1
1 SUPERIOR COURT OF CALIFORNIA
2 COUNTY OF SAN FRANCISCO
3 BEFORE THE HONORABLE JOHN E. MUNTER, JUDGE PRESIDING
4 DEPARTMENT NUMBER 305
5 ---oOo---
6 JOSEPH AVENIUS, et al., )
)
7 Plaintiffs, ) Case No. 06-453422
) MOTIONS
8 vs. )
)
9 BANC OF AMERICA SECURITIES, )
LLC, et al., )
10 )
Defendants. )
11 _______________________________________)
OVERSTOCK.COM, et al., )
12 )
Plaintiffs, ) Case No. 07-460147
13 ) MOTIONS
vs. )
14 )
MORGAN STANLEY & CO., and )
15 others )
)
16 Defendants. )
_______________________________________)
17
18
19 Reporter's Transcript of Proceedings
20 Tuesday, July 17, 2007
21
22
23
24
GOVERNMENT CODE § 69954(D): "ANY COURT, PARTY, OR PERSON WHO
25 HAS PURCHASED A TRANSCRIPT MAY, WITHOUT PAYING A FURTHER FEE TO
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27 PARTY OR PERSON."
28 Reported by: RHONDA L. AQUILINA, CSR #9956, RMR, CRR, CCP, CBC
2
1 APPEARANCES CONT'D.
2 For Plaintiffs:
3 Stein & Lubin
600 Montgomery St., 14th Fl.
4 San Francisco CA 94111
By: THEODORE A. GRIFFINGER, JR., ESQ.
5 ELLEN A. CIRANGLE, ESQ.
Tanya Herrera, Esq.
6
For Defendant Lehman Brothers (Avenius):
7
Paul, Weiss, Rifkind, Wharton & Garrison, LLP
8 1285 Avenue of the Americas
New York, NY 10019-6064
9 By: MOSES SILVERMAN, ESQ.
10 For Defendant Merrill Lynch (Avenius):
11 Skadden, Arps, Slate, Meagher & Flom
Four Embarcadero Center
12 San Francisco, CA 94111-4144
By: JAMES E. LYONS, ESQ.
13 THOMAS V. CHRISTOPHER, ESQ.
14 For Defendant Goldman Sachs Group, Inc.:
15 Morgan, Lewis & Bockius, LLP
One Market, Spear Street Tower
16 San Francisco, CA 94105
By: MICHAEL J. LAWSON, ESQ.
17 JOSEPH E. FLOREN, ESQ.
18 For Defendant Citigroup, Inc. & Credit Suisse (USA) Inc.,:
19 Wilmer, Cutler, Pickering, Hale & Dorr, LLP
1117 California Ave
20 Palo Alto, CA 94304
By: NIKI MOORE, ESQ.
21 JENNIFER H. LEE, ESQ.
22 For DefendantLehman Brothers, Inc.:
23 Heller, Ehrman, White & McAuliffe
333 Bush Street
24 San Francisco, CA 94104-2878
By: SCOTT E. MORGAN, ESQ.
25
For Defendants Bank of New York:
26
Clifford, Chance
27 2001 K Street NW
Washington, D.C. 20006-1001
28 By: JON R. ROELLKE, ESQ.
3
1 APPEARANCES CONT'D.
2 For Defendant Bear Stearns:
3 Proskauer, Rose LLP
2049 Century Park East, Suite 3200
4 Los Angeles, CA 90067-3206
By: MICHAEL A. FIRESTEIN, ESQ.
5 STEPHEN RATNER, ESQ. (BY COURT CALL)
6 For Defendants UBS:
7 Kirkland & Ellis
555 California Street, 27th Floor
8 San Francisco, CA 94104
By: MARK MCKANE, ESQ.
9 ANDREW CLUBOK, ESQ.
Eliot Adelson, Esq.
10
For Defendants Banc of America Securities, LLC:
11
O'Melveny & Myers
12 Embarcadero Center West
275 Battery Street
13 San Francisco, CA 94111-3305
By: CHRISTOPHER D. CATALANO, ESQ.
14
15 For DefendantMorgan Stanley & Co., Inc.:
16 Davis, Polk & Wardwell
450 Lexington Ave.
17 New York, NY 10017
By: RAJAT SONI, ESQ.
18
For Defendant Goldman Sachs:
19
Sullivan & Cromwell, LLP
20 125 Broad Street
New York, NY 10004-2498
21 By: RICHARD H. KLAPPER, ESQ.
22 For Defendant Deutsche Bank Securities, Inc.:
23 Fenwick & West
555 California Street, 12th Floor
24 San Francisco, CA 94104
By: JENNIFER C. BRETAN, ESQ.
25
For Defendant Deutsche Bank:
26
Cadwalader, Wickersham & Taft
27 One World Financial Center
New York, N.Y. 10281
28 By: GREG ZIMMER, ESQ. (BY COURT CALL)
4
1 Tuesday, July 17, 2007 9:43 a.m.
2
3 THE COURT: All right. We're on the record.
4 Craig, would you please call the case.
5 THE CLERK: Yes, actually, there's two cases that are before
6 the Court, Joseph Avenius et al. versus Bank of America
7 securities et al. that is Case No. CGC-06-453422, also we have
8 the case of Overstock.Com Inc. versus Morgan Stanley & Company,
9 and others, Case No. CGC-07-460147.
10 Counsel, please state your appearances for the record.
11 MR. GRIFFINGER: Good morning, Your Honor. Theodore
12 Griffinger, Eleanor Cirangle and Tanya Herrera for both cases.
13 MR. LYONS: Good morning, Your Honor. Jim Lyons for the
14 Skadden, Arps firm, and with me is my colleague Paul Eckles on
15 behalf of Merrill Lynch, Incorporated in both cases.
16 DEFENSE2: Good morning, Your Honor. Mike Lawson Morgan,
17 Lewis & Bockius for defendant Goldman Sachs Group, Inc. and if I
18 could introduce to the Court my co-counsel Mr. Rich Klapper who
19 has been admitted pro hac vice. Mr. Klapper is with the New
20 York firm of Sullivan & Cromwell and is co-counsel for Goldman
21 Sachs Group, and also at this table my colleague Joseph Floren
22 also from Morgan Lewis here in San Francisco.
23 MR. FLOREN: Good morning.
24 THE COURT: Thank you. Good morning.
25 MR. CLUBOK: Good morning, Your Honor, Andrew Clubok from
26 Kirkland & Ellis on behalf of UBS Financial Services, along with
27 Eliot Adelson.
28 It's still a premature event, but I understand you're going
5
1 to grant my pro hac vice, which I appreciate it.
2 THE COURT: You're correct.
3 MR. WISE: Robert Wise of Davis, Polk & Wardwell for Morgan
4 Stanley, and I'm appearing pro hac vice.
5 THE COURT: And if there's people here that have
6 applications in for pro hac vice, we've discussed this off the
7 record, I believe they're all going to be granted, so you can
8 just state your appearances.
9 MR. FIRESTEIN: Good morning, Your Honor, Michael Firestein
10 of Proskauer Rose on behalf of Bear Stearns. I believe on Court
11 Call this morning is my partner and colleague Stephen Ratner
12 from my New York office.
13 THE COURT: Mr. Ratner, are you here?
14 MR. RATNER: Yes, I am, Your Honor.
15 THE COURT: Thank you.
16 MR. SILVERMAN: Good morning, Your Honor, Moses Silverman,
17 Paul, Weiss, Rifkind, Wharton & Garrison for Lehman Brothers in
18 the Avenius action.
19 MR. CATALANO: Good morning, Your Honor, Christopher
20 Catalano with O'Melveny & Myers for Banc of America Securities
21 in both cases.
22 MS. MOORE: Good morning, Your Honor, Niki Moore from Wilmer
23 & Hale on behalf of Citigroup, Inc. and Credit Suisse U.S.A. in
24 both cases.
25 MS. BRETAN: Good morning, Your Honor. Jennifer Bretan of
26 Fenwick & West on behalf of Deutsche Bank Securities, Inc. on
27 both cases, and on the line is co-counsel from the New York firm
28 of Cadwalader, Wickersham & Taft, Greg Zimmer.
6
1 THE COURT: Mr. Zimmer, are you here?
2 MR. ZIMMER: Yes, sir.
3 THE COURT: Thank you.
4 MR. ADELSON: Good morning, Eliot Adelson, Kirkland & Ellis
5 for UBS.
6 MR. CLUBOK: Good morning, Your Honor --
7 THE COURT: In which case?
8 MR. ADELSON: In both.
9 MR. CHRISTOPHER: Good morning, Your Honor. Thomas
10 Christopher of Skadden, Arps for Merrill Lynch in both actions.
11 MR. MORGAN: Good morning, Your Honor. Scott Morgan from
12 Heller, Ehrman for defendant Lehman Brothers in the Avenius
13 case.
14 MR. ROELLKE: Good morning, Your Honor. Jon Roellke from
15 Clifford Chance on behalf of Bank of New York in both cases.
16 THE COURT: Okay. Anybody else? Okay.
17 We had some -- or I have some pro hac vice applications, and
18 I understand there's no objection to them, but let me just go
19 through on the record and just be sure that's correct.
20 I have an application to admit John R. Phillips pro hac vice
21 in the Overstock case. Any objection?
22 MR. GRIFFINGER: No objection, Your Honor --
23 THE COURT: Okay.
24 MR. GRIFFINGER: -- for the plaintiffs.
25 THE COURT: Okay. Thank you. And an application to admit
26 Andrew Clubok in the Overstock case. Any objection to that?
27 MR. GRIFFINGER: No objection from the plaintiffs, Your
28 Honor.
7
1 THE COURT: Okay. So that's being signed. And an
2 application to admit John R. Phillips in the Avenius case.
3 MR. GRIFFINGER: No objection from the plaintiffs, Your
4 Honor.
5 THE COURT: That's being granted. And an application for
6 the admission of Andrew Clubok in the Avenius case.
7 MR. GRIFFINGER: No objection from the plaintiffs, Your
8 Honor.
9 THE COURT: And that's being granted. And, finally, an
10 application to admit Richard Pepperman, Richard Klapper and
11 Tracy High in the Overstock case.
12 MR. GRIFFINGER: No objection from the plaintiffs, Your
13 Honor.
14 THE COURT: Okay, those are being granted. And I think I've
15 taken care of the applications that I received that we earlier
16 didn't deal with. Are there any other pending applications that
17 I've missed?
18 MS. MOORE: Your Honor, Niki Moore from Wilmer, Hale.
19 We submitted an application for Frazier Hunter in the
20 Overstock case.
21 THE COURT: Mr. Hunter in Overstock?
22 MS. MOORE: Yes.
23 THE COURT: When did you submit that?
24 MS. MOORE: I believe about a month ago.
25 THE COURT: A month ago. I didn't grant that the last time
26 we were together?
27 MS. MOORE: I believe not, your Honor.
28 THE CLERK: I don't have anything outstanding.
8
1 THE COURT: Why don't we go off the record for a minute and
2 see if we can't take care of this. We're off the record.
3 (pause in proceedings).
4 THE COURT: We're back on the record.
5 While we were off the record, apparently the Register of
6 Actions shows that there was an application for admission of
7 Mr. Hunter back in, what was it?
8 THE CLERK: June 12th.
9 THE COURT: June 12th, but neither I nor my clerk has a
10 recollection of having seen it, which doesn't necessarily mean,
11 at least in my case, that I haven't seen it, but I don't recall
12 it. And I understand, counsel, that you can get us another copy
13 of the application and proposed order today, and I understand
14 from plaintiff's counsel there's no objection to that being
15 granted; is that correct?
16 MR. GRIFFINGER: It is, Your Honor, we've had no objection
17 to any of these. I don't remember this particular one, but we
18 haven't had any objection to any of them, so I don't think we
19 have any to this one.
20 THE COURT: Can I take that as a no objection?
21 MR. GRIFFINGER: Yes.
22 THE COURT: Okay. Assuming the application is in order,
23 then, hopefully I can deal with it in your absence today or
24 tomorrow, if possible. All right.
25 THE CLERK: Is that going to be both cases?
26 THE COURT: Is that both cases?
27 MR. LYONS: I believe Mr. Frazier Hunter is already admitted
28 in the Avenius case. This is a pro hac application for the
9
1 Overstock case.
2 THE COURT: That makes it even simpler. So this is only --
3 it's only the Overstock case that it hasn't been acted upon, but
4 basically the same application for Avenius was granted?
5 MS. MOORE: Yes, Yes, Your Honor.
6 THE COURT: All right. I don't think this will be a problem
7 then, but why don't you get me the papers, if you would be good
8 enough to do that, and we'll take a look at them.
9 MS. MOORE: Thank you.
10 THE COURT: All right. Thank you.
11 All right. We're here on a couple of -- well, we're here on
12 a couple things, a case management conference, but before we get
13 to the case management conference, let's deal with oral
14 argument.
