may have teased the course todd collins for appellants i will respectfully reserve three minutes for a bottle if i may read it your honour's this case involves a very narrow issue and exceptional facts the very narrow issue as you know is whether reliance is presumed where a regulatory authority in this case the s e c would have prevented the offering that is would not have allowed the registration statements you go effective is that is that you think first of all i can assure you the panel knows the facts and you spend half your brief on the facts but i think the panel will be most interested in what you characterized as the narrow issue and part of that narrow issue if i might broaden it a bit is ways or not we should acknowledge the fraud created the market which we have not done previously i don't know that we've been called upon to do it notwithstanding the fact a few of the courts in the third circuit have spoken to it and the district court here respect to the assumption of s c c approval sounds like and i must be wrong i must be misapprehend being sounds like a legal marketability theory which is not what i thought you were proceeding on but if you could if you could indicate for a shift what theory it is you do pursue in that the district court really addressed all three par the factual marketability and the economic marketability and the legal marketability as a subset of factual this probably fits most clearly within legal marketability the wiley case judge lechner discussed this in the movie in the context of factual marketability versus economic marketability judge  about the theory itself that is any one of those three applications as the court's well aware there are cases that go both ways all of the court's all of the district courts in this circuit have embraced fraud created the market at least in in one form or another the district court in its opinion suggested that the economic branch of the theory should apply what i'm here today to suggest is on the facts of this particular case not only is fraud created the market an appropriate standard to apply in this circuit but in this particular case th the situation is so precise and so narrow in the facts are so unusual that whether we call it act whether we call it factual or whether we call it legal this case applies whatever we call it though it seems that your position necessarily asks us to him poor principles of the fish and markets theory into the fraud created the market theory your cause of action and it page thirty one of your brief you argue since persons who buy securities in inefficient markets need protection from for audit as well as those who buy in official markets some circuit cour as well as the district courts within third circuit have adopted the fraud created the market presumption now are you arguing that we should apply the fraud created the market theory simply because those who purchase securities in an inefficient market may be harmed but they simply i have a remedy he doesn't seem to the argument doesn't seem to be founded on the economic theory that underlies basic and all of our viewers prudence that is followed it in fraud created the market case your honor it the presumption of fraud created the market is a presumption but it is different from the fraud on the market presumption in the basic case the court pointed out that there are different circumstances in which reliance is presumed and the court in the basic case cited specifically to the affiliated you case with and situation with with  omissions of course it doesn't really have any application here though and in fact the district court as i recall from its opinion so you did not realigning exactly right your honor my point is simply not that that applies exactly what is the common sense and newman experience that i would argue for adoption of a fraud created the market theory more particularly for the  reliance the presumption of reliance that you require here because fraud on a market applies in a sophisticated market where there is a history where there has been a long series of transactions which have processed information upon which ayers and sellers may reasonably rely that makes perfect sense yes of practical there where there is none of the downstream information in the history of transactions the analysts the institutional investors and so quite well that is exactly the point your honor and thank you for asking it what this will aides to is not the efficiency of the price not reliance on the price as in front of the market but instead reliance on the integrity of the market because the idea is that the market or of several very limited players who are fundamental to that primary market whether it be an i p o or going well respectfully i think that's one of the ways in which the district court got it wrong because if we're going to call this legal it's part of the regs right the requirement is that in order for the registration statement to go effect of the consent from the auditor with respect to the use of the op it's the clean audits or possibly the going concern audits in this case clean has to be included in the registrations one of the auditor had said in all candor well you know the company here the issuer is using a discount rate that may be lower than what the market them on similar that are being sold across this country would indicate and in fact they may be understating their default rate in comparison to similarly situated issues but having said that these are the facts  us said accepted go ahead and sell it was certainly if that disclosure had been provided in the prospectus and the registration slaven you're right your honor i don't know whether it would have been the auditor or the kompany someone but but yes if that disclosure had been there and and this again respectfully is one area where i think the district court went wrong it's not a matter here as the district court said that we're simply complaining about a particular risk that wasn't disclosed it's not a question that that the delinquency rates were improperly reported as a district court suggested that's just an additional risk so maybe the bond was worth a little less than in fact was being sold for the interest rate would be different that's not the case we have here instead it's a go nogo you need for your prospectus american business required for its prospectus a statement that this was these that that the financials very clear no effectiveness now since you're what you're asking what kind of rule you're asking us to adopt it seems like on the one hand you're asking for a block for under factual market ability whereas the cases which have adopted the fraud fraud creates a market theory have said that there could be there niek anomic marketability theory or a legal on market ability theory yes and you're asking for sort of a hybrid of that which is another step where we're asking for a decision very similar to what happened