[00:00:00] Speaker 04:
And we will move on to our next case set for argument today, Max Royal versus Ativa, case number 23-16049.

[00:01:01] Speaker 04:
You may proceed.

[00:01:02] Speaker 00:
I would like to reserve four minutes, Your Honors.

[00:01:04] Speaker 00:
Sure.

[00:01:05] Speaker 00:
Thank you.

[00:01:06] Speaker 00:
Good morning.

[00:01:06] Speaker 00:
May it please the court.

[00:01:07] Speaker 00:
My name is Jake Bisolinsk from the law firm Lobaton Keller Cicharro on behalf of lead plaintiffs in this federal securities action.

[00:01:15] Speaker 00:
The district court erred

[00:01:16] Speaker 00:
in dismissing this case on materiality grounds.

[00:01:19] Speaker 00:
The core error in the district court's approach was substituting the court's own judgment as to what was reasonable for investors to believe and rely on for the existing empirical evidence that investors, reasonable investors, in fact relied on the misstatements at issue in this case.

[00:01:35] Speaker 00:
The district court also erred, as I'll explain later, in holding, even in the application of its own judgment, the pleadings to too high of a standard on the motion to dismiss stage.

[00:01:45] Speaker 04:
Not to divert you from the merits, because I know you're here to argue that, but we have a gatekeeping function with standing.

[00:01:53] Speaker 04:
Obviously, the district court found that you had standing.

[00:01:57] Speaker 04:
Would you agree that the district court's decision would conflict with the Second Circuit's recent decision addressing this question?

[00:02:07] Speaker 00:
Yes, it would, Your Honor, but the district court's decision is fully consistent with other circuit case decisions on this exact same issue.

[00:02:14] Speaker 00:
So we cite the Sendant case, which also conflicts with the Second Circuit's position.

[00:02:19] Speaker 04:
And that was, what court was that?

[00:02:21] Speaker 00:
I believe it's the Third Circuit, Your Honor.

[00:02:24] Speaker 03:
Council, I have the same concern with regard to the district court's analysis on standing.

[00:02:30] Speaker 03:
As I read the Supreme Court's blue chip stamps decision, it's pretty clear that a securities fraud action must lie in the purchase or sale of a security.

[00:02:46] Speaker 03:
And other, I guess, the Second Circuit's decisions in Menorah and Birnbaum tie the false misrepresentation to the actual security that is purchased.

[00:03:06] Speaker 03:
And the problem I'm having is that your claim here dealt with misrepresentations concerning Lucid, but the stock actually acquired was in a different company, Churchill.

[00:03:21] Speaker 03:
So if you can help me with that, I'm all ears.

[00:03:25] Speaker 00:
Certainly you're on.

[00:03:26] Speaker 00:
So that was exactly the question that the district court looked at in its decision.

[00:03:31] Speaker 00:
And the reasoning here is that the Birnbaum decision and Bluechip are both focused on the fact that one must have purchased a security and cannot merely proceed as the holder of shares or someone who declined to purchase shares.

[00:03:43] Speaker 00:
That's as far as the Bluechip decision goes.

[00:03:46] Speaker 00:
The factual context of that case was plaintiffs were alleging the company was forced to, by an agreement, offer shares to the public and intentionally dissuaded the public from buying those shares.

[00:03:57] Speaker 00:
And the court said, well, you don't have any purchase, you don't have standing.

[00:04:01] Speaker 00:
The separate question of what security you have to have purchased is, well, you have to have purchased the security you're suing about, right?

[00:04:10] Speaker 00:
But the question of is the fraud sufficiently connected to the security you purchased is a question that's answered by the in-connection-with requirement.

[00:04:18] Speaker 00:
And the clear language of the, the clear standard applied to the in-connection-with requirement in this circuit

[00:04:24] Speaker 00:
is for publicly disseminated statements, you've satisfied the in connection with requirement when the misstatements are material to investment in the security you purchased.

[00:04:35] Speaker 00:
So, defendants have tried to construct this view that we're doing something odd here, but the standard in all cases when looking at the in connection with requirement

[00:04:44] Speaker 00:
is the misstatement material to the investment that you made.

[00:04:48] Speaker 00:
The separate question that Blue Chip addresses is a much simpler question that many courts have rejected as applying a sort of nexus requirement and merely holds that you have to have purchased some security.

[00:05:02] Speaker 00:
I'm happy to talk more about standing, or I can move back to materiality.

