.S. 642, 655 (1997) (“Because the deception essential to the misappro- priation theory involves feigning fidelity to the source of information, if the fiduciary discloses to 31 See Finkel v. Docutel/Olivetti, 817 F.2d 356, the source that he plans to trade on the nonpublic 359 (5th Cir. 1987) (referring to the common law information, there is no ‘deceptive device’ and thus and determining that § 10(b) requires transaction no § 10(b) violation.”); id. at 656 (“The securities causation); Shores v. Sklar, 647 F.2d 462, 469 n.5 transaction and the breach of duty thus coin- (5th Cir. May 1981) (en banc) (citing the Restate- cide. . . . A misappropriator who trades on the ba- ment of Torts for the proposition that securities sis of material, nonpublic information, in short, fraud requires loss causation); Huddleston v. Her- gains his advantageous market position through de- man & MacLean, 640 F.2d 534, 547 n.21 (5th Cir. ception; he deceives the source of the information Unit A Mar. 1981) (citing Prosser as authority for and simultaneously harms members of the investing requirement of scienter in securities fraud), vacated public.”) We take the quoted statements to mean on other grounds, 459 U.S. 375 (1983). that “deception” occurs where the misappropriator 32 breaches his duty to his source, the act/scheme/- See Cent. Bank, 511 U.S. at 173 (establishing omission (collectively “device”) is the trading of that rule 10b-5 may not exceed the scope of the security without disclosure. § 10(b)).

sentations more plausible.33 The banks’ parti- the Court has not precisely defined the term cipation in the transactions, regardless of the beyond providing a few examples such as wash purpose or effect of those transactions, did not sales, matched orders, and rigged prices, then- give rise to primary liability under § 10(b). District Judge Higginbotham, in an influential opinion issued shortly after Santa Fe, ex- IX. haustively analyzed the meaning of “manipu- Having determined that the banks’ alleged lation” and concluded that “[f]rom this study, actions were not “misrepresentations” in the the following definition emerges: practices in sense of “deceptive acts” on which an efficient the marketplace which have the effect of either market may be presumed to rely, we proceed creating the false impression that certain mar- to consider whether they constituted manipula- ket activity is occurring when in fact such ac- tion.34 They did not. tivity is unrelated to actual supply and demand or tampering with the price itself are man- Manipulation requires that a defendant act ipulative.” Hundahl v. United Benefit Life directly in the market for the relevant security. Ins. Co., 465 F. Supp. 1349, 1360 (N.D. Tex. The Supreme Court has cited a dictionary defi- 1979). nition of the word but, at the same time, has attached the caveat that, as used in securities In Hundahl, Judge Higginbotham carefully fraud law, it is “virtually a term of art.” Ernst emphasized that such activity could not take & Ernst, 425 U.S. at 199 & n.21. Although place outside the market for the relevant se- curity and retain the title of manipulation; con- duct that affects the marketplace indirectly can 33 See Armstrong v. McAlpin, 699 F.2d 79, 91 violate § 10(b) only if it constitutes deception. (2d Cir. 1983) (explaining that before Central Id. at 1359, 1362. Like the Eighth Circuit, we Bank, aiding and abetting securities fraud required adopt Judge Higginbotham’s reasoning and proof of “(1) a securities law violation by a pri- definition in full, and we are aware of no cir- mary wrongdoer, (2) knowledge of the violation by cuit that recognizes a broader definition. See the person sought to be charged, and (3) . . . that Charter, 443 F.3d at 992 n.2. the person sought to be charged substantially as- sisted in the primary wrongdoing”). We agree with Plaintiffs argue that this course is fore- the court in Parmalat that whether the banks would have been guilty of aiding and abetting, had their closed to us by Schreiber v. Burlington Nor- actions taken place before Central Bank, is not thern Inc., 472 U.S. 1, 6-7 (1985), and Shores. particularly important; if they have committed a We disagree. In Schreiber, 472 U.S. at 6, the primary violation as well, the fact that their con- Court declared only that its definition of man- duct could also be characterized as aiding and abet- ipulation, insofar as it had defined that term in ting would not save them. See Parmalat, 376 F. Ernst & Ernst, is consistent with both the dic- Supp. 2d at 493. What is important is that plain- tionary and the common law. So is Judge tiffs have not pleaded that the banks have commit- Higginbotham’s. ted the primary violation of employing a “deceptive device.” In Hundahl, Judge Higginbotham thor- 34 oughly analyzed the common law history of See § 10(b); Santa Fe, 430 U.S. at 473 (stat- the term and concluded that the “manipula- ing that “the language of § 10(b) gives no indi- cation that Congress meant to prohibit any conduct tion” cause of action was primarily concerned not involving manipulation or deception”). with keeping free markets clear of interference

but does not reach all conduct that might con- different from what the banks are alleged to stitute deception or breach of fiduciary duty. have done, namely engage in transactions else- See Hundahl, 465 F. Supp. at 1359-62. The where that gave a misleading impression of the Court in Schreiber, 472 U.S. at 7, citing Santa value of Enron securities that were already on Fe, adopted a similar limited construction to the market.36 Moreover, in Shores the manip- determine that not all breaches of state law fi- ulation happened when the bogus security was duciary duty constituted manipulation for pur- introduced into the market; lawyers and other poses of the federal securities laws. The fact secondary actors were rendered liable for hav- that the Supreme Court’s definition of “manip- ing conspired to achieve that end.37 In the ulation” is consistent with the dictionary’s wake of Central Bank, however, conspiracy is does not mean that it is coextensive with it; no longer a viable theory of § 10(b) liability, so “manipulation” is a term of art, and it applies that aspect of Shores has been overruled.38 only to conduct that takes place directly within the market for the relevant security. 35 (...continued) Our holding in Shores requires somewhat enterprise itself was patently worthless”). more explanation. In that case, we adopted 36 At oral argument, plaintiffs’ counsel contend- the “fraud-created-the-market” theory, where- ed that in Finkel v. Docutel/Olivetti, 817 F.2d 356 by actors who introduced an otherwise unmar- (5th Cir. 1987), this court expanded the fraud-on- ketable security into the market by means of the-market presumption from Shores to reach cir- fraud are deemed guilty of manipulation, and cumstances like the case at bar. In fact, Finkel es- a plaintiff can plead that he relied on the integ- tablished, pre-Basic, that the fraud-on-the-market rity of the market rather than on individual presumption applies to allegations of deceptive fraudulent disclosures. Shores, 647 F.2d at omissions within the limited meaning of “decep- 469-70 & n.8. We determined that lawyers tive” that we have described above. Id. at 362. and other secondary actors involved in prepar- We did not broaden the concept of manipulation. ing the fraudulent statements that facilitated in- Likewise, plaintiffs’ citation of SEC v. Zandford, troduction of the otherwise unmarketable se- 535 U.S. 813, 819 (2002), misses the mark. De- curity could be liable for the plaintiff security ception, as occurred in that case, need not coincide with a defendant’s activity in the market for the purchaser’s loss. See id. relevant securities; manipulation must so coincide. Shores does not preclude the decision we 37 See Shores, 647 F.2d at 469 (“[Plaintiff’s] reach in this case. The basis of the fraud-cre- burden of proof will be to show that (1) the defen- ated-the-market theory is that the fraudster dants knowingly conspired to bring securities onto directlyinterfered with the market by introduc- the market which were not entitled to be market- ing something that is not like the others: an ed.”) (emphasis added). objectively unmarketable security that has no 38 business being there.35 This is qualitatively See Dinsmore v. Squadron, Ellenoff, Plesent, Sheinfeld & Sorkin, 135 F.3d 837, 842 (2d Cir. 1998); In re GlenFed, Inc. Sec. Litig., 60 F.3d 591, 592 (9th Cir. 1995). See also Cent. Bank, 35 See Abell, 858 F.2d at 1122 (explaining that 511 U.S. at 201 n.12 (Stevens, J., dissenting) under Shores, “the test of ‘not entitled to be mar- (“The Court’s rationale would sweep away the de- keted’ [is met] only where the promoters knew the cisions recognizing that a defendant may be found (continued...) (continued...)