in rainy and the tenth circuit where  an authority in that case an issuing authority had the opportunity to say yes or no to the offering going going forward and but for fraud it would have said no exactly the same thing here  i do want to point out if i may would you please would you survive scrutiny under an economic marketability theory we would not i could argue your honor we might it's a close call but our purposes of this argument we're going on let me ask you this are you asking for a different unmarketable a theory and what appeared in most of the other cases that have adopted the fraud created the markets here i wouldn't say most i would say for example your honor that what we're asking for here is the same as shore's raney wiley in all of those cases there was the the the authority that allowed the offering to go forward that would not have been the case had the fraud been disclosed so what would the rule be that you would ask us to with gov't very thank you the rule applies specifically obviously in the class certification context it applies in light of hydrogen of course the rule would be this where it is where there the district court can find by a preponderance of the evidence that the audit opinion was the product of fraud so your fraud created the market theory for this case really really hinges or focuses on the intended media it to your financial affairs if it hinges on the intent because this is a fraud case but it could also be recklessness in either forgive me your honor if i'm taking too long but the situation that we're in now is we have a virtual admission from b t o on two critical things one is i rephrase that we have a flat out admission by very great amount of information that we've put forward about the four jewel a nature of the audit we have a near admission that that is so because they put forward no evidence whatsoever to refute it except for the broadest well we did what we thought was right there out of fraud did he win or lose or if trying to do it was it's an exceptional case and it's an exceptional case because of these admissions it's also exceptional in the context of the hydrogen case because right now we need to show  as plaintiffs by a preponderance that that this fact is true that this was a fraudulent audit and we have received we received almost no refutation or the most general refutation from the other side peroxide but i want to envision just how this plays out well on plain just side your honor i can assure you it didn't make life simpler the dutch it judges say the same but what it means as we understand it and what we believe we did in this case is to prevail by a preponderance on all of the elements of rule twenty three and obviously is hydrogen peroxide is the court's well aware as that as as hydrogen peroxide says we need to prevail by  and that's why we put together just an avalanche of information here with regard to the specific ways in which there was a violation of auditing standards and also a gap in connection with these financial opinions and in every other case has required there to be a sham a hoax for a business a worthless entity so if under those two tests clearly they don't satisfy the standard that's been articulated in any of the cases in the eastern pennsylvania in the wyly case and in any of the other cases frankly with respect to legal market ability they're clearly seeking to misapply the legal market ability test that sense circuit opinion in teaching raney is very very different there the court held that the securities were not qualified legally to be issued the issuer entity there was a adjudicated in a separate proceeding to be an invalid public trust in that case demonstrates the limited applicability of the exception since the issuers found not to be a valid trust and was quote thus prohibited from issuing any bonds by oklahoma law this is judge  explain the legal and marketability occurs when a regulatory or municipal agency would have been required by law to prevent or fit forbid the issuance of the security this is very different case the opponents of failed to demonstrate a preponderance of the evidence that it b f s was not a legitimate lending business that should have been shut down by state regulators indeed the speculation about might might have happened if video did something different is contradicted b extensive discovery record in the case and i think the best example of that is found in a one thirteen in the record which is an email from oregon b'nai who was the district administrator for the f c c in philadelphia presentation as she she testified during the deposition as as i recall to the effect that the notes never made it on to the market but for the video audit opinion didn't i was going to get to that and it's a good question and it goes to the core of the theory that they're trying to articulate which is they're trying to create a new a new theory which is based what you would call defendants compliance with the walk related them this is the theory that the plaintiffs has this now have us now have a source in any other court of appeals decision that you know i can i can give you a little bit by that i mean the express the explicit test that mr collins gave me in response to my request writs that's a good question let me just let me just start by saying  it hasn't been accepted by any case and it shouldn't be accepted by any case because all he's saying is that the company complied with the law with the federal securities laws the federal securities laws require the inclusion of audited financial statements in a registration statement the federal securities laws require officers and directors to sign the registration stated if the tests the test that they're suggesting is true you would have no reliance element you would be collapsing the concept of immaterial misstatement into the concept of reliance you can't satisfy that test just by showing that the company complied with the law by getting audited financial statements and getting signatures from directors and officers if this test is true you can just sue directors and officers and you can sue auditor's in any case where a registration segment was filed in accordance with law and then it turned out that there were false statements in that in that misstatement that's does not the law that has not been accepted in the cases applying the fraud created the market theory now going back to your question judge smith there there was this is really a variation of a discredited reliance on the regulatory process theory that was articulated by the ninth circuit prior to basic in the or through young case which is cited in opinion in our brief that case suggested  that in filing a filing with the s e c was sufficient to satisfy the reliance element but the joseph versus wiles opinion in addition to judge o'neill's opinion expressed very clearly that the problem with this presumption of reliance is that it way which