[00:05:06] Speaker 03:
Well, I'm still struggling.

[00:05:09] Speaker 03:
It seems to me that the...

[00:05:13] Speaker 03:
The Supreme Court has said that normally rumors with regard to potential mergers and acquisitions that neither company here publicly confirmed or denied is not material.

[00:05:31] Speaker 03:
And therefore, you've got to have something more in order to tie the misrepresentation to the purchase or sale of the security.

[00:05:42] Speaker 00:
So I don't think the Supreme Court has ever said anything like that.

[00:05:46] Speaker 00:
What the Basic decision said was, and let me talk for a second about the facts of Basic because I really do think it's informative here.

[00:05:52] Speaker 00:
In Basic, the defendant had denied that there had been any merger negotiations.

[00:05:58] Speaker 00:
And in reality, there had been some meetings and some telephone conversations.

[00:06:02] Speaker 00:
There is really no question that the denial that there had been any merger negotiations was false.

[00:06:07] Speaker 00:
And so the question was, was that a material false statement?

[00:06:11] Speaker 00:
And to answer that question, what the Supreme Court said was, first of all, no bright line rules are allowed.

[00:06:17] Speaker 00:
The case was allowed to proceed.

[00:06:18] Speaker 00:
They found that the case could not be rejected on materiality grounds.

[00:06:21] Speaker 00:
But specifically what it said was,

[00:06:24] Speaker 00:
we'll look to the indicia of interest underlying those negotiations.

[00:06:29] Speaker 00:
We'll see in this case where the question was, were the negotiations themselves material?

[00:06:34] Speaker 00:
In that case, you have to look to whether or not the negotiations were far along and so on.

[00:06:38] Speaker 00:
That does not map onto this case where we're not dealing with false denials of emerging negotiation.

[00:06:44] Speaker 00:
And so the two lessons from BASIC that you should take away on this point is, one, no bright line rules.

[00:06:51] Speaker 00:
And two, a flexible standard that looks to what information reasonable investors actually relied upon.

[00:06:56] Speaker 00:
There's no requirement that anyone makes a public statement confirming the merger negotiations.

[00:07:01] Speaker 00:
And that sort of a rule would run afoul of the basic ideas of the securities rules, which is realistic in looking to the way that actual investors behave.

[00:07:08] Speaker 03:
But isn't isn't the record here that the negotiations did not commence until after the article.

[00:07:15] Speaker 03:
Occurred yeah appeared publicly.

[00:07:18] Speaker 00:
Yeah, the record is that Bloomberg published an article on January 11th and then for a couple of weeks after that additional sort of

[00:07:27] Speaker 00:
pieces of information came into the public, additional news articles and so on.

[00:07:30] Speaker 00:
But immediately after that news article, negotiations did commence.

[00:07:34] Speaker 00:
And that's known to us now because of the proxy statement that was filed after the class period.

[00:07:39] Speaker 00:
Right?

[00:07:40] Speaker 00:
Right.

[00:07:41] Speaker 03:
But neither company confirmed or denied the existence of negotiations publicly until the letter of intent had been signed.

[00:07:51] Speaker 03:
Is that correct?

[00:07:51] Speaker 00:
Yeah, so I was just answering the very specific question that you asked, which is the merger negotiations themselves had been going on for weeks at the time that the first false statement that we're alleging was made.

[00:08:01] Speaker 00:
The question that we think matters for this court to decide under a materiality analysis is,

[00:08:07] Speaker 00:
did reasonable investors rely on the misrepresentations at issue here?

[00:08:11] Speaker 00:
And there's sort of two approaches to answering that question.

[00:08:14] Speaker 00:
One is the position that we're advocating, which is that when you have very clear stock price reactions to those misrepresentations, that should carry the day.

[00:08:22] Speaker 00:
The real question that we're trying to answer is, at a time when it was not certain that this merger would go through, when there was a rumor in the market that was well-founded in the sense that reputable publications had talked about it, but it was still uncertain,

[00:08:35] Speaker 00:
Did investors, in fact, rely upon misstatements about Lucid when buying CCIE shares?

[00:08:42] Speaker 00:
And you answer that question through a pleading stage inquiry that asks, is it so obvious that no reasonable person could disagree in holding that reasonable investors would not have relied on those misstatements?

[00:08:52] Speaker 03:
When we talk about the reasonable investor though, wouldn't a reasonable investor know that all merger talks do not necessarily result in a final deal?

