© 2020 Thomson Reuters. No Claim to Original U.S. Government Works. 1 Garth JENSEN Et Al., Plaintiffs-Appellants, V

Garth JENSEN et al., Plaintiffs-Appellants, v. ISHARES..., 2018 WL 5778127...

2018 WL 5778127 (Cal.App. 1 Dist.) (Appellate Brief) Court of Appeal, First District, California, Division Two.

Garth JENSEN et al., Plaintiffs-Appellants, v. ISHARES TRUST et al., Defendants-Respondents.

No. A153511. October 30, 2018.

On Appeal from the San Francisco County Superior Court No. CGC 16-552567 The Honorable Curtis E.A. Karnow, Judge

Respondents' Brief

Eben P. Colby, Skadden, ARPS, Slate, Meagher & Flom, 500 Boylston Street, Boston, Massachusetts 02116, Telephone: (617) 573-4800, Facsimile: (617) 573-4822, [email protected].

Jeremy A. Berman, Skadden, ARPS, Slate, Meagher & Flom, Four Times Square, New York, NY 10036, Telephone: (212) 735-3000.

Patrick Hammon (SBN 255047), Skadden, ARPS, Slate, Meagher & Flom, 525 University Avenue, Suite 1400, Palo Alto, California 94301, Telephone: (650) 470-4500, Facsimile: (650) 470-4570, [email protected].

Manish Mehta, Mark Weidman, Robert S. Kapito and Jack Gee, Advisors, Blackrock Investments, LLC, Facsimile: (917) 777-2032, jeremy.berman @skadden.com, for defendants-respondents Ishares Trust, Blackrock, Inc., Blackrock Fund.

Bruce H. Schneider (pro hac vice), Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York 10038, Telephone: (212) 806-5636, Facsimile: (212) 806-6006, [email protected], for defendants-respondents John Martinez, Cecilia H. Herbert, Charles A. Hurty, John Kerrigan, Robert H. Silver, Madhav V. Rajan and George G.C. Parker.

John R. Loftus (126841), Stroock & Stroock & Lavan LLP, 2029 Century Park East, Los Angeles, California 90067, Telephone: (310) 556-5800, Facsimile: (310) 556-5959, [email protected], for defendants-respondents John Martinez, Cecilia H. Herbert, Charles A. Hurty, John Kerrigan, Robert H. Silver, Madhav V. Rajan and George G. C. Parker.

*3 CERTIFICATE OF INTERESTED PARTIES

Respondents BlackRock Fund Advisors and BlackRock Investments, LLC are direct or indirect subsidiaries of Respondent BlackRock, Inc., a publicly-held company with stock traded on the New York Stock Exchange. No other respondent is a subsidiary or affiliate of a publicly-owned corporation.

More than ten percent (10%) of the outstanding shares of common stock issued by nonparty BlackRock, Inc., is owned by nonparty PNC Financial Services Group, Inc., a publicly-held corporation with stock traded on the New York Stock Exchange.

Dated: October 30, 2018

PATRICK HAMMON (SBN 255047)

525 University Avenue, Suite 1400

Palo Alto, California 94301

Telephone: (650) 470-4500

Facsimile: (650) 470-4570 [email protected]

Attorneys for Defendants-Respondents iShares Trust, BlackRock, Inc.,

BlackRock Fund Advisors, BlackRock Investments, LLC, Manish Mehta, Mark Weidman, Robert S. Kapito and Jack Gee

*4 TABLE OF CONTENTS I. INTRODUCTION ...... 11 II. FACTUAL BACKGROUND ...... 16 A. How ETFs Work ...... 16 B. The Flash Crashes ...... 21 C. Plaintiffs' Funds Issued Millions of Shares Under Registration Statements or Amendments That Are Not 22 Alleged To Be Misleading...... D. Plaintiffs Did Not Show Whether the Shares They Purchased Were Issued Under the Allegedly 24 Misleading Post-2010 Flash Crash Registration Statements or Amendments or Earlier Registration Statements or Amendments That Were Not Alleged To Be Misleading...... III. PROCEDURAL BACKGROUND ...... 24 A. The Initial Complaint ...... 24 B. The First Amended Complaint ...... 25 C. The Bifurcated Bench Trial ...... 26 IV. STANDARD OF REVIEW ...... 27 V. LEGAL STANDARD ...... 28 A. Section 11 of the 1933 Act Regulates a Corporation's Disclosures Made When New Shares Are First 28 Put Into the Market ...... B. The 1934 Act Generally Regulates an Issuer's Statements and Disclosures After Its Shares Are Trading 29 in the Secondary Market ...... C. The Investment Company Act of 1940 Governs the Business Practices of Investment Companies ...... 30 VI. ARGUMENT ...... 31 A. The Trial Court's Dismissal of Plaintiffs' Section 11 Claim Should Be Affirmed ...... 31 1. Plaintiffs Were Required To Demonstrate That the Shares They Purchased Were Traceable to a 32 Misleading Registration Statement or Amendment ...... *5 2. Plaintiffs Utterly Failed To Demonstrate That the Shares They Purchased Were Traceable to a 35 Misleading Registration Statement or Amendment ...... 3. To Satisfy the Tracing Requirement, Plaintiffs Must Trace the ETF Shares They Purchased to a 38 Misleading Registration Statement or Amendment and Not Merely to the Latest Amendment Filed Before Their Secondary Market Purchase ...... 4. Section 24(e) of the Investment Company Act Left Intact the Tracing Requirement of Section 11 of the 39 1933 Act and Did Not Alter or Weaken It ...... (a) Section 24(e)'s Purpose Was To Allow Investment Companies To File Amendments to Their 40 Registration Statements Rather than New Registration Statements While Preserving the Status Quo with Respect to Sections 11 and 13 ...... (i) Section 24(e) Eliminated Paperwork and Expense for Investment Companies ...... 40 (ii) Section 24(e) Does Not - and Did Not - Change the Standing or Tracing Requirements Necessary for 42 Bringing Section 11 and 13 Claims ......

(b) Section 24(e)'s Reference to “Securities Sold After Such Amendment” Is to the Sale of Shares by the 46 Issuer, Not to Sales in the Secondary Market By Investors ...... (c) The Other Statutory Construction Arguments Plaintiffs Advance Do Not Support Their Argument That 48 Section 24(e) Eliminates Tracing ...... 5. Interpreting the ICA in a Way That Expands Standing Under the Securities Laws for Disclosure 49 Violations Would Contravene the Purpose and History of the ICA ...... (a) The ICA Should Not Be Construed in a Manner That Would Effectively Create a New Private Right of 49 Action for Alleged Violations of the Federal Securities Laws ...... *6 (b) Plaintiffs' Arguments About the Registration Requirements Do Not Support Their Appeal ...... 51 (c) None of the Differences Between the 1933 Act and the ICA Address Tracing ...... 52 6. The SEC's Exemptive Orders Allowing Secondary Trading for ETFs Did Not Eliminate, But Rather 54 Affirmed, Section 11's Tracing Requirements ...... 7. Plaintiffs' Policy Arguments Regarding Sections 11 and 24(e) Are Unavailing ...... 55 B. The Trial Court's Dismissal of the Section 12(a)(2) Claim Should Be Affirmed ...... 58 1. Plaintiffs' 12(a)(2) Claim Should Be Dismissed Because They Purchased Their ETFs in the Secondary 58 Market and Not Directly From an Issuer...... 2. The Absence of a Prospectus Delivery Requirement for ETFs Underscores That Defendants Are Not 62 Statutory Sellers for Purposes of Section 12(a)(2) ...... VII. CONCLUSION ...... 64 CERTIFICATE OF WORD COUNT ...... 66 CERTIFICATE OF SERVICE ...... 67

*7 TABLE OF AUTHORITIES CASES 36, 37 Abbey v. Computer Memories, Inc. (N.D. Cal. 1986) 634 F.Supp. 870...... 50 Alexander v. Sandoval (2001) 532 U.S. 275...... In re ARIAD Pharmaceuticals Securities Litigation (1st Cir. 2016) 842 F.3d 34, 56 744...... 33, 35 Barnes v. Osofsky (2d Cir. 1967) 373 F.2d 269...... 50 Bellikoff v. Eaton Vance Corp. (2d Cir. 2007) 481 F.3d 110...... 30 Blue Chip Stamps v. Manor Drug Stores (1975) 421 U.S. 723...... 30 Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A. (1994) 511 U.S. 164...... In re Century Aluminum Co. Securities Litigation (9th Cir. 2013) 729 F.3d 1104passim In re Countrywide Financial Corp. Mortgage-Backed Securities Litigation 58, 59, 60 (C.D. Cal. 2013) 932 F.Supp.2d 1095...... 56 In re Countrywide Financial Corp. Securities Litigation (C.D. Cal. 2008) 588 F.Supp.2d 1132...... 24 Cyan, Inc. v. Beaver County Employees Retirement Fund (2018) 138 S.Ct. 1061...... Daily Income Fund v. Fox (1984) 464 U.S.523 ...... 30 61 Feiner v. SS & C Technologies, Inc. (D. Conn. 1999) 47 F.Supp.2d 250...... 37, 38 Guenther v. Cooper Life Sciences, Inc. (N.D. Cal. 1990) 759 F.Supp. 1437.. 28, 59 Gustafson v. Alloyd Co. (1995) 513 U.S. 561...... 36 Hemmer Group v. Southwest Water Co. (9th Cir. 2016) 663 F.App'x 496...... 33, 58 Hertzberg v. Dignity Partners, Inc. (9th Cir. 1999) 191 F.3d 1076...... Johnson v. CBD Energy Ltd. (S.D. Tex. July 6, 2016, No. H-15-1668) 2016 34 WL 3654657...... *8 Krim v. pcOrder,com, Inc. (5th Cir. 2005) 402 F.3d 489passim

