seventeen thirty four zero seven todd graham versus richard fair on all arguments that exceed fifteen minutes per side mr broader offer the appellant's good morning your owners may please the court my name is samuel bond or off i'm here on behalf of current and former employees of the even corporation who invested in the eaton savings plan and specifically in the eaton company stock fund during a period from november of two thousand and thirteen through the end of july in two thousand and fourteen and specifically our cases about what happens when fiduciaries of an employee stock option plan or aesop are aware that the employee stock is trading at an artificially inflated price the question then becomes what if anything should they as fiduciary is do about it the guidance primarily comes from the supreme court's two thousand and fourteen decision fifth didn't offer which basically says that whatever action they you propose they take or should have taken has to meet two criteria it has to be consistent with the federal securities laws and it has to be one that a reasonable fiduciary in the same circumstances would not believe is more likely to harm than help the plan and plan participants i've looked at every circuit court posted an offer and haven't seen one that's found latter point have you found one one court that has ruled in favor of a plaintiff making these claims no absolutely not your honor not a single circuit court and since the amgen decision in two thousand and sixteen not a single district talking about efficient markets and efficiently traded stock so if you are bound by the federal securities laws to make a corrective disclosure how could it be that as a fiduciary you could believe that making a corrective disclosure that would merely eliminate the artificial inflation of the stock price would somehow be more harmful to those you're supposed to be looking after than helpful but it seems i understand your point at same time it seems like every summarizing what most of those courts have said and i would submit that for two reasons we should be very careful about listening to that reasoning won the doesn't actually make sense if you look at what what a lot of courts have done since student offer and amgen is extrapolated from the language of do not of the more harm than good standard and said that it stands for more than it really does what it says is that a district court should consider whether a reasonable view to sherry might believe that disclosing negative information to the public might cause greater harm than help ok it's perfectly fair to consider that it uses the phrase negative public information you have to come up with a solution solution is i guess to hold one is that i think has as this court ruled in the summer case if i'm pronouncing that correctly and what other courts have ruled the rinehart case in the second circuit you can't just simply put forward a case for generic securities fraud and then slapping a receipt label on it and say that therefore the more harm than good test will always be passed if there's the same case as a securities fraud case you have to go a little further than that you have to have some facts that are specific to the actual case you're looking at which we believe we have here we have first of all we have not just the issue of the stock price correction because of the fraud but we have the concern that a fiduciary should have had that the longer the fraud went on not only might the stock price correction be her share but that the stock price recovery could be slower and that's another harm that nobody has talked about any of these decisions but it's a real harm that if you do sherry on a come on the time you filed suit the stock price was back where it was or maybe even above where it was when they initially made this disclosure yes the stock price did eventually recovery several years later but in the mid the many in suing months after the disclosure after the in the class period the stock price not only didn't recover it dropped further i mean they timidly make the disclosure here right they say look we can't we're going to consider spin offs and then they say whatever they said there's a tax consequence or we're not going to do it right yes and so i mean i guess when i look at the three things you've said they should have done issued corrective disclosures halted new contributions and directed the funded divert a portion of its holding into a low cost hedging project it seems like what you're spending most of your time on is point one are you essentially it seems to me can point to is really i mean that's a hard one you seemed almost conceded are you still trying to pursue it or isn't it are you conceding it's foreclosed on the facts by amgen and sour sour i would say your honor that i tend actually to agree that the second option is not the best one the concern that is articulated in didn't offer in some of the other cases is that if you make a corrective disclosure prematurely you'll spook the market and there could be an overcorrection what's your best argument why we should go contrary basically to every other circuit well one i would encourage you to read didn't offer itself i think a lot of the circuits and district courts language and i've got it here it looks pretty bad for you well i would say first of all do not offer is primarily concerned with arguing why  to a defendant friendly pleading presumption it's actually going out of its way most of the decision is concerned with saying they should be subject to the same duty of prudence as every other receiver do sherri the only exception to that is that they don't have to diversify but otherwise their duty of prudence is the same as everybody else's since then the law of these other circuits especially the fifth circuit in whitley has been to say well any stock price drop that a reasonable fiduciary might fear from correctness closure is enough to foreclose the case if that's true then there's no way to plead a duty of prudence case against in the sub fiduciary which means we are back to the much presumption only it's even worse it's essentially saying th know let me let me ask you this let me read you this language and then ask you how you have satisfied this not how you hypothetically could but how you have third lower courts and