[00:09:03] Speaker 03:
And that through the due diligence investigation that follows an indication of interest, mustn't we assume on this record that Churchill, the acquiring company,

[00:09:18] Speaker 03:
was at some point informed about the status of startup production and at that point made a choice either terminate the merger and acquisition discussions or maybe it resulted in a lower purchase price.

[00:09:35] Speaker 03:
We have no way of knowing at this point.

[00:09:38] Speaker 03:
But why wouldn't an investor appreciate the fact that the acquiring company may also have learned

[00:09:46] Speaker 03:
of this information, maybe at the same time the investor did, but nonetheless decided to go forward with the acquisition while knowing that the start of production of this electric vehicle was going to be delayed significantly.

[00:09:59] Speaker 00:
I think there's two ideas sort of nested in that question.

[00:10:02] Speaker 00:
So the first idea is, weren't investors aware that there was some uncertainty regarding whether or not the merger would go forward?

[00:10:08] Speaker 00:
Absolutely.

[00:10:09] Speaker 00:
We don't deny that at all.

[00:10:10] Speaker 00:
It was not a certainty that this merger would close.

[00:10:12] Speaker 00:
And that's not a question that's before this court.

[00:10:14] Speaker 03:
Well, it's clearly a speculative investment, is it not, for that reason?

[00:10:19] Speaker 00:
I would say that there is uncertainty embedded in this investment.

[00:10:22] Speaker 03:
I don't draw any distinction there.

[00:10:27] Speaker 00:
What I was about to say is the courts are clear that the securities laws are designed to protect all investors, but the real point I'm trying to get to on this point is the degree of uncertainty involved is not like a gatekeeping question here.

[00:10:40] Speaker 00:
The question here is, was it reasonable, and did reasonable investors rely on the misstatements that Rawlinson made?

[00:10:47] Speaker 00:
And you don't have to have believed the merger was a certainty.

[00:10:50] Speaker 00:
You don't even have to have believed it was overwhelmingly likely to have bought CCIB shares based on a view that that was a good investment, given the likely possibility that CCIB would acquire Lucid and given the misstatements that were being made about Lucid, that

[00:11:03] Speaker 00:
And so our view is, it doesn't depend on a view that this deal was certain to go forward.

[00:11:08] Speaker 00:
The other question you were asking is, wasn't there a possibility that CCIV was informed of the truth?

[00:11:14] Speaker 00:
And that fact is unknown to us at this time.

[00:11:16] Speaker 00:
We don't know when CCIV learned the truth, but it's not terribly important to our... Well, if it was being reported in the press, presumably...

[00:11:23] Speaker 00:
CCIV certainly knew that there were merger negotiations going on.

[00:11:25] Speaker 03:
No, no, no.

[00:11:26] Speaker 03:
The delay isn't the start of production.

[00:11:29] Speaker 00:
That was disclosed at the end of the class period when the truth came out.

[00:11:33] Speaker 00:
Whether or not CCIV was made aware of that during the diligence process has no bearing on whether or not investors were made aware of that when they were buying CCIV shares at a given price.

[00:11:43] Speaker 00:
And that loops back to the point we were just talking about, which is this isn't a fraud on CCIV.

[00:11:47] Speaker 00:
This is a fraud on investors who chose to buy CCIV shares at inflated prices.

[00:11:53] Speaker 03:
Well, why wouldn't it be a fraud on CCIV?

[00:11:55] Speaker 00:
There might also have been a fraud on CCIV.

[00:11:57] Speaker 00:
That's not the case that we're litigating.

[00:11:59] Speaker 03:
We're litigating a case on... Presumably, CCIV was aware of what Mr. Rawlinson was saying that was being reported in the media.

[00:12:07] Speaker 00:
Yeah, I'm just saying I have, from our position, it's irrelevant to our case whether or not CCIV was also defrauded.

[00:12:13] Speaker 00:
I think that the narrative that we put forward into our complaint...

[00:12:17] Speaker 00:
is that Rawlinson understood that he could affect CCIV stock price by making public representations while his company is privately traded.

[00:12:25] Speaker 00:
He goes on a stock market centric TV show and talks about and while the market believed this rumor, this merger was likely to emerge or had some degree of likelihood to emerge, he goes and makes misstatements about Lucid to drive up CCIV stock price.

[00:12:39] Speaker 00:
And that gives him an upper hand in negotiating with CCIV, because it would be very embarrassing for CCIV to walk away from a deal that it looked like investors were supportive of.

