UNITED STATES DISTRICT COURT FOR THE...

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK

UNITED STATES OF AMERICA

v. MATHEW MARTOMA,

Defendant.

Criminal Case No.: 12 Cr. 973 (PGG)

DEFENDANT MATHEW MARTOMA’S MEMORANDUM OF LAW IN SUPPORT OF HIS MOTION TO DISMISS COUNT TWO AND THE CORRESPONDING

ALLEGATIONS IN COUNT ONE OF THE INDICTMENT

GOODWIN PROCTER LLP Richard M. Strassberg John O. Farley Daniel P. Roeser 620 Eighth Avenue The New York Times Building New York, NY 10018 (212) 813-8800 Roberto M. Braceras 53 State Street Boston, MA 02109 (617) 570-1000 Attorneys for Defendant Mathew Martoma

June 28, 2013

Case 1:12-cr-00973-PGG Document 39 Filed 06/28/13 of 25

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TABLE OF CONTENTS

Page

PRELIMINARY STATEMENT .................................................................................................... 1

FACTUAL BACKGROUND ......................................................................................................... 2

ARGUMENT .................................................................................................................................. 4

I. MORRISON PRECLUDES THE APPLICATION OF SECTION 10(B) OF THE EXCHANGE ACT TO FOREIGN TRANSACTIONS IN CRIMINAL CASES. ................. 5

A. The Presumption Against Extraterritoriality Applies To Criminal Cases. ....................... 6

B. Morrison Controls The Application Of Section 10(b) Of The Exchange Act To Criminal Cases. ................................................................................................................ 9

C. Commonsense Principles Of Statutory Interpretation Mandate That Section 10(b) Of The Exchange Act Can Have Only One Meaning. ........................................................ 10

II. TRANSACTIONS IN ELAN ADRS ARE FOREIGN TRANSACTIONS UNDER MORRISON. .......................................................................................................................... 11

A. Transactions In ADRs Are Foreign Transactions By Their Very Nature. ..................... 12

B. Transactions In The Elan ADRs At Issue Are Foreign Transactions. ........................... 15

CONCLUSION ......................................................................................................................... 19


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TABLE OF AUTHORITIES

Page(s) CASES

Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012) .........................15

Acticon AG v. China N. E. Petroleum Holdings Ltd., 692 F.3d 34 (2d Cir. 2012) ........................17

American Banana Co. v. United Fruit Co., 213 U.S. 347 (1909)....................................................7

Blackmer v. United States, 284 U.S. 421 (1932) .............................................................................6

Campos v. City of New York, No. 10 CV 493, 2010 WL 3912493 (S.D.N.Y. Sept. 13, 2010) ........................................................................................................................................16

Clark v. Martinez, 543 U.S. 371 (2005) ........................................................................................11

Coakley v. Jaffe, 49 F. Supp. 2d 615 (S.D.N.Y. 1999) ..................................................................16

Coggins v. Cnty. of Nassau, No. 07-CV-3624, 2008 WL 2522501 (E.D.N.Y. June 20, 2008) ........................................................................................................................................16

Copeland v. Fortis, 685 F. Supp. 2d 498 (S.D.N.Y. 2010) ...........................................................12

Cornwell v. Credit Suisse Grp., 729 F. Supp. 2d 620 (S.D.N.Y. 2010) ........................................18

Dowling v. United States, 473 U.S. 207 (1985) ...............................................................................4

EEOC v. Arabian Am. Oil Co., 499 U.S. 244 (1991) ......................................................................7

Elliott Assocs. v. Porsche Automobil Holding SE 759 F. Supp. 2d 469 (S.D.N.Y. 2010) ..........................................................................13, 14, 18

Foley Bros., Inc. v. Filardo, 336 U.S. 281 (1949) ...........................................................................7

Ganino v. Citizens Utils. Co., 228 F.3d 154 (2d Cir. 2000) ..........................................................17

In re Alstom SA Sec. Litig., 741 F. Supp. 2d 469 (S.D.N.Y. 2010) ...............................................13

In re Elan, Nos. 08 CV 8761 (AKH), 10 CV 5630 (AKH), 2011 WL 1442328 (S.D.N.Y. Mar. 18, 2011)..........................................................................................................................16

In re Initial Pub. Offering Sec. Litig., 241 F. Supp. 2d 281 (S.D.N.Y. 2003) ...............................11