Nothing in today’s decision contradicts our ceptive acts” or “schemes” gives rise to the precedent. Applying the Hundahl definition of type of certainty that the Court sought in Cen- manipulation, we conclude that the banks’ tral Bank. The banks may exaggerate the actions are not alleged to be the type of manip- length of the parade of horribles they present ulative devices on which an efficient market wherein defendants are continually taken out may be legally presumed to rely because the of and put back into endless securities cases banks did not act directly in the market for based on, shifting, ad hoc, fact-based percep- Enron securities. tions of liability influenced by plaintiffs’ skill at artful pleading. X. As the Supreme Court did in Central Bank, But the fact that the banks may be on to it may be worth taking into account certain something serious might be best demonstrated policy considerations to determine whether our by the fact that in Simpson, 452 F.3d at 1050, interpretation of § 10(b) plausiblyaccords with the court attempted to distinguish Charter as the will of Congress. Defendants do, after all, addressing an arms-length transaction not sub- escape liability for alleged conduct that was ject to primary liability, i.e., a ruling consistent hardly praiseworthy. According to plaintiffs, with its own. If there is a distinct difference defendants could have pulled the plug on the between the culpability of defendants’ actions Enron fraud; instead they profited from it based on the pleadings in those two cases, it is while large numbers of people eventually lost not apparent to us and is likely beyond the un- an aggregate sum in the tens of billions of derstanding of good-faith financial profession- dollars. als who are attempting to avoid liability.

Ultimately, however, the rule of liability This is not to say that the instant matter must be either overinclusive or underinclusive should be decided in accord with this court’s so as to avoid what Hundahl called “in terror- policy preferences. We mention policy only to em settlements” resulting from the expense demonstrate that, even considering the scope and difficulty of, even meritoriously, defending of the Enron disaster, Congress was not irra- this kind of litigation. Hundahl, 465 F. Supp. tional to promote plain legal standards for ac- at 1363.39 Strict construction of § 10(b) tors in the financial markets by limiting sec- against inputting aiding and abetting liability ondary liability. As the Eighth Circuit has for secondary actors under the rubric of “de- said,

To impose liability for securities fraud on 38 (...continued) one party to an arm’s length business trans- liable in a private action for conspiring to violate action in goods or services other than se- § 10(b) and Rule 10b-5.”). curities because that party knew or should have known that the other party would use 39 Again we quote Judge Higginbotham, finding the transaction to mislead investors in its his words in Hundahl, 465 F. Supp. at 1363, ap- stock would introduce potentially far- plicable to this case: “This suit is hardly of the reaching duties and uncertainties for those strike variety. The plaintiffs [were] substantial engaged in day-to-day business dealings. shareholders. They are represented by distin- guished and able counsel. It is the precedential Decisions of this magnitude should be made force of the rule that is here addressed.” by Congress.

Charter, 443 F.3d at 992-93. allege was aided and abetted by the defendants at bar, with notions of justice and fair play. XI. We acknowledge that the courts’ interpreta- The necessity of establishing a classwide tion of § 10(b) could have gone in a different presumption of reliance in securities class ac- direction and might have established liability tions makes substantial merits review on a rule for the actions the banks are alleged to have 23(f) appeal inevitable. A classwide presump- undertaken. Indeed, one of our sister cir- tion of reliance is not only crucial to class cer- cuitsSSthe NinthSSbelieves that it did. We tification, it prima facie establishes a critical have applied the Supreme Court’s guidance in element of the substantive tort. Reliance “pro- ascribing a limited interpretation to the words vides the requisite causal connection between of § 10, viewing the statute as the result of a defendant’s misrepresentation and a plain- Congress’s balancing of competing desires to tiff’s injury.” Basic, 485 U.S. at 243. Where provide for some remedy for securities fraud the plaintiffs’ several interactions with the mar- without opening the floodgates for nearly un- ket are alleged to supply the basis for their limited and frequently unpredictable liability joint reliance on defendants’ conduct, we must for secondary actors in the securities markets. examine carefully the third leg of that meta- phorical triangle: the legal nature of defen- In summary, the Affiliated Ute presumption dants’ interactions with the market. of classwide reliance cannot apply here. Like- wise, the district court, albeit with the best of If, as is probably the case here, that legally intentions, misapplied the fraud-on-the-market appropriate examination makes interlocutory presumption; the facts alleged do not consti- appeals in securities cases practically disposi- tute misrepresentations on which an efficient tive of the merits, we take comfort in two ob- market may be presumed to rely. servations. First, the availability of broad pre- sumptions in this area means that the legal Because no class may be certified in a merit of securities cases is somewhat less likely § 10(b) case without a classwide presumption than that of other cases to be contingent on of reliance, our analysis of reliance disposes of facts that have been only incompletely devel- this appeal. We decline to address whether, oped at the time of class certification. Second, had defendants’ actions been misrepresenta- as we observed in Castano, 84 F.3d at 746, tions on which the market was presumed to class certification is often practically disposi- rely, they would have been appropriately tive of litigation like the case at bar. If the cer- grouped together as a unitary scheme giving tification decision is so entangled with the rise to common issues of loss causation among merits as to make interlocutory appeal disposi- the class members. Likewise, we abstain from tive of the substantive litigation, it is inciden- addressing the manageability of the district tally but perhaps happily more likely that the court’s plan to implement the proportionate legal merit and practical outcome of securities liability provisions of the PSLRA. cases will coincide. The order certifying a class is REVERSED We recognize, however, that our ruling on and REMANDED for further proceedings as legal merit may not coincide, particularly in the appropriate. The motion to stay the trial is minds of aggrieved former Enron shareholders DENIED. The mandate shall issue forthwith. who have lost billions of dollars in a fraud they