15 In both cases we have demurrers and motions to strike by the
16 defendants, and I understand, from a discussion off the record,
17 that your preference is to argue these together for the two
18 cases, and that's fine with the Court as well, so, Mr. Lyons, I
19 gather you're about to stand up.
20 MR. LYONS: I'm about to stand up, Your Honor.
21 THE COURT: Please proceed.
22 MR. LYONS: On behalf of Merrill Lynch in both cases, our
23 demurrer as to both the Avenius case and the Overstock case,
24 Your Honor, is based on really two things. First, the claims
25 that are asserted in Avenius and Overstock are claims that are
26 preempted by federal law under Regulation SHO, S-H-O, adopted by
27 the SEC which governs all short sale trading activity; and,
28 second, Your Honor, plaintiffs have failed to plead manipulation
10
1 under California law. They can't state a claim under 17200 and
2 17500 because they're dealing with securities transactions which
3 are exempted from the application statute, and the remaining
4 California common law claims, Your Honor, simply don't state the
5 claim.
6 Let me begin, Your Honor, by describing who the parties are,
7 because I think that's important to the Court's analysis. First
8 of all, we're dealing in Avenius with 41 present or former
9 shareholders of Novastar, a Kansas City-based corporation. Only
10 34 -- excuse me, of the 41, 34 plaintiffs are not California
11 residents, as far as we can tell, have no contact with
12 California. In the Overstock case we have, as the plaintiffs,
13 Overstock itself is a Salt Lake City-based corporation
14 incorporated in Delaware and five presently are former
15 shareholders.
16 Now, the claims that the plaintiffs are making all arise out
17 of short sale trading activity in the marketplace, but
18 plaintiffs are not short sellers, nor do they claim to be buyers
19 on the other side of those sales transactions, and the
20 defendants, including my client Merrill Lynch, are not alleged
21 to have been counter parties in those short sales transactions
22 either. Instead, we are what's called prime brokers. We
23 provide services to our customers and our customers then engage
24 in short sale trading activity.
25 Plaintiffs don't claim that they have had any business
26 dealings with defendants at all or, frankly, with any of our
27 customers who engaged in trading activity. They don't claim
28 that they engaged in any short selling with defense or anyone
11
1 else. They don't even claim that any of the parties they sued
2 here engaged in short selling.
3 Now, plaintiffs claim that the price of Novastar stock and
4 Overstock declined, that's what they claim their injury is, but,
5 in fact, Your Honor, both Novastar and Overstock are very poor
6 investments. They have both reported dreadful financial
7 performance and they have a terrible outlook for the future.
8 It's no wonder their stock prices declined, and it's no wonder
9 that people have engaged in short selling activity. As we've
10 described in our papers, a short seller bets, hopes that the
11 price is going to decline in the stock, that's why they engage
12 in short selling activity, and as price declines is what
13 encourages short selling activity.
14 But what the plaintiffs try to do, instead of looking to the
15 management of Novastar and Overstock, they try to make my client
16 and these other defendants scapegoats for their own poor
17 investment strategies.
18 It's a common tactic in these kinds of cases, as the SEC
19 said in the papers we submitted, Request for Judicial Notice in
20 Exhibit N, which is key points that the SEC put up on its web
21 site. What the SEC says is the following: "Individuals may
22 claim that the price decrease is a temporary condition resulting
23 from activities of naked short sellers. Often, the price
24 decrease is the result of a company's poor financial situation,
25 rather than the reasons provided by insiders or promoters."
26 Now, Novastar, NFI, is a subprime lender. Your Honor is
27 familiar with the press reports that talk about the terrible
28 condition that Novastar is in, or that prime lenders are
12
1 generally in and in particular Novastar as well.
2 We submitted to the Court --
3 THE COURT: On a demurrer are those admissible for the
4 truth?
5 MR. LYONS: Well, Your Honor, I think they are admissible,
6 because these are admissions by Novastar and Overstock, and I
7 think it's relevant --
8 THE COURT: But they appear in a press release.
9 MR. LYONS: Well, Your Honor, they appear in their own
10 filings.
11 THE COURT: Where is that evidence before me?
12 MR. LYONS: Well, we've asked the Court to take judicial
13 notice.
14 THE COURT: Of the fact that it appears in their files?
15 MR. LYONS: We've asked the Court to take judicial notice of
16 the admission by Novastar and Overstock in their own filings
17 which demonstrate that both Novastar and Overstock have had very
18 poor financial performances.
19 Now, Your Honor, I think the point we're trying to make is
20 that when plaintiffs complain about our short sale activity,
21 what they're really doing is attacking the entire market in the
22 short selling activity, and for that reason plaintiffs' claims
23 are preempted under the supremacy clause. It's a facial attack,
24 really, on the balance that the SEC has structured when it
25 adopted Reg SHO back in August of 2004 before these complaints
26 were filed. And, for that reason, Your Honor, because it's that
27 attack, in our view, plaintiffs' claims, in the words of the
28 United States Supreme Court, stand as an obstacle to the
13
1 accomplishment of the goals that the SEC tried to achieve.
2 Now, what are those goals? First, the SEC adopted Reg SHO
3 to impose a uniform regulatory requirement, to get rid of a
4 patchwork quilt of regulations that might apply to short sale
5 transactions. They now have a uniform standard in the Reg SHO
6 and that uniform standard, among other things, imposes upon the
7 participants in the short sale transactions requirements to
8 locate stock in order to engage in short sale transactions and
9 requirements to deliver stock on the counterpart of the short
10 sale transaction. That is to say, a short seller offers to sell
11 stock that he may not then own. He covers that by borrowing the
12 stock or acquiring the stock some other way to cover the
13 transaction, and prime brokers and the executing brokers are
14 obliged to provide delivery services to deliver that stock
15 within a certain period of time.
16 It's uniform, Your Honor, because the SEC was concerned that
17 with different regulatory schemes there might be different and
18 competing obligations on the part of prime brokers in delivering
19 these services. But it's important, Your Honor, that when the
20 SEC -- to understand when the SEC adopted Reg SHO it did so by
21 balancing interests. On the one hand, Your Honor, it wanted to
22 discourage but not prohibit failures to deliver, and naked short
23 selling. On the other hand, it wanted to encourage short
24 selling because short selling provides two important benefits in
25 the marketplace: Pricing efficiency and market liquidity. It's
26 very important for the markets to operate to have both those
27 goals satisfied. In that connection, Your Honor, that's why Reg
28 SHO does not prohibit all fails to deliver. It doesn't prohibit
14
1 fails to deliver, for example, in securities that aren't in turn
2 threshold securities. It doesn't prohibit fails to deliver that
3 take place before a security is open for more than thirteen
4 days, for example.
5 By imposing these lower requirements, by refusing requests
6 to ban all fails to deliver and to ban all naked short sales,
7 what the SEC decided to do was to adopt a practical method to
8 encourage smooth trading in the marketplace through a system
9 called a Continuous Net Settlement System.
10 Now, Your Honor, what the plaintiffs have done in bringing
11 their claims is a direct challenge to that balanced market that
12 the SEC has established through Reg SHO. We've established --
13 we've provided Your Honor with probably too many citations to
14 Supreme Court cases, U.S. Supreme Court and California Supreme
15 Court cases, which describe the basic principles of preemption.
16 And, by the way, here, what we're talking about, Your Honor,
17 is what's called conflict preemption, that's preemption --
18 federal law preempts state law when state law stands as an
19 obstacle to the goals of the federal system.
20 And when Federal law has been adopted, especially through a
21 balancing process -- excuse me.
22 When state law attempts to attack the balance that the
23 federal law has put in place, that raises the classic question
24 of preemption. For example, in the Barnette Bank case and the
25 Crosby case, these are situations we cited to the Court where
26 federal law determined, after balancing competing
27 considerations, what should be permitted, what should be allowed
28 to happen, and preempted state law that sought to prohibit
15
1 conduct that federal law permitted. That's the case we have
2 here.
3 By interfering with the operation of the marketplace, in
4 short sale transactions, plaintiffs' claims are preempted. Now,
5 how do they interfere? Let's look at what the claims are.
6 Basically, what plaintiffs allege is that defendants
7 permitted fails to deliver, even intentional fails to deliver in
8 covering short sale transactions, which they contend amounts to
9 manipulation. But, as I said, Your Honor, Reg SHO doesn't
10 prohibit conduct of that type. Reg SHO doesn't say you can't
11 have a fail to deliver and even an intentional fail to deliver,
12 and the SEC has said even naked short sales can provide benefits
13 to the marketplace.
14 I think, Your Honor, a case that we would submit is very
15 closely on point is a case from the Seventh Circuit, the
16 American Agricultural Movement case versus Board of Trade.
17 That's a case we cited at 977 F. 2d, and, in particular, I want
18 to focus on pages 1156 to 57. That was a case involving
19 plaintiffs who brought state law claims under Illinois law for
20 fraud -- for breach of fiduciary duty and negligence against the
21 Chicago Board of Trade, involving trading in the soy beans
22 market, the commodities market for soy beans.
23 And what the Seventh Circuit said in that context, those
24 claims are preempted, and they drew a distinction, Your Honor,
25 between two kinds of claims, one that was brought and one that
26 could have been brought. The one that was brought, Your Honor,
27 was seen by the Seventh Circuit as interfering with the uniform
28 regulations that the Chicago Board of Trade, as approved by the
16
1 SEC, intended to adopt, and, therefore, they held that the
2 claims brought by the plaintiffs directly affected trading or
3 operations of securities market, because it was interfering with
4 defendants' ability to execute trades as permitted by Chicago
5 Board of Trade regulations. It therefore stands as an obstacle
6 to the accomplishment of Congress's goals. But they drew a
7 sharp distinction, Your Honor, between that kind of claim and
8 the claim where the application -- I'm reading from page 1157 of
9 the opinion. The contrast they drew was the attack on the
10 uniform -- on the entire market versus the following: "Where
11 application of state law would affect only the relationship
12 between brokers and investors or other individuals involved in
13 the market." In that circumstance, they say, that's not a
14 preemption issue, that's a private transaction. It's not -- it
15 doesn't effect the entire market.
16 Well, what do we have here, Your Honor? What is the
17 plaintiffs' case? The plaintiffs' case is not bringing
18 manipulation claims involving parties to the transaction. As I
19 said, the plaintiffs are strangers to these transactions. And,
20 indeed, Your Honor, respectfully, defendants didn't participate
21 in the transactions, except provide services to facilitate the
22 transactions to come about. So, it's not an attack on
23 individual transactions that the Seventh Circuit recognized
24 wouldn't be preempted. This is an attack on the entire market
25 mechanism, and that's the market mechanism the SEC established
26 and it established through a balancing of interests which it
27 says serves the goals of pricing efficiency and market
28 liquidity.
17
1 Now, plaintiffs contend that these are intentional fails to
2 deliver and intentional fails to deliver shouldn't be permitted
3 under Reg SHO or anywhere else, but, in truth, Your Honor, what
4 they attack is not simply intentional fails to deliver, in their
5 complaint they attack all fails to deliver, and you can see that
6 by looking at paragraphs 61, 63 and 69 of the Avenius complaint
7 and paragraphs 27 to 29 and 31 of the Overstock complaint. They
8 complain in those paragraphs that fails to deliver create
9 oversupply, causing the prices to decline. They're not limiting
10 their attack on intentional fails to deliver.
11 And, in any event, Your Honor, as we said, even if they were
12 to focus only on intentional fails to deliver, that doesn't
13 violate Reg SHO. Intentional fails to deliver can be permitted
14 under Reg SHO. And, therefore, by making the allegation we
15 engaged in intentional fails to deliver, if they were to focus
16 their claims in that way, still raises the issue of conflict.
17 In the words of the court in the Crosby case, conflict --
18 preemption is eminent when you have two -- when you have two
19 regulatory schemes dealing with the same course of conduct. And
20 what plaintiffs are really trying to do is to have California
21 law compete with Reg SHO in short sale transactions on a
22 market-wide basis, that raises a preemption claim.
23 Now, plaintiffs say, well, wait a second, intentional
24 manipulation, manipulation of any sort, they say, is
25 manipulation -- is a claim that's not protected by Reg SHO. In
26 fact, they cite to an SEC release which talks about how naked
27 short sales can be manipulative, and they also cite to some
28 statements by Chairman Cox of the SEC.
18
1 But if we look at the cases that the plaintiffs focus on to
2 support their manipulation claim, they all involve elements that
3 are absent here. They cite Diamond versus Multimedia, for
4 example, to support their claim of manipulation. But, in
5 Diamond, what was the situation? Those were parties to a
6 transaction. The defendant in that particular case, Diamond,
7 and together with the officers and directors, issued false
8 statements which inflated the value of Diamond securities, to
9 the detriment of the plaintiffs who paid more than they should
10 have paid when they first bought the stock, so there's an
11 element of deception there. And in In Re: Adler Coleman they
12 cite is another case on manipulation which also involves short
13 sale activity, but extortion and other deceptive activity,
14 including stealing of employees that gave rise to the
15 manipulation claim.