[00:12:47] Speaker 00:
I don't need to prove all of that for my case to move forward, but I wanted to give you the factual context.

[00:12:51] Speaker 01:
Yeah, that's all.

[00:12:52] Speaker 01:
Judge Gould, I have a question for you.

[00:12:54] Speaker 00:
Thank you.

[00:12:55] Speaker 01:
At some point, I think you mentioned reliance in your argument.

[00:13:00] Speaker 01:
But I had thought that the district court grounded its decision on materiality

[00:13:09] Speaker 01:
and didn't reach Reliance.

[00:13:12] Speaker 00:
I, yes, your honor, I wasn't trying to talk about, I don't remember what sentence you're referencing, but I wasn't trying to explicitly reference the reliance element.

[00:13:19] Speaker 00:
What I will say is in the American West case that your honor, Mr. Talman, Judge Talman, that you wrote the dissent in, you, I think very elegantly explained that in fraud in the market cases, there's a very close connection between the notion that investors relied on misrepresentations and observable stock prices, stock price changes, and the issue of materiality.

[00:13:39] Speaker 00:
Our point here is very simple, ultimately, on this appeal.

[00:13:44] Speaker 00:
Investors, we cite in our briefing a lot of reasons why investors thought there was a good chance this merger would proceed.

[00:13:50] Speaker 00:
You don't even need to think about that, though, because you have very clear empirical evidence that, in fact, reasonable investors did think that the statements that Rawlinson was making were relevant to their investment in CCIV.

[00:14:01] Speaker 00:
If there are no further questions, I'll reserve the rest of my time.

[00:14:04] Speaker 04:
Thank you.

[00:14:16] Speaker 05:
May I proceed?

[00:14:19] Speaker 05:
May it please the court, Brian Bernofsky on behalf of Appellees.

[00:14:24] Speaker 05:
Your Honors, the district court's judgment should be affirmed, whether analyzed as a matter of materiality or under the issue of statutory standing under the purchaser-seller rule.

[00:14:36] Speaker 05:
Plaintiffs who bought stock in CCIV

[00:14:39] Speaker 05:
cannot sue Lucid or its CEO for allegedly misleading statements about Lucid's own business.

[00:14:47] Speaker 03:
So you think you agree that the district court erred on the standing determination?

[00:14:52] Speaker 04:
I do agree and if it's okay with... Can you address this third circuit case?

[00:14:57] Speaker 04:
I don't think I focused on it but counsel said that this would there's already a circuit split out there between the second and the third.

[00:15:04] Speaker 04:
Do you agree with that assessment?

[00:15:05] Speaker 05:
I do not agree with that assessment.

[00:15:07] Speaker 05:
I believe this the case I don't

[00:15:08] Speaker 05:
I don't believe my friend mentioned the case, but I believe he's referring to the send in case in the Third Circuit, which was cited in the papers.

[00:15:15] Speaker 05:
That case is looking at the issue of materiality.

[00:15:19] Speaker 05:
It did not address the purchaser seller rule and blue chip stamps, unlike the Second Circuit in fruit around.

[00:15:27] Speaker 04:
Although, it's interesting because there is some overlap here between the materiality analysis and the standing analysis.

[00:15:35] Speaker 05:
Yeah, I mean, look, I think the way that the Second Circuit looked at the statutory standing issue in Fudaram was probably more of a bright line rule because it's grounded in policy concerns than courts typically analyze the materiality issue.

[00:15:51] Speaker 05:
I would say in this case,

[00:15:53] Speaker 05:
six of one half dozen of the other, because in a case like Sendent, there was at least a link between the two companies, there was an announced transaction.

[00:16:02] Speaker 05:
As Judge Tallman noted here, all you have here is rumors of a merger, or actually rumors of discussions about a merger.

[00:16:12] Speaker 05:
There was no announced transaction.

[00:16:14] Speaker 05:
Neither of the companies confirmed or denied or said anything about the merger until the merger was actually announced on February 22nd.

[00:16:22] Speaker 05:
Can you respond?

[00:16:26] Speaker 04:
Sorry, I know.

[00:16:26] Speaker 04:
I keep bringing you back to standing.

[00:16:29] Speaker 04:
We have this gatekeeping fight.

[00:16:31] Speaker 04:
We can't even get into the merits until we get past this.

[00:16:34] Speaker 04:
I mean, is there anything wrong with a rule?