Laborers' Local 265 Pension Fund v. iShares Trust (6th Cir. 2014) 769 F.3d 49, 51 399...... 27 Le v. Pham (2010) 180 Cal.App.4th 1201...... Medina v. Clovis Oncology, Inc. (D. Colo. 2017) 215 F.Supp.3d 1094...... 59 60 In re Merrill Lynch & Co., Inc. Research Reports Securities Litigation (S.D.N.Y. 2003) 272 F.Supp.2d 243...... 27 Morgan Stanley Information Fund Securities Litig. (2d Cir. 2010) 592 F.3d 347...... 41,44 Morse v. Peat, Marwick, Mitchell & Co. (S.D.N.Y. 1977) 445 F.Supp. 619.. Northstar Financial Advisors, Inc. v. Schwab Investments (9th Cir. 2010) 615 49 F.3d 1106...... 41,43 P. Stolz Family Partnership L.P. v. Daum (2d Cir. 2004) 355 F.3d 92...... Perrin v. SouthWest Water Co. (C.D. Cal. July 2, 2014, No. CV 08-7844 DMG 34 (AGR)) 2014 WL 10979865...... 61 Pinter v. Dahl (1988) 486 U.S. 622...... 59 Primo v. Pacific Biosciences of California, Inc. (N.D. Cal. 2013) 940 F.Supp.2d 1105...... In re Puda Coal Securities Inc. (S.D.N.Y. Oct. 1, 2013, 11 Civ. 2598 (KEF)) 36,37 2013 U.S. Dist. LEXIS 142081, judg. vacated in part on other grounds, (S.D.N.Y. Apr. 7, 2014) 2014 U.S. Dist. LEXIS 49718 ...... 29 Rubke v. Capitol Bancorp Ltd. (9th Cir. 2009) 551 F.3d 1156...... 49 Santomenno ex rel. John Hancock Trust v. John Hancock Life Insurance Co. (3d Cir. 2012) 677 F.3d 178...... Scott v. ZST Digital Networks, Inc. (C.D. Cal. 2012) 896 F.Supp.2d 877...... 34 27 Stichting Pensioenfonds ABP v. Countrywide Financial Corp. (C.D. Cal. 2011) 802 F.Supp.2d 1125...... TAAM Associates Inc. v. Housecall Medical Resources, Inc. (N.D. Ga. Mar. 30 30, 1998, No. 1:96CV2214 A JEC) 1998 WL 1745361...... *9 TransEnterix Investor Group v. TransEnterix, Inc. (E.D.N.C. 2017) 272 34 F.Supp.3d 740...... 28 United States v. Naftalin (1979) 441 U.S. 768...... United States v. National Ass'n of Securities Dealers (1975) 422 U.S. 694passim In re Vocera Communications, Inc. Securities Litigation (N.D. Cal. Feb. 34 11,2015, No. C-13-3567 EMC) 2015 WL 603208...... 59 Welgus v. TriNet Group, Inc. (N.D. Cal. Jan. 17, 2017, No. 15- CV-03625-BLF) 2017 WL 167708...... STATUTES 15 U.S.C. § 77a...... 11 15 U.S.C. § 77h(c)...... 23 15 U.S.C. § 77j(a)...... 48 15 U.S.C. § 77kpassim 12, 58 15 U.S.C. § 77l(a)(2)...... 15 U.S.C. § 77m...... 44 15 U.S.C. § 77o(a)...... 27 15 U.S.C. § 78a...... 12 14, 29 15 U.S.C. § 78j(b)...... 15 U.S.C. § 80a-1...... 12 15 15 U.S.C. § 80a-3...... 15 U.S.C. § 80a-5...... 17

51 15 U.S.C. § 80a-8...... 15 U.S.C. § 80a-23...... 17 15 U.S.C. § 80a-24 passim 15 U.S.C. § 80a-35...... 50 50 15 U.S.C. § 80a-41...... *10 REGULATIONS 17 C.F.R. § 229.512...... 48 53 17 C.F.R. § 230.159A...... 17 C.F.R. § 240.10b-5...... 14, 28 LEGISLATIVE MATERIALS H.R.Rep. No. 83-1542 (1954) ...... 41, 45 Sen.Rep. No. 83-1036 (1954) ...... 41, 45 H.R.Rep. No. 104-622 (1996) ...... 53 OTHER AUTHORITIES Antoniewicz and Heinrichs, Understanding Exchange-Traded Funds: How 18 ETFs Work (Sept. 2014) fn. 14, ICI Research Perspective (Inv. Co. Inst. <; www.ici.org/pdf/per20-05.pdf>;) ...... Frankel & Laby, Regulation of Money Managers: Mutual Funds and Advisers 40 (3d ed. 2015) § 25.01 ...... Loss & Seligman, Securities Regulation p. 538 (4th ed. 2006) ...... 41 5 Jacobs, Disclosure and Remedies Under the Securities Laws (2017) § 3:72 ... 44, 47

*11 I. INTRODUCTION

Plaintiffs are purchasers of exchange-traded funds (“ETFs”) who claim to have been misled by registration statements and amendments thereto that Defendant iShares Trust (“iShares”) filed with the Securities and Exchange Commission (“SEC”). The other defendants are BlackRock Fund Advisors (“BFA”) and BlackRock Investments, LLC (“BRIL”), both of which are subsidiaries of defendant BlackRock, Inc. (“BlackRock”). BFA is the investment adviser to the funds created by iShares, and BRIL distributes the Creation Units (discussed below) issued by these funds to institutional investors. 1

*12 Plaintiffs sued Defendants for losses they suffered during an unprecedented market event referred to as a “flash crash.” Plaintiffs alleged that certain of Defendants' registration statements and amendments thereto were false or misleading in that they failed to disclose the risks associated with flash crashes. Indeed, all of Plaintiffs' claims arose under the Securities Act of 1933 (15 U.S.C. § 77a et seq.) (“1933 Act”), a statute primarily concerned with a company's registration statements and amendments for public offerings of new shares by a corporate issuer. This primary market is fundamentally different than the “aftermarket” or “secondary market” - where Plaintiffs purchased their shares - which is the “‘securities market in which previously issued securities are traded among investors.”' 2 Trading on the secondary market is generally governed by the Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq.) (“1934 Act”), which is focused on a company's post-issuance statements and disclosures, such as press releases and other public statements.

*13 On September 18, 2017, four months after dismissing Plaintiffs' claims arising under Section 12(a)(2) of the Securities Act of 1933, 15 U.S.C. § 77 (a)(2) (“Section 12(a)(2)”), the Superior Court for the County of San Francisco issued a Statement of Decision that disposed of the remaining claims asserted by Plaintiffs, thereby ending this litigation at the trial court level. In that decision, which was entered after a bench trial, the Superior Court held that Plaintiffs lacked standing to bring a cause of action under Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k (“Section 11”) because they could not prove that the ETF shares they purchased were issued (i.e., first put into the market) pursuant to a registration statement that was false and misleading - and not issued pursuant to a different registration statement that was accurate. Thereafter, Plaintiffs filed the instant appeal, which endeavors to convince this Court to rely on language from a completely different statute - Section 24(e) 3

(“Section 24(e)”) of the Investment Company Act of 1940 (15 U.S.C. § 80a-1 et seq.) (“ICA”) - to override the undisputed requirements for bringing a Section 11 claim.

Plaintiffs' appeal, however, presents no justification for reversing the findings of the Superior Court. Both of the Superior Court's decisions should be affirmed for the same reason. First, the rejection of Plaintiffs' Section 11 claim was proper because they failed to satisfy the well-settled Section 11 standing requirement to “trace” their shares to an allegedly false or misleading registration statement or amendment. Second, the dismissal of Plaintiffs' Section 12(a)(2) claim was appropriate because Plaintiffs also did not have standing to bring such claims because they purchased in the secondary market rather than in a primary offering from the Defendants.

*14 First, the dismissal of Plaintiffs' Section 11 claim was proper because Plaintiffs failed to prove that they had standing to bring their claim. The 1933 Act regulates the offer and sale of securities by issuers and Section 11 of the Securities Act “provides a cause of action to any person who buys a security issued under a materially false or misleading registration statement.” ( In re Century Aluminum Co. Sec. Litig. (9th Cir. 2013) 729 F.3d 1104, 1106, hereafter Century Aluminum.) Although Section 11 is not limited to plaintiffs who “purchased shares in the offering made under the misleading registration statement,” and aftermarket purchasers have standing to sue as well, ibid., Congress imposed an important limitation on potential aftermarket plaintiffs. They must be able to trace their shares back to the relevant offering at issue. Ibid. This is because Section 11 is akin to a strict liability statute and does not require plaintiffs to make an affirmative showing of scienter and reliance like they must for other securities claims (such as those under Section 10(b) 4 of the Securities Exchange Act of 1934 and SEC Rule 10b-5). 5 Id. at p. 1107. Thus, the “tracing requirement is the condition Congress has imposed for granting access to the ‘relaxed liability requirements' § 11 affords.” Ibid. (emphasis added). There are no exceptions to the requirement that a plaintiff must be able to trace the shares that he or she purchased to a registration statement or amendment that was false and misleading.

Here, the ETF funds whose shares Plaintiffs purchased had issued hundreds of millions of shares between 2000 and 2010. On May 6, 2010, what is known as a “flash crash” occurred, causing market prices for ordinary stock and ETF shares to drop precipitously. After that crash, the ETF funds whose disclosures are the subject of this lawsuit issued additional shares pursuant to subsequent registration statements and *15 amendments. Plaintiffs concede that only the post-2010 statements were allegedly misleading because they purportedly did not disclose the risks associated with a potential future flash crash. In 2015, a second flash crash occurred, as a result of which Plaintiffs allegedly suffered damages when they sold their ETF shares at significant losses. Plaintiffs, however, did not - and cannot - show whether the shares they purchased were issued under the allegedly misleading post-2010 flash crash registration statements or amendments, or whether their shares were issued under earlier registration statements or amendments that are not alleged to be misleading. The Superior Court correctly found that Plaintiffs' failure to trace their shares to any of the allegedly defective registration statements or amendments was fatal to their Section 11 claim.

*16 Plaintiffs want this Court to override Congress's intent - and undo decades of Section 11 jurisprudence in the process - by finding that plaintiffs who sue investment companies 6 such as ETFs do not need to satisfy Section 11's longstanding tracing requirement. Plaintiffs base their argument on an incorrect reading of ICA Section 24(e) - a statute from a different set of laws, serving different purposes. Plaintiffs' argument is simply not supported by the language, history, or purpose of either Section 11 or Section 24(e), let alone by any cases interpreting those statutes. Literally, no court in the country has endorsed or adopted Plaintiffs' interpretation of Section 24(e).

Second, the Superior Court's dismissal of Plaintiffs' Section 12(a)(2) claim should also be affirmed because Plaintiffs did not have standing to assert such claim. Section 12(a)(2) only confers standing on those who purchased directly from an issuer;

© 2020 Thomson Reuters. No claim to original U.S. Government Works. 6 Garth JENSEN et al., Plaintiffs-Appellants, v. ISHARES..., 2018 WL 5778127... purchasers in the secondary market cannot bring such claims. Because none of Plaintiffs alleged that they made any purchases directly from the funds at issue, and, instead, the brokerage records attached to their declarations confirm that they purchased ETFs in the secondary market, Plaintiffs' Section 12(a)(2) claim was properly dismissed.

II. FACTUAL BACKGROUND

A. How ETFs Work.

*17 Investment companies - such as open-end mutual funds, closed-end funds, and ETFs - are vehicles in which investors' assets are pooled to invest in stocks, bonds, and other securities. These investment companies offer shares to the investing public; each share representing a proportional interest of the pool of investments that are held by the investment company. That proportional interest's value is known as its net asset value per share, or NAV, and represents the investment company's assets (i.e., the value of the securities held by the investment company) minus its liabilities (i.e., the costs of operating the investment company) divided by the number of shares outstanding. Investment companies calculate the NAV of their shares every trading day. 7

Open-end funds continuously offer and redeem shares at NAV directly to shareholders in exchange for cash. (See 15 U.S.C. § 80a-5(a)(1).) Closed-end funds, on the other hand, typically conduct offerings of a set number of shares to the market at NAV, and thereafter those shares are traded among shareholders on an exchange at prevailing market prices. (See 15 U.S.C. § 80a-5(a)(2); 15 U.S.C. § 80a-23.)