i'm reading from the end of dude an offer faced with such claims should also consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant's position could not have concluded that stopping purchases which market which the market might take as a sign that insider for the series of u b employee stock is a bad investment or publically disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and it can copy and drop in the value of the stock already held by the font to focus on the corrective disclosure part of that pretty fiduciary in this case would have looked and said well the stock is artificially inflated not and by fraud it is not negative public information we're talking about we're talking about right but the one to be artificially it seems to me and correct me if i'm wrong because i do struggle with this it seems to me that what this says is this presume the fraud and says making the disclosure or presumes the heir whatever you want to call it making the disclosure would do more harm than good to the fund by causing a drop in the stock price and we can look at what happened here when they made the disclosure there was the biggest stock drop in the stock price  dollars or something fourteen to twenty percent stock drop in the stock price right that occurred so why couldn't they in their judgment say making this disclosure is going to cause a problem it's going to cause a drop in the stock price and it's not worth it at this time the logical extension of that is to say that they never need to act on fraud essentially because whenever you correct a fraud in stock price the stock price will drop that if they did hear of already they did listen they did correct it here right it's not enron they went out and said look we got a problem boom we can't do this the stock dropped if they had done it earlier fewer people would have bought at the inflated price that's less harm to plan participants the stock price we contend the stock price drop would not at some always true so the day you make the mistake you're subject to suit under your analysis because the next day if you don't disclose you've cause some want to buy at an inflated price if you make the if you correct the mistake early on you're not going to have the reputational harm penalty for prolonging the fraud but weird if there isn't any of that in this case this is what i'm struggling with and all the circuits are struggling with is what they said is that you have to show a prudent for douche here would have made a contrary decision what you're saying is look at all these good reasons they should do your honor two things before it before i have to sit up one is no court has been able to come up with what if the way you just articulated it is correct if that's the way we have to read this no judge has been able to articulate a situation where you could plausibly allege this claim and there's nothing in didn't offer that says they wanted to end these claims and to we've been down this path before we spent twenty years assuming that there was this defendant friendly presumption in the law and that you saw were essentially immune from liability until the supreme court had to come out correct all of the circuits in the country and i think it would be important for us not to go good morning your honour's may it please the court my name is raymond martinez i represent the defendants in this case your honor the core issue in this case as members of the court have recognized has been looked at very carefully by the supreme court multiple times now it's been looked at by this court in summer it's been looked at by the second in the fifth circuit it's been looked at by at least fourteen district courts across the country and never will and the plaintiffs have never won and that isn't your cocoa or your opposing counsel's point of valid one which is this the supreme court didn't mean to foreclose these claims altogether i think that's right your honor i think the supreme court didn't didn't mean to foreclose these claims in the test they are to collate it doesn't foreclose them the how could it tell me how post didn't offer a plaintiff could or what what would they have had to done differently in this case to state it clearly i want to answer that question let me just preface it by saying that i think there are some tricky questions no doubt about exactly what  interpret it and how to apply it and i think in a harder case it make you may need to draw fine lines i don't think this is the case in which you need to why not because this case is actually an easy one under any conception of didn't offer based on the facts i think first of all with respect to the pleadings that were made in this complaint everything that they have said everything that they have pointed to would actually require every fraud claim to survive a motion to dismiss because the the theory is that they put forth but now every but they say and we have to take these is true that your guys were saying basically look we can spin these companies off and we can span him off and they claim that that artificially inflated the price don't they don't they claim that and then i don't think they claim that your honor with respect i think if you look at the what the district court said pages three to four of it's opinion they say are actually the opposite eaton executives repeatedly made clear that they were not going to do a spinoff now i think what plaintiffs do claim and i don't want be unfair to there to the allegations in their complaint with they do claim is that that my clients were misleading about whether the spinoff could be done with or without adverse tax consequences and what the district court in this case recognized and if you look at the southern district of new york that addressed the exact same literally the exact same allegations what they said was that that essentially that the tax consequences of a spinoff are immaterial and they're immaterial precisely because the executives in this case made clear over and over again that the spin off wasn't going to take place just a step back their essential their fraud allegation is that the eaton executives failed to disclose the hypothetical tax consequences of a hypothetical spinoff that even executives unambiguous lee said over and over again they want considering wasn't going to happen