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) © 2020 Thomson Reuters. No claim to original U.S. Government Works. 1 Garth JENSEN et al., Plaintiffs-Appellants, v. ISHARES..., 2018 WL 5778127... 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 ................................................................................................................ © 2020 Thomson Reuters. No claim to original U.S. Government Works. 2 Garth JENSEN et al., Plaintiffs-Appellants, v. ISHARES..., 2018 WL 5778127... (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)