16 So what is present in plaintiffs' cases that's absent here?
17 Two things: First, some form of deception, non-disclosure. As
18 the Supreme Court said in Santa Fe -v- Green, deception,
19 non-disclosure is usually an essential element of a disclosure,
20 manipulation claim; and, second, what's missing is that the
21 party -- the defendants in that case were directly involved in
22 the short selling transaction or the transaction that involved a
23 false statement made to the plaintiffs. As I said, that's not
24 our case.
25 The plaintiffs here are strangers to the market transactions
26 that we're alleged to have facilitated. They had absolutely no
27 dealings with defendants whatsoever. And may I also add they
28 failed to allege a single false statement or deceptive act by
19
1 defendants, not a one.
2 Now, defendants -- excuse me, plaintiffs, I suppose, might
3 say to you, well, Judge, we have alleged a form of deception,
4 because, they say, the conduct that the defendants facilitated
5 result in the creation of "phantom shares," that because we
6 facilitated short sale transactions, somehow or other we created
7 additional shares or permitted the creation of additional shares
8 that resulted in a devaluation in the value of the company
9 stock, but that claim, Your Honor, respectfully, reflects a
10 fundamental misunderstanding of how transactions in short sales
11 work.
12 We've cited to the Court the SEC statements on this point,
13 Exhibit O of our Request for Judicial Notice in Avenius, and
14 Exhibit D for our Request for Judicial Notice in the Overstock
15 case, and both quote the SEC as saying the following: Exhibit O
16 at page 18 says, by the -- this is an amicus brief by the SEC,
17 Your Honor: "Naked short selling has no effect, no effect, on
18 issues of total shares outstanding." And in the Exhibit D of
19 the amicus brief in the Miller case, the SEC: "Nothing happens
20 in the course of clearing and selling trades that can change the
21 number of securities issued and the number outstanding." The
22 reason for that, Your Honor, is when there is a short sale
23 transaction, the buyer's account is credited under Article 8 of
24 the UCC, credited with an entitlement, a security of entitlement
25 which reflects the buyer's rights in the interest in that
26 particular security. That happens automatically. That
27 doesn't -- it's not affected by a fail to deliver. Still, the
28 buyer is credited with that amount. And, indeed, the plaintiffs
20
1 admit in their complaint that when there's a naked short sale,
2 the sales of the buyer still occurs. That's in their complaint.
3 Now, this makes sense, Your Honor, it makes sense that fails
4 to deliver don't affect the number of outstanding shares by the
5 plaintiffs, because the number of outstanding shares by Novastar
6 and Overstock are determined by those companies themselves. The
7 Board of Directors adopts charters or resolutions that issue
8 securities to the marketplace. They know how many shares are
9 outstanding. And if there are any doubts about that, if there's
10 any doubt at all, Your Honor, I'd like Your Honor to refer to
11 two SEC filings, respectfully, because I think this is directly
12 relevant to the point I'm making.
13 When Avenius filed -- when the Avenius plaintiffs filed
14 their complaint on June 22, 2006, about 30 days later Avenius
15 filed a Schedule 10-Q with the SEC, and that is our Request for
16 Judicial Notice Exhibit G-2 at page 1 as to Form 10-Q by
17 Avenius. And if you look at the very bottom of the page --
18 MR. GRIFFINGER: It's filed by Novastar, Counsel.
19 MR. LYONS: I'm sorry, Novastar, I beg your pardon,
20 Novastar.
21 If you look at the very bottom of that page, Your Honor, it
22 says, "The number of shares of registered common stock
23 outstanding on July 31, 2006 is 34,200,707. Now, there's no
24 asterisks there. There's no statement that says that number
25 varies depending upon the level of short sale activity. That's
26 an admission by Novastar of the total number of shares
27 outstanding.
28 Overstock did the same thing in its filing, and that's
21
1 Exhibit K, Request for Judicial Notice Exhibit K-1.
2 MR. GRIFFINGER: Your Honor, may I? First of all, Novastar
3 is not a party to either one of these actions, so there can be
4 no admission by Novastar, but this is all factual argument which
5 has no place in this demurrer hearing.
6 THE COURT: You'll get a chance to argue.
7 MR. GRIFFINGER: Thank you.
8 MR. LYONS: Your Honor, respectfully, it's not factual
9 argument. This is an admission by Overstock, K-1, as the total
10 number of shares outstanding on March 9, 2007. That's within
11 about a month from when they filed their complaint.
12 There are no additional shares created. As a matter of law,
13 there are no additional shares created. The number of shares
14 outstanding can be determined only by Overstock and Novastar and
15 their board of directors.
16 So, Your Honor, the fundamental point I wanted to make on
17 the preemption argument is this. The SEC has adopted a uniform
18 comprehensive regulatory market framework for short sale
19 activity. It permits fails to deliver, even intentional ones.
20 For the plaintiffs to allege that we violated California law by
21 engaging in conduct that's not prohibited by federal law raises
22 a precise issue of preemption, and what the Supreme Court says
23 in that circumstance is that federal law must trump state law,
24 so, for that reason, Your Honor, we think all these claims are
25 preempted.
26 Now, let's focus for a moment in particular on the remaining
27 claims, on the individual claims I should say. And, first, let
28 me deal with the 17200 claim that's brought in both cases, Your
22
1 Honor. 17200 and 17500 are alleged in both cases, but of course
2 the issue there, Your Honor, is does it apply to securities
3 transactions at all? And we would respectfully submit the Bowen
4 case puts an end to that issue, that Bowen establishes that
5 17200, 17500 cannot be based upon claims arising out of
6 securities transactions. We don't think there's any doubt left
7 about that issue.
8 Now, the plaintiffs argue, well, let's look at the Roskind
9 case, which in dicta appear to suggest securities claims could
10 fall under 17200. What plaintiffs didn't mention in their
11 papers, however, is that that precise citation they make to
12 Roskind was directly addressed by the Court in Bowen, and the
13 Court in Bowen said, first, that's pure dicta. They weren't
14 focused on the issue.
15 THE COURT: Didn't the First District just say the other day
16 it was not dicta?
17 MR. LYONS: The First District --
18 THE COURT: Here in San Francisco.
19 MR. LYONS: -- did not say that 17200 --
20 THE COURT: It said that that statement was not dicta, it
21 was essential to the determination.
22 MR. LYONS: Your Honor, if you're talking about the
23 Overstock case --
24 THE COURT: I am, in Gradient.
25 MR. LYONS: In the Gradient case in the Overstock case, I
26 think Your Honor quoted the language correctly. But remember
27 what the issue was in that case, the issue in that case was a
28 claim for defamation.
23
1 THE COURT: Which case?
2 MR. LYONS: The Gradient case.
3 THE COURT: I'm talking about what Gradient said about the
4 case that you just discussed where you said that Roskind was
5 dictum, and I was saying didn't Gradient say that it was not
6 dictum in this case?
7 MR. LYONS: Well, Your Honor, but my point, though, is that
8 the context of Gradient making the statement it did was in the
9 context of a claim brought for defamation.
10 THE COURT: Well, are you saying Gradient's statement about
11 what this being dictum and riscum was dictum in Gradient?
12 MR. LYONS: Well, Your Honor, I guess I would have to say
13 that, I guess I would, and the reason, Your Honor, is because
14 they didn't have before it an issue of whether 17200 was subject
15 to securities transactions or not.
16 Now, we have, I think, respectfully, the Bowen case is a
17 case that comes out all fours on this precise issue, and I would
18 submit to the Court that that means, respectfully, that we
19 should follow the Bowen case in this circumstance, and that
20 17200 does not apply to securities claims, and, in fact, we've
21 cited to the Court several other cases that have followed Bowen
22 are to the same effect. And, true, we do have the decision in
23 Gradient, but the truth -- but the facts are in Gradient, Your
24 Honor, they did not deal directly with the application of 17200
25 to a securities transaction, it was a context of a defamation
26 case.
27 So let's talk a minute then, now, if I could turn to the
28 manipulation claim that the plaintiffs make in the 25400. And
24
1 where I'd like to start there, Your Honor, I think the best
2 place to start with a 25400 claim is with the language of the
3 statute. 25400(A) says, it's illegal, "For the purpose of
4 creating a false or misleading appearance of active trading any
5 security," sub one says, "to effect any transaction of security
6 which involves no change in the beneficial ownership thereof."
7 No change.
8 As we've said, Your Honor, here, there is a change in the
9 beneficial ownership, short sale activity, even with fails to
10 deliver. There is a change in beneficial ownership, the SEC
11 says so, Article 8 of the UCC says so, so, I would submit, Your
12 Honor, on its face, 25400(A) wouldn't apply.
13 But there's another reason why 25400(A) doesn't apply, and
14 that's because, in alleging manipulation, Your Honor, they have
15 to allege that there is a false or misleading appearance created
16 in the marketplace as to the price or trading activity in a
17 security.
18 Now, Your Honor, we've presented to the Court, I think Your
19 Honor has four cases, four reported cases, that deal with
20 whether short selling activity can be -- is manipulation.
21 They're all federal cases, admittedly, Your Honor, but, as the
22 plaintiffs acknowledge, state law and federal law on
23 manipulation really comes from the same source. Indeed, the
24 plaintiffs acknowledge in their Opposition at page 9 that 25400
25 is based on federal manipulation statute.
26 So, we have four cases that address whether short selling
27 activity amounts to manipulation; we have three circuit court
28 cases which we cited to the Court, the GFL case, which is at 272
25
1 F. 3d at 197, deals with this subject; we have the Sullivan Long
2 case, which is 47 F. 3d, at 864, deals with this precise issue;
3 and then, finally, Your Honor, on Friday we did submit to the
4 Court a subsequent authority, the ATSI case, A-T-S-I , which is
5 a 2007 U.S. Lexis appeal 16382, came down on the 11th of July.
6 All those cases, Your Honor, as I mentioned a moment ago, deal
7 with short selling activity. None of them found that short
8 selling activity amounted to manipulative conduct. Now, they
9 did draw a distinction between short selling activity that's
10 accompanied by false or fraudulent statements, deception, if you
11 will, and short selling activity that's not. The latter, even
12 if it's naked short selling, even if it involves intentional
13 fails to deliver, if it's not accompanied by misrepresentations
14 of nondisclosures don't amount to manipulation. The former, if
15 there are elements of deception, could amount to some
16 manipulation. And, as I said, Your Honor, that's illustrated by
17 the plaintiffs' only authority on this point, which is the Adler
18 Coleman case, which had elements of deception in that particular
19 case.
20 So what's missing? Well, their manipulation claim is,
21 number one, they haven't shown and they cannot show as a matter
22 of law that there's no change in beneficial ownership. In fact,
23 there is a change in beneficial ownership. Even as I mentioned,
24 even as the Avenius plaintiffs admit at paragraph 61 of their
25 complaint, the sales of the buyer still occurs on naked short
26 sale, and as the UCC Article 8 establishes.
27 The second thing they are missing, Your Honor, are claims of
28 non-disclosure and deception. There's not a claim in here that
26
1 defendants failed to disclose anything. There's no false
2 statement pled at all, let alone pled with particularity, by any
3 of the defendants. And, as we've pointed out in our papers,
4 Your Honor, the marketplace was well informed of the existence
5 of substantial fails to deliver, they admit that in their
6 complaint. Paragraph 60 -- this is of the Avenius complaint,
7 paragraph 64 and 66 -- to 66, plaintiffs admit that the market
8 knew that Novastar had substantial fails to deliver. And
9 paragraph 30 of the Overstock complaint talks about short
10 positions in Overstock exceeding the outstanding shares, there's
11 no claim made that the public didn't know that.
12 So, in the absence of deception or manipulation, in the
13 absence of an inability to show that there was no change in
14 beneficial ownership, I would submit there can't be a
15 manipulation claim.
16 Now, it may be true, as the Adler Coleman indicated, there
17 may be a manipulation claim against the counter party of the
18 transaction, but, as I said, the plaintiffs here aren't buyers
19 on the other side of those transactions, and my client, my
20 client, among the other defendants, are not sellers, so, for
21 those reasons, Your Honor, as a matter of law they cannot state
22 a manipulation claim, because they failed to plead those
23 essential elements.
24 Now, Your Honor, I should cover just very briefly the other
25 part of their manipulation claim, which is 25400(B), and that
26 makes it unlawful to effect a series of transactions of any
27 security, creating an actual or apparent trading in such
28 security by raising or depressing the price of security. That
27
1 really echoes back, Your Honor, to the issue of phantom shares.
2 That issue -- that comes back to the plaintiffs' point that
3 because of fails to deliver, that somehow these additional
4 shares are created out of thin air. I think, as a matter of
5 law, the Court could -- should determine that phantom shares --
6 that there are no additional shares created. The number of
7 outstanding shares publicly announced by Novastar and by
8 Overstock remain the same, or at least are not affected by any
9 short selling activity. And, as I said, if there's any doubt
10 about that, all we have to do is look at the SEC filings those
11 companies made, making that representation to the marketplace.