DENNIS, Circuit Judge, concurring in the judgment: I concur in the judgment reversing the district court’s certification order, but I do so on grounds different from those assigned by the majority. I respectfully disagree with the majority as to the issues upon which it decides the case. Although I ultimately agree that the certification order must be reversed, I do not believe that the law necessarily prevents the plaintiffs from prosecuting this case as a class action, and, as I explain below, I would remand the case to the district court for further consideration of whether the criteria for certification have been satisfied. The majority today holds that secondary actors (such as the investment banks involved in this case) who act in concert with issuers of publicly-traded securities in schemes to defraud the investing public cannot be held liable as primary violators of Section 10(b) or Rule 10b-5 unless they (1) directly make public misrepresentations; (2) owe the issuer’s shareholders a duty to disclose; or (3) directly “manipulate” the market for the issuer’s securities through practices such as wash sales or matched orders. In doing so, the majority aligns this court with the Eighth Circuit1 and immunizes a broad array of undeniably fraudulent conduct from civil liability under Section 10(b), effectively giving secondary actors license to scheme with impunity, as long as they keep quiet.2 Although, as I explain below, I cannot agree with the majority’s cramped interpretation of the statutory language of section 10(b), in my view, the majority commits a significant error by even

1 See In re Charter Commc’ns, Inc. Sec. Litig., 443 F.3d 987 (8th Cir. 2006). 2 The majority notes that the investment banks’ alleged conduct was “hardly praiseworthy,” but it brushes the significance of its decision to immunize their conduct aside by noting that “[u]ltimately, . . . the rule of liability must be either overinclusive or underinclusive.” See supra, at ___.

reaching this issue. Because the issue on which the majority opinion bases its decision today — a significant and unsettled question about the scope of primarily liability under Section 10(b) — is unnecessary to a determination of whether the plaintiffs have satisfied the prerequisites for maintaining a class action under Federal Rule of Civil Procedure 23, we should not consider it on this interlocutory appeal of class certification. The investment banks have, however, raised two substantial issues that are related to the district court’s Rule 23 inquiry. The banks argue that the plaintiffs are not entitled to the fraud-on-the-market presumption of reliance because they have not satisfied the requirements of this court’s decision in Greenberg v. Crossroad Systems, Inc., 364 F.3d 657 (5th Cir. 2004),3 and that the district court erred when it concluded that any defendant found to have knowingly violated the securities laws could be held jointly and severally liable for all of the plaintiffs’ losses in connection with Enron’s multi-year fraudulent scheme. Greenberg, in my view, is inconsistent with prior precedents of the Supreme Court and this court insofar as it purports to relieve securities defendants of the burden of rebutting the fraud-on-the-market presumption. On the latter point, however, I conclude that the district court erred by construing too broadly the joint and several liability provision of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”), 15 U.S.C. § 78u-4. I would remand the case to the district court to determine whether, applying the correct legal standard, common damages issues continue to predominate over individual issues and whether the case can be tried in a manageable fashion.

I.

3 Plaintiffs also seek to rely on the Affiliated Ute presumption of reliance. See Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972). I do not disagree with the majority’s conclusion that the Affiliated Ute presumption does not apply in this case. See supra, at ___.

Our inquiry on this interlocutory appeal under Rule 23(f)4 is limited to determining whether the district court erred in certifying the case as a class action. See Bell v. Ascendant Solutions, Inc., 422 F.3d 307, 314 (5th Cir. 2005) (stating that Rule 23(f) permits a party to “‘appeal only the issue of class certification; no other issues may be raised’”) (quoting Bertulli v. Indep. Ass’n of Cont’l Pilots, 242 F.3d 290, 294 (5th Cir. 2001)). We are not permitted to go beyond the issues necessary to class certification and rule on the merits of plaintiffs’ claims. See Unger v. Amedisys, Inc., 401 F.3d 316, 321 (5th Cir. 2005) (“Class certification hearings should not be mini-trials on the merits of the class or individual claims.”); see also Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 177 (1974) (noting that courts cannot “conduct a preliminary inquiry into the merits of a suit” on class certification). It is clear, though, that a district court cannot certify a class action unless it finds that the plaintiffs have satisfied all of the requirements of Rule 23(a) and of one of the three subsections of Rule 23(b). To fulfill that obligation, it is often necessary for the district court to go “beyond the pleadings” and “understand the claims, defenses, relevant facts, and applicable substantive law in order to make a meaningful determination of the certification issues.” Castano v. Am. Tobacco Co., 84 F.3d 734, 744 (5th Cir. 1996). In addition, to the extent that issues relevant to the ultimate merits of the case are also necessary to the district court’s determination of one or more of the requirements of Rule 23, the district court can, and must, consider those issues at the class certification stage. See Bell, 422 F.3d at 311-12; see also In re Initial Pub. Offering Sec. Litig., 471 F.3d 24, 41 (2d Cir. 2006)

4 Fed. R. Civ. P. 23(f) provides:

A court of appeals may in its discretion permit an appeal from an order of a district court granting or denying class action certification under this rule if application is made to it within ten days after entry of the order. An appeal does not stay proceedings in the district court unless the district judge or the court of appeals so orders.

(“[T]here is no reason to lessen a district court’s obligation to make a determination that every Rule 23 requirement is met before certifying a class just because of some or even full overlap of that requirement with a merits issue.”).5 By the same token, any such issues are also necessarily within the scope of our review on an interlocutory appeal of a district court’s decision to certify a class. Like the district court, however, this court can consider issues relevant to the merits of the plaintiffs’ claims only to the extent that such consideration is necessary to determine whether the proposed class satisfies the requirements of Rule 23. See Initial Pub. Offering, 471 F.3d at 41 (“[A] district judge should not assess any aspect of the merits unrelated to a Rule 23 requirement.”) (emphasis added). In the majority’s view, one of the issues that this court can review on this interlocutory appeal is the district court’s conclusion that a secondary actor can be held liable as a primary violator of Section 10(b) and Rule 10b-5 for its participation in a scheme to defraud, even though it does not make a direct public misrepresentation or have a duty to speak.6 According to the majority, the

5 It is important to note that the factual findings made by the district court at the class certification stage are not binding on the trier of fact at trial. See Initial Pub. Offering, 471 F.3d at 41 (“[T]he determination as to a Rule 23 requirement is made only for purposes of class certification and is not binding on the trier of facts, even if that trier is the class certification judge.”); Unger, 401 F.3d at 323 (stating that “the court’s determination for class certification purposes may be revised (or wholly rejected) by the ultimate factfinder”); Gariety v. Grant Thornton, LLP, 368 F.3d 356, 366 (4th Cir. 2004) (“The findings made for resolving a class action certification motion serve the court only in its determination of whether the requirements of Rule 23 have been demonstrated.”). 6 The district court initially held that secondary actors can be liable under Section 10(b) and Rule 10b-5 based on deceptive acts not involving a direct public misstatement or a duty to speak when it denied certain defendants’ motions to dismiss the Section 10(b) claims against them. See In re Enron Corp. Sec., Derivative & ERISA Litig., 235 F. Supp. 2d 549, 590-94 (S.D. Tex. 2002). In its opinion on class certification, the court reconsidered (and ultimately adhered to) its earlier views in light of recent developments in the case law, noting that it had “the power to reconsider such interlocutory decisions.” See In re Enron Corp. Sec., Derivative & ERISA Litig., No. H-01-3624, 2006 U.S. Dist. LEXIS 43146, at *155 n.84 (S.D. Tex. June 5, 2006). The district court did not, however, indicate at any point that it believed that its decision on that issue was relevant to any (continued...)