In re Société Générale Sec. Litig., No. 08 Civ. 2495 (RMB), 2010 WL 3910286 (S.D.N.Y. Sept. 29, 2010) ....................................................................................................1, 12

Kollias v. D & G Marine Maint., 29 F.3d 67 (2d Cir. 1994) .......................................................8, 9


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Leocal v. Ashcroft, 543 U.S. 1 (2004)............................................................................................11

Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010)....................................... passim

New York Cent. R. Co. v. Chisholm, 268 U.S. 29 (1925) ................................................................7

Sears, Roebuck and Co. v. Sears PLC, 752 F. Supp. 1223 (D. Del. 1990) ...................................13

Small v. United States, 544 U.S. 385 (2005) ...................................................................................6

Smith v. United States, 507 U.S. 197 (1993) ...................................................................................7

United States v. Aleynikov, 676 F.3d 71 (2d Cir. 2012) ...................................................................4

United States v. Bowman, 260 U.S. 94 (1922).........................................................................6, 7, 8

United States v. Boyer, 694 F.2d 58 (3d Cir. 1982) .......................................................................11

United States v. Charnay, 537 F.2d 341 (9th Cir. 1976), cert. denied, 429 U.S. 1000 (1976) .......................................................................................................................................11

United States v. Chiarella, 588 F.2d 1358 (2d Cir. 1978), rev’d on other grounds, 445 U.S. 222 (1980) ........................................................................................................................11

United States v. Gansman, 657 F.3d 85 (2d Cir. 2011) .................................................................11

United States v. Gatlin, 216 F.3d 207 (2d Cir. 2000) ..................................................................7, 8

United States v. Gleason, 616 F.2d 2 (2d Cir. 1979) .....................................................................11

United States v. Gordon, 710 F.3d 1124 (10th Cir. 2013) .............................................................11

United States v. Palmer, 16 U.S. (3 Wheat.) 610 (1818) .................................................................7

United States v. Weingarten, 632 F.3d 60 (2d Cir. 2011) ................................................................7

STATUTES, RULES, REGULATIONS

18 U.S.C. § 3143(b)(1)(B) ...............................................................................................................5

Exchange Act Release No. 6984, 1991 WL 294145 (May 23, 1991) ...........................................14

Federal Rule of Criminal Procedure 12(b)(3)(B) .............................................................................4

OTHER AUTHORITIES

David Blumental, Sources of Funds and Risk Management for International Energy Projects, 16 Berkeley J. Int’l L. 267, 286 n. 53 (1998) ...........................................................14


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Joseph Velli, American Depositary Receipts: An Overview, 17 Fordham Int’l L.J. S38, S39 (1993-1994) ................................................................................................................13, 14

Lou Kling & Eileen Nugent, Negotiated Acquisitions of Companies, Subsidiaries and Divisions, § 22.05 (2013) .........................................................................................................13


Defendant Mathew Martoma respectfully submits this memorandum of law in support of

his motion to dismiss Count Two and the corresponding allegations in Count One of the

Indictment. More specifically, Mr. Martoma respectfully requests that this Court dismiss all

charges related to transactions in the securities of Elan Corporation, plc (“Elan”), an Irish

corporation with stock publicly traded on the Irish and London stock exchanges, because Section

10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) does not reach foreign

securities transactions.1

PRELIMINARY STATEMENT

The Government alleges that Mr. Martoma traded on inside information when he

purchased and sold Elan stock in the form of American Depository Receipts (“ADRs”). Elan

ADRs were derivatives that simply repackaged Elan stock, which is traded abroad. In the

landmark case of Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010), the Supreme

Court held that Section 10(b) of the Exchange Act applies only to “purchases and sales of

securities in the United States” and does not reach “conduct in this country affecting exchanges

or transactions abroad.” Id. at 2884-85. For that reason, courts in this Circuit have held that

Section 10(b) is inapplicable to ADR transactions under Morrison because “trade in ADRs is

considered to be a predominantly foreign securities transaction” even where the ADRs are

purchased on a U.S. exchange. See In re Société Générale Sec. Litig., No. 08 Civ. 2495 (RMB),

2010 WL 3910286, at *6 & n.5 (S.D.N.Y. Sept. 29, 2010) (brackets and internal quotation marks

omitted) (dismissing Section 10(b) securities fraud claims on ADRs sua sponte under Morrison).