12 So, the conclusion on the manipulation point, Your Honor,
13 is, respectfully, that there can't be manipulation here, because
14 they failed the essential elements required by the language of
15 the statutes of 25400(A) and 25400(B). There is a change in the
16 beneficial ownership in these transactions. There are no
17 phantom shares created. But the overarching issue on the
18 manipulation points, Your Honor, is there can't be manipulation
19 absent deception, and no deception by defendants is alleged.
20 Now, Your Honor, if I could just turn very briefly to the
21 remaining claims where I think, respectfully, Your Honor, we're
22 done with the claims in the Avenius case, Avenius as just a
23 17200 claim and the 25400 claim. Overstock has some additional
24 claims, and let me just address those very briefly.
25 First, Overstock has a claim for conversion and trespass,
26 but that claim doesn't work, Your Honor, because it requires
27 interference with plaintiffs' actual possession of the property.
28 And we can go all the way back to one of the cases that
28
1 Overstock cites, I think coming from the 1880's, Your Honor,
2 Payne versus Elliott, and as you look at that old case, cited by
3 the plaintiffs, in particular 54 California at page 343, that
4 shows you the element of trespass and conversion that's missing
5 here, namely, in that particular case, the defendant took
6 physical possession of the stock security certificates and did
7 not return them. Not alleged here and, frankly, cannot be
8 alleged here, so we think those claims as a matter of law should
9 be dismissed.
10 Then, Your Honor, we have the Overstock's claim for
11 interference with prospective economic advantage. We're a
12 little puzzled by that claim, because we don't quite understand
13 what prospective economic advantage Overstock has that
14 defendants, through some wrongful conduct, interfered with,
15 which I would submit needs to be set out in their complaint.
16 If the claim is based upon wrongful conduct in permitting
17 fails to deliver, Your Honor, I would submit it's not wrongful.
18 It doesn't amount to manipulation, as we talked about in
19 California law, and its conduct is permitted by Reg SHO, so that
20 fundamental element of an interference claim with respect to
21 economic advantage, that claim is missing.
22 But the second point, the second defect in that claim is the
23 claim also requires what the courts tell us is actual disruption
24 of an economically advantaged relationship.
25 Now, I know, Your Honor, there's a conclusory allegation
26 that they make in their complaint, I understand that, on actual
27 disruption, but, Your Honor, that's a conclusion I would
28 respectfully submit the Court need not accept as true on this
29
1 demurrer. There is no elements pled -- no facts are pled as to
2 with whom Overstock had that relationship or how it was
3 disrupted by what we did.
4 And, Your Honor, there is a case that we cited to the Court
5 called Silicon Nice, and even though it's a federal case -- it's
6 983 F. Supp. 1303, and I think when we gave Your Honor the
7 highlighted cases, we highlighted pages 1311 to 12. It is a
8 federal case, but it does apply California law, and, there, it
9 dismissed an interference with respect to economic advantage,
10 because there was no factual allegation that the plaintiff's
11 relationship was actually disrupted. There were no facts shown
12 how the disruption took place, who the counter parties were in
13 the transaction defendants allegedly interfered with.
14 That's what we have here, Your Honor, and I would submit
15 that for that ground, for that reason, the interference claim
16 should be -- the demurrers to the interference claims should be
17 sustained.
18 Now, Your Honor, let me make one more point if I could, and
19 then I'll turn the matter over to Mr. Griffinger. And I want to
20 return, if I could for a moment, to the Avenius complaint, which
21 I think raises a significant issue -- another significant
22 constitutional issue, this one under the Commerce Clause.
23 If the Court recalls, the defendants, as prime brokers, are
24 all financial services institutions headquartered on the East
25 Coast. Novastar is a Kansas City corporation not incorporated
26 in California, traded on the New York Stock Exchange, and of the
27 41 plaintiffs we have here, Your Honor, in Avenius, 34 are
28 outside of California, some are outside the United States as a
30
1 matter of fact.
2 So the question raised by the Avenius claims is how can
3 California law reach short sale transactions occurring entirely
4 outside the state affecting plaintiffs who reside outside the
5 state?
6 THE COURT: Well, some are in the state, some are out of the
7 state, it's a demurrer.
8 MR. LYONS: You're correct, Your Honor.
9 THE COURT: I mean, that's the allegation.
10 MR. LYONS: That is the allegation, Your Honor. But I
11 think, in this particular case, since we don't have a class
12 action, we need to look at whether each individual plaintiff can
13 state a claim, and we have seven in California, and I'm not
14 making my argument on the Commerce Clause with respect to them,
15 because they said they're in California, but I've got 34 other
16 plaintiffs who are also making these claims. They've got no
17 connection with California. And I think, in determining this
18 particular aspect of the demurrer, Your Honor respectfully
19 should look at each individual plaintiff's claim.
20 So how can these 34 non-California residents engaging in
21 transactions with no allegation any of them took place in
22 California, how can that be subject to California law? And we
23 had cited a couple of U.S. Supreme Court cases on that point,
24 Edgar versus Might, 457 U.S. at 642 to 43, which basically says,
25 as clearly as can be, that state law cannot be applied to
26 commerce that take place wholly outside the state's borders,
27 that's what's happened here with respect to these 34 claims.
28 And Davis, the Davis case, a 1923 case by Justice Brandeis, we
31
1 cited, 262 U.S. at 315 makes the same point.
2 Now, plaintiffs' response is, well, we have an allegation at
3 paragraph 76 of the complaint, this is Avenius complaint. They
4 say defendants' violations were committed either directly or
5 indirectly in California. They say that saves us from the
6 Commerce Clause attack. I would submit, Your Honor, that that's
7 too vague an allegation to avoid a Commerce Clause application.
8 What does indirectly in California mean, and which of the 34
9 plaintiffs are they alleging -- the 34 non-California residents
10 are they alleging engaged in conduct resulting from transactions
11 that took place in California? They don't answer that question,
12 or those two questions, and so for that reason, Your Honor, I
13 would submit that there's a significant Commerce Clause issue
14 with respect to those 34 plaintiffs.
15 So, Your Honor, with that, I think I've completed my
16 remarks, opening remarks on the demurrer, and I appreciate Your
17 Honor giving me your attention.
18 THE COURT: Okay. Thank you very much. Let's take a
19 recess. Why don't we -- it's between 20 and quarter to 11:00,
20 let's take a recess until 11:00. See you back at 11:00.
21 (Recess taken at 10:40 a.m.)
22 (Proceedings resumed at 11:10 a.m.)
23 THE COURT: Back on the record.
24 Mr. Griffinger.
25 MR. LYONS: Your Honor, housekeeping matter if I may.
26 THE COURT: Sure, of course.
27 MR. LYONS: I did not address, Your Honor, the motion to
28 strike. Mr. Wallace is prepared to address that, but we could
32
1 proceed with Mr. Griffinger now if Your Honor prefers.
2 THE COURT: No, let's do the motion to strike and then
3 Mr. Griffinger can respond to them both.
4 MR. LAWSON: Good morning, Your Honor.
5 THE COURT: Good morning.
6 MR. LAWSON: Michael Lawson, Morgan, Lewis & Bockius for the
7 plaintiffs Goldman Sachs group.
8 Your Honor, our motion to strike is directed to the
9 allegations in both complaints that seek relief in connection
10 with the 17200 cause of action that in our view is not
11 actionable and not cognizable under California law.
12 Your Honor, I'm sure, is very familiar with 17200 and the
13 restrictions on remedies which the California Supreme Court has
14 imposed on both the injunction side and the restitution side,
15 and I'd like to speak to both of those very briefly.
16 First, focusing on the injunction, if I might for just a
17 minute, in a sense this dovetails with the preemption argument
18 that you heard before. The plaintiffs are going to ask you,
19 under 17200, to craft an injunction that is going to deal with a
20 prevailing market practice engaged in by all the market leaders,
21 allegedly, nationwide and market-wide dealing with the entire
22 practice of naked short selling, and that's something obviously
23 that market participants, the SEC, the Stock Exchange, Nasdaq
24 presumably would have an interest in. That makes the argument
25 why this is a market-wide practice. This is not something
26 specific in a transaction between a customer on the one hand --
27 on the one side of a transaction, a buyer or a seller or with a
28 broker. Those are the kinds of transactions that these other
33
1 cases, like Adler referred to. But when Mr. Lyons is referring
2 to an attack on a market-wide practice, you're going to be asked
3 to draft the injunction that says how naked short selling can
4 occur in the U.S. equity market, and that is where Reg SHO comes
5 in. So our first viewpoint is that the request for injunctive
6 relief under 17200 is proof of the preemption argument that we
7 have to deal with here.
8 The restitution side, Your Honor, is also problematic. We
9 all know that under the Korea case the Supreme Court has said
10 that restitution must be true restitution. It cannot be some
11 type of monetary remedy gussied up on which someone hangs the
12 name restitution. It must have the plaintiff's money or
13 property, number one, number two, taken by the defendant, and,
14 number three, it can be restored by the defendant to the
15 plaintiff. It cannot be something else, whether it's disguised
16 restitution or disgorgement.
17 Here, when we look at the complaint, the allegations of
18 which are the subject of a motion to dismiss, there are two
19 kinds of items that are the basis for the action: Number one,
20 the claim that the plaintiffs are shareholders, present or
21 former, who sold shares at depressed prices, that is damages:
22 My stock was lower because too much volume, too many
23 transactions, give me my money back - or some remedy that has
24 that look and feel. That's not restitution.
25 The second -- and this is really the gist of the case when
26 it was first pled, plaintiffs are backing away from that now,
27 but paragraph 62 of the Avenius complaint, which talks about the
28 reason why, allegedly, the defendants engage in this practice,
34
1 which is also repeated in the Overstock complaint, says, "Prime
2 brokers," and I'm reading from paragraph 62, "are motivated to
3 intentionally fail to deliver stocks, because this removes a
4 core cost for their securities lending business, the cost of
5 providing the security, thus allowing them to earn more money
6 through the charging of fees, commissions, and so forth, through
7 phantom securities transactions. Upon information and belief
8 the prime brokers earn approximately $10 billion annually from
9 their securities lending operations."
10 First, that's not manipulation, that's an allegation that
11 we're doing something in order to make money. Part of
12 Mr. Lyons' point is there is not an allegation here that meets
13 the standard of manipulation, but even getting past that, that's
14 the gist of a disgorgement claim. That cannot be the basis for
15 a 17200 claim either, clearly under Korea and other cases.
16 Everyone admits, it is conceded, and I don't think
17 Mr. Griffinger is going to say otherwise, no plaintiff did
18 business with any defendant, and doesn't that prove the point
19 that no defendant took anything from any plaintiff? No
20 defendant has anything that belongs to a plaintiff. We are
21 complete strangers, and therefore there cannot be anything to
22 restore. This is not true restitution, it's something else
23 masquerading as such.
24 So, in our view, Your Honor, the 17200 claims for relief are
25 not substantiated and are not cognizable given the allegations
26 in the case both on the injunction side, which we think is proof
27 of the preemption issue, and on the so-called restitution side,
28 which we think is gussied up as something else.
35
1 In Avenius, we mentioned the fact that they want special
2 damages. What more could that be? Other relief under the
3 corporations code, there is none, and so forth.
4 Thank you very much, Your Honor.
5 THE COURT: Thank you. Mr. Griffinger.
6 MR. GRIFFINGER: Thank you, Your Honor.
7 Your Honor, I jumped up in the middle of Mr. Lyons' argument
8 somewhat out of frustration, because we are here on a demurrer
9 and a motion to strike, and what we heard was a lot of summary
10 judgment and closing argument to a jury from the defendants.
11 When the time comes, we will present evidence of two
12 remarkable companies, Overstock, which started relatively
13 recently and is now a company that is one of the largest online
14 retailers in the world, over $850 million in sales a year, NFI,
15 which is a similar interesting, dynamic company, and what you'll
16 hear about how companies like this, who are attacked by
17 practices that are engaged in by the defendants which create
18 massive quantities of phantom shares from which they derive
19 billions of dollars in income, how what a devastating effect
20 that has on companies like this, emerging companies that you'll
21 hear are extremely important to the American economy and
22 dynamic. You'll also hear from people with knowledge of it,
23 unlike Mr. Lyons and myself, about how these companies create
24 phantom shares, about how millions of shares are created which
25 are nowhere reflected on the books.
26 Now, let's go to the demurrer itself. What our case is
27 about is fails to deliver with intent to manipulate the market.
28 In their brief, their reply brief, the defendants say that
36
1 plaintiffs simplistically argue that intentional market
2 manipulation is flatly prohibited by federal law. They say this
3 is nothing more than a legal truism. Absolutely, and that's our
4 case, that's at page 6, lines 12 to 13.