i think really tells the story better than anything else when he says we talked to them in this endlessly reviewed their documents met with their auditors jack who was and corporate finance worried over their discount rate assumptions we all hate  sale accounting but we never found anything we could say was false and misleading and it goes on as long as we have a disclosure and not merit based system of securities regulation i don't feel there's a lot of can do a lot of folks made a lot of money for a lot of years on these things people bought them in the pursuit of above market returns and to disclose above market rests one of those disclosed rests the inability to issue new notes became reality there is no test that that adopts what they're saying he tries to refocus the issue on the on the element of a misstatement an alleged misstatement he focuses on b t o audit's we don't adopt anything that he says we say we we vehemently disagree with the concept  not perform audits in accordance with generally accepted ordering standards but that's not an issue that's relevant to the to today's argument that is an issue that's relevant to whether there was a material misstatement made whether c enter those are issues for  summary judgment motion i think again going back to t j rainey and then i just want to point out one other fact on wiley before i move on to another issue that you raised is the wiley case again which is the other significant case that that touches on this legal marketability is extremely different that was a case where there are criminal pleas for violations of the federal securities laws the f c c stepped in and obtained a stop order putting the c e o of the securities it issue that that case like t j rainey you have you you know what happens you're not focusing on speculation that exists in a case about what the government might have done if the facts were different and this all goes back to the hydrogen peroxide standard which says that appellant elements have a burden to show by a preponderance of the evidence each of the elements to satisfy class certification they have not done that unlike those cases where you had actual proof you had actual facts they are speculating about what might have happened which is directly contrary contradicted by the gavin a email so from an evidentiary standpoint under hydrogen peroxide which does create a higher standard and makes it easier for a court to deny clouser of adventures to a higher creates a higher evidentiary standard at the class certification stage and makes it easier for a court to focus that the company complied with the law the f c c rules say you need to have an audited financial statement it's nothing else it doesn't it doesn't get you over the hurdle if you have their proposed test as arctic you late in response the judge in this question and as argued in their brief it seems to me to be a proposed but for test and haven't they met that haven't they met their proposed pass if there  but for the compliance with the law let's assume that's it that's assume for a moment that's their test the factual on marketability theory if that's their tests haven't they met at least that test now leave leave for assad to second whether that's right test but if that's their test haven't they met that if their test is but for compliance with the law the registration of the notes would not have been issued yes that would they would satisfy that test what i'm saying is no court has ever adopted that was why shouldn't we use the fact that no court has adopted that test why shouldn't we apply that test in this case the supreme court has not said we can't adopt this kind of test and this is a you know this is a little different factual scenario and you have in other cases so why should we apply and it's a good question the quite the answer is yes the supreme court has said that you can adopt that basic because basic has said that reliance is an element of a section found in front of their test would give a presumed reliance which is similar to the presumed reliance that the supreme court has approved in the sale of marketable secur s again one this is as is basic recognized this is a very different situation basic said when you're involved in face to face type transactions you don't you don't have these types of presumptions that's why the fraud in the market theory was focused on an efficient market secondly if you adopt that test there will be no reliance anymore because in every situation companies comply with the law directors sign registration statements auditors include their audit file their audited financial statements in the registration statement there will be no case involving a registration statement fog with the f c c where they would not be able to establish this fraud created the market theory there  no precedent to support that i think it's flies in the face of the basic opinion i think it flies directly in the face of the stonebridge opinion the recent stonebridge opinion from the us supreme court which certainly hold back on on  on the concept of of expanding private rights of action same to be desexed on bridge is an example of a case where the supreme court's basically saying well you know we may have gone a little bit too far down the line beyond what we're congress said we should go and we just hope nobody goes much further and again i think stonebridge also recognized only two exceptions to the  e very amusing the pointed out some of the statements that were filed that absolutely clear that what was being registered was garbage but it was registered and sold and you can do that well let's let's let's take that back to what was disclosed here and why in this case it wouldn't make sense to say that the many people who didn't read this should be permitted to go forward with a with a class action this is not a situation the disclosure document about the risks that were faced by people page one of the registration statement said quote b f s incurred losses of twenty nine point nine million and twenty six point three million for two thousand and three and two thousand and four page one said an investment in these securities is highly speculative involves a i degree of risk page one of the prospectus and registration statement said quote you should only invest in these securities if you can afford to lose your entire investment so the scenario that you're proposing occurred here and it and it really demonstrates straits why it would be ludicrous to permit a class to go  forward and one of the one of the proposed class members actually said if he did read it he wouldn't have invested you know so what some of the decisions including just judge easterbrook in criticizing the fraud created the market theory emphasized to create any creating an incentive to disregard the written materials that support an offering is illogical particularly in a situation where you know there's no efficient market where