Indeed, the Elan ADRs at issue here already have been the subject of another case in this

District. See In re Elan Corp. Sec. Litig., Nos. 08 CV 8761 (AKH), 10 CV 5630 (AKH) 1 Count Three of the Indictment charges securities fraud under 15 U.S.C. §§ 78j(b) and 78ff and SEC Rule 10b-5

based on transactions in the stock of Wyeth, a Delaware corporation headquartered in New Jersey. Mr. Martoma is not seeking to dismiss Count Three at this time, but reserves his right to do so at a later date.


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(S.D.N.Y.). In that case, the court focused on the derivative nature of ADRs and found that, if it

could be shown “that the ADRs are entirely derivative in value on the shares traded on the Irish

exchange,” that fact could warrant dismissal under Morrison. Transcript of Proceedings Before

Hon. Alvin K. Hellerstein at 9:3-6, In re Elan Corp. Sec. Litig., Nos. 08 CV 8761 (AKH), 10 CV

5630 (AKH), (S.D.N.Y. Mar. 17, 2011) (“Transcript”), (Strassberg Decl., Ex. A). As set forth

below, the Elan ADRs were entirely derivative of the Elan stock. Under the agreement

governing the issuance of Elan ADRs, the ADRs could be redeemed for shares of Elan stock at

any time and provided for dividends and voting rights proportionate to the amount of Elan stock

that the ADRs represented. And, not surprisingly, the price of Elan ADRs was virtually identical

to the price of Elan stock on the Irish and London stock exchanges. Because the Elan ADRs

were “entirely derivative” of the Elan stock traded on foreign exchanges, they are outside the

reach of Section 10(b).

In short, under Morrison and the guidance provided by other rulings in this Circuit,

Section 10(b) of the Exchange Act does not reach Mr. Martoma’s purchases and sales of Elan

ADRs. Accordingly, the charges against Mr. Martoma based on transactions in Elan ADRs

should be dismissed.

FACTUAL BACKGROUND

The Government charges securities fraud (Count Two) under Section 10(b) of the

Exchange Act based on transactions in the “common stock of Elan.” Indictment, ¶ 16-17. The

Government also charges conspiracy to commit securities fraud (Count One) based in part on

transactions in Elan stock. Id. ¶¶ 1-15. The Government admits (as it must) that, “[a]t all

relevant times, Elan Corporation, plc (‘Elan’) was a corporation headquartered in Dublin, Ireland.

Elan’s stock traded on the New York Stock Exchange (‘NYSE’) through the issuance of American

Depository Receipts (or ‘ADRs’) under the ticker symbol ‘ELN.’” Id. ¶ 2. The principal trading


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markets for Elan stock (or “ordinary shares”) were the Irish and London stock exchanges. Elan

Corp., plc Annual Report (Form 20-F) (Feb. 28, 2008) (“Elan Form 20-F”) at 72 (Strassberg

Decl., Ex. B). Only Elan ADRs were traded on the NYSE. Id.

Structurally, transactions in Elan ADRs occurred abroad. Elan ADRs were issued under

an Amended and Restated Deposit Agreement Among Elan Corporation, plc, The Bank of New

York, As Depositary, and Holders of American Depositary Receipts (the “Deposit Agreement”)

(Strassberg Decl., Ex. C). See Elan Corp., plc. Form 8-A/A3 for Registration of Certain Classes

of Securities (Dec. 6, 2004) (“Elan Form 8-A/A3”) at 9 (Strassberg Decl., Ex. D). Under the

Deposit Agreement, Elan ADRs were created when ordinary shares issued by Elan in Ireland

were deposited in The Bank of Ireland in Ireland. Deposit Agreement, §§ 2.2, 2.3; Elan Form

20-F at 72. When The Bank of Ireland received Elan’s ordinary shares, it notified The Bank of

New York, which was required to “execute and deliver” ADRs representing the authorized

number of Elan ordinary shares as determined by The Bank of Ireland to the persons identified

by The Bank of Ireland. Deposit Agreement, §§ 2.2, 2.3. The operative transaction for the

issuance of Elan’s ADRs – i.e., the deposit of Elan ordinary shares with The Bank of Ireland –

was executed in Ireland. Id. The only domestic entity involved in the issuance of Elan ADRs,

The Bank of New York, acted merely as an intermediary bound in all respects by the transaction

in Ireland. Id.