[00:16:38] Speaker 04:
Blue chip, would you agree that blue chip doesn't directly require us to adopt a rule that says you have to purchase that stock and if you didn't, you don't have standing?

[00:16:53] Speaker 05:
I guess what I would say, Church Nelson, is that

[00:16:56] Speaker 05:
the factual scenario in Bluechip did not address that issue.

[00:17:01] Speaker 05:
But the language of Bluechip, the rule announced in Bluechip, I think does go further than that.

[00:17:06] Speaker 04:
And so that's my question.

[00:17:08] Speaker 04:
Because the language and the opinion, which I mean, we'll hear from opposing counsel if he wants to address this in rebuttal, but the purchaser-seller rule limits standing to purchases or sellers of the stock in question.

[00:17:19] Speaker 04:
That's a direct quote from Bluechip.

[00:17:22] Speaker 04:
Does that make that dicta?

[00:17:25] Speaker 04:
from the Supreme Court because it isn't really necessary for the case there because there wasn't a purchaser of the stock in question there?

[00:17:34] Speaker 05:
I don't think so.

[00:17:34] Speaker 05:
I mean, I think, again, I think the court was laying out a rule grounded in policy concerns, policy concerns about dexatious securities litigation and the costs of this kind of consideration, which I would note the court recognized 50 years ago.

[00:17:49] Speaker 05:
It's only gotten worse since then.

[00:17:51] Speaker 05:
and issues around evidentiary concerns, around oral testimony.

[00:17:56] Speaker 04:
I think those concerns apply directly, and I think the language that the Court... And when you say policy concerns, you're referencing the factors that the Second Circuit talked about, which is, yeah, there is an implied right of action, but we need to construe it narrowly and things like that.

[00:18:09] Speaker 05:
Correct.

[00:18:10] Speaker 05:
I would say the Supreme Court in Blue Chip itself recognized those policy concerns.

[00:18:15] Speaker 05:
Obviously, in Fudaram, the Second Circuit,

[00:18:18] Speaker 05:
uh... again recognize it in the context of this particular or in in a context very similar to this case uh... and and i think uh... you obviously between blue chip and the second circuit's decision in frutaram this the supreme court has reiterated uh... those policy concerns and the concerns around expanding what is an implied right of action in section ten b not expanding the uh...

[00:18:43] Speaker 05:
the scope of defendants who can be sued by private plaintiffs in a Section 10B action.

[00:18:50] Speaker 01:
I have a question for you.

[00:18:52] Speaker 01:
Yes, Judge Gould.

[00:18:53] Speaker 01:
We have a circuit rule that says we can consider a well-considered dicta of the Supreme Court.

[00:19:04] Speaker 01:
That's some precedent that whether or not what the Supreme Court said is technically a hold, a holding, or if it's a dictum,

[00:19:17] Speaker 05:
I apologize, Judge Gould.

[00:19:19] Speaker 05:
The question is, is there authority in this circuit regarding the consideration of dictum by the Supreme Court?

[00:19:25] Speaker 05:
That's not something that was briefed by the parties, and I'm not aware.

[00:19:29] Speaker 01:
I'm just commenting.

[00:19:30] Speaker 01:
I think that is our rule.

[00:19:33] Speaker 01:
And so my question is whether or not the statement that Judge Nelson referred to in blue chip is a holding or a dictum.

[00:19:46] Speaker 01:
wouldn't our panel, I think our panel would be bound by it.

[00:19:52] Speaker 01:
And so I'm saying, would you agree that that statement means that the securities claim can only be made by someone who owned the securities on which there was a misrepresentation?

[00:20:14] Speaker 05:
Yes, Judge Gould, I do agree with that.

[00:20:16] Speaker 05:
And if I may, I just want to, because I think it's important and I suspect my friend may address this on rebuttal because the district court did.

[00:20:24] Speaker 05:
The language that Judge Nelson quoted in the opinion, the stock in question, the district court found that that could just as easily be the stock that the

[00:20:35] Speaker 05:
It was affected by the stock that was affected by the misstatement.

[00:20:40] Speaker 05:
Right.

[00:20:40] Speaker 05:
And here, I think the district court said, well, that could just as easily be the stock in CCIV, even though the misstatement was not about CCIV.

[00:20:47] Speaker 05:
I think that is not a fair reading of blue chip.

[00:20:50] Speaker 04:
Well, especially when, does it even matter whether it's a fair reading of blue chip, because as I understand it, they've

[00:20:56] Speaker 04:
the plaintiffs have specifically said, there's no misstatements as to CCIP here.