5 Regulations SHO, no federal law, nobody is maintaining that
6 Reg SHO was intended to allow intentional fails with intent to
7 manipulate the market. At the first CMC, Your Honor encouraged
8 the parties to draft the jury instructions, to tailor the case
9 in that way. We did that. And, at the end of the day, we're
10 going to have to prove that the intent -- the fails to deliver
11 were done with intention to manipulate the market. That is our
12 burden of proof, and we will meet that.
13 They try to characterize our case as about intentional fails
14 to deliver. That's not what it's about. It's about intentional
15 fails to deliver which are done with the intent of manipulating
16 the market in individual securities.
17 We have pled the elements that are required under 25400.
18 Nowhere is there a requirement in 25400 that we be in privity
19 with these defendants. Nowhere is it required that we do
20 business with them. We have pled the elements of 25400, and we
21 have pled the factual background for those elements.
22 25400 is a fraud on the market theory. Counsel's reliance
23 on UCC Article 8 is misplaced. UCC Article 8 says merely that
24 when a short sale is effected, the buyer receives a beneficial
25 ownership in their account. There is no change of ownership in
26 the stock itself, that is the essence of our complaint. So
27 while that ownership interest may be registered, there is no
28 change in that ownership which is under 25400, because there are
37
1 no stocks located and delivered.
2 The 10-Qs that they waive as admissions are stock that is
3 issued and authorized by the company. It will be shown that
4 there are millions of shares of stock floating around out there
5 that are not issued and authorized by the company.
6 Let me address the Bowen, Roskind cases. The Bowen case was
7 a ponzi scheme in which the plaintiff buyers sought damages from
8 the issuer of the securities -- it was directly a security
9 transaction -- and, in that case, the Bowen case, found that the
10 section 17200 did not apply.
11 The Roskind case, on the other hand, was a case similar to
12 this one, in which it does not involve, as counsel pointed out
13 several times, direct transactions between the plaintiffs and
14 the defendants. What they would have you do is carve out an
15 exception for the securities industry from the California UCL,
16 which is in no way justified by any sort of legislative history.
17 And, as Your Honor quite correctly pointed out in the
18 Gradient case, the court of appeals stated: Whether one agrees
19 with Bowen or not, its holding that securities transactions are
20 not covered under the UCL bars lawsuits based on deceptive
21 conduct in the sale and purchase of securities, nothing more.
22 Overstock's claims here do not arise from any stock transactions
23 between the parties," and they went on that basis.
24 Other cases that they cite as supporting the Bowen theory
25 include the Feitelberg case, which they say holds that the UCL
26 does not apply to securities transactions. That is not what it
27 holds. The Feitelberg case went off on the 17200 remedy theory,
28 it merely recited what the holding of Bowen held. It had
38
1 nothing to do with the case.
2 The Credit Suisse case and the Canos (sic) cases, which are
3 also cited in support of their position, are directly between
4 buyers and sellers of securities.
5 So, in this case, which does not involve a direct quote -- I
6 mean, excuse me, the direct purchase between the parties, the
7 UCL does apply.
8 Now, the conversion claim is very interesting. They cite
9 the Payne case, good California law, 1880 California Supreme
10 Court, and they say, well, that proves that you have to have --
11 in order to have a conversion claim, you have to take the
12 certificates. The opening line of that case: "There is no
13 allegation that the defendants received or converted any
14 certificate of stock, but only that they converted 100 shares of
15 stock." And the Court goes on to discuss in great detail that
16 in order to have a claim, you can have a claim for conversion of
17 stock that does not involve taking physical possession or
18 interfering with physical possession of certificates, because
19 there are many rights that go along with it, which, again, is
20 the point of our case. By creating these phantom shares, you're
21 interfering with many of the ownership rights that the
22 plaintiffs have in these stocks. So, we would just merely
23 encourage you to read the Payne case, because they're wrong.
24 Now, finally, on the issue of the Commerce Clause, I would
25 encourage Your Honor to take a look at Judge Jenkins' decision
26 in the motion to remand.
27 THE COURT: I've read it.
28 MR. GRIFFINGER: All right. Can I just point out one. He
39
1 was -- they made the same argument to him, and his opinion
2 states: "The complaint sets forth in detail the purported
3 wrongful conduct and alleges that such conduct occurred in
4 California. Absent some argument that plaintiffs lack any basis
5 for making such allegation, the Court finds these allegations
6 sufficient to state a viable claim under California Corporations
7 Code Section 25400 and Business & Professions Code Section 17200
8 and 17500. So, Judge Jenkins entertained the same argument and
9 rejected it. It was in the context of a wrongful joinder for
10 purposes of defeating diversity, but it's the same argument.
11 In sum, the argument on the demurrer -- there was not one
12 argument made that was not in their papers. We would stand on
13 our papers. Every single one of those arguments is addressed in
14 our Opposition, so I would encourage you to reread that if you
15 have any questions or comments that arise after the hearing,
16 because we're very comfortable with our Opposition in response
17 to this.
18 And that goes for the motion to strike, too. On the motion
19 to strike, the -- what's happened here is that by creating these
20 phantom shares, they've essentially taken away from us valuable
21 rights we have in this stock. The restitution that -- the
22 injunction that we would seek is that they replace those rights
23 by an injunction that would cause the delivery, the location and
24 delivery of shares that have been failed to deliver with intent
25 to manipulate the market, by either purchasing those stocks from
26 us or purchasing them in the open market and locating and
27 delivering them as they should have.
28 And on the restitution side, the restitution would be to
40
1 restore to the plaintiffs the decrease in value created by
2 virtue of their conduct, and that is squarely within the
3 restitution statute 17203 and injunction -- excuse me, the UCL's
4 remedy statute, which is 17203.
5 So, again, Your Honor, I didn't hear anything different from
6 either of these gentlemen, that's all in our opposition, stand
7 on it, unless you have any questions, I'll rest.
8 THE COURT: Okay. Anything further?
9 MR. LYONS: Your Honor, if I may briefly address some of the
10 points that Mr. Griffinger raised.
11 THE COURT: Sure.
12 MR. LYONS: And I'd like to perhaps begin by his point that
13 we're pleading evidence. I have to respectfully disagree. I
14 think the issue of whether the Court can credit the legal
15 argument that phantom shares are created is a legal question. I
16 don't think it's a fact question at all.
17 And if the Court -- as we've set forth in our papers, the
18 SEC and the manner in which the Article 8 operates establishes
19 that there is a change in beneficial ownership, indeed
20 plaintiffs seem to acknowledge that themselves in their own
21 complaint when they make the point that at a naked short sale
22 the sale in fact does occur. I think that's a legal question,
23 not a factual one.
24 Now, they say we're alleging intentional fails to deliver
25 done to manipulate the market. I think Your Honor needs to --
26 respectfully, should look at the complaint, because the breadth
27 of the complaint is much broader than intentional fails to
28 deliver. If the Court were to look at paragraph -- ah,
41
1 Mr. Lawson took it -- paragraph 62 of Overstock, for example --
2 of Avenius, I beg your pardon, paragraph -- first paragraph 61
3 talks about fails to deliver, not intentional ones. The first
4 sentence of paragraph 62 says, "Upon information and belief, the
5 vast majority of fails to deliver for the fails are persistent
6 or intentional, not due to inadvertent errors." But paragraphs
7 63, 69 go on to talk about fails to deliver not limited to those
8 that are intentional, indeed paragraph 62 is attacking more than
9 simply intentional fails to deliver. They're not contending all
10 these fails were intentional, and I think that raises precisely
11 the issue of preemption under Reg SHO, because they're attacking
12 the manner in which fails to deliver occur on the marketplace.
13 That's a market-wide attack.
14 Mr. Griffinger also said that the 25400 claim really was a
15 claim of a fraud in the market theory. Well, that's our point,
16 Your Honor. If they're going to make a fraud claim, there's got
17 to be a non-disclosure and deception and it has to be pled with
18 specificity with respect to the defendants. That's not in their
19 complaint. There are no facts as to the who, what, why, when or
20 how of the fraud conduct engaged in by defendants, and for that
21 reason alone the 25400 claim in our view should not survive.
22 Now, Your Honor, let me talk about the Gradient issue that
23 the Court raised. And Your Honor I think did correctly describe
24 the reference in Gradient to Roskind, but I'd like the Court
25 also to respectfully look at another portion of the Gradient
26 decision, and that is at -- I've got the -- looks like I have a
27 Westlaw cite, Your Honor, it's page 20 of the Westlaw cite. We
28 did cite it in our reply brief, Your Honor.
42
1 THE COURT: That's why I usually ask counsel to highlight or
2 underline the materials they give me, because when you print
3 materials off a computer today, every page has several page
4 numbers on it.
5 MR. LYONS: Every page has several page numbers. And what
6 we printed off, I think when submitted it, we submitted a Lexis
7 cite, and I can give you that. I think I printed that. We can
8 give it to the Court. If Your Honor would look at star 53, so
9 it's page 20 of the Westlaw cite, star 53 of the Lexis cite that
10 we provided to the Court.
11 THE COURT: Do you have a copy of the case?
12 MR. LYONS: I do.
13 THE COURT: Why don't you pass it up and I can follow you,
14 otherwise I may spend a lot of time looking for star 53
15 somewhere.
16 MR. LYONS: I've given you a clean one, Your Honor.
17 THE COURT: Okay. But have you pointed out where star 53
18 is?
19 MR. LYONS: Well, I'll tell you, if you look at page 20 at
20 the top --
21 THE COURT: Okay, that's good, 20 of 26 or the page under
22 that that says page 19?
23 MR. LYONS: You're right.
24 (laughter)
25 MR. LYONS: It's page 21 of 26 under that page 20.
26 THE COURT: This illustrates the point. Okay.
27 MR. LYONS: Do you have it, 21 of 26?
28 If you look at the bottom, Your Honor, this is right
43
1 following the Bowen citation, left-hand corner.
2 THE COURT: The plaintiffs in Bowen?
3 MR. LYONS: Right. That paragraph.
4 THE COURT: Okay.
5 MR. LYONS: The bottom says, "Whether one agrees with Bowen
6 or not," Mr. Griffinger referred to this language, "its holding
7 that securities transactions are not covered under UCL bars
8 lawsuits based on deceptive conduct in the sale and purchase of
9 securities, nothing more." And they italicize the following
10 sentence that I want to focus on: "Overstock's claims do not
11 arise from a stock transaction between the parties."
12 Well, Your Honor, that's an absolutely true statement in
13 that case. That was a case for defamation.
14 THE COURT: Now, how does that help you?
15 MR. LYONS: Here, in contrast --
16 THE COURT: How does that help you?
17 MR. LYONS: Here, in contrast, the claims here are all based
18 on securities transactions, short sale securities transactions.
19 THE COURT: But they're saying that Bowen doesn't cover a
20 situation where the claims do not arise from stock transaction
21 between the parties, and you've constantly made the point that's
22 our case.
23 MR. LYONS: Well, Your Honor, respectfully, I understand
24 what you've just said.
25 THE COURT: Okay.
26 MR. LYONS: But, respectfully, I submit --
27 THE COURT: I don't expect you to agree with it.
28 MR. LYONS: No, but I would respectfully submit that you're
44
1 reading more into it than what the Gradient case says.
2 THE COURT: Well, but you just said the sentence that you
3 read is italicized for emphasis.
4 MR. LYONS: Well, but the point that the Gradient case was
5 making with respect to the Overstock claims before in that case
6 were claims based upon defamation, not based on any aspect of
7 securities transactions.
8 THE COURT: I understand that point.
9 MR. LYONS: So I'm merely suggesting to the Court that we do
10 have a case, Bowen, which talks about securities transactions
11 and whether they can support a UCL case.
12 Now, it may be true --
13 THE COURT: Doesn't this say, or not, that Bowen doesn't
14 apply to our case?
15 MR. LYONS: No, it says it doesn't apply to the case in
16 Gradient. It does not apply to the Gradient case.
17 THE COURT: But doesn't it say -- I don't mean to argue with
18 you, but doesn't it say that it doesn't apply to a situation
19 where the claims do not arise from stock transactions between
20 the parties; isn't that the very sentence you just read to me?
21 MR. LYONS: Well, correct, Your Honor.
22 THE COURT: But that's our case, isn't it?
23 MR. LYONS: The context of that statement was the Gradient
24 decision, which was not, and did not, involve any stock
25 transactions between the parties.
26 THE COURT: Now what you're saying to me is that's dictum, I
27 guess, but you're not saying that isn't what it says, you're
28 just saying it arose in the context of a defamation case.
45
1 MR. LYONS: That's precisely what I'm saying, correct.
2 THE COURT: You're not disagreeing with my interpretation of
3 what it says, but you're saying that I shouldn't follow it
4 because it's dictum.
5 MR. LYONS: I'm saying it doesn't apply here, precisely.
6 THE COURT: Doesn't apply here is a different statement.
7 I'm saying to you --
8 MR. LYONS: I'm saying both, Your Honor.
9 THE COURT: Doesn't this say, or not, I'm asking, I'm not
10 telling you, doesn't this say that Bowen doesn't apply to a
11 situation where you do not have a stock transaction between the
12 parties, because Bowen just doesn't apply to that; isn't that
13 what this is?