Economically, transactions in Elan ADRs also occurred abroad. Elan ADRs were

receipts evidencing a right to receive Elan ordinary shares that were deposited with the Bank of

Ireland in Dublin, Ireland. Elan Form 8-A/A3 at 9.2 Elan ADR holders were entitled to

dividends and voting rights proportionate to the amount of Elan ordinary shares represented by

2 Technically, Elan ADRs evidence Elan American Depositary Shares, each of which “represents one [Elan]

ordinary share, or evidence of a right to receive an [Elan] ordinary share, deposited in accordance with the deposit agreement with the Bank of Ireland, Dublin, Ireland.” Elan Form 8-A/A3 at 9.


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their ADRs. Deposit Agreement, §§ 4.1, 4.7; see also Elan Form 8-A/A3 at 9, 11.3 ADR

holders also were entitled to redeem their ADRs for Elan ordinary shares at any time. Deposit

Agreement, § 2.5. In fact, a simple comparison of the publicly available prices of Elan ordinary

shares traded on the Irish and London stock exchanges shows that the prices are virtually

identical. Therefore, the value of Elan ADRs and the rights of Elan ADR holders were

inextricably tied to, and entirely derivative of, the Elan ordinary shares represented by the

ADRs.4

ARGUMENT

Federal Rule of Criminal Procedure 12(b)(3)(B) provides that, “at any time while the case

is pending, the court may hear a claim that the indictment or information fails to invoke the

court’s jurisdiction or to state an offense.” Federal crimes are “solely creatures of statute,”

Dowling v. United States, 473 U.S. 207, 213 (1985) (internal quotation marks omitted), and

consequently “a federal indictment can be challenged on the ground that it fails to allege a crime

within the terms of the applicable statute.” United States v. Aleynikov, 676 F.3d 71, 75-76 (2d

Cir. 2012). In interpreting the bounds of a criminal statute, “[d]ue respect for the prerogatives of

Congress in defining federal crimes prompts restraint,” and courts “typically find a narrow

interpretation appropriate.” Id. at 76 (quoting Dowling, 473 U.S. at 213).

Applying these fundamental principles, the Court should dismiss the Indictment, as

Morrison precludes the application of Section 10(b) of the Exchange Act to conduct affecting

foreign transactions, such as those involving Elan ADRs.

3 Elan’s shareholder votes were conducted at Annual General Meetings held in Dublin, Ireland. See Elan Corp.,

plc Report of Foreign Private Issuer (Form 6-K) (Mar. 31, 2008), Exhibit 99.1 (Strassberg Decl., Ex. E). 4 In In re Elan, Judge Hellerstein withheld judgment as to whether Elan ADRs were derivative of Elan ordinary

shares in deciding a Rule 12(b)(6) motion to dismiss a civil case on the pleadings, where the defendants had not made a showing that the ADRs were derivative of Elan stock. Here, by contrast, the Court has the information necessary to rule now that the ADRs are derivative of Elan ordinary shares and thus not covered by Section 10(b).


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I. MORRISON PRECLUDES THE APPLICATION OF SECTION 10(B) OF THE EXCHANGE ACT TO FOREIGN TRANSACTIONS IN CRIMINAL CASES.

In Morrison, the Supreme Court held that “Section 10(b) reaches the use of a

manipulative or deceptive device or contrivance only in connection with the purchase or sale of a

security listed on an American stock exchange, and the purchase or sale of any other security in

the United States.” Morrison, 130 S. Ct. at 2888. “It is a longstanding principle of American

law that legislation of Congress, unless a contrary intent appears, is meant to apply only within

the territorial jurisdiction of the United States.” Id. at 2877 (internal quotation marks omitted).

“When a statute gives no clear indication of an extraterritorial application, it has none.” Id. at

2878. “Thus, unless there is the affirmative intention of the Congress clearly expressed to give a

statute extraterritorial effect, we must presume it is primarily concerned with domestic

conditions.” Id. at 2877 (internal quotation marks omitted). Notably, as the Supreme Court

explained, “there is no affirmative indication in the Exchange Act that § 10(b) applies

extraterritorially, and we therefore conclude that it does not.” Id. at 2883.

Notwithstanding the Supreme Court’s holding, the Government has taken the position in

two cases recently argued in the Second Circuit5 that “the Supreme Court did not intend its

decision in Morrison to limit the ability of the United States to bring criminal securities fraud

prosecutions involving overseas transactions.” Vilar Gov’t Br., 2012 WL 1076169, at *97.6

Thus, the Government has argued that Section 10(b) – the very statute interpreted by the

Supreme Court in Morrison – may apply to criminal cases “even if some of the transactions at 5 See United States v. Vilar, Docket No. 10-521 (2d Cir); United States v. Mandell, Docket No. 12-1967 (2d Cir.).