and so i think in this particular case a reasonable fiduciary didn't they do more i mean said your honor is that there's nothing in the structure of the deal that would preclude or forbid a spinoff i don't think they ever said in fact that the record shows that they it does not show that they ever said that there would be zero tax consequences of a spinoff but i think what's also you're right they said there's nothing in the deal per se that would prevent us from taking portfolio moves right but we have no such plan right and then again this is getting into the weeds of the facts a little bit but just i just want to be very clear i think what i think the southern district of new york and the district court here what they concluded was that in light of the repeated statements that the spinoff was just not going to happen it wasn't in the cards was it under contemplation they simply said that you know the tax the hypothetical tax consequences of that hypothetical spinoff really don't make a difference and so if you put yourself in the shoes of the reasonable fiduciary in the circumstances who's aware of these same disclaimers of the intent to do a spin off at all i think a fiduciary could say hey you know we've made clear that we're not going to do a spinoff so even if there were some confusion or some doubt as to the tax consequences of this hypothetical spinoff it wouldn't matter then why did why did the stock price drops i'm sorry judge white did i interrupt you i was just asking what about the leaders of the company were always they were inflexibly opposed to considering opportunities that arose in general i think i don't think that sacred cow comment should be interpreted as some sort of signal that with respect to the vehicle division which is the one that's at issue the the allegation it's really a far fetched theory around or it's this idea that we were misleading about the hypothetical tax consequences of this hypothetical spin off transaction involving the vehicle division even though it's unambiguous undisputed and perfectly clear from the record that the eton executives repeatedly said they weren't going to do that the transaction they were considering the spin off transaction and all i would point why does it matter what the hypothetical tax consequences would be and i think this relates to the second reason why this case is a particularly straightforward one and not one in which you need to you know face hard issues about didn't offer and that's that the the nature of the fraud here is one that unlike some other frauds it just wasn't going to come to light on its own you know some frauds are going to come out one way or the other either way and so the question is well is it better to sort of get the information out there earlier selves or let it come out naturally the nature of this particular fraud is such that you know the claim is about the tax consequences of a spin off but everyone agrees i think on both sides that the spin off was not going to happen in reality and so if eaton had just waited out the period until two thousand and seventeen if no spin off had occurred what's the significance of the drop in stock price then when they announced the us well i think the drop in struck price you know they announced this in july two thousand and fourteen it was that i believe at the end of a call it talked about a number of things including negative financial performance and so you know there were a whole bunch of things going on with the stock price i mean certainly wasn't just your position is it wasn't just attributed to this statement that there would be tax consequence i think it's very hard to know exactly what was driving it but certainly there were other negative things that were part of that call and certainly you know as as i think the court adverted to earlier the stock price has fully fully rebounded so i think when you look at the allegations in this case you know they're there they're the same kind of generic and conclusionary allegations that have been rejected in cases over and over again i mean this this is not a circuit that has not addressed this issue this is the summer circuit you know just a few months ago and some are court this court addressed a case that raised essentially the same allegations the same factual scenario judge white did you have a question now ok sorry counsel let me say a word about about summer here are the exact same allegations were made there you know there was the insiders allegedly knew that the stock price was overvalued they they did the plaintiffs allege that they should have disclosed information and the court you know what can you go back to my question how could a plaintiff make this claim like where is it post didn't offer because your your opponent is right we can agree that the supreme court did not mean to foreclose these claims in total i think the kind of case that would survive is that is there is a case on unlike this one where the fraud is both severe and it is known with certainty that there is in fact a fraud i think where the the information is going to inevitably come out unlike this case where it wouldn't necessarily come out and third where was she gave an example that was sort of an enron had pathetically but i don't think it's necessarily the case you know for example imagine you had a car company where the c e o of the car company announces you know thirty days from today we're releasing a new truck it's the best truly safe and the insider fiduciary knows that in fact the testing has shown that the car is not safe in that you know one in ten fender benders is going to lead to an explosion the insider fischer at that point knows that once that car hits the market but you know cars are going to start blowing up across the country it's inevitably going to be discovered that what the c e o said was wrong this is not that case because here again everyone agrees the spin off transaction wasn't going to happen so no one would have ever found out no it would have ever learned what the tax consequences of that spin off were and so even if there was in some sense of a fraud or some misleading statement about the tax consequence of a spinoff that was not something that was going to come to light so i think that would be the that would be the kind of scenario i think the other