14 MR. LYONS: No, I would respectfully submit it does not mean
15 that, it may say that.
16 THE COURT: It says it, but it doesn't mean it?
17 MR. LYONS: But it doesn't mean it, because, Your Honor, the
18 context of the statement is drawn in a defamation case, what
19 wasn't before the Court there.
20 THE COURT: What?
21 MR. LYONS: What was not before the Court.
22 THE COURT: I know, but that could be a statement that it's
23 dictum. I don't mean to be arguing with you.
24 MR. LYONS: Your Honor, I apologize.
25 THE COURT: You're saying it's what it says, but it's not
26 what it means, I'm not exactly sure what you're telling me.
27 MR. LYONS: Your Honor, I apologize, I may be confusing my
28 dictum with my distinguishing.
46
1 THE COURT: Right. Is that what it says, is my first
2 question.
3 MR. LYONS: It is what it says.
4 THE COURT: Okay. I don't mean to be argumentative with
5 you, I'm just trying to understand what you're saying.
6 MR. LYONS: Well, I think the point I'm trying to make, Your
7 Honor, is that we do have a case from the Court of Appeal that
8 does deal with securities transactions and says that UCL does
9 not apply in that context.
10 THE COURT: Bowen.
11 MR. LYONS: Bowen. It is correct that in the Bowen case
12 there were securities transactions among the parties to the
13 case. No question about that. I think, though, it's a leap to
14 go from that factual situation to say that the UCL bar on
15 securities transactions only applies when there's transactions
16 between the parties.
17 THE COURT: You're basically saying then, Bowen ought to be
18 given a broader reading than the First District gives to Bowen.
19 MR. LYONS: Correct, that's precisely what I'm saying. And
20 The whole purpose of that, if one goes back and looks at the
21 Bowen rationale, the Bowen rationale, for whether the UCL covers
22 securities transactions, all deals with its analysis of
23 statutory history. The analysis is directly applicable here, I
24 would submit. So, for that reason, the Bowen decision should be
25 given a broader reading than, respectfully, Mr. Griffinger would
26 like to give it.
27 Now, Your Honor, let me make one more point before I sit
28 down, and that has to do with the Payne case, this conversion
47
1 case, because Mr. Griffinger asked you to look at the very first
2 sentence of the Payne decision, and I'd like you to look, and
3 Mr. Griffinger correctly read you that decision, that first
4 sentence, but I'd like you to look at the page -- and I
5 apologize, Your Honor, this is -- the official citation, Your
6 Honor, is 54 California, and I think we can follow it in the
7 report, page 343, which is near the end of the opinion. And
8 what they say on page 343 is the Payne case involved a
9 circumstance of a claim by the plaintiff that the plaintiff
10 delivered the stock to defendants to hold a security for the
11 payment of $409, which he owed to them. The stock was
12 delivered. The defendant took possession of the stock.
13 Now, the Court talks about the concept of stock
14 certificates, and, in fact, in 1882, it was a bit of an
15 amorphous concept as to what stock certificates represented.
16 But the Court is clear, I submit, at page 43 -- 343 that we're
17 talking about the actual delivery of stock to the defendants,
18 and that gave rise to the conversion and trespass claim.
19 So, Your Honor, if I could respectfully submit, this is an
20 attack by plaintiffs in their complaints on the entire market
21 and short sale activity. It's preempted. It doesn't amount to
22 manipulation. It's barred by the Bowen case, and we would
23 submit on that, Your Honor.
24 THE COURT: Okay.
25 MR. LAWSON: And, Your Honor, may I just put 30 seconds in
26 on the last word on the motion to strike?
27 THE COURT: Sure.
28 MR. LAWSON: Your Honor, I'm certain I heard Mr. Griffinger
48
1 say that on the restitution piece -- I tried to write down
2 exactly what he said -- the defendants should restore to the
3 plaintiffs the decrease in the value of their shares created by
4 their conduct. Now, if there weren't a better description of
5 damages, I don't know what there would be there. That's not
6 true restitution under Korea or any other case.
7 And then, secondly, the injunction, which he said he wants
8 now, is with respect to a practice that creates a so-called
9 phantom share, and I think that proved the point that I made the
10 first time up. He's asking the Court to enjoin a practice that
11 is engaged in allegedly by the largest market participants
12 industry-wide, not just directed to two stocks. He's not saying
13 we just did this on Overstock or we just did this on NFI, he's
14 saying we do this as part of our business. How can you issue an
15 injunction that says in Superior Court in San Francisco I'm
16 going to enjoin all the market participants from doing this kind
17 of naked short selling trading in two stocks? You can't do
18 that, because all stocks have to trade on the same platform
19 applying the same rules. Cannot be done. That's preemption,
20 and that's why this is an invalid remedy under 17200. Thank
21 you.
22 THE COURT: Okay. Submitted?
23 MR. GRIFFINGER: Very briefly. We're not asking for
24 injunction on the whole system, we're only asking as to these
25 two companies, I want to make that very clear.
26 I'd also like to say that regardless of how they parse out
27 our complaint, what we're going to have to prove is intentional
28 manipulation, that is not allowed for under any form of federal
49
1 law.
2 And the pleading standards that Mr. Lyons would have us
3 adhere to might be appropriate under Federal Rule 9, but they
4 are not California standards, and they are not -- we have pled
5 what we were required to do under 25400 and the common law
6 claims. Thank you. Submitted.
7 THE COURT: Submitted?
8 MR. LYONS: Submitted.
9 MR. LAWSON: Submitted.
10 THE COURT: Okay. What I think I'll do is recess for lunch
11 and probably render a decision when we return, and so why don't
12 we go to lunch and come back around 1:30; is that okay? See you
13 then.
14 MR. LYONS: Thank you for your time, Your Honor.
15 THE COURT: Thank you.
16 Thank you for your arguments.
17 (Luncheon recess was taken at 11:45 a.M.)
18
19
20
21
22
23
24
25
26
27
28
50
1 AFTERNOON SESSION 1:30 P.M.
2
3 THE COURT: Okay. We're on the record. Good afternoon,
4 everybody.
5 And these matters are submitted, and I'm going to give you
6 my decisions in two of them. I'm going to give you
7 opinions/decisions in each case separately, but there's a lot of
8 commonality in the rulings, because there's a lot of commonality
9 in the issues, but I'm doing this so that we have a record of
10 the rulings in each of the cases separately.
11 First, the ruling in Avenius is as follows: Both sides have
12 asked that judicial notice be taken of certain documents, and
13 there has been no opposition. Accordingly, the Court takes
14 judicial notice as requested, having in mind both the extent and
15 the limitations of the purposes for which the judicially noticed
16 documents may be considered.
17 The essence of plaintiffs' claims is found in the
18 allegations that (1) defendants engaged in specified conduct
19 related to the short sales of the stock of Novastar Financial,
20 Inc. with the intent to manipulate the market for Novastar
21 shares by creating a false or misleading appearance with respect
22 to that market; (2) defendants knew that their conduct would
23 artificially depress the market price of Novastar shares and
24 acted in order to induce the sale of Novastar shares at
25 artificially depressed prices; (3) defendants successfully
26 achieved the intended manipulation of the market for Novastar
27 shares, and (4) the result was that the Novastar shares held by
28 the plaintiffs were artificially deflated to plaintiffs'
51
1 financial detriment. Included among the more specific
2 allegations of the complaint are that the defendants have
3 intentionally and persistently failed to deliver shares of
4 Novastar stock as required for proper settlement of short sale
5 trades; that the result has been dramatic distortion with regard
6 to the nature and amount of trading in Novastar's publicly
7 traded stock; that Novastar shares issued by the company in the
8 normal course of raising capital as a public company are not
9 being properly valued because of the dilutive effect of the
10 alleged phantom shares, which were not issued by Novastar; and
11 that selling but failing to deliver actual shares issued by
12 Novastar has had the effect of generating a virtually unlimited
13 supply of Novastar shares for sale, which in turn has negatively
14 altered normal supply side market constraints found in a
15 properly functioning market.
16 To state the obvious, the issue for this Court on demurrer
17 is not the correctness or accuracy of the allegations contained
18 in the complaint. Those allegations, which of course must be
19 accepted as true at the demurrer stage, charge intentional and
20 successful market manipulation to the damage of those whose
21 stock prices were thereby distorted to their disadvantage. In
22 this connection and as previously noted, one of the allegations
23 is that the defendants acted in order to induce the sale of
24 Novastar shares at artificially depressed prices.
25 Against that background, it is the Court's view that,
26 contrary to defendants' contention, the application of pertinent
27 California law to defendants' alleged short selling activities
28 would not stand as an obstacle to the accomplishment or the
52
1 execution of the full purposes or objectives of federal law.
2 Plaintiffs' claims do not conflict with federal law in that
3 federal law does not sanction or otherwise protect intentional
4 market manipulation such as that here alleged and there is room
5 for state law remedies relating to such conduct that would not
6 obstruct or otherwise impede federal law. In short, the
7 allegations of plaintiffs' complaint are consistent with federal
8 law. Therefore, the Court holds that plaintiffs' claims are not
9 preempted by federal law, noting parenthetically that defendants
10 do not claim, nor could they persuasively contend, that there is
11 either express preemption or field preemption in the
12 circumstances of this case.
13 Turning to the demurrer to the first cause of action brought
14 under Corporations Code Section 25400, et seq., the Court
15 overrules the demurrer. Plaintiffs have pled facts sufficient
16 to constitute a cause of action under Sections 25400, et seq.
17 Addressing the demurrer to the second cause of action
18 brought under Business & Professions Code Sections 17200, et
19 seq. and 17500, et seq., the Court overrules the demurrer.
20 Support for this ruling is found in the recent case of
21 Overstock.Com, Inc. versus Gradient Analytics, Inc. 151 Cal.
22 App. 4th 688, a First District decision rendered or issued on
23 May 30th, 2007. That opinion stands for the following
24 propositions. First, whether or not one agrees with the
25 decision in the case of Bowen versus Ziasun, Z-I-A-S-U-N,
26 Technologies, Inc., 116 Cal. App. 4th 777, the Bowen court's
27 holding that securities transactions are not covered under the
28 UCL bars lawsuits based on deceptive conduct in the sale and
53
1 purchase of securities, nothing more. In other words, the
2 Analytics court interprets the Bowen court's holding as being
3 nothing more than that securities transactions are not covered
4 under the UCL -- that securities transactions not covered under
5 the -- excuse me -- that securities transactions are not covered
6 under the UCL bars lawsuits based only on deceptive conduct in
7 the sale and purchase of securities. In other words, as made
8 clear by the Analytics court in italicized language of that
9 opinion that we looked at earlier in this argument, the Bowen
10 case does not hold that claims are barred where they do not
11 arise from stock transactions between the parties. Second, as
12 further said by the Analytics court, the conclusion reached by
13 the court in the case of Roskind versus Morgan Stanley Dean
14 Witter, 80 Cal. App. 4th 345, that the UCL potentially could
15 provide a remedy for the securities violations there at issue if
16 not preempted by federal law in that context was integral to the
17 Roskind court's determination that federal securities law did
18 not preempt the plaintiffs' UCL claim. In short, that
19 conclusion of the Roskind court was not mere dictum. Third, at
20 least as applied to non-preempted lawsuits not based on
21 deceptive conduct in the sale and purchase of securities, the
22 UCL may reach conduct occurring in the context of securities
23 transactions. It is further worthy of mention that the
24 Overstock versus Gradient appellate opinion includes a reminder
25 of the words of the California Supreme Court in the leading case
26 of Cel-Tech Communications, Inc. versus Los Angeles Cellular
27 Telephone Co., 20 Cal.4th 163, that the sweeping language of the
28 UCL is intended to permit tribunals to enjoin on-going wrongful
54
1 business conduct in whatever context such activity might occur.
2 It follows from the foregoing analysis that the plaintiffs
3 have pled facts sufficient to constitute a cause of action under
4 Sections 17200, et seq. and 17500, et seq.
5 This Court rejects defendants' contention that their
6 demurrer must be sustained because applying California law to
7 conduct outside California's borders violates the Commerce
8 Clause. It is sufficient answer to observe that in paragraph 70
9 of the complaint it is alleged upon information and belief that
10 "Defendants' market manipulation took place in the state of
11 California" and in paragraph 75 of the complaint there is
12 allegation that "Defendants' violations were committed either
13 directly or indirectly within California." These allegations
14 make it premature at this stage to further consider Commerce
15 Clause contentions.
16 In this connection, the Court notes parenthetically that
17 when this case was in federal court, Judge Jenkins rejected
18 defendants' contention that certain of the plaintiffs have
19 failed to state actionable claims under California law because
20 they do not adequately allege that defendants' wrongdoing
21 occurred in California. In rejecting that contention, Judge
22 Jenkins stated, "The Complaint sets forth in detail the
23 purported wrongful conduct and alleges that such conduct
24 occurred in California. Absent some argument that plaintiffs
25 lack any basis for making such allegations, the Court finds
26 these allegations sufficient to state a viable claim under
27 California Corporations Code Section 25400 and Business &
28 Professions Code Section 17200 and Section 17500." No argument
55
1 has been made to this Court that plaintiffs lack any basis for
2 making such allegations, and this Court agrees with the
3 conclusion of the federal court as just quoted.