district court’s determination that secondary actors can violate Section 10(b) and Rule 10b-5 by engaging in “deceptive” acts without making a public misrepresentation or having a duty to speak implicates Rule 23(b)(3)’s requirement that “questions of law or fact common to the members of the class predominate over any questions affecting only individual members.” Fed. R. Civ. P. 23(b)(3). Without that finding, the majority states, the district court could not have concluded that the plaintiffs were entitled to a classwide presumption of reliance, and individual issues of reliance would overwhelm the common, classwide issues, rendering class treatment inappropriate. Thus, the majority variously characterizes the district court’s ruling on the scope of Section 10(b) liability as “integral” or “critical” to its class certification decision. The majority opinion labors to create the impression of a relationship between the district court’s decision that securities plaintiffs can state a Section 10(b) claim against a secondary actor who did not make any affirmative misstatements and the issue of whether the plaintiffs are entitled to rely on the fraud-on-the-market presumption of Basic Inc. v. Levinson, 485 U.S. 224 (1988). According to the majority, because the banks did not make public misstatements and had no duty to disclose vis-avis Enron’s shareholders, their participation with Enron in fraudulent transactions that lacked any independent business purpose is beyond the reach of Section 10(b); because the banks’ conduct is not actionable under Section 10(b), the plaintiffs cannot invoke a classwide presumption of reliance; and because reliance cannot be presumed on a classwide basis, individual issues of reliance predominate over common issues. In sum, the upshot of the majority’s reasoning is that plaintiffs are not entitled to maintain a class action because the conduct for which they seek to recover — to take the

6 (...continued) specific requirement of Rule 23.

majority’s example, Merrill Lynch’s alleged conduct in connection with the so-called “Nigerian Barges Transaction” — is not actionable under Section 10(b). With the reasoning that underlies the majority’s view set out in this manner, it becomes apparent that any link between the district court’s liability ruling and its application of the fraud-on-the-market presumption is tangential at best. The question of whether the banks can be subject to Section 10(b) liability without making public misrepresentations is by no means necessarily related to the applicability of the fraud-on-the-market presumption of reliance. Although it is true that the fraud-on-the-market presumption requires that there be a public misrepresentation upon which the market can rely, in this case, there were certainly public misrepresentations that arose out of the banks’ allegedly fraudulent transactions with Enron; the rub, of course — and the banks’ primary argument for why they are not subject to Section 10(b) liability — is that Enron, not the banks, conveyed the misrepresentations to the market. According to the banks, because they made no public statements, they are, at worst, aiders and abettors of Enron’s fraud. The plaintiffs counter by asserting, among other things, that the banks’ allegedly fraudulent conduct is not immunized simply because their joint scheme to defraud affected the market only through Enron’s public statements. The majority’s leap to reach and resolve this dispute — which is strictly a question about the substantive reach of Section 10(b) — at the certification stage overlooks a key fact: Regardless of whether this court ultimately agrees with the district court that the banks’ alleged actions are “deceptive” acts within the meaning of Section 10(b), those actions affected the market via Enron’s public misrepresentations. Thus, this court can determine whether the plaintiffs are entitled to the fraud-on-the-market presumption without delving into the district court’s decision that the banks’ conduct is covered by Section 10(b). Viewed in this light, there is little doubt that in this case the *26 element of transaction causation, or reliance, can be satisfied by the market’s reliance on Enron’s public representations of its financial health and/or its statements about the transactions in question. See Simpson v. AOL Time Warner Inc., 452 F.3d 1040, 1052 (9th Cir. 2006) (“[A] plaintiff may be presumed to have relied on th[e] scheme to defraud if a misrepresentation, which necessarily resulted from the scheme and the defendant’s conduct therein, was disseminated into an efficient market and was reflected in the market price.”); In re Parmalat Sec. Litig., 376 F. Supp. 2d 472, 509 (S.D.N.Y. 2005) (applying fraud-on-the-market presumption to claims against secondary actors even though onlyissuer made public misrepresentations to the market). Accordingly, this court can assess whether a classwide presumption of reliance applies in this case without first considering the district court’s merits ruling on the scope of Section 10(b) liability. I would therefore find that the latter issue is beyond the permissible scope of our limited, interlocutory review under Rule 23(f). The majority is, of course, correct in some sense — if the banks engaged in no conduct within the reach of Section 10(b), then the plaintiffs cannot prevail against them in a class action. But the plaintiffs’ inability to proceed under such circumstances would have nothing to do with the need to prove reliance on an individual basis. When this court decides, on a common, classwide basis, as the majority does today, that the banks’ alleged conduct is non-actionable as a matter of law, it is dubious to then claim that we are actually finding only that individual issues of reliance predominate over common issues. Under the majority’s reasoning, individual questions of reliance do not predominate; rather, reliance is simply irrelevant, because no plaintiff can, on an individual or a class basis, establish that the banks engaged in any actionable conduct. The mere fact that the resolution of a merits issue against a putative class of plaintiffs would, by definition, preclude the maintenance of a class action simply cannot be sufficient to warrant review *27 of that issue on an interlocutory appeal. Under such a rule, the resolution of any Rule 12(b)(6) issue would then become fair game for Rule 23(f) review. The D.C. Circuit has rejected just such a “but-for” approach to Rule 23(f) appeals. In In re: Lorazepam & Clorazepate Antitrust Litigation, 289 F.3d 98, 107 (D.C. Cir. 2002), the court refused to grant a Rule 23(f) appeal despite the petitioner’s assertions that the plaintiff class members lacked antitrust standing to maintain the suit. In a passage that is particularly pertinent to this case, the court explained that Rule 23(f) does not permit review of every issue that, if resolved against the plaintiffs, would destroy the class action:

Mylan’s effort to recast its Rule 12(b)(6) arguments as a challenge to class certification on the ground that a class of direct purchasers lacks antitrust standing, is to no avail. That Mylan’s argument as to antitrust standing may dispose of the class as a whole and thereby preclude a lawsuit by direct purchasers goes well beyond the purpose of Rule 23(f) review because it is unrelated to the Rule 23 requirements. The fact that Mylan’s challenge would be dispositive of the class action is not unlike a variety of issues of law on the merits of a class action because of the very nature of commonality; review of such issues would expand Rule 23(f) interlocutory review to include review of any question raised in a motion to dismiss that may potentially dispose of a lawsuit as to the class as a whole. This result would inappropriately mix the issue of class certification with the merits of a case, which do not warrant interlocutory review pursuant to Rule 23(f). What matters for purposes of Rule 23(f) is whether the issue is related to class certification itself . . . .

Id. (internal citation omitted). The relationship between the banks’ potential Section 10(b) liability and class certification in this case is no closer than the relationship between antitrust standing and class certification described in Lorazepam. Despite the majority’s claims to the contrary, as I explained above, whether the banks’ conduct can give rise to a Section 10(b) action under any circumstances need not be decided in order to determine whether the plaintiffs are entitled to invoke Basic’s presumption of reliance, and it is therefore not sufficiently related to any of Rule 23’s class action requirements to warrant interlocutory review.