*18 An ETF is a hybrid of an open-end and a closed-end fund, although they are registered with the SEC as open-end funds. (See 1AA0409 [“SEC Concept Release: Actively Managed Exchange-Traded Funds,” modified May 18, 2004, explaining “What Are ETFs”].) Like a closed-end fund, ETF shares are primarily traded on secondary markets, such as stock exchanges. (1AA0143 ¶¶ 57-59.) Like an open-end fund, however, ETFs continuously offer shares, issuing more shares as shareholders invest more money and buying back shares when shareholders redeem their investment. (See 1AA0409.) ETFs, however, do not transact directly with retail investors, but only offer and redeem shares through financial intermediaries - certain broker-dealers known as “Authorized Participants.” (4AA1452.) ETFs issue and redeem large blocks of shares at NAV, typically 50,000 shares or multiples thereof called “Creation Units,” to and from Authorized Participants in so-called primary market transactions. The Authorized Participants then split up Creation Units into individual shares and sell them on a secondary market to end investors such as Plaintiffs. (1AA0144 ¶¶ 61-63; see also AA0409.) 8

*19 The creation and redemption activity between iShares and Authorized Participants is part of the primary or “new issue” market and is “analogous to an operating firm issuing new shares to raise additional capital for investment or retiring shares by buying them back.” 9 On occasion, this activity is initiated by Authorized Participants to capture arbitrage opportunities that may arise when there are disparities between the market prices of ETF shares and their NAV. For example, when the market price of a particular ETF share exceeds its NAV - i.e., the share trades at a premium to NAV - Authorized Participants may purchase newly issued Creation Units at NAV and sell shares to retail investors at market prices above NAV. Conversely, when ETF shares trade in the secondary market at a discount to NAV, Authorized Participants may purchase discounted shares in the market, and then sell Creation Units back to the ETFs at NAV, enabling Authorized Participants to receive a premium over the prevailing market price. Under normal market conditions, these arbitrage transactions operate to minimize the trading of ETF shares at a premium or discount to NAV. In periods of high market volatility, market prices and NAVs can diverge, sometimes significantly, as iShares itself disclosed in its filings with the SEC. (See 3AA0958.)

*20 The relevant terms of these primary market transactions - the sale of Creation Units of a particular ETF to Authorized Participants - are spelled out in a registration statement, which is a required disclosure under the 1933 Act. These registration statements are publicly filed with the SEC, and are available for inspection and review by the investing public on the SEC's website, called EDGAR. (See 4AA1452 ¶ 5; 4AA1476 ¶ 3; see also Pl. Br. 10 at p.48, fn. 28.)

Once the individual shares are trading on a securities exchange, such as the New York Stock Exchange Arca, retail investors may buy and sell individual shares in that secondary market through retail securities brokers, just like they do with common company stock. (4AA1452-53.) Like ordinary common stock, an ETF's price per share fluctuates according to market forces, based on supply and demand for the shares. (1AA0144 ¶¶64-65.) ETFs trade at prevailing market prices. (See ibid.)

Both primary market transactions in Creation Units and secondary market transactions in ETF shares are executed without the physical transfer of share certificates. (4AA1476.) All Creation Units and ETF shares are held in fungible bulk by The Depository Trust Company (“DTC”), and registered in the name of its nominee, Cede & Co., the sole record owner of those shares. (4AA1476-77.) Through use of an electronic book-entry system, DTC transfers ETF shares by debiting and crediting the accounts of participating members of DTC, the so-called DTC Participants, who typically are broker-dealers, banks, and other institutions. (4AA1477.) Because all ETF shares are held in fungible bulk in DTC's vault, “in most instances, it is not possible to link specific ETF shares to specific investors.” (Ibid.)

*21 B. The Flash Crashes.

On May 6, 2010, publicly traded security prices on the New York Stock Exchange dropped at a dramatic and unprecedented rate in what is referred to as a “flash crash” (“2010 flash crash”). During the crash, prices declined precipitously in about 30 minutes, and did not return to their precrash price levels until the end of the trading day. (1AA0145.) Plaintiffs claim that ETF investors that had pending “stop loss” orders were the most severely impacted by this flash crash. A stop loss order is a standing instruction by an investor to their broker to try to sell a security if the market price of that security falls below a specified price. (1AA0115.) The 2010 flash crash caused market prices of ETF shares sponsored by various fund companies (including iShares) to decline rapidly, which, in turn, automatically converted outstanding stop loss orders on those shares to sell orders to be executed in the secondary market. (See 1AA0116.) Given the precipitous market drop, ETF shareholders with pending stop loss orders ultimately were only able to sell their securities at prices below the NAV and their designated stop price. (1AA0116-17.) The 2010 flash crash was unanticipated and unprecedented, considered to be “one of the most unusual - and puzzling - events in U.S. stock market history.” (4AA1455, citation omitted.)

A second flash crash occurred approximately five years later, on August 24, 2015 (“2015 flash crash”). Plaintiffs had stop loss orders *22 pending on that date, which triggered the sale of their fund shares at market prices below both their designated stop prices and below the NAV of the shares. (See 1AA0120, 0123-28.)

Plaintiffs claim they suffered losses in the 2015 flash crash because, after the 2010 flash crash, subsequent iShares offering documents did not adequately disclose the risk of loss from a potential future flash crash to ETF investors who utilized stop loss orders. Plaintiffs contend that iShares should have disclosed that risk because of its experience with the flash crash that occurred five years earlier, in 2010.

C. Plaintiffs' Funds Issued Millions of Shares Under Registration Statements or Amendments That Are Not Alleged To Be Misleading.

*23 The ETF funds at issue - i.e., funds whose shares Plaintiffs had purchased (“Plaintiffs' Funds”) - had issued millions of shares prior to the 2010 flash crash, the point in time at which Plaintiffs allege the relevant offering documents became misleading. Beginning a decade earlier, on July 10, 2000, iShares began issuing shares of the Plaintiffs' Funds. The effective

© 2020 Thomson Reuters. No claim to original U.S. Government Works. 8 Garth JENSEN et al., Plaintiffs-Appellants, v. ISHARES..., 2018 WL 5778127... dates for their initial registration statements were as follows: IWF and IVV (July 10, 2000); IJR (October 15, 2000); IWS (January 21, 2001); IWP and IWR (February 5, 2001); DVY (November 1, 2003); JKG and JKD (May 19, 2004); ITA (February 28, 2006); and PFF (September 18, 2006). (1AA0278.) 11 Between 2000 and May 6, 2010, Plaintiffs' Funds collectively issued and sold Creation Units comprised of hundreds of millions of shares in a series of primary market transactions pursuant to registration statements and amendments filed with the SEC. (See IAA 0260-76, 0278, 0280-281.) The cumulative effect of these issuances in primary offerings (and redemptions) was that Plaintiffs' Funds, respectively, had between 1,600,000 and 220,950,000 shares outstanding as of the 2010 flash crash. (1AA0280-81.)

It is undisputed that these shares were issued pursuant to offering documents that were not false or misleading. Plaintiffs stipulated at trial that “[t]here [wa]s no material misrepresentation or omission in any part of any registration statement or any amendment thereto... before May 6, 2010.” (4AA1448 ¶ 1.) The Plaintiffs' Funds continued to issue shares after May 6, 2010. (1AA0260-76.) 12

*24 D. Plaintiffs Did Not Show Whether the Shares They Purchased Were Issued Under the Allegedly Misleading Post-2010 Flash Crash Registration Statements or Amendments or Earlier Registration Statements or Amendments That Were Not Alleged To Be Misleading.

Plaintiffs purchased their ETF shares on secondary securities exchanges via their retail brokers. (See 2AA0511-722.) But because all these shares were held in fungible bulk at the DTC, Plaintiffs were unable to prove at trial whether these shares were issued pursuant to registration statements and amendments that pre-dated or post-dated May 6, 2010.

III. PROCEDURAL BACKGROUND

A. The Initial Complaint.

*25 Plaintiffs' initial and amended complaints were both brought under the 1933 Act. Plaintiffs filed their initial complaint against Defendants on June 16, 2016, and alleged three claims under the 1933 Act. 13 Those claims were: (1) violation of Section 11 for allegedly causing material misstatements and/or omissions to be made in the registration statements, (2) violation of Section 12(a)(2) for offering or selling a security by means of prospectuses that allegedly contained untrue statements of material fact or omissions of material facts that defendants knew (or should have known) were untrue or omitted, and (3) violation of Section 15 of the 1933 Act (15 U.S.C. § 77o) by controlling persons and/or those who aided and abetted alleged violations of the 1933 Act. (1A0025-68.) On December 21, 2016, the trial court dismissed the initial complaint without prejudice on statute of limitations grounds because Plaintiffs had not adequately alleged that they purchased their ETF shares within one year of their discovery of the alleged misstatements. (1AA0101-08.)

B. The First Amended Complaint.

After the trial court dismissed their initial complaint, Plaintiffs filed their “First Amended Complaint for Violation of the U.S. Securities Act of 1933,” which also suffered from fatal legal defects. Plaintiffs' First Amended Complaint contained the same three causes of action as their initial complaint. (1AA0109-191.) By Order dated April 27, 2017, the trial court partially granted Defendants' motion for judgment on the pleadings by dismissing Plaintiffs' claim under Section 12(a)(2) for lack of standing, on the ground that none of Plaintiffs alleged they purchased ETF shares in an initial offering. (1AA0217-25.) The trial court reasoned:

“[P]urchasers in private or secondary market offerings do not have standing to bring 12(a)(2) actions.”

There are no allegations in the FAC that plaintiffs purchased their ETF shares in an initial offering. In fact, the complaint suggest [sic] just the opposite. ETFs are not sold directly to individuals from retail investors, but sold in large blocks to an “Authorized Participant” who then splits up the shares “and sell[s] them to individuals or on a secondary market such as the NASDAQ Arca.” FAC ¶¶ 61-63. Ninety percent of ETFs are traded on a secondary market (the New York Stock Exchange Arca). Id. ¶ 59.

(1AA0222-23, second alteration in original, citations omitted.)

*26 In that same order, the trial court held there was an issue of fact as to whether Plaintiffs satisfied the tracing requirement needed to establish standing on their Section 11 claim. Citing supporting case law, the Superior Court explained that if there are some registration statements that are alleged to be false and misleading and some that are not, a plaintiff will have to trace his or her shares to a specific registration statement:

Where all the potentially pertinent registration statements contain the same allegedly false or misleading language and each was at the time false and misleading, there may not be much reason to insist on traceability to any one of them. If the fact is that some of potentially pertinent registration statements do, and some do not, contain the false and misleading statements alleged in the operative complaint, then plaintiff will indeed have to shoulder the burden of tracing title to a specific registration statement, a burden which they likely cannot sustain.