The Second Circuit has been presented with the question of whether Morrison applies to criminal cases brought under Section 10(b) in both Vilar and Mandell. The panel in Vilar will decide the issue. Vilar was fully briefed on April 30, 2012, and the Second Circuit heard oral argument on August 21, 2012. The defendants’ motions for bail pending appeal in both Vilar and Mandell have been granted by the Second Circuit, indicating that the question is likely to result in reversal, a new trial, and/or a reduced sentence. 18 U.S.C. § 3143(b)(1)(B).

6 Brief for the United States of America, United States v. Vilar, No. 10-521 (2d Cir. Mar. 26, 2012), 2012 WL

1076169 (“Vilar Gov’t Br.”).


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issue were executed overseas.” Mandell Gov’t Br., 2012 WL 6811426, at *39.7 For support, the

Government has relied heavily on the Supreme Court’s decision in United States v. Bowman, 260

U.S. 94 (1922), which was decided almost 90 years before Morrison. The Government’s

argument is wrong as a matter of logic and law. Indeed, Bowman itself is entirely consistent

with Morrison and the existence of a presumption against extraterritoriality in criminal cases.

This Court should reject any extraterritorial application of Section 10(b) for at least the following

three reasons, all of which are explained at great length in an amicus brief recently submitted to

the Second Circuit by The Association of the Bar of the City of New York.8

A. The Presumption Against Extraterritoriality Applies To Criminal Cases.

In Morrison, the Supreme Court did not differentiate between criminal and civil cases

when it applied the presumption against extraterritoriality and concluded that Section 10(b) does

not apply to foreign transactions. Rather, the Supreme Court expressly held: “[W]e apply the

presumption in all cases, preserving a stable background against which Congress can legislate

with predictable effects.” Morrison, 130 S. Ct. at 2881 (emphasis added). That is not surprising.

The presumption against extraterritoriality has been upheld by the Supreme Court in criminal

cases stretching back almost 200 years.

The Supreme Court has repeatedly reaffirmed the presumption against extraterritoriality

in criminal cases. See, e.g., Small v. United States, 544 U.S. 385, 388-89 (2005) (“Congress

generally legislates with domestic concerns in mind. This notion has led the Court to adopt the

legal presumption that Congress ordinarily intends its statutes to have domestic, not

extraterritorial, application.”) (citation and internal quotation marks omitted); Blackmer v. United

7 Brief for the United States of America, United States v. Mandell, No. 12-1967 (2d Cir. Dec. 20, 2012), 2012

WL 6811426 (“Mandell Gov’t Br.”). 8 Brief for Amicus Curiae The Association of the Bar of the City of New York in Support of Defendants-

Appellants, United States v. Mandell, No. 12-1967 (2d Cir. Sept. 25, 2012) (“Mandell Amicus Br.”) (Strassberg Decl., Ex. F).


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States, 284 U.S. 421, 437 (1932) (“[L]egislation of the Congress, unless the contrary intent

appears, is construed to apply only within the territorial jurisdiction of the United States.”);

Bowman, 260 U.S. at 98 (“Crimes . . . must, of course, be committed within the territorial

jurisdiction of the government.”); United States v. Palmer, 16 U.S. (3 Wheat.) 610, 631 (1818)

(Antipiracy provisions “must . . . be limited to cases within the jurisdiction of the state.”).9

Following the Supreme Court, the Second Circuit similarly has applied the presumption

against extraterritoriality in criminal cases. See, e.g., United States v. Weingarten, 632 F.3d 60,

64-65 (2d Cir. 2011) (“Congress does not intend a statute to apply to conduct outside the

territorial jurisdiction of the United States unless it clearly expresses its intent to do so” and,

therefore, a court must “look for a clear and affirmative indication that a statute applies to

conduct occurring outside the territorial jurisdiction of the United States.”) (citation and internal

quotation marks omitted); United States v. Gatlin, 216 F.3d 207, 211-12 (2d Cir. 2000)

(reversing a conviction and ordering an indictment dismissed because the statute could have

extraterritorial application only if “there appears the affirmative intention of the Congress clearly

expressed” and, “absent clear evidence of congressional intent to apply a statute beyond our

borders, the statute will apply only to the territorial United States”) (citation and internal

quotation marks omitted).