II. Even were it appropriate for this court to consider whether the banks’ alleged conduct can constitute a primary violation of Section 10(b) and Rule 10b-5, the majority errs by defining the term “deceptive” in Section 10(b) in an unduly restrictive fashion. Based on language gathered from inapposite Supreme Court decisions, the majority opinion concludes that the Supreme Court has defined “deceptive” in a manner that both departs from the plain meaning of the word and reduces Section 10(b)’s flexible prohibition on “directly or indirectly” using or employing any “deceptive device or contrivance”7 to a much more circumscribed prohibition that applies only to specific misrepresentations or omissions in breach of an affirmative duty to speak. Having arrived at this narrow definition of deceptive acts, the majority opinion then finds that, because the banks did not make misrepresentations or have a duty to speak, Section 10(b) does not reach their conduct, and imposing liability on them would be indistinguishable from the type of aiding and abetting liability barred by Central Bank of Denver, N.A. v. First Interstate Bank of Denver,

N.A., 511 U.S. 164 (1994).8

Such a narrow interpretation of Section 10(b) is neither compelled nor justified by Supreme Court precedent. The majority’s conclusion hinges almost entirely on its determination that a court considering the reach of Section 10(b) cannot give the term “deceptive” (in the phrase “manipulative

7 Section 10(b) also prohibits any “manipulative” device or contrivance, but I do not take issue with the majority opinion’s conclusion that the banks’ alleged conduct in this case was not “manipulative,” as that term is used in Section 10(b). See supra, at ___. 8 Although this issue is commonly framed as whether liability can be imposed consistent with the Central Bank decision, Central Bank itself establishes relatively little about the reach of Section 10(b). The plaintiffs in that case alleged only that Central Bank aided and abetted a violation of Section 10(b); the plaintiffs did not claim that the bank was liable as a primary violator of the statute. See Central Bank, 511 U.S. at 191 (“Respondents concede that Central Bank did not commit a manipulative or deceptive act within the meaning of § 10(b).”).

or deceptive device or contrivance”) its commonly understood, or dictionary, meaning,9 because the Supreme Court has told us that a defendant acts deceptively only if it makes a misrepresentation or remains silent in the face of a duty to disclose. The majority opinion relies primarily on Chiarella v. United States, 445 U.S. 222 (1980), and United States v. O’Hagan, 521 U.S. 642 (1997), to support this narrow view of the statutory language. The majority’s view is not implausible — some statements in Chiarella, O’Hagan, and other cases can be read together to support the majority’s position10 — but neither is it compelling, and the passages upon which the majority relies fall far short of establishing that the Supreme Court has limited Section 10(b)’s prohibition on “deceptive” practices exclusively to misrepresentations or omissions. Neither Chiarella nor O’Hagan purported to hold that a person can never engage in “deceptive” action through conduct, rather than speech or nondisclosure. In those cases, the Court held that a person who trades on non-public information violates Section 10(b) only if he breaches a duty to disclose, either to the source of the information or to the other party to the trade. See O’Hagan, 521 U.S. at 654-56; Chiarella, 445 U.S. at 235.11 Those cases, however, dealt only with insider trading

9 Reference to the common, dictionary definition is, incidentally, the approach that the Supreme Court has used to define the words “manipulative,” “device,” and “contrivance.” See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199 & nn.20-21 (1976). 10 It is unsurprising that the Supreme Court’s decisions generally speak of misrepresentations or omissions, as they are typically the means through which fraudulent conduct reaches the market. As Judge Kaplan remarked in Parmalat, “[A]ny deceptive device or practice, other than one involving manipulative trading activity, logically requires that somebody misrepresent or omit something at some point, even though the device could entail more than the misrepresentation.” Parmalat, 376 F. Supp. 2d at 497. 11 Also central to those cases, however, was the Chiarella court’s observation that entering into a transaction on the basis of unequal information, while perhaps unfair, is not inherently fraudulent or deceptive in any sense of those words. See Chiarella, 445 U.S. at 232 (“[N]ot every instance of financial unfairness constitutes fraudulent activity under § 10(b).”); id. at 233 (“[N]either the Congress nor the Commission ever has adopted a parity-of-information rule.”).

— the defendants in those cases were prosecuted only for their silence, i.e., their failure to disclose that they possessed material information that other investors in the market did not possess. Neither of those cases involved allegations of a multi-party scheme to defraud. Here, by contrast, the plaintiffs assert that the banks engaged in a scheme with Enron whereby they structured and entered into wholly fraudulent transactions that were designed for the sole purpose of falsifying Enron’s financial results. Nothing in Chiarella or O’Hagan forecloses the conclusion that Section 10(b) can reach “deceptive” conduct that is not in the form of a misrepresentation or omission in cases, like this one, that involve large-scale schemes to defraud. Nor do any of the Supreme Court’s other decisions establish that fraudulent conduct is beyond the reach of Section 10(b) simply because it affects the market only through the misrepresentations of another participant in the fraudulent scheme. As noted above, Central Bank itself did not reach this question because the plaintiffs in that case asserted only that the defendant’s conduct amounted to aiding and abetting. Moreover, language from other of the Court’s opinions affirmatively indicates that “deceptive” conduct need not always be in the form of a misrepresentation or an omission. See Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 475-76 (1977) (explaining that the Court’s prior cases all “included some element of deception,” and did not “support the proposition . . . that a breach of fiduciary duty by majority stockholders, without any deception, misrepresentation, or nondisclosure, violates the statute and the Rule”) (emphasis added). Because the Supreme Court has not, as the majority opinion maintains, narrowly defined the term “deceptive” to capture only direct misrepresentations or omissions, this court must construe the disputed statutory language “not technically and restrictively, but flexibly to effectuate its remedial purposes.” SEC v. Zandford, 535 U.S. 813, 819 (2002) (internal quotation marks omitted). In light *31 of this canon of interpretation, I see no basis for the majority opinion’s strict, narrow reading, and I agree with the district court, the Ninth Circuit, Judge Kaplan, and the SEC that Section 10(b)’s prohibition on directly or indirectly employing any “deceptive device or contrivance” can reach secondary actors who, with scienter, engage in fraudulent transactions that are used to inflate an issuer’s financial results. See Simpson, 452 F.3d at 1050 (“If a defendant’s conduct or role in an illegitimate transaction has the principal purpose and effect of creating a false appearance of fact in the furtherance of a scheme to defraud, then the defendant is using or employing a deceptive device within the meaning of § 10(b).”); Enron, 2006 U.S. Dist. LEXIS 43146, at *167-74 (adopting SEC view “that a deceptive act includes a transaction whose principal purpose and effect is to create a false appearance of revenues, which can be accomplished by acts as well as by words”) (internal quotation marks omitted); Parmalat, 376 F. Supp. 2d at 502-03.12

III.