On this record, I do not know if we have a standing problem or not, because I do not know if we have more than one offering under multiple registration statements with materially differing representations...

(1AA0221-22, emphasis added, citations omitted.)

C. The Bifurcated Bench Trial.

On June 25, 2017, the parties agreed to a bifurcated bench trial on the issue of whether Plaintiffs had standing to bring a claim under Section 11. (1AA0239.) The trial was conducted on September 11, 2017. At trial, the parties provided opening statements, presented arguments, and delivered closing arguments before the Court, all regarding Plaintiffs' standing. The parties introduced evidence in the form of sworn affidavits and stipulated facts, including the stipulation that “[t]here [wa]s no material *27 misrepresentation or omission in any part of any registration statement or any amendment thereto... before May 6, 2010,” when the 2010 flash crash occurred. (4AA1448 ¶ 1.)

At trial, no Plaintiff offered any evidence as to whether any of the shares he or she purchased were issued before or after May 6, 2010. Instead, each Plaintiff submitted evidence that it purchased its ETF shares in the secondary market through a brokerage firm. (2AA0511-722.)

One week after trial, on September 18, 2017, the Superior Court issued a Statement of Decision that disposed of Plaintiffs' remaining Section 11 and Section 15 claims. 14 The trial court held that because Plaintiffs could not trace their shares to a defective registration statement, their claims failed for failure to prove standing. Plaintiffs appealed.

IV. STANDARD OF REVIEW

The question presented on appeal - namely, whether Section 24(e) eliminates Section 11's standing and tracing requirement - should be evaluated under the “independent review” standard. ( Le v. Pham (2010) 180 Cal.App.4th 1201, 1206.) Under this standard of review, Plaintiffs' *28 appeal must be rejected for the reasons described below.

V. LEGAL STANDARD

The nature, purpose, and background of the 1933 Act, the 1934 Act, and the ICA demonstrate that Plaintiffs' argument that Section 24(e) of the ICA supersedes the tracing requirement of the 1933 Act is meritless.

A. Section 11 of the 1933 Act Regulates a Corporation's Disclosures Made When New Shares Are First Put Into the Market.

The 1933 Act, of which Section 11 is a part, regulates the offer and sale of securities by issuers and seeks to prevent fraud in public offerings by imposing disclosure and registration requirements. (See Gustafson v. Alloyd Co. (1995) 513 U.S. 561, 571-572 [“primary innovation” of the 1933 Act “was the creation of federal duties - [principally,] registration and disclosure obligations - in connection with public offerings”]; United States v. Naftalin (1979) 441 U.S. 768, 777-778 [“T]he 1933 Act was primarily concerned with the regulation of new offerings.”].)

Section 11 provides a private right of action for purchasers of a security if the issuer of new shares files a registration statement for those shares that “contain[s] an untrue statement of a material fact or omit[s] to state a material fact required to be stated therein or necessary to make the statements therein not misleading.” (15 U.S.C. § 77k(a).) Plaintiffs seeking to assert such a claim must prove (1) that the registration statement contained an omission or misrepresentation, and (2) that the omission or *29 misrepresentation was material. ( Rubke v. Capitol Bancorp Ltd. (9th Cir. 2009) 551 F.3d 1156, 1161.)

A Section 11 plaintiff generally need not prove scienter or causation. Furthermore, a Section 11 plaintiff ordinarily does not have to prove reliance on the misstatement (although there is an exception where the issuer's financial statements have been on file for over a year). (See 15 U.S.C. § 77k(a).) As discussed below, however, in order to avail themselves of Section 11 as a remedy, plaintiffs must trace their shares to the allegedly defective registration statement.

B. The 1934 Act Generally Regulates an Issuer's Statements and Disclosures After Its Shares Are Trading in the Secondary Market.

Plaintiffs in this case purchased their shares in the secondary market. The 1934 Act generally regulates an issuer's statements and disclosures after its shares begin trading on the secondary market. Section 10(b) of the 1934 Act, along with SEC Rule 10b-5, prohibits “any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.” (17 C.F.R. § 240.10b-5(c); accord 15 U.S.C. § 78j(b).) 15

*30 Courts have long recognized that Section 10(b) generally deals with trading in the secondary market. (See Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., (1994) 511 U.S. 164, 170-71 [“The 1933 Act regulates initial distributions of securities, and the 1934 Act for the most part regulates post-distribution trading.”].) While the “purpose behind § 11 of the 1933 Act is relatively limited in scope,” § 10(b) of the 1934 Act imposes “a broad proscription against fraud.” (See TAAM Assocs. Inc. v. Housecall Med. Res., Inc. (N.D. Ga. Mar. 30, 1998, No. 1:96CV2214 A JEC) 1998 WL 1745361, at *4-5.) 16

C. The Investment Company Act of 1940 Governs the Business Practices of Investment Companies.

*31 The ICA, which Plaintiffs argue gives them standing in this case, regulates investment companies, including ETFs, and was adopted principally to police the potential conflicts between an investment company and its advisor. (See Daily Income

Fund v. Fox (1984) 464 U.S. 523, 536 [“Congress adopted the [ICA] because of its concern with ‘the potential for abuse inherent in the structure of investment companies.”’] (citation omitted).) To reduce the risk these conflicts pose, the ICA (i) regulated transactions between investment companies and their advisors; (ii) limited the number of persons affiliated with the advisor who may serve on the investment company's board; and (iii) required that advisory fees be set forth in written agreements. (See ibid. at pp. 536-37.) The remedies prescribed by the ICA concern the business practices of investment companies. ( Nat'l Ass'n. of Sec. Dealers, supra, 422 U.S. at pp. 704-705 [“The [ICA] vests in the SEC broad regulatory authority over the business practices of investment companies.”].) 17 The ICA does not have a private right of action for fraud (as noted above, that is covered by the 1933 Act and the 1934 Act).

VI. ARGUMENT

A. The Trial Court's Dismissal of Plaintiffs' Section 11 Claim Should Be Affirmed.

Plaintiffs' entire argument that their Section 11 claims were improperly dismissed rests on their incorrect view that they are not required to trace their shares to a primary offering that had an allegedly defective registration statement. Instead, Plaintiffs argue that they only need to show that the registration statement that was effective at the time they purchased shares on the secondary market contained materially misleading information. In other words, Plaintiffs essentially read the tracing requirement completely out of Section 11.

Plaintiffs raise a number of arguments - some more intelligible *32 than others - as to why this Court should ignore black- letter law that, in order to have standing to bring a Section 11 claim against an issuer, a plaintiff must trace his or her shares to a defective registration statement. All of Plaintiffs' arguments hinge on their apparent view that the securities at issue here - shares of ETFs - are so unique as to require special treatment under the 1933 Act. Of course, there are no cases that support their radical proposition, so Plaintiffs attempt to obfuscate by pointing to other, unrelated securities laws, strained statutory construction, irrelevant SEC orders, and unfounded policy arguments to support their position. But none of these arguments are availing; if anything, the materials relied on by Plaintiffs reflect a deliberate intention by Congress and the SEC not to broaden Section 11 liability beyond the original constructs. Further, Plaintiffs' policy arguments apply just as equally to investors in other securities that are traded principally on the secondary market (e.g., equities), but those arguments have not been adopted by Congress or the courts.

1. Plaintiffs Were Required To Demonstrate That the Shares They Purchased Were Traceable to a Misleading Registration Statement or Amendment.

Section 11 of the 1933 Act provides, in relevant part, as follows:

In case any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring such security (unless it is proved that at the time of such acquisition he knew of such *33 untruth or omission) may, either at law or in equity . sue... [a list of specific categories of defendants].

(15 U.S.C. § 77k, emphasis added.)

Section 11's tracing requirement derives from its plain language. In order to state a Section 11 claim, a purchaser must prove that “such security” that is the basis of the cause of action was purchased pursuant to a registration statement (or part thereof)

that misstated or omitted material facts at the time the registration statement became effective. (See Hertzberg v. Dignity Partners, Inc. (9th Cir. 1999) 191 F.3d 1076, 1080, cited in Pl. Br. at p. 37 [“The limitation on ‘any person’ is that he or she must have purchased ‘such security.’ Clearly, this limitation only means that the person must have purchased a security issued under that, rather than some other, registration statement.”].) “Such security” refers only to the specific securities registered pursuant to the allegedly defective filing; it does not refer to all securities of the same class as those registered by the allegedly misleading filing. (See Barnes v. Osofsky (2d Cir. 1967) 373 F.2d 269, 271-72.)

*34 Section 11's tracing requirement is well established. As courts across the country have recognized, Section 11 “provides a cause of action to any person who buys a security issued under a materially false or misleading registration statement.” (See Century Aluminum, supra, 729 F.3d at p. 1106.) A plaintiff need not have purchased in an initial public offering to have standing under Section 11, but secondary market purchasers have standing only if “they can trace their shares back to the relevant offering.” (Ibid.; see also In re ARIAD Pharm. Sec. Litig. (1st Cir. 2016) 842 F.3d 744, 755-756 [affirming dismissal of Section 11 claim for failure to plead facts sufficient to satisfy tracing requirement]; Krim v. pcOrder.com, Inc. (5th Cir. 2005) 402 F.3d 489, 498-499 [affirming dismissal of Section 11 claim where plaintiff's statistical tracing method was insufficient to demonstrate that their shares were traceable to a challenged registration statement]; TransEnterix Inv. Grp. v. TransEnterix, Inc. (E.D.N.C. 2017) 272 F.Supp.3d 740, 760-762 [plaintiffs failed to adequately allege tracing where 92% of the shares in the market came from offering documents that pre-dated the allegedly false and misleading prospectus]; Scott v. ZST Dig. Networks, Inc. (C.D. Cal. 2012) 896 F.Supp.2d 877, 887-888 [dismissing Section 11 claim based on a failure to adequately allege tracing].) 18

Tracing is a critical requirement of a Section 11 claim because a plaintiff generally need not prove normal fraud requirements such as scienter and reliance. It is precisely because of these “relaxed liability *35 requirements” that Congress and the courts have imposed a strict tracing requirement, which serves as a necessary limit on Section 11 liability. (See Century Aluminum, supra, 729 F.3d at p. 1107; Barnes, supra, 373 F.2d at pp. 271-73 [explaining that because Section 11 does not include the more-difficult-to-prove intent requirement, potential liability is limited to claims relating to securities traceable to a defective registration statement].)

2. Plaintiffs Utterly Failed To Demonstrate That the Shares They Purchased Were Traceable to a Misleading Registration Statement or Amendment.

At the outset, it is beyond dispute that Plaintiffs were not able to trace their shares to an allegedly defective registration statement at trial. Indeed, before trial, Plaintiffs stipulated that the iShares' registration statements and amendments that pre-dated May 6, 2010 were not misleading. Thus, Plaintiffs' shares could have been issued pursuant to a registration statement that had no alleged misstatements. Given that Plaintiffs did not even attempt to establish that their shares were purchased in connection with a post-May 6, 2010 offering of fund shares, Plaintiffs failed to meet Section 11's tracing requirement.