[00:21:03] Speaker 05:
Correct, correct.

[00:21:04] Speaker 05:
The only plaintiff's theory, well, let me go back to, if I may, basic and the materiality question for a second, because I think- I know.

[00:21:12] Speaker 04:
There's overlap.

[00:21:13] Speaker 04:
We get that in this, it's a very frustrating process.

[00:21:18] Speaker 05:
Indeed.

[00:21:18] Speaker 05:
But the materiality question in basic is,

[00:21:24] Speaker 05:
as applied here is would information, is it substantially likely that information about CCIV would significantly alter, significantly alter the total mix of information relevant to an investment in CCIV where the information at issue is information about a wholly separate company and the only

[00:21:48] Speaker 05:
I think ordinarily, very clearly, the answer would be no.

[00:21:50] Speaker 05:
Information about a private company, statements by a private company about the private company itself would not be material to another company.

[00:21:58] Speaker 05:
The only reason plaintiffs allege or argue otherwise here is because of rumors of a potential merger.

[00:22:07] Speaker 05:
And I do want to address a couple of points that my friend made.

[00:22:12] Speaker 05:
Again, I think they're somewhat relevant to both points.

[00:22:15] Speaker 05:
But in the context of materiality,

[00:22:17] Speaker 05:
Plaintiffs argue that the information here was clearly material because it moved the market, because stockholders actually traded on it.

[00:22:32] Speaker 05:
I don't think that's consistent with basic.

[00:22:35] Speaker 05:
I don't think that's consistent with controlling law in this circuit.

[00:22:40] Speaker 05:
As this court has explained, materiality, unlike loss causation, for instance,

[00:22:45] Speaker 05:
concerns an objective and hypothetical inquiry, an ex ante inquiry, into what information would be substantially likely to significantly alter the total mix of information for a reasonable investor.

[00:22:58] Speaker 05:
And that's the Miller v. Thane International case, which wasn't cited in the papers, but it's 615 F3rd 1095.

[00:23:07] Speaker 05:
I think, as the district court noted, stockholders do sometimes trade on speculative information.

[00:23:12] Speaker 05:
That happens.

[00:23:13] Speaker 05:
I think it's clear from this case.

[00:23:15] Speaker 05:
What's remarkable about the case is, as we talked about earlier, the

[00:23:22] Speaker 05:
The Bloomberg article that was published on January 11th, 2021 announced that there were merger discussions ongoing according to sources familiar with the matter.

[00:23:33] Speaker 05:
But as plaintiffs concede, that was false.

[00:23:35] Speaker 05:
It didn't happen at the time.

[00:23:36] Speaker 05:
And yet the stock moved over 30% that day.

[00:23:41] Speaker 05:
I think that's pretty clear that shareholders are, yes, they do trade on speculative information, but that doesn't make them a reasonable investor within the meaning of the securities laws for purposes of either materiality or statutory standing.

[00:23:55] Speaker 03:
Counsel, this may be a better question for your opponent, but I'm looking at language from blue chip stamps, which is pretty strong at 421 US at 731.

[00:24:08] Speaker 03:
where it says the Court of Appeals in this case, which was the Ninth Circuit, did not repudiate Birnbaum.

[00:24:15] Speaker 03:
Indeed, another panel of that court, in an opinion by Judge Ely, had but a short time earlier, affirmed the rule of that case.

[00:24:24] Speaker 03:
in a case in the Ninth Circuit called Mount Clement Industries.

[00:24:28] Speaker 03:
But in this case, a majority of the Court of Appeals found that the facts warranted an exception to the Birnbaum rule.

[00:24:35] Speaker 03:
For the reasons herein stated, we are of the opinion that Birnbaum was rightly decided and that it bars respondent from maintaining this suit under Rule 10b-5.

[00:24:46] Speaker 03:
That may very well be dicta, but it's pretty strong.

[00:24:51] Speaker 05:
I agree, Your Honor.

[00:24:52] Speaker 05:
It is pretty strong.

[00:24:53] Speaker 05:
And again, I think there's

[00:24:54] Speaker 05:
There's also language elsewhere throughout Bluechip's stamp that I think makes clear that the rule stands for the proposition that shareholders who own stock in one company don't have statutory standing for policy reasons to bring suit against another wholly independent company.

[00:25:12] Speaker 04:
Well, and I just want to be clear, not for policy reasons, but for statutory reasons.