The investment banks also assert that the district court erred by failing to apply this court’s decision in Greenberg v. Crossroad Systems, Inc., 364 F.3d 657 (5th Cir. 2004), to determine whether the plaintiffs could proceed under the fraud-on-the-market theory. In Greenberg, a panel of this court held that plaintiffs who seek to invoke the fraud-on-the-market presumption of reliance must show both that the misrepresentations made to the market were “non-confirmatory,” i.e., that they did not simply confirm the market’s expectations, and that the misrepresentations actually

12 Although those courts that have found that Section 10(b) can reach conduct of the type alleged here have developed different formulations of the standard for liability, see Simpson, 452 F.3d at 1048 & n.5, I agree with the majority that any such distinctions are not relevant to this interlocutory appeal. See supra, at ___ n.25.

affected the market price of the securities in question. See id. at 665-66.13 In its June 5, 2006 opinion, the district court declined to apply Greenberg to this case. The district court concluded that Greenberg applies only to cases under Rule 10b-5(b) involving misrepresentations, not to cases like this one involving a scheme to defraud under Rule 10b-5(a) or (c). See Enron, 2006 U.S. Dist. LEXIS 43146, at *287-88. On appeal, the plaintiffs proffer several additional reasons why Greenberg does not mandate reversal. Plaintiffs assert that (1) Greenberg does not apply to cases like this one, where the alleged scheme to defraud stems from the defendants’ fraudulent efforts to conceal from the market information that would show that the issuer is not actually meeting the market’s expectations; (2) Greenberg should not be read to saddle plaintiffs with the burden of showing that the alleged misrepresentations actually changed the market price of the issuer’s securities; and (3) Greenberg’s requirements have, in any event, been satisfied in this case. I agree with the plaintiffs that this court cannot use Greenberg to relieve the defendants of the burden, allocated to them in Basic and in subsequent decisions of this court, of rebutting the fraud-on-the-market presumption. In Basic itself, the Supreme Court was unmistakably clear that the defendant has the burden of rebutting the presumption of reliance:

Any showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at a fair market price, will be sufficient to rebut the presumption of reliance. For example, if [defendants] could show that the “market makers” were privy to the truth about the merger discussions here with Combustion, and thus that the market price would not have been affected by their misrepresentations, the causal connection could be broken: the basis for finding that the fraud had been transmitted through market price would be gone.

13 This required showing is in addition to Basic’s requirements that plaintiffs show that (1) there were material, public misrepresentations; (2) the securities in question traded in an efficient market; and (3) the plaintiffs traded in the securities in question between the date of the misrepresentations and the date on which the truth was disclosed to the market. See Greenberg, 364 F.3d at 661.

Basic, 485 U.S. at 248; see also id. at 245 (“Arising out of considerations of fairness, public policy, and probability, as well as judicial economy, presumptions are also useful devices for allocating the burdens of proof between parties.”). The clear import of Basic was not lost on this court. In Fine v. American Solar King Corp., 919 F.2d 290, 299 (5th Cir. 1990), this court recognized that the defendant could rebut Basic’s presumption of reliance only by showing: “(1) that the nondisclosures did not affect the market price, or (2) that the Plaintiffs would have purchased the stock at the same price had they known the information that was not disclosed; or (3) that the Plaintiffs actually knew the information that was not disclosed to the market.” This court’s more recent decisions, including Greenberg, have at least professed fidelity to Basic’s burden-shifting approach. In Greenberg, the court described the fraud-on-the-market presumption as follows:

Under this theory, reliance on the statement is rebuttably presumed if the plaintiffs can show that (1) the defendant made public material misrepresentations, (2) the defendant’s shares were traded in an efficient market, and (3) the plaintiffs traded shares between the time the misrepresentations were made and the time the truth was revealed. The Defendants may rebut this presumption by “[a]ny showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at fair market price[.]”

Greenberg, 364 F.3d at 661-62 (quoting Basic, 485 U.S. at 247) (alterations in original) (internal citations and footnote omitted). In parts IV and V of its opinion, however, the Greenberg panel changed course and found that it is actually the plaintiffs’ affirmative burden to show, as a prerequisite to the application of the presumption, that the defendant’s misrepresentation actually moved the market price of the security in question:

We are satisfied that plaintiffs cannot trigger the presumption of reliance by simply offering evidence of any decrease in price following the release of negative information. Such evidence does not raise an inference that the stock's price was actually affected by an earlier release of positive information. To raise an inference

through a decline in stock price that an earlier false, positive statement actually affected a stock's price, the plaintiffs must show that the false statement causing the increase was related to the statement causing the decrease.

Id. at 665; see also id. at 663 (referring to the plaintiffs’ “burden in a fraud-on-the-market case to show that a stock’s price was actually affected by an allegedly false statement”). Greenberg appears to have mistakenly relied on this court’s earlier decision in Nathenson v. Zonagen Inc., 267 F.3d 400 (5th Cir. 2001), as the authority for its decision to relieve securities defendants of the burden of rebutting the fraud-on-the-market presumption. In Nathenson, a panel of this court held that “where the facts properly considered by the district court reflect that the information in question did not affect the price of the stock then the district court may properly deny fraud-on-the-market based recovery.” Nathenson, 267 F.3d at 415. Nathenson did not, however, expressly purport to convert the defendant’s burden of rebutting the fraud-on-the-market presumption — by, for example, showing that the alleged misrepresentation had no effect on the market price of the security — into a burden on the plaintiff to show that the misrepresentation did affect the price of the security. Rather, the panel in Nathenson simply determined that a district court did not err when it found that the allegations of the plaintiffs’ complaint affirmatively demonstrated that the misrepresentations in question did not affect the price of the issuer’s stock. Id. at 414, 417-18. In other words, the plaintiffs in Nathenson affirmatively pleaded themselves out of the fraud-on-the-market presumption. Thus, Nathenson lends no support to the view that securities plaintiffs can invoke the fraud-on-the-market presumption only if they first affirmatively demonstrate that the market moved in response to the alleged misrepresentation. Because the Greenberg panel’s decision to reallocate the burdens in fraud-on-the-market cases conflicts not only with Basic, but also with earlier decisions of this court, such as Fine, I would follow *35 those decisions and hold that the defendant retains the burden of rebutting Basic’s presumption of reliance. See, e.g., Modica v. Taylor, 465 F.3d 174, 183 (5th Cir. 2006) (“‘When panel opinions appear to conflict, we are bound to follow the earlier opinion.’”) (quoting H&D Tire & Auto.-Hardware, Inc. v. Pitney Bowes Inc., 227 F.3d 326, 330 (5th Cir. 2001)); cf. Unger, 401 F.3d at 322 n.4 (“[I]t is the Supreme Court’s job to overrule Basic, in the absence of outright conflict with the Private Securities Litigation Reform Act.”) (citation omitted). The banks do not appear to have satisfied that burden on the record before us.14

IV. The banks argue that the district court erroneously determined that any defendant found to have knowingly violated the securities laws could be held jointly and severally liable for all of the losses