Moreover, Plaintiffs could not trace their shares to a post-May 6, 2010 offering document even if they tried. Because all shares Plaintiffs purchased were held in fungible bulk at DTC, Plaintiffs cannot trace their shares to any specific registration statement or amendment, let alone one after May 6, 2010. (See 4AA1476-77.) The Ninth Circuit Court of *36 Appeals has held that shares held in fungible bulk cannot be traced to any one of multiple registration statements, explaining in language equally applicable here:

[Plaintiff] cannot trace its shares to an offering made under a false or materially misleading registration statement. The... shares owned by [plaintiff] were part of a fungible mass of... shares held by a [DTC Participant]... Such situation effectively prevented any chain of title from ever being built because shares from several offerings were entirely indistinguishable. Because [plaintiff] could not demonstrate

that its shares originated from the relevant registration statement, it lacked standing to pursue its Section 11 claim.

( Hemmer Grp. v. Sw. Water Co. (9th Cir. 2016) 663 F.App'x 496, 498, emphasis added; accord In re Puda Coal Sec. Inc. (S.D.N.Y. Oct. 1, 2013, 11 Civ. 2598 (KEF)) 2013 U.S. Dist. LEXIS 142081, at *24 [the “steps necessarily involving the [DTC] are fatal to traceability”], judg. vacated in part on other grounds, (S.D.N.Y. Apr. 7, 2014) 2014 U.S. Dist. LEXIS 49718; Abbey v. Comput. Memories, Inc. (N.D. Cal. 1986) 634 F.Supp. 870, 872-875 [plaintiff could not establish tracing where all CMI shares he purchased “were a part of the common pool of CMI shares held in DTC's vault on the day of the transfer”].)

Plaintiffs do not seriously dispute that they are unable to trace their shares to an actionable registration statement. Rather, they claim that, for procedural reasons, the issue of standing is not properly before this court. (See Pl. Br. pp. 20-22.) These arguments are meritless.

*37 First, contrary to Plaintiffs' suggestion, tracing is not an affirmative defense; rather, Plaintiffs bear the burden on the issue of statutory standing, which, for Section 11's purposes, requires them to demonstrate tracing. (See Guenther v. Cooper Life Sci., Inc. (N.D. Cal. 1990) 759 F.Supp. 1437, 1439 [“The burden of tracing shares to a particular public offering rests with plaintiffs.”].) Where, as here, “a company has issued shares under more than one registration statement, the plaintiff must prove that her shares were issued under the allegedly false or misleading registration statement, rather than some other registration statement.” ( Century Aluminum, supra, 729 F.3d at p. 1106; accord In re Puda Coal, supra, 2013 U.S. Dist. LEXIS 142081, at p. *18; Abbey, supra, 634 F.Supp. at 876, fn. 5.) Indeed, recognizing this burden of proof, Plaintiffs' complaints alleged that their purchases were made “pursuant and traceable to the Offering Documents” (emphasis added). 19 Defendants were neither required to raise tracing as an affirmative defense or to have raised it in their first motion for judgment on the pleadings.

Second, Plaintiffs waived whatever objection they claim to have here when they agreed to a trial on the issue of standing without objecting that the issue had not been raised previously. In the Joint Case Management Conference Statement, both Plaintiffs and Defendants agreed *38 that the tracing issue should be resolved through a bench trial. (See 1AA0226, 0228, 0230, 0236 (“Parties make a joint proposal to the Court for a bench trial.” (1AA0236)).) Thus, Plaintiffs' procedural arguments fail.

3. To Satisfy the Tracing Requirement, Plaintiffs Must Trace the ETF Shares They Purchased to a Misleading Registration Statement or Amendment and Not Merely to the Latest Amendment Filed Before Their Secondary Market Purchase.

Plaintiffs argue that each amendment becomes the operative registration statement for all previously issued shares, even the millions of shares issued pursuant to non-defective registration statements. That argument was rejected in Guenther v. Cooper Life Sci., Inc., supra, 759 F.Supp. at pp. 1439-1441. There, the court rejected the plaintiffs' claim that the non-defective registration statement could be retroactively rendered blemished by a later misleading amendment. (Ibid.) To have Section 11 standing, the court held that plaintiffs had to trace securities purchased on the secondary market after the allegedly defective amendment to a misleading registration statement. (Ibid.)

Under Plaintiffs' argument, an issuer of securities would be liable under Section 11 if the shares were issued pursuant to an accurate registration statement, i.e., one that was accurate on its effective date. That is inconsistent with the language of Section 11. Section 11 only creates potential liability if “any part of the registration statement, when such part *39 became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to

© 2020 Thomson Reuters. No claim to original U.S. Government Works. 14 Garth JENSEN et al., Plaintiffs-Appellants, v. ISHARES..., 2018 WL 5778127... make the statements therein not misleading.” (15 U.S.C. § 77k(a), emphasis added.) Thus, Plaintiffs' argument is contrary to the plain language of Section 11, which looks at the accuracy of the registration statement at the time the shares were issued.

Moreover, there is no evidence that Congress intended to subject investment companies to Section 11 liability for shares issued under an accurate registration statement. As the trial court persuasively stated, that was not the intent of the ICA:

If plaintiffs are right and there is no tracing requirement, and plaintiffs need only show they bought in the secondary market after an infirm registration statement, then all securities, including those sold in an initial offering pursuant to a perfectly innocent registration statement, could be the subject of a § 11 suit if the securities ended up in the hands of someone - anyone - after a much later infirm registration statement. Plaintiffs do not demonstrate this was the legislative intent behind the ICA.

(4AA1547-48.)

4. Section 24(e) of the Investment Company Act Left Intact the Tracing Requirement of Section 11 of the 1933 Act and Did Not Alter or Weaken It

Plaintiffs' appeal relies heavily on Section 24(e) of the ICA. That statute permits investment companies to file amendments instead of new registration statements. But Section 24(e) does not alter the well-established tracing requirement of Section 11.

*40 (a) Section 24(e)'s Purpose Was To Allow Investment Companies To File Amendments to Their Registration Statements Rather than New Registration Statements While Preserving the Status Quo with Respect to Sections 11 and 13.

(i) Section 24(e) Eliminated Paperwork and Expense for Investment Companies.

Section 24(e) permits updated disclosures to be “filed as part of an amendment to the registration statement under [the 1933 Act].” (15 U.S.C. § 80a-24(e).) Its goal was to relieve investment companies of the expense and paperwork associated with each new share issuance by allowing them to file annual amendments to their registration statements (known as “post-effective amendments”), rather than having to incur the substantially greater expense of filing a new registration statement each time they issue new shares. 20 (See Frankel & Laby, Regulation of Money Managers: Mutual Funds and Advisers (3d ed. 2015) 25.01, p. 18.) As a leading treatise noted:

“[A] new § 24(e) was added to the [ICA] so as to permit those investment companies engaged in continuous offerings... to register additional securities under the Securities Act either by filing a new registration *41 statement as they formerly did or by filing an appropriate amendment, approximately once a year, to the latest effective registration statement for securities of the same class.”

(Loss & Seligman, Securities Regulation (4th ed. 2006) p. 538, fn. 69, 1AA0391.) 21

Section 24(e)'s legislative history confirms this purpose. The Senate and House Committee Reports state that 24(e) intends that “only those revised prospectuses which reflect a periodic general revision, to bring up to date the latest prospectus contained in the registration statement, or other important change must be filed as a part of the registration statement.” (Sen.Rep. No. 83-1036, 2d Sess., p. 21 (1954) (1AA0382); H.R.Rep. No. 83-1542, 2d Sess., p. 30 (1954) (1AA0 388).) Courts have consistently recognized this legislative intent. (P. Stolz Fam. Partn. L.P. v. Daum (2d Cir. 2004) 355 F.3d 92, 105 [“This amendment

© 2020 Thomson Reuters. No claim to original U.S. Government Works. 15 Garth JENSEN et al., Plaintiffs-Appellants, v. ISHARES..., 2018 WL 5778127... permits the registration of additional securities of open-end investment companies to be effected by amending an earlier registration statement, instead of filing a new one.”]; Morse v. Peat, Marwick, Mitchell & Co. (S.D.N.Y. 1977) 445 F.Supp. 619, 623 [1954 amendment “permitted] investment companies engaged in the continuous offerings of their shares periodically to increase the number of shares registered under the Securities Act by filing amendments to their *42 existing registration statements rather than by filing new registration statements”] (hereafter Morse).)

Contrary to Plaintiffs' contention, Section 24(e) was not intended to address trading in the secondary market. Indeed, Plaintiffs' argument that Congress “intended [to create] broader standing for Securities Act claims involving investment companies” that traded in the secondary market through enacting Section 24(e) is necessarily false, since that section was enacted in 1954 and ETFs did not exist until around 40 years later. Surely, Congress' intent could not have been to expand the rights of investors related to a product that would not exist for another four decades.

(ii) Section 24(e) Does Not - and Did Not - Change the Standing or Tracing Requirements Necessary for Bringing Section 11 and 13 Claims.

While it did reduce compliance costs for investment companies, Section 24(e) left shareholders' ability to bring Section 11 claims unaltered. The pertinent language of Section 24(e) is as follows:

For the purposes of Section 11 of the Securities Act of 1933, as amended, the effective date of the latest amendment filed shall be deemed the effective date of the registration statement with respect to securities sold after such amendment shall have become effective. For the purposes of section 13 of the Securities Act of 1933, as amended, no such security shall be deemed to have been bona fide offered to the public prior to the effective date of the latest amendment filed pursuant to this subsection.

This language reflects that, at the same time as Congress sought to allow investment companies to issue shares in a less expensive manner, it *43 also wanted to maintain Section 11 liability for the less costly post-effective amendments utilized by investment companies. As written, Section 11 only applies to “registration statements,” not post-effective amendments to those registration statements. Thus, without the added reference to Section 11, investors could have been barred from bringing Section 11 claims where the original registration statement did not contain misleading statements but the shares at issue were sold pursuant to a post-effective amendment that was misleading on its effective date. (This, of course, is not the situation here because Plaintiffs failed to prove whether the shares they purchased were issued pursuant to an accurate offering document or an offering document Plaintiffs claimed was misleading.)

Section 24(e)'s language referencing Section 13 also reinforced the status quo for Section 11 claims. Again, Section 13 only references claims being time barred “more than three years after the security was bona fide offered to the public.” Thus, without the Section 13 reference, any investor who purchased shares issued pursuant to a post-effective amendment that became effective more than three years after the investment company first bona fide offered shares to the public would be automatically time- barred from bringing Section 11 claims. (See P. Stolz Fam. Partn., supra, 355 F.3d at p. 106 [“In 1954 Congress amended the Investment Company Act to eliminate th[e] problem [that arises when an offering extends beyond three years] in connection with the sale of mutual fund shares, where it was *44 most acute.”'], citation omitted.) By adding the reference to Section 13, Congress made clear that investors who purchased in these circumstances would not face statute of limitations issues in bringing a Section 11 claim for the misleading post-effective amendment.