[00:25:18] Speaker 04:
I mean, that's how the statute is interpreted not to give standing.

[00:25:22] Speaker 04:
I mean, I think we got to be careful about not imbuing.

[00:25:26] Speaker 04:
There are policy reasons that support the language.

[00:25:29] Speaker 04:
But at the end of the day, we're reading the statutory language.

[00:25:33] Speaker 05:
I think that's right, Judge.

[00:25:33] Speaker 05:
The point I'm trying to make is a point that the Supreme Court made in the Dabit case.

[00:25:39] Speaker 05:
And it responds to a point that my friend made about the in connection with language in the statute.

[00:25:46] Speaker 05:
The Supreme Court explained in Dabit that

[00:25:50] Speaker 05:
the purchaser-seller rule in blue-chip stamps is actually not grounded in the in-connection with language of the statute.

[00:25:59] Speaker 05:
It's an interpretation of the statute.

[00:26:00] Speaker 05:
It's the scope, it's the permissible scope of a cause of action under Section 10b and Rule 10b-5 that again is grounded in the notion that what is an implied right that is not authorized by Congress must be construed narrowly.

[00:26:18] Speaker 04:
There's a connection for sure, Your Honor, but- I mean, coming back to the statutory language, if we were just going to- my understanding, maybe you could address this, is that Congress proposed amendments to actually broaden the statutory standing, and they were not able to- that was never able to pass.

[00:26:38] Speaker 04:
Is that accurate?

[00:26:39] Speaker 04:
And if so, how relevant is that to our inquiry here?

[00:26:43] Speaker 05:
I believe that's accurate and I believe it's relevant because absent some express authorization from Congress that would permit suit in the situation we have here where you buy stock in one company and you try to bring suit against another company and its CEO for statements made about that other company that are wholly unrelated to the company you bought stock in, I don't think you have a cause of action.

[00:27:06] Speaker 03:
The only heartburn I have with your conclusion is that, as I understand it, these S-P-A-G, I forget what the acronym is.

[00:27:17] Speaker 03:
S-P-A-G.

[00:27:18] Speaker 03:
S-P-A-G, thank you, Judge Gold.

[00:27:22] Speaker 03:
These financing entities exist solely for the purpose of raising capital to invest in something.

[00:27:29] Speaker 03:
It's Churchill was not like a typical ongoing concern that decided to acquire another company and make it a subdivision or a division of the of the company.

[00:27:42] Speaker 05:
I think that's right.

[00:27:43] Speaker 05:
Again, I don't think that impacts the statutory standing rule at all.

[00:27:46] Speaker 05:
I guess what I would say is in materiality, it would impact to some degree the

[00:27:52] Speaker 05:
application of basics, probability, and magnitude test.

[00:27:58] Speaker 05:
With respect to magnitude, for example, if you were looking at the merger itself, a SPAC merging with a private entity, that would probably be material because the SPAC does, sorry, that would meet the magnitude threshold because the SPAC doesn't have operations of its own.

[00:28:15] Speaker 05:
But the probability portion of it, I don't think, changes at all.

[00:28:19] Speaker 05:
In basic, what the Supreme Court was looking at, as my friend noted, was the materiality of the merger itself.

[00:28:33] Speaker 05:
And in looking at the materiality of the merger itself in the context of allegedly false denial that merger negotiations were ongoing, what the Supreme Court said is you have to look at the probability of the merger happening.

[00:28:44] Speaker 05:
and the magnitude of the merger in the context of the two companies.

[00:28:49] Speaker 05:
But even acknowledging that mergers typically have a high magnitude, mergers are typically important events, certainly it would be for a SPAC.

[00:28:59] Speaker 05:
Nothing in the Supreme Court's opinion suggested that probability didn't matter or some very, very low level of probability would be sufficient simply because a merger is an important event in the life of a company, even for a SPAC, Your Honor.

[00:29:14] Speaker 05:
Rather, what the Court said is you have to look to indicia of reliability at the highest corporate levels.

[00:29:18] Speaker 05:
I think what that suggests to me is, and I see I'm out of time, so.

[00:29:24] Speaker 05:
Go ahead and finish your answer.

[00:29:26] Speaker 05:
What that suggests to me, Your Honor, is that

[00:29:29] Speaker 05:
what you need is a reliable information.

[00:29:34] Speaker 05:
Whether the issue is the materiality of the merger itself, or as here, the materiality of one company's information to another, where the only link between the companies is a merger, the probability of the merger is important, and that probability must be assessed based on reliable information, as the Supreme Court said, both in basic as well as the matrix decision, which we address in our papers.