you know that the people at the company who have an incentive to maximize the price for the offering to get the offering done are controlling that decision whether to go to market this is the very situation where they should have looked at the financial statements and all they had to do was look at page one and they would have seen what was there and  that's what they disregarded and that's why yes in some senses this is a unique case because because the disclosures were there and you have so many people who didn't read the financial statements in this case say anything about the size of the investments and i say that sometimes you have class actions with the actual individual losses or very very small you know of one hundred dollars we know what's involved here it's to two things one going back to the hydrogen peroxide standard there is no expert coming in here who's done a full analysis and has talked to that specific issue there and there really is no evidence to support any of anything with respect to the issue of what the size was of the investments or any of the there's there's bits and pieces of random stuff in the seventy deposition days from the trustees and but but the answer is yes i think for the reasons that are expressed in eckstein i think for the reasons that articulated with respect to stonebridge and just one final point within the last two weeks there have been three decisions issued by district courts in the southern district of new york and in the eastern district of california since i just learned about them yesterday i did not submit those i'm happy to submit a letter to that to the court to attach those three dhabi commercial bank versus morgan stanley from the southern district of new york is a judge sheindlin opinion which in re u b s auction rate securities also from the southern district of new york and george rhesus calif infrastructure and economic development bank which both confirmed that the second and ninth circuit's have not adopted the fraud created the market theory and also very critical and i am expand on the reasons articulated by  and also use the stonebridge opinion to basically show how that limited the presumptions that are afforded under section ten b to the two different scenarios of the fraud on the market in affiliated you and how adopt some form of fraud created the market will reject it outright district courts within the thirds or it will continue as the district court did here having to make assumptions and in this whereas with a pronouncement from us one way or another certainly district courts themselves would have some guidance they lack at the present yet yes your honor absolutely clarity clarity is always a good thing and obviously for you when is a when i understand you know i will absolutely give you that admission in three seconds but it just you know if i may just touch on it because you asked really what should be the standard and i think you know if you if you do it adopts for a creative the market i think again the the standards that were applied by by by the courts in this case any group or was it was exceptional again focusing on sham or worthless enterprises  which i think really is consistent with with riley which again that the key language there is so pervasive to undermine its genuineness and render it unworthy of trading and talk about no legitima you're basically saying you could live with limited to illegal on marketability yes i have an obviously my primary interest is is is that good enough earnings beside the voter but you asked me to question should the court adopt and i think i think the confusion that's been out there in terms of what the in terms of what if erie is i think i think the the difficulties in trying to apply a fraud created the market theory i think you know anything that goes beyond the sham hopes which is talked about in one and wiley the worthless entity i think is really creating more problems and opening up holes and really is a direct  t on on basic on stonebridge on central bank in terms of the efforts to limit causes of action under ten d and the efforts to to affirm that reliance is a real element of a section and the cause of action and  way that these kind of situations where someone comes in and says your compliance with law is enough to get us acts past the reliance on that that's a travesty and that would be horrible both for this case and for any other case before this  actually in questions the panel has asked stonebridge and i i'm interested in hearing your view soley for our our interpreter purposes would  you agree that the supreme court and i suppose even congress with p s l array has seemed to instruct us or suggest to us a narrowing of ten b liability and if that's the case if that's the assumption why should we credit a new theory providing for a presumption of reliance we argue that all ten courts that have considered it at the district court level have have embraced ordered or talked about it and if they roll a line i guess what i would suggest here though is that it's not nobody has rewritten securities laws yet stonebridge said a lot of things but most of what's on bridge said was not relevant to this case it was a situation as is the courts aware where is the supreme court said that someone who does not speak to the market cannot be held liable no question here but for the fact that this defendant b t o spoke to the spoke to the market system brutally doesn't apply in terms of knowing the law your honor i don't know but in terms of of maintaining the law and not expanding it i think i think that's a fair conclusion but this respectfully despite mr hofner his argument does not expand the law it doesn't because same thing happened in the shores case the same thing happened and ensures the court which was enough of the authority which said no to the offering the this authority this this public authority if they had known about the scheme they would never have allowed the bonds to issue that's not new law that's that shore's in the riley case there were a lot of bad things going on in the wiley case they didn't have to decide the case on this basis but the court did say that if the fraud had been disclosed the s e c would have prevented the registration states from becoming effective again respectfully very narrow we're talking about an audit opinion that was fraudulent as to which at the hydrogen classification stage we've heard essentially no denial that it was fraudulent this is an opening the floodgates floodgates in the basic case as well you will recall this same argument was brought forward and rejected by the court that this is going to read the reliance requirement out of the securities laws isn't the case thank you very much thank you so much  case very interesting case i would direct that a transcript be prepared and ask counsel if they would range to the clerk's office for sharing of the cost transcript of this mark would take the