This language of Section 24(e) thus has been rightly interpreted as expressing Congress's desire to maintain the status quo for Sections 11 and 13 22 of the 1933 Act, while allowing investment companies to file post-effective amendments:

The intention of the legislation was thus to conform the registration procedures of the Securities Act to the special needs of investment companies but, simultaneously, to preserve intact the [Section] 11 liability of investment companies... [T]hat provision was in the view of Congress simply a means of maintaining the status quo with respect to the liability of investment companies under [Section] 11 of the Securities Act.

( Morse, supra, 445 F.Supp. at p. 623, emphasis added; see also 5 Jacobs, Disclosure and Remedies Under the Securities Laws (2017) § 3:72 (hereafter Disclosure and Remedies) (1AA0398) [“[Section 24(e) is] merely... a restatement of existing Section 11 law.”].)

Finally, the House and Senate Committee Reports that accompanied the passage of Section 24(e) likewise reflect its purpose to maintain the *45 status quo regarding Sections 11 and 13. Paragraph (3) also contains references to sections 11 and 13 of the Securities Act so that there will be no departure from either the disclosure standards or the liabilities imposed upon sellers. Thus, under the new section 24(e) of the Investment Company Act, the registration statement under the Securities Act of 1933 of an issuer referred to in this subsection must meet the standards of section 11 of the Securities Act not only on the original effective date but also on the effective date of each post-effective amendment to such registration statement, and the periods of limitation on actions provided by section 13 of the Securities Act start anew with respect to securities sold thereafter each time such registration statement is effectively amended either to increase the number or amount of securities registered or to make the above-mentioned revisions of the prospectus a part of the registration statement.

(H.R.Rep. No. 83-1542, at 31 (1954) (1AA0386), emphasis added; Sen.Rep. No. 83-1036, 2d Sess., p. 21(1954) (1AA0382), emphasis added.)

*46 Plaintiffs argue that, if the Court does not adopt their interpretation, Section 24(e)'s references to Sections 11 and 13 would be rendered “surplusage.” (See Pl. Br. at p. 28.) That is simply not accurate. As discussed above, that language played the important role of maintaining the status quo for Section 11 claims and the Section 13 limitations period in the context of investment companies being permitted to file post-effective amendments. Simply put, the plain language and legislative history of Section 24(e) show it was designed to maintain the status quo for Sections 11 and 13 and not to expand Section 11 liability by eliminating the need to trace. 23

(b) Section 24(e)'s Reference to “Securities Sold After Such Amendment” Is to the Sale of Shares by the Issuer, Not to Sales in the Secondary Market By Investors.

The trial court correctly observed that Section 24(e)'s language “the effective date of the latest amendment filed pursuant to this subsection or otherwise shall be deemed the effective date of the registration statement with respect to securities sold after such amendment shall have become effective” refers to securities sold by the issuer and not to sales by investors in the secondary market. (4AA 1546-48.) There is no merit to Plaintiffs' argument that Section 24(e)'s reference to “securities sold after such amendment” refers to the sale of ETF shares in the secondary market. (Pl. Br. at pp. 27-29.)

Indeed, the language of Section 24(e) provides ample support for the trial court's conclusion. First, the reference to Section 11 in the first sentence of Section 24(e) (“For the purposes of section 11 of the Securities Act of 1933”) indicates that Section 24(e) applies to new issuances of a company's shares, rather than to aftermarket trading governed by the *47 Exchange Act of 1934. As discussed above, the 1933 Act and Section 11 address disclosures for newly issued securities, not in connection with aftermarket trading. Given that it is “[f]or the purposes of section 11,” the most reasonable inference is that Section 24(e)'s reference to “securities sold” is to securities sold by the issuer in a new offering, rather than sales by other shareholders in the secondary market. (See 5 Disclosure and Remedies, supra, at § 3:72 [stating that “sold” or “offered” within the intendment

© 2020 Thomson Reuters. No claim to original U.S. Government Works. 17 Garth JENSEN et al., Plaintiffs-Appellants, v. ISHARES..., 2018 WL 5778127... of Section 24(e) means “(1) securities sold pursuant to the registration statement after the effective date of the post-effective amendment, not (2) securities sold in the open market after such effective date”] (1AA0398, emphasis added).)

Second, given the context of its enactment, it would be anomalous if Section 24(e) applied to open market transactions, rather than to sales of securities by issuers. As noted, when promulgated in 1954, Section 24(e) applied to open-end mutual funds, where there was no secondary market and the issuer was the sole seller of shares. Thus, in using the language “securities sold,” Congress could not mean securities traded in the secondary market. 24

*48 (c) The Other Statutory Construction Arguments Plaintiffs Advance Do Not Support Their Argument That Section 24(e) Eliminates Tracing.

Plaintiffs' other statutory construction arguments for the ICA supposedly taking precedence over the 1933 Act are also unavailing for two additional, independent reasons.

First, Plaintiffs' claim that the ICA somehow takes precedence over the 1933 Act because the former is a “specific statute” while the latter is a general one is not accurate. (See Pl. Br. at pp. 28-29.) The more specific statute is Section 11, whose specific language “any person acquiring such security” yields the tracing requirement. (See Krim v. pcOrder.com, Inc. (5th Cir. 2005) 402 F.3d 489, 497 [“In limiting those who can sue to ‘any person acquiring such security,’ Congress specifically conferred standing on a subset of security owners...”].)

Second, Plaintiffs' argument - that Section 24(e) confers broader standing than Section 11 because of the supposed use of “sold after” in Section 24(e) as compared to “specified therein as proposed to be offered” in Section 6(a) of the 1933 Act (15 U.S.C. § 77j(a)) and “offered therein” in 17 C.F.R. § 229.512 (2018) of the SEC regulations (Pl. Br. at pp. 26-28) - is also groundless. These linguistic distinctions do nothing more than permit investment companies to file amendments rather than new registration statements, as other companies are required to do. They do not *49 speak to tracing.

5. Interpreting the ICA in a Way That Expands Standing Under the Securities Laws for Disclosure Violations Would Contravene the Purpose and History of the ICA.

(a) The ICA Should Not Be Construed in a Manner That Would Effectively Create a New Private Right of Action for Alleged Violations of the Federal Securities Laws.

Plaintiffs' appeal rests on the notion that the ICA in Section 24(e) dramatically enlarged the scope of the remedies afforded under Section 11 of the 1933 Act. This is inconsistent with the fundamental nature of both statutes. As a general matter, as discussed in the Legal Standard section above, the 1933 Act is the source of a remedy for disclosure violations in the offering of new shares, while the ICA is focused on the business practices of investment companies.

More specifically, however, Plaintiffs' argument that Section 24(e) expands liability under Section 11 is contradicted by numerous holdings that private rights of action cannot be implied under the ICA. (See, e.g., Laborers' Local 265 Pension Fund v. iShares Trust (6th Cir. 2014) 769 F.3d 399, 406-408 [finding no intent by Congress to imply private right of action under Section 36(a) of the ICA]; Northstar Fin. Advisors, Inc. v. Schwab Invs. (9th Cir. 2010) 615 F.3d 1106, 1122 [recognizing the “modern trend” “has been for federal courts to deny the existence of implied private rights of action under the ICA”]; Santomenno ex rel. John *50 Hancock Tr. v. John Hancock Life Ins. Co. (3d Cir. 2012) 677 F.3d 178, 186 [“Congress empowered the [SEC] to enforce all ICA provisions [pursuant to] Section 42 [of the statute], see 15 U.S.C. § 80a-41, while creating an exclusive private right of action in Section 36(b).”], emphasis added.)

Therefore, notwithstanding the specific language of Section 24(e) and any of Plaintiffs' arguments about it, using this statute to significantly expand the scope of Section 11 would effectively be creating a private right of action under Section 24(e) without any expression of Congressional intent to do so. The United States Supreme Court has held that courts should disfavor creating new rights in such circumstances by implication. (See Alexander v. Sandoval (2001) 532 U.S. 275, 291-293.) 25

Similarly, Plaintiffs' argument that “the interpretation favoring investor protection controls” (Pl. Br. at p. 41) contravenes judicial interpretations of the ICA. As the United States Court of Appeals for the Sixth Circuit observed, the statutory language must be followed: *51 [A]lthough the plaintiffs invoke the broad remedial purposes of the ICA, generalized references to the remedial purposes must yield to the unambiguous text and structure of a statute. See Touche Ross & Co., 442 U.S. at 578... (explaining that even if a statute was enacted with a broad remedial purpose, this fact “will not justify reading a provision ‘more broadly than [the statute's] language and the statutory scheme reasonably permit”’).

(Laborers' Local, supra, 769 F.3d at p. 408.) Simply put, the ICA's general goal of investor protection cannot be the basis for a dramatic expansion of potential liability that has no foundation in the statutory scheme, is otherwise unsupported and is contrary to black-letter law.

(b) Plaintiffs' Arguments About the Registration Requirements Do Not Support Their Appeal.

The fact that ETFs are registered under the ICA does not exempt ETFs from Section 11's tracing requirements, as Plaintiffs imply. (See Pl. Br. at p. 31.) Generally, if an investment company, such as an ETF, is organized under the laws of the United States, it must register as an investment company with the SEC pursuant to the ICA. (See Section 8(a) of the ICA, 15 U.S.C. § 80a-8(a).) In addition, it must also register the shares that it is publicly offering under the 1933 Act pursuant to Section 24(a) of the ICA (15 U.S.C. § 80a-24(a)). Indeed, while Plaintiffs single out a statement on the cover page of certain Registration Statement Amendments indicating it is a “Registration Statement Under the Investment Company Act of 1940,” in each instance, that declaration is preceded by a declaration that is a “Registration Statement Under the *52 Securities Act of 1933.” (See, e.g., 2AA0733; 3AA0879; 4AA1267.)

Plaintiffs similarly grasp at straws in arguing that “the form S-1 registration statements... include[d] the ‘Title of Each Class of Securities to be Registered’ and the ‘Amount to be Registered,”’ while “defendants' Form N-1A registration statements for ETFs registered pursuant to the ICA, do not contain these specifics.” (Pl. Br. at p. 32, citation omitted.) This difference in the disclosures required of an investment company does not bear on the requirements of Section 11. The variance Plaintiffs point to is merely a function of investment companies being permitted to issue an indefinite number of shares. And although investment companies and non-investment companies have some different disclosure obligations, they both are subject to claims under Section 11 and shareholders bringing claims under that statute must satisfy its requirements, including tracing.

Plaintiffs also attempt to conjure a basis for their arguments from some of the differences between the 1933 Act and the ICA, but none of those differences bear any relevance to the tracing requirement under Section 11. Rather, the discrepancies reflect the ways that investment companies operate differently from non-investment companies.

For example, one such basic difference, as Plaintiffs note, is that open-end investment companies continuously distribute and redeem shares *53 (Pl. Br. at p. 30). (See United States v. Nat'l Ass'n. of Sec. Dealers, Inc., supra, 422 U.S. at 698 [recognizing that investment companies continuously issue and redeem shares].)