4 Defendants have moved to strike a few lines of the complaint
5 relating to the relief available under the second cause of
6 action, that is, the claims under the Unfair Competition Law.
7 Defendants contend that the passages at issue directly affect
8 the scope of this case in discovery and the issues for trial.
9 That conclusion appears to rest upon the assertion that
10 plaintiffs may not recover under the UCL any reduced transaction
11 costs or cost savings that are alleged to have benefited the
12 defendants. However, plaintiffs at least appear to be saying in
13 their opposition brief that they do not seek recovery of such
14 alleged cost savings. In any event, such recovery would not be
15 restitutionary. It would not represent a return of money to
16 those persons from whom the property was taken, that is, to
17 persons who had an ownership interest in the property or those
18 claiming through that person. In short, such relief would not
19 be available under the UCL.
20 Plaintiffs' brief, although not entirely clear to the Court
21 in this respect, seems to suggest that the recovery sought under
22 the UCL is included within the scope of the recovery sought
23 under one or more of the other causes of action. If that is so,
24 then it would appear that neither the scope of discovery nor the
25 issues for trial would be narrowed by granting the motion to
26 strike.
27 That aside and turning to the merits of that motion, this
28 Court holds that, under the present pleading, plaintiffs may not
56
1 recover on their UCL claims any sums for any decline in the
2 values of their stock holdings. The UCL permits only two forms
3 of relief, injunctive relief and restitution, as stated in the
4 case of Feitelberg versus Credit Suisse First Boston, LLC, 134
5 Cal. App. 4th 997, at pages 1011 and 1012. Any recovery in this
6 action measured by the decline in the value of plaintiffs' stock
7 holdings would not be restitutionary in nature, as made clear by
8 the case of Korea Supply Company versus Lockheed Martin
9 Corporation, 29 Cal.4th 1134.
10 In the case at bar, there is no allegation that plaintiffs
11 have an ownership interest in the money they seek to recover
12 from defendants. Plaintiffs are not seeking the return of money
13 or property that allegedly was once in their possession. Under
14 the factual allegations of the complaint, it is obvious that any
15 award that plaintiffs would recover from defendants for
16 diminished stock value would not replace any money or property
17 that defendants took directly from plaintiffs. Moreover,
18 recovery for lost stock value in this case cannot be traced or
19 in any way related to any funds allegedly in defendants'
20 possession.
21 Furthermore, plaintiffs have not alleged any facts showing
22 that they have a vested interest in the money they seek to
23 recover for diminished stock value. While plaintiffs own or
24 have owned particular shares of stock, such ownership is not
25 fairly characterized as giving rise to a vested interest in
26 particular stock values attaching to their shares over time.
27 Any lost value attaching to stock ownership is akin to the loss
28 of an expectancy, not to the loss of a vested interest.
57
1 As noted by the Korea Supply court, the UCL does not
2 authorize remedies that closely resemble a claim for damages.
3 Plaintiffs' claim for loss of stock value is precisely such a
4 claim.
5 As also noted by the Korea Supply court, the object of
6 restitution is to restore the status quo by returning to the
7 plaintiff funds in which he or she has an ownership interest.
8 That object does not fit the situation of recovery for alleged
9 diminished stock value in this case. To hold that such recovery
10 is restitutionary is to put a square peg into a round hole.
11 Therefore, the Court grants the motion to strike the
12 following: (1) that portion of paragraph 84, page 13, lines 24
13 and 25 of the complaint, which states, "and restitution from
14 Defendants according to proof."; (2) the prayer on the second
15 cause of action, page 14, lines 10 and 11, which states "for
16 restitution in an amount according to proof at trial, in an
17 amount in excess of the jurisdictional minimum of this Court";
18 (3) the prayer on the second cause of action, page 14, lines 12
19 and 13, which states "for special damages in an amount according
20 to proof at trial, in an amount in excess of the jurisdictional
21 minimum of this Court"; and (4) the prayer on the second cause
22 of action, page 14, line 14, which states "for prejudgment
23 interest." As stated, there are no factual allegations upon
24 which a restitutionary remedy can be premised.
25 At the same time, the Court denies the motion to strike the
26 balance of the language of the complaint sought to be stricken.
27 That language is appropriate in support of relief potentially
28 available under the UCL.
58
1 In their opposition brief, plaintiffs have asked for leave
2 to amend their complaint so they can "clarify the relief sought
3 by their UCL cause of action." The Court grants that request
4 and gives plaintiffs leave to amend for the limited purpose
5 stated.
6 And when I finish with the rulings in this and Overstock, I
7 need to work out the details of an order to be prepared on these
8 rulings.
9 So let me turn to Overstock, and, as I say, of necessity,
10 you're going to hear some repetition here.
11 Both sides -- this is the ruling on Overstock.
12 Both sides have asked that judicial notice be taken of
13 certain documents, and there has been no opposition.
14 Accordingly, the Court takes judicial notice as requested,
15 having in mind both the extent and the limitations of the
16 purposes for which the judicially noticed documents may be
17 considered.
18 The essence of plaintiffs' claims is found in the
19 allegations that (1) defendants engaged in specified conduct
20 related to the short sales of the stock of Overstock.com, with
21 the intent to manipulate the market for Overstock shares by
22 creating a false or misleading appearance with respect to that
23 market; (2) defendants knew that their conduct would
24 artificially depress the market price of Overstock shares and
25 acted in order to induce the sale of Overstock shares at
26 artificially depressed prices; (3) defendants successfully
27 achieved the intended manipulation of the market for Overstock
28 shares, and (4) the result was that the Overstock shares held by
59
1 the plaintiffs were artificially deflated to plaintiffs'
2 financial detriment. Included among the more specific
3 allegations of the complaint are that the defendants have
4 intentionally and persistently failed to deliver shares of stock
5 in Overstock for proper settlement of short sale trades; that
6 the result has been that shares issued by Overstock in the
7 normal course of raising capital as a public company have not
8 been properly valued because of the dilutive effect of the
9 alleged phantom shares, which were not issued by Overstock; and
10 that selling but failing to deliver actual shares issued by
11 Overstock has had the effect of generating a virtually unlimited
12 supply of Overstock shares for sale.
13 To state the obvious, the issue for this Court on demurrer
14 is not the correctness or accuracy of the allegations contained
15 in the complaint. Those allegations, which of course must be
16 accepted as true at the demurrer stage, charge intentional and
17 successfully market manipulation to the damage of those whose
18 stock prices were thereby distorted to their disadvantage. In
19 this connection and as previously noted, one of the allegations
20 is that the defendants acted in order to induce the sale of
21 Overstock shares at artificially depressed prices.
22 Against that background, it is this Court's view that,
23 contrary to defendants' contention, the application of pertinent
24 California law to defendants' alleged short selling activities
25 would not stand as an obstacle to the accomplishment or the
26 execution of the full purposes or objectives of federal law.
27 Plaintiffs' claims do not conflict with federal law in that
28 federal law does not sanction or otherwise protect intentional
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1 market manipulation such as that here alleged and there is room
2 for state law remedies relating to such conduct that do not
3 obstruct or otherwise impede federal law. In short, the
4 allegations of plaintiffs' complaint are consistent with federal
5 law. Therefore, the Court holds that plaintiffs' claims are not
6 preempted by federal law, noting parenthetically that defendants
7 do not claim, nor could they persuasively contend, that there is
8 either express preemption or field preemption in the
9 circumstances of this case.
10 Turning to the demurrer to the fifth cause of action brought
11 under Business & Professions Code Section 17200, et seq. and
12 17500, et seq., the Court overrules the demurrer. Support for
13 this ruling is found in the recent case of Overstock.Com, Inc.
14 versus Gradient Analytics, Inc., 151 Cal. App. 4th 688, First
15 District, May 30th, 2007. That opinion stands for the following
16 propositions. First, whether or not one agrees with the
17 decision in the case of Bowen versus Ziasun Technologies, Inc.
18 116 Cal. App. 4th 777, the Bowen court's holding that securities
19 transactions are not covered under the UCL bars lawsuits based
20 on deceptive conduct in the sale and purchase of securities,
21 nothing more. In other words, as made clear by the Analytics
22 court in italicized language of that opinion, the Bowen case
23 does not hold that claims are barred where they do not arise
24 from stock transactions between the parties. Second, as further
25 said by the Analytics court, the conclusion reached by the court
26 in the case of Roskind versus Morgan Stanley Dean Witter, 80
27 Cal. App. 4th 345, that the UCL potentially could provide a
28 remedy for the securities violations there at issue if not
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1 preempted by federal law in that context was integral to the
2 Roskind court's determination, that federal securities law did
3 not preempt the plaintiff's UCL claim. In short, that
4 conclusion of the Roskind court was not mere dictum. Third, at
5 least as applied to non-preempted lawsuits not based on
6 deceptive conduct in the sale and purchase of securities, the
7 UCL may reach conduct occurring in the context of securities
8 transactions. It is further worthy of mention that the
9 Overstock versus Gradient appellate opinion includes a reminder
10 of the words of the California Supreme Court in the leading case
11 of Cel-Tech Communications versus Los Angeles Cellular Telephone
12 Co., that the sweeping language of the UCL is intended to permit
13 tribunals to enjoin on-going wrongful business conduct in
14 whatever context such activity might occur.
15 It follows from the foregoing analysis that plaintiffs have
16 pled facts sufficient to constitute a cause of action under
17 Sections 17200, et seq. and 17500, et seq.
18 Addressing the fourth cause of action brought under
19 Corporations Code Section 25400, et seq., the Court overrules
20 the demurrer to that claim. Plaintiffs have pled facts
21 sufficient to constitute a cause of action under Sections 25400,
22 et seq.
23 Addressing the first and second causes of action for
24 conversion and trespass, respectively, the Court overrules the
25 demurrers. Support is found in the case of Fremont Indemnity Co
26 versus Fremont General Corp, 148 Cal. App. 4th -- I'm not sure I
27 have the page right, but does anybody have the cite on that?
28 MR. GRIFFINGER: We have the case, Your Honor.
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1 THE COURT: What is the cite, is it 597?
2 MS. CIRANGLE: I have 148 Cal. App. 4th 97.
3 THE COURT: 97?
4 MR. GRIFFINGER: Right, 97.
5 THE COURT: Okay. Addressing the alleged third cause of
6 action for intentional interference with prospective economic
7 advantage, the Court sustains the demurrer with leave to amend.
8 The allegations are conclusory as to essential elements of that
9 claim. The Court is referring to paragraphs 44 and 45, at least
10 in part. It is facts, rather than conclusions, that must be
11 pleaded, especially in light of the requirements of this tort as
12 set forth in the case of Westside Center Associates versus
13 Safeway Stores, 42 Cal. App. 4th 507, at pages 523 through 528.
14 The Westside court said that the interference tort applies
15 to interfering with existing noncontractual relations which hold
16 the promise of future economic advantage. "In other words, it
17 protects the expectation that the relationship will eventually
18 yield the desired benefit, not necessarily the more speculative
19 expectation that a potentially beneficial relationship will
20 eventually arise." That's from page 524 of the opinion. The
21 Westside court went on to note that "the usual formulation of
22 the elements of the tort," require "an economic relationship
23 between the plaintiff and a third party, knowledge of the
24 existence of the relationship on the part of the defendant and
25 intentional acts by the defendant designed to disrupt the
26 relationship, and actual disruption," and the language there is
27 from page 525 and 526 of the opinion, and the reference to
28 existence is italicized for emphasis by the Court. The
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1 following language in the Westside opinion is particularly
2 relevant here: Referring to plaintiff's theory in that case,
3 the court said, at page 527, "It likewise fails to provide any
4 factual basis upon which to determine whether the plaintiff was
5 likely to have actually received the expected benefit." The
6 same is true in the instant case. There is no factual
7 allegation in the complaint now before this Court of existing
8 economic relationships, knowledge by defendants of the existence
9 of those relationships, intent on the part of the defendants to
10 disrupt those relationships, or actual disruption. In short, to
11 state a cause of action for intentional interference, there must
12 be allegations of a factual nature to the effect that the
13 plaintiffs had existing relationships with third parties which
14 were reasonably likely to produce future economic benefits to
15 the plaintiffs.
16 Defendants have moved to strike a few lines of the complaint
17 relating to the relief available under the fifth cause of
18 action, that is, the claims under the Unfair Competition Law.
19 Defendants contend that the passages at issue directly affect
20 the scope of this case in discovery and the issues for trial.