[00:29:58] Speaker 05:
Thank you, Your Honors.

[00:29:59] Speaker 04:
Thank you.

[00:30:00] Speaker 04:
We'll hear rebuttal now.

[00:30:07] Speaker 00:
The most important thing I'd like to address is this idea of a bright line rule about standing.

[00:30:12] Speaker 00:
So the position that the other side is advocating for and that the Second Circuit has adopted is a misreading of the blue chip decision.

[00:30:21] Speaker 02:
Then why did the Supreme Court say what it said?

[00:30:24] Speaker 00:
Because what the Supreme Court was saying, it's very clear in context when you read the opinion that it was not suggesting any probing of the nexus between misstatements and the security that was purchased.

[00:30:35] Speaker 00:
The sole issue before the court was, do you need to have actually purchased the security that you're suing about?

[00:30:41] Speaker 00:
And in that context, the language that we're talking about, I don't think is dicta.

[00:30:46] Speaker 02:
I think it's just a... But you didn't sue Churchill.

[00:30:49] Speaker 02:
You sued...

[00:30:50] Speaker 00:
And that's a question that turns on the nexus between the misstatements and the investment value of the security that they purchased, not a question about whether or not the misstatements were about the security that you purchased.

[00:31:05] Speaker 03:
So is your argument that even though Lucid was a private company that issued no public shares,

[00:31:12] Speaker 03:
that the publicly traded shares in Churchill service some kind of a proxy because it's being used to finance the acquisition of Lucid?

[00:31:23] Speaker 00:
That's a reasonable way of looking at it, but it's not exactly what I'm trying to explain.

[00:31:27] Speaker 00:
What I'm trying to say is that there is a rule here that relates to the degree of connection between the security that you purchased and the misstatements.

[00:31:36] Speaker 00:
That is the in connection with requirement.

[00:31:38] Speaker 00:
I don't disagree with you about the question, but you heard two different portions of the language.

[00:31:56] Speaker 04:
I mean, I'll just repeat mine.

[00:31:57] Speaker 04:
Purchaser-seller rule limits standing to purchases or sellers of the stock in question.

[00:32:04] Speaker 04:
I guess you would adopt the same thing that the district court did and said, well, in question could refer to either.

[00:32:09] Speaker 00:
And that's what courts have largely done with the exception of the Second Circuit.

[00:32:13] Speaker 04:
The Sendant decision addressed a merger in which they- But do you agree that the Sendant didn't address the standing question specifically?

[00:32:20] Speaker 00:
I think Sendent didn't address the standing question only because it's a made-up issue in this context.

[00:32:26] Speaker 00:
There was a purchase, and so the standing requirement from Bluechip was satisfied, and then it properly analyzed the question through the in-connection-with requirement.

[00:32:34] Speaker 00:
So there was no reason for it to discuss this in the context of Bluechip.

[00:32:38] Speaker 00:
That's an invention after the fact.

[00:32:40] Speaker 00:
The only other sort of key point that I want to get to is this is a case in large part at this stage that turns on the application of bright line rules versus more factually intensive analysis.

[00:32:51] Speaker 00:
Our position is not that every time there's some theoretical merger between two companies, you're good to go to the races.

[00:32:58] Speaker 00:
The theory that we've put forward is there's not a bright line standing requirement here.

[00:33:02] Speaker 00:
There is a limit here on vexatious litigation that the defendants are so concerned about, and that limit is the materiality inquiry.

[00:33:08] Speaker 00:
The question is not some bright line superficial rule about whether or not the statement named the issuer of the security you purchased, but it turns on the reality of whether or not reasonable investors would have made investment decisions based on the misstatements that occurred.

[00:33:22] Speaker 00:
And here we have specific statements by the company that were extremely material to lucid, stock price reactions to those statements in CCIV that largely answers that question, as well as the additional evidence we cite about why it was reasonable for investors to have made that decision.

[00:33:37] Speaker 04:
Okay.

[00:33:38] Speaker 04:
Counsel, thank you.

[00:33:39] Speaker 04:
Judge Gould, do you have any further questions?

[00:33:41] Speaker 04:
No further.

[00:33:43] Speaker 04:
Okay.

[00:33:43] Speaker 04:
Thank you to both counsel for your arguments.

[00:33:46] Speaker 04:
The case is now submitted, and that concludes our arguments for today.