Another basic difference is that open-end investment companies register an indefinite number of shares as opposed to other companies that issue a pre-specified number of shares. (See Pl. Br. at p. 30-31.) Because investment companies do not know the number of shares they will need to satisfy daily inflows of cash, Congress authorized them to issue an indefinite number of shares. Permitting the issuance of an indefinite number of shares decreases the risk that an investment company will be fined for not paying the proper registration fee under Section 24(f)(2) of the ICA, 15 U.S.C. § 80a - 24(f)(2). To accommodate that continuous issuance of shares, Congress amended Section 24(f) of the ICA (which relates to registration fees payable by investment companies) as part of the National Securities Markets Improvement Act of 1996 in order to allow investment companies to pay registration fees based on the net number of shares they issue during the year. SeeH.R. Rep. No. 104-622, at 44 (1996).

Both of these are core features of investment companies, which allow such companies to operate efficiently and in line with their intended purpose. But in defining these features, Congress in no way altered the tracing requirement for investment companies. Given that the tracing requirement derives from the language of Section 11, and that language is *54 the same for investment companies and non-investment companies alike, there is no basis to override the plain meaning of the statute and eliminate the tracing requirement for investment companies.

6. The SEC's Exemptive Orders Allowing Secondary Trading for ETFs Did Not Eliminate, But Rather Affirmed, Section 11's Tracing Requirements.

There is also no merit to Plaintiffs' argument that the tracing requirement should be discarded because the SEC had recognized in exemptive orders pursuant to which ETF shares trade that investors in the secondary market are beneficiaries of the updated disclosures made by ETFs. (Pl. Br. at pp. 33-36.) These features of ETFs in no way eliminate the tracing requirement and, in fact, the SEC affirmed tracing in granting exemptive relief.

Indeed, in responding to iShares's request for an exemption to the prospectus delivery requirement of Section 24(d) of the ICA, the SEC itself recognized the tracing requirement in connection with iShares' sales of ETFs. (See Investment Company Release No. 25,623, Order Under Section 6(C) of the Investment Company Act of 1940 Granting an Exemption from Section 24(D) of the Act (June 25, 2002) (4AA1446.)) This exemption is a critical component of how ETFs are permitted to be traded on the secondary market. In granting it, the SEC expressly stated that the exemption “does not affect a purchaser's rights under the civil liability and anti-fraud provisions of the Securities Act.” (Ibid.) The SEC then *55 observed that “rights under section 11 and section 12(a)(2) of the Securities Act extend to all purchasers who can trace their securities to a registration statement filed with the Commission, whether or not they were delivered a prospectus in connection with their purchase.” (Ibid.) (emphasis added.) Thus, where the SEC granted an exemptive order to allow secondary market trading of ETFs, it did so with the proviso that tracing applied.

As is the case with the statutory language and legislative history, nothing in the SEC comments or exemptive orders surrounding Section 11 or Section 24(e) suggests that ETF investors do not have to trace their shares to a misleading offering document. In fact, critical SEC statements regarding ETF secondary market trading explicitly reaffirm Section 11's tracing requirements for secondary market purchases such as those made by Plaintiffs here.

7. Plaintiffs' Policy Arguments Regarding Sections 11 and 24(e) Are Unavailing.

*56 Plaintiffs' policy arguments that the trial court's interpretation of the tracing requirement would “dissipate” Section 11 liability for investment companies (see Pl. Br. at p. 40) are likewise without merit. Under the Superior Court's tracing paradigm, investment companies remain liable for shares issued pursuant to misleading registration statements in the same way as any other non-investment companies that register shares under the 1933 Act. 26 And all such issuers may still be held liable under the 1934 Act.

Moreover, the challenges of tracing secondary market purchases back to primary offerings apply to both investment companies and non-investment companies alike. (See, e.g., Century Aluminum, supra, 729 F.3d at pp. 1106-1107; In re Countrywide Fin. Corp. Sec. Litig. (C.D. Cal. 2008) 588 F.Supp.2d 1132, 1164-1165.) While “difficult to meet in some circumstances, this tracing requirement is the condition Congress has imposed for granting access to the ‘relaxed liability requirements' § 11 affords.” ( Century Aluminum, supra, 729 F.3d at p. 1107, citations omitted; see also In re ARIAD Pharm. Sec. Litig. (1st Cir. 2016) 842 F.3d 744, 755-56 [recognizing difficulty of alleging tracing when there were multiple stock offerings]; Krim, supra, 402 F.3d at p. 408 [“That present market realities, given the fungibility of stock held in street name, may render Section 11 ineffective as a practical matter in some aftermarket scenarios is an issue properly addressed by Congress. It is not within our purview to rewrite the statute to take account of changed conditions.”].) Thus, Plaintiffs are not in a unique predicament as ETF shareholders that this or any other court needs to address by rewriting black-letter law.

*57 Finally, although any such claim would be baseless (or perhaps because any such claim would be baseless), Plaintiffs made the strategic decision not to assert claims premised on fraud under Section 10(b) in either iteration of their complaints. They omitted such a claim, even though the SEC has pronounced that “[l]ike operating companies or closed-end funds, ETFs register offers and sales of shares under the Securities Act and list their ETF shares for trading on a national securities exchange under the Securities Exchange Act of 1934.” (1AA0410.) Plaintiffs cannot complain about a lack of remedy for secondary market trading when they strategically chose to not avail themselves of potential remedies under the 1934 Act. By electing to pursue the strict liability (and relaxed requirements) of the 1933 Act, Plaintiffs chose to subject themselves to its tracing requirements. (See Century Aluminum, supra, 729 F.3d at p. 1107 [“Though difficult to meet in some circumstances, this tracing requirement is the condition Congress has imposed for granting access to the ‘relaxed liability requirements' § 11 affords.”], citation omitted.)

In short, Plaintiffs' policy arguments - which suggest that Section 11's tracing requirement has imposed some unique hardship or deprivation of remedies upon them - are unavailing because the difficulties in proving tracing apply to investment companies and non-investment companies alike.

*58 B. The Trial Court's Dismissal of the Section 12(a)(2) Claim Should Be Affirmed.

1. Plaintiffs' 12(a)(2) Claim Should Be Dismissed Because They Purchased Their ETFs in the Secondary Market and Not Directly From an Issuer.

The Court should affirm the Superior Court's dismissal of Plaintiffs' Section 12(a)(2) claim. The law is well settled that purchasers in the secondary market cannot bring claims under Section 12(a)(2). None of the individual Plaintiffs purchased in an initial offering. Each plaintiff averred that he or she purchased ETFs through a retail broker, whose purchases took place on the New York Stock Exchange. No one alleged that they purchased ETFs directly from iShares. Plaintiffs therefore lack standing to sue under Section 12(a)(2). (In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig. (C.D. Cal. 2013) 932 F.Supp.2d 1095, 1118 [“Liability extends only to the ‘immediate sellers' of securities and ‘those who solicit purchasers to serve their own financial interests or those of the securities owner.”’], citation omitted.)

*59 “Section 12... permits suit against a seller of a security by prospectus only by ‘the person purchasing such security from him,’ thus specifying that a plaintiff must have purchased the security directly from the issuer of the prospectus. 15 U.S.C. § 771(a)(2).” ( Hertzberg v. Dignity Partners, Inc. (9th Cir. 1999) 191 F.3d 1076, 1081.) The statutory language “‘give[s] a cause of action only to individuals who purchase securities directly from a person who sells the securities by means of a prospectus.”’ (Medina v. Clovis Oncology, Inc. (D. Colo. 2017) 215 F.Supp.3d 1094, 1135, citation omitted.) 27 Because of the statutory language, only purchasers in a public offering of securities, not purchasers in the secondary market, have standing to bring § 12(a)(2) claims. (See Gustafson v. Alloyd Co., supra, 513 U.S. at pp. 570, 577; Welgus v. TriNet Grp., Inc.

(N.D. Cal. Jan. 17, 2017, No. 15-CV-03625-BLF) 2017 WL 167708, at *18; Primo v. Pac. Biosciences of Cal., Inc. (N.D. Cal. 2013) 940 F.Supp.2d 1105, 1124.)

Each Plaintiff has only alleged a purchase of shares of iShares ETFs “pursuant and traceable to the Offering Documents,” without specifying whether such purchases were in an initial offering or were of previously issued shares already trading in the secondary market. (1AA0122-39.) The Plaintiffs' declarations and attached exhibits clearly indicate that the shares were purchased in the secondary market. (2AA0511-722.) For example, Plaintiffs admit that they did not purchase any ETFs directly from iShares, acknowledging that:

ETFs can be sold only by Authorized Participants who have purchased them from issuers such as defendants, *60 who, in turn, can sell them only to broker-dealers. (1AA0247-248.) They are then limited to being sold on a national exchange or by broker-dealers. (4AA1452-1453, 1476.)

(Pl. Br. at p. 41.) Plaintiffs also admit that they purchased the shares in anonymous transactions “over the exchange.” (1AA0144 ¶ 63.) Given the undisputed fact that they did not purchase directly in an offering, Plaintiffs lack standing under Section 12(a) (2). (In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig. (C.D. Cal. 2013) 932 F.Supp.2d 1095, 1118.)

*61 Plaintiffs cannot avoid having their Section 12(a)(2) claims barred simply because iShares is an investment company. Plaintiffs offer no case law in support of their argument that the well-established privity requirement in 12(a)(2) case law should be ignored just because a defendant happens to be an investment company. (Pl. Br. at pp. 44-46.) As with Section 11, Section 12(a)(2) applies to investment companies and non-investment companies alike. With both subject to the same governing statute, there should be no difference in the 12(a)(2) privity requirement as between the two types of entities. (See In re Merrill Lynch & Co., Inc. Research Reports Sec. Litig. (S.D.N.Y. 2003) 272 F.Supp.2d 243, 255 [finding that plaintiff failed to allege a direct purchase from, among others, the investment company and dismissed the 12(a)(2) claim because, “only a defendant from whom the plaintiff purchased securities may be liable”], citation omitted.) 28

Finally, there is no merit to Plaintiffs' argument that certain case law conferring liability beyond the person that passed title applies to grant Section 12(a)(2) standing here. (Pl. Br. at p. 49.) To be sure, cases such as Pinter v. Dahl (1988) 486 U.S. 622 have recognized that, in some situations, 12(a)(2) liability can extend beyond the transferor of title. But those whom the court referred to in Pinter are those who facilitate the sale, such as “brokers and others who solicit offers to purchase securities.” ( Id. at p. 646.) Factors considered by the court were whether the person received a commission or whether the person “who solicits the purchase will have sought or received a personal financial benefit from the sale,” such as anticipation of a share of the profits. ( Id. at p. 654.) None of the factors are alleged to apply to Defendants with respect to sales in the secondary market. iShares is not alleged to have been directly or indirectly involved in the selling of shares traded on the secondary market. Accordingly, even under the broader interpretation of Section 12(a)(2) standing under Pinter, liability cannot attach to iShares for Plaintiffs' *62 trading in the secondary market.