21 That conclusion appears to rest upon the assertion that
22 plaintiffs may not recover under the UCL any reduced transaction
23 costs or cost savings that are alleged to have benefited the
24 defendants. However, plaintiffs make it clear in their
25 opposition brief that they do not seek recovery of such alleged
26 cost savings. In any event, such recovery would not be
27 restitutionary. It would not represent a return of money to
28 those persons from whom the property was taken, that is, to
64
1 persons who had an ownership interest in the property or those
2 claiming through that person. In short, such relief would not
3 be available under the UCL.
4 Plaintiffs' brief, while not entirely clear to the Court in
5 this respect, seems to suggest that the recovery sought under
6 the UCL is included within the scope of the recovery sought
7 under one or more of the other causes of action. If that is so,
8 then it would appear that neither the scope of discovery nor the
9 issues for trial would be narrowed by granting the motion to
10 strike.
11 That aside and turning to the merits of that motion, the
12 Court holds that, under the present pleading, plaintiffs may not
13 recover on their UCL claims any sums for any decline in the
14 values of their stock holdings. The UCL permits only two forms
15 of relief, injunctive relief and restitution, as stated in the
16 case of Feitelberg versus Credit Suisse First Boston, LLC, 134
17 Cal. App. 4th 997, at pages 1011 and 1012. Any recovery in this
18 action measured by the decline in the values of plaintiffs'
19 stock holdings would not be restitutionary in nature, as made
20 clear by the case of Korea Supply Company versus Lockheed Martin
21 Corporation, 29 Cal 4th 1134. In the case at bar, there is no
22 allegation that plaintiffs have an ownership interest in the
23 money they seek to recover from defendants. Plaintiffs are not
24 seeking the return of money or property that allegedly was once
25 in their possession. Under the factual allegations of the
26 complaint, it is obvious that any award that plaintiffs would
27 recover from defendants for diminished stock value would not
28 replace any money or property that defendants took directly from
65
1 plaintiffs. Moreover, recovery for lost stock value in this
2 case cannot be traced or in any way related to any funds
3 allegedly in defendants' possession.
4 Furthermore, plaintiffs have not alleged any facts showing
5 that they have a vested interest in the money they seek to
6 recover for diminished stock value. While plaintiffs own or
7 have owned particular shares of stock, such ownership is not
8 fairly characterized as giving rise to a vested interest in
9 particular stock values attaching to their shares over time.
10 Any lost value attaching to stock ownership is akin to the loss
11 of an expectancy, not to the loss of a vested interest.
12 As noted by the Korea Supply court, 29 Cal 4th at 1150 and
13 1151, the UCL does not authorize remedies that closely resemble
14 a claim for damages. Plaintiffs' claim for loss of stock value
15 is precisely such a claim.
16 As noted by the Korea Supply court, the object of
17 restitution is to restore the status quo by returning to the
18 plaintiff funds in which he or she has an ownership interest.
19 That object does not fit the situation of recovery for alleged
20 diminished stock value in this case. To hold that such recovery
21 is restitutionary is to put a square peg into a round hole.
22 Therefore, the Court grants the motion to strike that
23 portion of paragraph 56, page 11, lines 14 and 15 of the
24 complaint which states, "and restitution from Defendants
25 according to proof." As stated, there are no factual
26 allegations upon which a restitutionary remedy can be premised.
27 At the same time, the Court denies the motion to strike that
28 portion of paragraph six of the prayer at page 11, which reads
66
1 "... and Business & Professions Code." As plaintiffs point out
2 in their brief, that allegation could apply to relief ancillary
3 to injunctive relief.
4 On the last page of their reply brief on the motion to
5 strike, defendants ask the Court to strike plaintiffs' request
6 for "such other and further relief as the Court may deem
7 appropriate." That portion of the prayer of the complaint,
8 however, was not made part of the motion to strike, and so the
9 Court declines to address that matter at this time.
10 In their opposition brief, plaintiffs have asked for leave
11 to amend their complaint so they can "clarify the relief sought
12 by their UCL cause of action." The Court grants that request
13 and gives plaintiffs leave to amend for the limited purpose
14 stated.
15 Now, those are the rulings. And we need to work out --
16 well, I guess the first question is are the plaintiffs in a
17 position to state in the two cases whether they want to amend.
18 MR. GRIFFINGER: We do. We are, Your Honor, we would like
19 to.
20 THE COURT: You would like to amend?
21 MR. GRIFFINGER: Yes, please.
22 THE COURT: How much time would you like?
23 MR. GRIFFINGER: Well, we'd like until September 14th.
24 THE COURT: Well, let's see if there's any objection to
25 that.
26 MR. GRIFFINGER: All right.
27 THE COURT: Is there any objection to that?
28 MR. GRIFFINGER: That's both -- that's a personal reason and
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1 a professional reason for that. I've got a daughter getting
2 married in August.
3 THE COURT: You're going to make it hard now for there to be
4 an objection.
5 MR. GRIFFINGER: I'm making it hard on myself and on
6 Mr. Lawson as I possibly can.
7 MR. LAWSON: I guess, Your Honor, if -- Michael Lawson,
8 Morgan, Lewis for Goldman Sachs.
9 First, congratulations.
10 (laughter)
11 MR. LAWSON: To him.
12 MR. GRIFFINGER: You really hurt us on the 17200 stuff. Oh,
13 you're talking about my daughter.
14 MR. LAWSON: Yes. 60 days sounds like a long time if all
15 we're doing is talking about tweaking the relief.
16 THE COURT: Do you want me to give you a couple minutes just
17 to chat off the record and see if you wouldn't --
18 MR. LAWSON: If you don't mind, that might help.
19 THE COURT: All right. Why don't we just take a minute, go
20 off the record, and you can chat and see if you can reach an
21 agreement.
22 (pause in proceedings)
23 MR. LAWSON: Thank you very much, Your Honor.
24 THE COURT: Sure.
25 MR. GRIFFINGER: Your Honor, I was asked at the break if we
26 were simply going to amend to --
27 THE COURT: We're off the record?
28 MR. GRIFFINGER: Yes, that's fine.
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1 (off the record discussion.)
2 THE COURT: We're back on the record.
3 I understand counsel have worked out an agreement on any
4 further amendments. Plaintiffs' counsel has indicated they --
5 plaintiffs do want to amend in both cases, and defense counsel
6 are agreeable to plaintiffs' counsel having to, and including,
7 September the 14th of this year in which to do that, correct?
8 MR. LAWSON: That's correct, Your Honor.
9 THE COURT: And that's the date plaintiffs' counsel has
10 asked for, for the record, right?
11 MR. GRIFFINGER: That is correct, Your Honor.
12 THE COURT: Okay. And then so that's granted, leave to
13 amend in accordance with the Court's ruling, to September -- to
14 and including September 14th of this year.
15 And counsel have indicated off the record that they're going
16 to meet and confer on the issue of whether or not plaintiffs
17 wish to add to amend in addition to the leave that is being
18 granted. They're going to communicate about that and see
19 whether plaintiffs do wish to do that, and, if so, whether
20 defendants wish to stipulate to it, or whether that will result
21 in a motion, and counsel cooperatively have agreed.
22 Mr. Griffinger said that he would get in touch with defense
23 counsel within the next couple of weeks to tell him what his
24 intentions are in that respect, so counsel are cooperating.
25 Have I correctly stated the situation in what I've just
26 said?
27 MR. GRIFFINGER: Yes, from the plaintiffs' point of view,
28 Your Honor.
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1 MR. LAWSON: Yes, from the defense side, Your Honor.
2 THE COURT: Okay. And then counsel have agreed to prepare a
3 proposed form of order jointly on today's rulings and hopefully
4 it will be submitted with both sides agreeing as to the form, so
5 that's requested by the Court.
6 Next, and moving on to a Case Management Conference, which
7 was also scheduled for today, the parties indicated in their CMC
8 statement that they're preparing a related case stipulation for
9 the Court, and, Mr. Griffinger, you were telling me off the
10 record the status of that.
11 MR. GRIFFINGER: We got one yesterday from the Morgan, Lewis
12 firm, and, with one addition, we're prepared to sign it. We
13 talked about that addition before the hearing today. I believe
14 there's agreement between the parties, so we should have that to
15 Your Honor filed and to Your Honor by tomorrow.
16 THE COURT: Okay. And I don't know whether you care about
17 the timing of this, but tomorrow I expect to be here until
18 approximately noon and then I'm gone for three weeks, so if it
19 makes any difference to you that I look at it before I leave, I
20 need it sooner rather than later, if it doesn't, I can look at
21 it when I get back.
22 MR. GRIFFINGER: From our point of view you can look at it
23 when you get back.
24 THE COURT: Okay. Everybody is nodding on that.
25 MR. LAWSON: Agreed.
26 THE COURT: Okay. The parties apparently are also preparing
27 a stipulation for e-mail service, again for the Court to sign.
28 You're still working on that.
70
1 UNIDENTIFIED COUNSEL: Same stipulation, Your Honor.
2 THE COURT: Same stipulation.
3 All right. And I had down to discuss at the CMC, but you've
4 taken care of this I think with my courtroom clerk, that liaison
5 counsel for the different parties, which I know you put on the
6 record earlier, but Mr. Blackstone wasn't here that day, but
7 you've now worked out with him -- maybe we should just say for
8 the record -- Stein & Lubin is liaison counsel for the
9 plaintiffs and Morgan, Lewis for the defendants, and if the
10 court wishes to communicate with counsel, I can do that through
11 liaison counsel on a telephone conference. We won't decide any
12 matters of substance, obviously.
13 MR. GRIFFINGER: That's correct from the plaintiff's point
14 of view.
15 MR. LAWSON: Correct, Your Honor.
16 THE COURT: And then the parties are also preparing a
17 stipulation on document preservation; is that going to be part
18 of the same stipulation?
19 MR. GRIFFINGER: That's separate, Your Honor.
20 THE COURT: Are you going to work on that and then submit it
21 to the Court after you complete it?
22 MR. GRIFFINGER: We are working on that, Your Honor.
23 MR. LAWSON: Correct.
24 THE COURT: And then let's go off the record for a couple of
25 minutes and discuss the discovery issue and see whether in the
26 end there will be a disagreement about it.
27 Off the record.
28 (off the record discussion.)
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1 THE COURT: Back on the record.
2 Counsel have also agreed off the record to another Case
3 Management Conference to be held on September the 20th at 1:30
4 in this department and waive further notice of time and place
5 and should prepare and submit a Joint Case Management Conference
6 Statement three court days before then; is that agreeable with
7 everybody?
8 MR. GRIFFINGER: It is, Your Honor.
9 MR. LAWSON: It is, Your Honor.
10 THE COURT: Okay. Thank you. We can go off the record and
11 discuss discovery.
12 (off the record discussion.)
13 THE COURT: All right. We're back on the record.
14 We've had a discussion about discovery, and my understanding
15 is, and this is agreeable with the Court, that counsel have
16 agreed that the initial efforts in the direction of discovery
17 between the parties should be in the direction of document
18 production, and they're going to -- counsel for the two sides,
19 all parties are going to meet and discuss before the next CMC
20 document production between themselves and hopefully reach some
21 agreements on matters to be produced initially and some schedule
22 to do it, and then they're also going to discuss whether there's
23 other categories of documents that one or the other side wants
24 as part of the initial discovery in the case, to which there's
25 not agreement. And to the extent that we have those kind of
26 categories, the parties will discuss that with the Court at the
27 CMC in September and give the Court a little heads up on it in
28 the CMC statement. And I understand, for the record, that's an
72
1 agreeable way of proceeding as far as everybody is concerned.
2 MR. GRIFFINGER: It is from the plaintiff's point of view,
3 Your Honor.
4 MR. LAWSON: And also from the defense side, Your Honor.
5 Thank you.
6 THE COURT: And I also understand from you that there's no
7 other business today. And let me thank you all for the
8 wonderful and informative arguments that you made and for your
9 continued professionalism in this case, so we'll see you in
10 September.
11 MR. LAWSON: Have a good vacation, Your Honor.
12 MR. LYONS: Thank you for your time, Your Honor.
13 MR. GRIFFINGER: Thank you, Your Honor.
14 THE COURT: Thank you.
15 TELEPHONE: Thank you, Your Honor.
16
17 (Whereupon proceedings adjourned at 2:55 p.m.)
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1 State of California )
)
2 County of San Francisco )
3
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5 I, Rhonda L. Aquilina, Official Reporter for the Superior
6 Court of California, County of San Francisco, do hereby certify:
7 That I was present at the time of the above proceedings;
8 That I took down in machine shorthand notes all proceedings
9 had and testimony given;
10 That I thereafter transcribed said shorthand notes with the
11 aid of a computer;
12 That the above and foregoing is a full, true, and correct
13 transcription of said shorthand notes, and a full, true and
14 correct transcript of all proceedings had and testimony taken;
15 That I am not a party to the action or related to a party
16 or counsel;
17 That I have no financial or other interest in the outcome
18 of the action.
19
20
21 Dated: July 20, 2007
22
23 ________________________________
24 Rhonda L. Aquilina, CSR No. 9956
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