14 Greenberg also purports to require that the plaintiffs establish that the defendant’s false statement was “non-confirmatory” — i.e., that it did not simply confirm the market’s preexisting expectations about, for example, the size of the issuer’s quarterly earnings — before the fraud-on-the-market presumption can apply. See Greenberg, 364 F.3d at 665-66. According to the Greenberg panel, the market cannot rely on allegedly false “confirmatory” statements because “confirmatory information has already been digested by the market and will not cause a change in the stock price.” Id.; see also id. at 666 (“Because the presumption of reliance is based upon actual movement of the stock price, confirmatory information cannot be the basis for a fraud-on- the-market claim.”). This requirement from Greenberg appears to be based on a misinterpretation of this court’s earlier decision in Nathenson. The Nathenson panel stated that, in certain “special circumstances,” such as when an issuer provides false information that confirms the market’s expectations, the market can rely on those false statements, even though the market price may not change at the time of the false “confirmatory” statement. See Nathenson, 267 F.3d at 319. Rather, the statement’s effect on the market price will show only when the falsity of the statement is later disclosed and the market price declines. See id. This makes sense: if the market expects earnings of $1.00 per share, then the share price might not move in response to a false public statement confirming that the issuer earned $1.00 per share (even though the issuer in fact lost $.50 per share). The lack of movement does not, however, mean that the false statement had no actual effect on the share price. Had the issuer truthfully disclosed its loss of $.50 per share to a market that expected earnings of $1.00 per share, the share price would have declined, rather than remaining steady; the false “confirmatory” statement actually affected the share price by keeping it artificially high in a situation where a truthful statement would have caused the share price to decline. As the Nathenson court suggested, the effect that the false statement had on the share price in such a case can be shown when the falsity of the statement is disclosed and the share price declines. See id. Thus, there appears to be no basis in Nathenson or otherwise for Greenberg’s conclusion that false “confirmatory” statements can never support a claim proceeding under a fraud-on-the-market theory.

caused by Enron’s entire overarching fraudulent scheme. The banks assert that without this erroneous legal conclusion, the district court could not have found that the proposed class satisfied Rule 23(b)(3)’s predominance requirement or the manageability aspect of Rule 23(b)(3)’s superiority requirement.15 Before the enactment of the PSLRA, the general rule in Section 10(b) actions was that defendants found to have violated Section 10(b) or Rule 10b-5 were jointly and severally liable for all of the plaintiff’s damages. See, e.g., Musik, Peeler & Garrett v. Employers Ins. of Wausau, 508 U.S. 286, 292 (1993) (noting that violators “share joint liability for that wrong under a remedial scheme established by the federal courts”); TBG, Inc. v. Bendis, 36 F.3d 916, 927 (10th Cir. 1994); G.A. Thompson & Co. v. Partridge, 636 F.2d 945, 963 (5th Cir. 1981); Ross v. Licht, 263 F. Supp. 395, 411 (S.D.N.Y. 1967).16 The legislative history of the PSLRA suggests that Congress was concerned about the unfairness that could result from the application of the traditional joint and several liability rule in many cases. See H.R. Rep. No. 104-369, at 37 (1995) (Conf. Rep.), 1995 U.S.C.C.A.N. 730, 736 (“Under current law, a single defendant who has been found to be 1% liable may be forced to

15 Among the factors to be considered in determining whether Rule 23(b)(3)’s superiority requirement is satisfied are “the difficulties likely to be encountered in the management of a class action.” Fed. R. Civ. P. 23(b)(3). 16 See also Amy J. St. Eve & Bryce C. Pilz, The Fault Allocation Provisions of the Private Securities Litigation Reform Act of 1995 — A Roadmap for Litigants and Courts, 3 N.Y.U. J.L. & Bus. 187, 194 (2006) (stating that prior to the PSLRA, “[c]ourts recognized an implied theory of joint and several liability in Section 10(b) and Rule 10b-5 claims”); Marc I. Steinberg & Christopher D. Olive, Contribution and Proportionate Liability Under the Federal Securities Laws in Multidefendant Securities Litigation After the Private Securities Litigation Reform Act of 1995, 50 SMU L. Rev. 337, 339-40 (1996) (“[I]f co-defendants were adjudged liable in a federal securities action, plaintiffs were entitled to recover the total judgment from any of the subject defendants.”); Stuart M. Grant et al., The Devil Is in the Details: Application of the PSLRA’s Proportionate Liability Provisions Is so Fraught With Uncertainty that They May Be Void for Vagueness, 1505 PLI/Corp. 83, 85 (2005) (“[Until 1995], each defendant found to have violated the federal securities laws could be required to pay the full amount of any judgment to the plaintiff, regardless of whether that defendant was the primary violator or merely one of many violators.”).

pay 100% of the damages in the case.”); S. Rep. No. 104-98, at 20 (1995), 1995 U.S.C.C.A.N. 679, 699 (“Under joint and several liability, each defendant is liable for all of the damages awarded to the plaintiff. Thus, a defendant found responsible for only 1% of the harm could be required to pay 100% of the damages.”). To combat this perceived unfairness, as part of the PSLRA, Congress enacted 15 U.S.C. § 78u-4(f), which replaced the existing joint and several liability regime with one of proportionate liability and limited joint and several liability to defendants who knowingly violate the securities laws. 15 U.S.C. § 78u-4(f)(2)(A) provides that any defendant “against whom a final judgment is entered in a private action shall be liable for damages jointly and severally only if the trier of fact specifically determines that such covered person knowingly committed a violation of the securities laws.” If no knowing violation is found, the statute provides that the defendant “shall be liable solely for the portion of the judgment that corresponds to the percentage of responsibility of that [defendant].” Id. § 78u-4(f)(2)(B). The banks assert that, under these statutory provisions, a defendant who knowingly violates Section 10(b) can be jointly and severally liable only for the damages caused by conduct in which that defendant knowingly participated. Anything more, the banks argue, would run afoul of the PSLRA’s requirement that the plaintiff must “prov[e] that the act or omission of the defendant alleged to violate this chapter caused the loss for which the plaintiff seeks to recover damages,” id. § 78u-4(b)(4), and would be tantamount to imposing liability for conspiracy to violate Section 10(b). See Dinsmore v. Squadron, Ellenoff, Plesent, Sheinfeld & Sorkin, 135 F.3d 837, 841 (2d Cir. 1998) (stating that, post-Central Bank, there is no cause of action for conspiracy to violate Section 10(b)). As the banks would have it, then, even if they were found to have knowingly violated Section 10(b), they could be held jointly and severally liable for only those damages that the plaintiffs suffered specifically as *38 a result of the transactions in which the banks participated with Enron. The plaintiffs, on the other hand, assert that because the alleged conduct of the banks, Enron, and others was all part of a single fraudulent scheme, any knowing violator can be held jointly and severally liable for harm caused by the other scheme participants. In considering whether the proposed class satisfied the requirements of Rule 23(b)(3), the district court rejected the banks’ argument and determined that the PSLRA permits courts to broadly impose on knowing violators joint and several liability for all of the damages caused by a fraudulent scheme as a whole:

The Court finds that a reasonable argument can be made that where a defendant knowingly engaged in a primary violation of the federal securities law that was in furtherance of a larger scheme, it should be jointly and severally liable for the loss caused by the entire overarching scheme, including conduct of other scheme participants about which it knew nothing. Indeed, express joint and several liability in the statute is a meaningless concept if it is limited to a defendant’s own wrongdo- ing. This Court acknowledges that it has previously questioned whether liability for conduct caused by all the scheme participants is compatible with the “knowing” requirement under § 78u-4(f)(2)(A). Nevertheless, the Court observes that the PSLRA not only replaced joint and several liability with proportionate liability except when the conduct was “knowing”, but established a right to contribution under § 78u-4(f)(8) to provide a remedy for unfairness, and, with a similar result, the judgment reduction formula embodied in § 78u-4(f)(2)(A) [sic]. Accordingly this Court concludes that Lead Plaintiff may pursue its claims for joint and several liability against those Defendants found to be primary violators in the scheme, as a whole.