2. The Absence of a Prospectus Delivery Requirement for ETFs Underscores That Defendants Are Not Statutory Sellers for Purposes of Section 12(a)(2)

There is no merit to Plaintiffs' argument that Defendants are liable as statutory sellers because Section 24(d) of the ICA allegedly requires them to deliver a prospectus to the buyer of an investment company's shares. (Pl. Br. at pp. 45-50.) In this connection, the prospectus delivery requirement in Section 24(d) of the ICA is “subject to such terms and conditions as the Commission, having due regard for the public interest and the protection of investors, may prescribe by rules or regulations with respect to any

© 2020 Thomson Reuters. No claim to original U.S. Government Works. 22 Garth JENSEN et al., Plaintiffs-Appellants, v. ISHARES..., 2018 WL 5778127... class of persons, securities, or transactions.” (15 U.S.C. § 80a-24(d).) Plaintiffs acknowledge that the SEC has exempted iShares from the prospectus delivery requirement of Section 24(d). (Pl. Br. at pp. 33-34; see also 4AA1440-46.) Because iShares is exempt from the Section 24(d) prospectus delivery requirement, whatever weight that requirement would provide to a 12(a)(2) standing argument in other circumstances, such as where the seller is required to deliver a prospectus, it has no bearing here. 29

*63 In short, the statutory seller requirement of Section 12(a)(2) bars Plaintiffs' claim in this case and that result is not altered by the prospectus delivery requirement of Section 24(d) which does not apply to ETFs such as the Trust.

*64 VII. CONCLUSION

For the foregoing reasons, Defendants respectfully ask this Court to affirm the trial court's disposition of each of Plaintiffs' claims.

Footnotes 1 The individual defendants, other than Manish Mehta and Jack Gee, are or were members of the Board of Trustees of iShares. Messrs. Mehta and Gee are, respectively, the President and CFO of iShares. Additional individual defendants, represented by Stroock & Stroock & Lavan LLP, are independent trustees John Martinez, Cecilia H. Herbert, Charles A. Hurty, John Kerrigan, Robert H. Silver, Madhav V. Rajan and George G. C. Parker. 2 ( Krim v. pcOrder.com, Inc. (5th Cir. 2005) 402 F.3d 489, 492 fn.4, citing Black's Law Diet. (8th ed. 2004) p. 990.) 3 (15 U.S.C. § 80a-24(e).) 4 ( 15 U.S.C. § 78j(b).) 5 (17 C.F.R. § 240.10b-5 (2018).) 6 “An ‘investment company’ invests in the securities of other corporations and issues securities of its own. Shares in an investment company thus represent proportionate interests in its investment portfolio, and their value fluctuates in relation to the changes in the

value of the securities it owns.” ( United States v. Nat'l Ass'n of Sec. Dealers (1975) 422 U.S. 694, 697-698; see also 15 U.S.C. § 80a-3(a)(1) [Section 3(a)(1) of the ICA] [including in definition of investment companies “any issuer which [i]s or holds itself out as being engaged primarily... in the business of investing, reinvesting, or trading in securities”].) 7 For example, if an investment company with 5 million outstanding shares has assets worth $100 million and liabilities of $10 million, its total NAV will be $90 million and its per share NAV will be $18 ($90 million ÷ 5 million = $18.) 8 Here, iShares issues multiple series of shares, with each series constituting a different iShares fund (a “Fund”), and each Fund comprising an investment portfolio of mainly equity securities tracking specific securities indexes. Examples of the series of iShares Funds purchased by Plaintiffs include DVY (“iShares Core S & P 500 ETG”) and DVY (“iShares Select Dividend ETF”). 9 (Antoniewicz and Heinrichs, Understanding Exchange-Traded Funds: How ETFs Work (Sept. 2014) fn. 14, ICI Research Perspective (Inv. Co. Inst. < ; www.ici.org/pdf/per20-05.pdf>; [as of Oct. 22, 2018]).) 10 References herein to “Pl. Br.” are to “Appellants' Opening Memorandum,” dated July 5, 2018. 11 The effective date is a temporal benchmark used in Section 11 to determine whether there was a material misstatement or omission as of a particular date. It is the date the SEC determines that the registration statement or amendment thereto is effective. (15 U.S.C. § 77h(c).) 12 Defendants continue to dispute that there were ever any misrepresentations in the iShares registration statements or amendments. For the limited purpose of this appeal, however, Defendants premise their argument on the stipulated fact that the iShares registration statements and amendments before May 6, 2010 did not contain any material misstatements or omissions. 13 There is concurrent federal and state jurisdiction for claims under the 1933 Act. Claims under the 1934 Act must be brought exclusively

in federal court. (See Cyan, Inc. v. Beaver County Employees Retirement Fund (2018) 138 S.Ct. 1061.) 14 Section 15 imposes liability on “control persons,” those who control defendants held liable for violating Section 11 of the statute. (See 15 U.S.C. § 77o(a).) Where, as here, plaintiffs have failed to state a claim under Section 11, they have no control person claim under

Section 15. (See Morgan Stanley Information Fund Sec. Litig. (2d Cir. 2010) 592 F.3d 347, 366; Stichting Pensioenfonds ABP

v. Countrywide Fin. Corp. (C.D. Cal. 2011) 802 F.Supp.2d 1125, 1131.) Accordingly, the Court should affirm the Superior Court's dismissal of Plaintiffs' Section 15 claim. 15 To prevail on a Section 10(b) claim, a plaintiff must prove (1) a material misrepresentation or omission of fact, (2) scienter, (3) a

connection with the purchase or sale of a security, (4) transaction and loss causation, and (5) economic loss. ( Rubke v. Capitol Bancorp Ltd., supra, 551 F.3d at p. 1164.) 16 (See also Blue Chip Stamps v. Manor Drug Stores (1975) 421 U.S. 723, 752 [“The 1933 Act is a far narrower statute [than the 1934 Act and is] chiefly concerned with disclosure and fraud in connection with offerings of securities - primarily, as here, initial distributions of newly issued stock from corporate issuers.”].) 17 The issue in National Association of Securities Dealers, upon which Plaintiffs rely, for example, was whether dealers of investment company securities were impliedly exempt under the antitrust laws for certain sales practices. 18 (See also Perrin v. Sw. Water Co. (C.D. Cal. July 2, 2014, No. CV 08-7844 DMG (AGR)) 2014 WL 10979865, at *7-8 [disposing Section 11 claim on summary judgment for failure to show tracing]; In re Vocera Commc'ns, Inc. Sec. Litig. (N.D. Cal. Feb. 11, 2015, No. C-13-3567 EMC) 2015 WL 603208, at *2 [dismissing Section 11 claim for failure to show tracing]; Johnson v. CBD Energy Ltd. (S.D. Tex. July 6, 2016, No. H-15-1668) 2016 WL 3654657, at *3-5 [same].) 19 (1AA0038 ¶¶26-33; 1AA0122 ¶28(a); 1AA0124 ¶ 29(a); 1AA0127 ¶30; 1AA0129 ¶31(a); 1AA0131 ¶32(a); 1AA0133 ¶ 33(a); 1AA0135 ¶34(a); 1AA0137 ¶35(a).) 20 (See United States v. Nat'l Ass'n. of Sec. Dealers, Inc. (1975) 422 U.S. 694, 698 [“The most common form of investment company, the ‘open end’ company or mutual fund, is required by law to redeem its securities on demand at a price approximating their proportionate share of the fund's net asset value at the time of redemption. In order to avoid liquidation through redemption, mutual funds continuously issue and sell new shares. These features - continuous and unlimited distribution and compulsory redemption - are... ‘unique characteristic[s] of this form of investment.”], ellipsis added, citation omitted.) 21 Issuers of ETFs, such as iShares, face the same expense concern as other investment company issuers, as ETFs are constantly issuing new Creation Units to Authorized Participants and satisfying redemption requests of those Authorized Participants. 22 Section 13 of the 1933 Act (“Section 13”) provides that the statute of limitations for a Section 11 claim is “one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence,” but no more than “three years after the security was bona fide offered to the public.” (15 U.S.C. § 77m.) 23 Although Plaintiffs purport to ground the instant appeal on Section 24(e) of the ICA, and repeatedly reference that statute as the source of their standing in their opening brief (see Pl. Br. at pp. 11, 13, 31, 32), that statute is not mentioned once in their First Amended Complaint. Plaintiffs' First Amended Complaint is brought entirely under the Securities Act, including Section 11. 24 Plaintiffs themselves recognize the absence of trading of redeemable securities, such as shares of investment companies, prior to the relatively recent SEC exemptions: “[U]nder the ICA and until recent SEC exemptions, redeemable securities such as ETFs were not sold on a national exchange or secondary market.” (Pl. Br. at p. 38.) 25 Moreover, the ICA sets forth one private right of action - and one private right of action alone. That claim is articulated in Section 36(b), 15 U.S.C. § 80a-35(b), and addresses fees charged to mutual funds, not disclosures, registration statements, or fraud. The recognition in one section of the ICA of a private cause of action, while Section 24(e) does not, demonstrates that Congress did not

intend to create a claim under Section 24(e). (See Bellikoff v. Eaton Vance Corp. (2d Cir. 2007) 481 F.3d 110, 116 (per curiam) [“Congress's explicit provision of a private right of action to enforce one section of [the] statute,” namely, Section 36(b), “suggests that omission of any explicit private right [of action] to enforce other sections [including Section 36(a)] was intentional”], citation omitted.) 26 Investment companies and non-investment alike are subject to tracing if all the registration statements and amendments contain the same misleading disclosure or if there is only a single registration statement. 27 17 C.F.R. § 230.159A (Pl. Br. at p. 49, fn. 30) is not to the contrary because, by its terms, it applies only to “primary offering[s],” not secondary trading. In all events, the rule effectively has been nullified in light of a ruling finding that the SEC exceeded its authority in adopting the rule. (See In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig. (C.D. Cal. 2013) 932 F.Supp.2d 1095, 1118.) 28 Feiner v. SS & C Technologies, Inc. (D. Conn. 1999) 47 F.Supp.2d 250 (Pl. Br. at p. 48) upon which Plaintiffs rely does not support granting them standing here. In that case, the 12(a)(2) claim was limited to those who purchased within 25 days of the initial offering because that was part of the initial distribution of the shares, and the claims could be brought only by those who purchased directly from the underwriters in a firm commitment underwriting. None of those facts are present here where all the shares were sold by iShares directly to Authorized Participants and not to retail brokers.

29 Regarding the letter referenced by Plaintiffs submitted by a predecessor of BlackRock (Pl. Br. at p. 45, fn. 22), there is no dispute that investors in the secondary market can bring federal securities law claims under Section 10(b) provided they sue in federal court and can pursue Section 11 claims in federal or state court if they can trace the securities they purchased to a misleading registration statement or amendment.