factor that's important to consider here is the makeup of the fund in the composition of the fund that's a very important factor that should bear on how courts analyze these complaints you know here the allegation is made that the fund was contained about nine hundred nine million dollars worth of investments and that during the class period forty million dollars of additional money was put in i think a reasonable fiduciary looking at those facts would realize that if this dach took a hit as a result of the disclosure the nine hundred nine million dollars would shrink a lot you know they allege ultimately about a twenty percent we think this is not correct but a twenty percent drop in the stock price so if you think that the disclosure would have would have led to a twenty percent drop that means one hundred eighty two million dollars of value would have evaporated immediately directly as a result of the fiduciaries action and according to plaintiffs the purpose of that is to protect the new investors the forty million dollars coming in so you know we're going to we're going to light on fire one hundred eighty two million dollars of existing value in order to protect against eight million dollars of losses i think a reasonable for you sure you can certainly look at that and say you know that trade off doesn't make sense at all and i think that's the kind of that's the kind of commonsense insight that was underlined this court this cour decision in summer and the supreme court decision and didn't offer that in the ordinary circumstance the fiduciary supposed to protect the beneficiaries and the plan participants and you don't usually do that by taking deliberate actions that you know are targeted to making him lose money i mean and so i think the supreme court recognized this is going to be a very unusual claim and that's why i think it's entirely appropriate entirely fair that that these claims to have been hard to plead and i think that makes a lot of sense you know we think that the the complaint in this case was properly dismissed we also think that that the district court properly did not grant leave to him and you know that that request was not made in the way to submit an amended complaint they did not submit an amended complaint at that point clear this this claim was properly dismissed the district court did not abuse its discretion which is the standard in denying leave to amend and so we asked the court to affirm thank you counsel let me just make a few brief points in rebuttal first let's talk about whether there's fraud here or not we've alleged that there was a no one fraud now the fence that the police are arguing that the fraud wasn't known it was suspected or there was no fraud at all they're basing that on that decision from outside the circuit which was subject to a very different pleading standard and which frankly we think is wrong on the facts but what is the known fraud the known fraud is them saying repeatedly to the public we can do a spin off anytime we want without consequences we're choosing not to we're not going to do a spin off this time but just so you know we could if we wanted to it would be fine we're not going to but we could but we're not going to that was something the market definitely took seriously analysts noted that that companies make ambiguous statements all the time about what they might and might not do and those clearly are covered in i mean didn't offer is made that clear what your honor look if we believe that under the pleading standard of the brule eight that recess is subject to and that these claims are subject to that ambiguity is to be you know those inferences should be read in our favor and if it does rise to the level of an adequately pleaded fraud i will say that the do not offer analysis does to a large extent turn on whether you believe there was a fraud pleated or not ok if you decide that the stock was not known to be fraudulent we inflated by the fiduciary is then their right you don't have to disclose that information that's exactly the kind of situation that didn't  contemplates where you might spook the market over correct but if you do has it blown twamley suggest that you should read the inferences in our favor and you don't subject them to the higher pleading standard of the p s l array and you don't find that an adequately alleged here then to be a plausible inference from the fact there get does we believe we've made that plausibly have pleaded that plausible inference i would also note that the southern district case that dismissed them did give them leave to amend and that to the extent this court feels that we didn't adequately plead the fraud we would ask for leave to amend i mean terminals in councils right are our circuit precedents pretty clear to get leave to a man you have to submit or at least tell the court the courts aren't in the business of giving advi opinions the judge here gave a pretty thorough opinion it's not meant to be advisory and if you're not going to submit what you're going to follow you're never going to get waived i understand that judge i would want to say one more thing with the remaining time i have which is that what we talked about is reputational damage here the reputational penalty cannot be pleaded in any case that is unique to this case and some other cases and it is the core pointed out the stock price eventual he did recover the stock price could have recovered right away that happens sometimes when frauds are disclosed and in that case one can argue that well you can see that they're not penalizing the company for having delayed in coming forth with the truth they're happy that they came forth with with it when they did reputational penalty it doesn't just affect the buyers it's false to say that this is about the holders versus the buyers because the holders get hurt by that penalty too they get a harsher correction than they otherwise would have dealt with they have no guarantee that the stock price will eventually recover they may have to get out of there for a one k before it does what about the holder who can't wait for the stock price to recover three years from now who needs that money right away they're left out in the cold for these reasons your honor we think you should reverse the thank you counsel or can call the next case