Enron, 2006 U.S. Dist. LEXIS 43146, at *222-23 (emphasis added) (internal citation omitted).17 The text of the PSLRA’s joint and several liability provision does not, on its own, resolve this issue. Section 78u-4(f)(2)(A) does not purport to define the scope of joint and several liability; rather, that provision simply places limits on who can be subject to joint and several liability. The

17 The district court also correctly noted that there is a paucity of authority addressing this issue. See Enron, 2006 U.S. Dist. LEXIS 43146, at *222.

statute’s legislative history, however, indicates that Congress intended that the potential scope of joint and several liability would remain the same as it was under the pre-PSLRA law. See H.R. Rep. No. 104-369, at 38, 1995 U.S.C.C.A.N. at 737 (“The Conference Report imposes full joint and several liability, as under current law, on defendants who engage in knowing violations of the securities laws.”); S. Rep. No. 104-98, at 22, 1995 U.S.C.C.A.N. at 701 (same). Under the pre-PSLRA practice described above, any defendant found to have violated Section 10(b) or Rule 10b-5 was jointly and severally liable for all of the damages suffered by the plaintiff; no distinction was made based on what portion of the plaintiff’s damages were caused by, or traceable to, any specific defendant’s conduct. See TBG, Inc., 36 F.3d at 927 (“Liability in Rule 10b-5 cases is strictly joint and several and is never allocated among individual defendants in deciding the plaintiff’s claim.”); Ross, 263 F. Supp. at 411 (finding joint and several liability for Section 10(b) claim because “the participation of each defendant was essential to the success of the scheme and there is no way to apportion guilt”); see also 5 Alan R. Bromberg & Lewis D. Lowenfels, Bromberg & Lowenfels on Securities Fraud and Commodities Fraud § 8.48 (2d ed.) (“[A]ny person found to have any liability whatsoever, no matter how insignificant, could be liable to plaintiffs for the total damages caused by all the misconduct.”). Accordingly, there appears to be no support for the banks’ assertion that any joint and several liability must be limited to joint and several liability for only the damages caused directly by the specific transactions in which they participated with Enron. Therefore, if the plaintiffs could succeed in proving at trial that the conduct alleged amounted to a single, overarching fraudulent scheme (as opposed to, as the banks assert, a number of separate and distinct fraudulent schemes), they should be permitted to recover damages jointly and severally from any knowing violator, and the scope of that joint and several liability should not be limited to the *40 damages caused directly by that defendant’s participation in the scheme.18 The banks are correct, however, that the scope of joint and several liability for a knowing violation of Section 10(b) must be informed by the reach of Section 10(b) itself. In particular, it seems fundamental that a defendant cannot be jointly and severally liable to a plaintiff unless that defendant is, in fact, primarily liable to that plaintiff. In other words, assuming that a jury finds that the banks knowingly violated Section 10(b) through their alleged participation with Enron in a scheme to defraud Enron’s investors, they can be held jointly and severally liable for all of the scheme-related losses suffered by any investor who was harmed in some way by their conduct, but the banks cannot be held responsible for the losses of any investors to whom they are not primarily liable under Section 10(b). In a multi-defendant securities class action such as this one, where presumably thousands of investors were harmed by a number of different acts committed by different defendants over a period of several years, not every plaintiff will have been harmed by every defendant. For example, if a particular defendant, who was previously uninvolved with the scheme, first structured or participated in a fraudulent transaction to falsely inflate Enron’s financial results near the end of the class period, that defendant could not be held liable under Section 10(b) to any investors who purchased Enron stock (the price of which may have already been inflated by the fraudulent acts of other defendants) before that transaction. Since those investors purchased their stock before the defendant engaged in any fraudulent conduct, they could not state a Section 10(b) claim against it, because they would

18 This court does not need to decide whether any defendant could be jointly and severally liable for damages caused by the actions of others if the plaintiffs could not prove that all of the conduct they allege was part of a single fraudulent scheme. In their brief, the plaintiffs concede that a defendant can be jointly and severally liable only for the damages caused by a scheme in which it participates.

be unable to show either that the defendant’s conduct caused them to purchase Enron stock at an inflated price (the element of reliance, or transaction causation) or that it caused them any harm (the element of loss causation). To make the defendant jointly and severally liable for the damages of those investors would, therefore, effectively expand the defendant’s underlying Section 10(b) liability to encompass plaintiffs who could not otherwise state a claim against it.19 It would simply be inconsistent with the elements of a Section 10(b) claim to hold a knowing violator jointly and severally liable for the damages of any plaintiff to whom it is not primarily liable under Section 10(b).20 That the fraud in this case is alleged to have been the result of a single, overarching scheme to defraud does not alter this conclusion. After Central Bank, a defendant can be liable under Section 10(b) only if it commits a primary violation of the statute. See Central Bank, 511 U.S. at 191. Under the district court’s open-ended interpretation of the PSLRA’s joint and several liability provision, however, a defendant’s knowing violation of the securities laws could not only increase the damages for which it can be liable, but could also make that defendant responsible for the damages of plaintiffs who were harmed exclusively by the conduct of others, and to whom that defendant could not otherwise be liable at all. This, in my view, exceeds the permissible bounds of primary liability under Section 10(b) and amounts to the impermissible imposition of conspiracy liability. See Dinsmore, 135 F.3d at 841. Because the district court’s class certification decision was based, in part, on this legal error, I

19 The plaintiffs expressly concede this point in their briefs, as they state that no defendant can be liable for damages from before the date on which it violated Section 10(b). 20 In the example given, if the defendant knowingly violated Section 10(b), it could be jointly and severally liable to any investors who purchased Enron stock after its fraudulent conduct and before the disclosure of the truth, even if those investors were also harmed by the conduct of other participants in the scheme.

would reverse the decision to certify the class on this ground only and remand the case to the district court to consider whether, in light of the proper interpretation of the PSLRA’s joint and several liability provision, the proposed class still satisfies the predominance and superiority requirements of Rule 23(b)(3).

CONCLUSION

Consequently, I concur in the judgment reversing the district court’s certification order, but I do so only for the reasons assigned herein. I would remand the case to that court for additional consideration of whether, in light of this opinion, this case meets Rule 23’s requirements for class certification.