9 The Supreme Court also has repeatedly reaffirmed the presumption against extraterritoriality in civil cases. See,

e.g., Smith v. United States, 507 U.S. 197, 203-04 (1993) (“[T]he presumption against extraterritorial application of United States statutes requires that any lingering doubt regarding the reach of the [Federal Tort Claims Act] be resolved against its encompassing torts committed [overseas].”); EEOC v. Arabian Am. Oil Co., 499 U.S. 244, 248 (1991) (“[U]nless there is the affirmative intention of the Congress clearly expressed . . . we must presume it is primarily concerned with domestic conditions.”) (internal quotation marks omitted); Foley Bros., Inc. v. Filardo, 336 U.S. 281, 285 (1949) (“[L]egislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States. . . . [The presumption] is based on the assumption that Congress is primarily concerned with domestic conditions.”); New York Cent. R. Co. v. Chisholm, 268 U.S. 29, 31 (1925) (“Legislation is presumptively territorial and confined to limits over which the law-making power has jurisdiction.”) (quoting Sandberg v. McDonald, 248 U.S. 185, 195 (1918)); American Banana Co. v. United Fruit Co., 213 U.S. 347, 357 (1909) (Statutes are presumptively “intended to be confined in [their] operation and effect to the territorial limits over which the lawmaker has general and legitimate power. All legislation is prima facie territorial.”) (citations and internal quotation marks omitted).


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The Government has relied heavily on Bowman in other cases to argue in support of the

extraterritorial reach of Section 10(b), see Vilar Gov’t Br., 2012 WL 1076169, at *91-101;

Mandell Gov’t Br., 2012 WL 6811426, at *33-43, but the Supreme Court actually applied the

presumption against extraterritoriality in Bowman where it held:

Crimes against private individuals or their property, like . . . frauds of all kinds, . . . must, of course, be committed within the territorial jurisdiction of the government where it may properly exercise it. If punishment of them is to be extended to include those committed outside of the strict territorial jurisdiction, it is natural for Congress to say so in the statute, and failure to do so will negative the purpose of Congress in this regard.

Bowman, 260 U.S. at 98. In fact, the Supreme Court in Bowman recognized that, absent a clear

statement by Congress, the presumption against extraterritoriality may be overcome only with

respect to the narrow set of statutes “enacted because of the right of the government to defend

itself against obstruction, or fraud whenever perpetrated, especially if committed by its own

citizens, officers or agents” (i.e., statutes that protect government contracts from fraud and

obstruction) where the “natural inference from the character of the offense” is that an

extraterritorial location “would be a probable place for its commission.” Id. at 98-99 (emphasis

added). In other words, Bowman permitted extraterritorial application of those few statutes that

could only – or mostly – be implicated abroad. And even in these limited circumstances, the

Second Circuit has recognized that Bowman must be “read narrowly” and “limited to its facts.”

Kollias v. D & G Marine Maint., 29 F.3d 67, 71 (2d Cir. 1994); Gatlin, 216 F.3d at 211 n.5.

Of course, securities fraud under Section 10(b) does not fall within the narrow set of

statutes governed by Bowman. Rather, securities fraud is directed against the “parties or

prospective parties to those transactions that the statute seeks to protect” (i.e., private individuals

and/or their property as opposed to the government). Morrison, 130 S. Ct. at 2884 (alteration

omitted). Thus, Bowman does not, and cannot, apply to this case. As the Second Circuit has


9

found, “[t]he Supreme Court’s recent discussions of the presumption against extraterritoriality,

none of which mentions Bowman, seem to require that all statutes, without exception, be

construed to apply within the United States only, unless a contrary intent appears.” Kollias, 29

F.3d at 71 (emphasis in original). In short, under both Supreme Court and Second Circuit

precedent, the presumption against extraterritoriality reflected in Morrison and elsewhere applies

to criminal cases.

B. Morrison Controls The Application Of Section 10(b) Of The Exchange Act To Criminal Cases.

In Morrison, the Supreme Court did not distinguish between the criminal and civil

application of Section 10(b) but instead grounded its holding in the plain language of the statute,

which governs both criminal and civil cases. The Supreme Court explained that, “when it comes

to the scope of the conduct prohibited by Rule 10b-5 and § 10(b), the text of the statute controls

our decision.” Morrison, 130 S. Ct. at 2881 n.5 (brackets and internal quotation marks omitted).

The Supreme Court then announced a definitive construction of Section 10(b)’s text for all

purposes by deciding (i) “what conduct § 10(b) reaches,” (ii) “what conduct § 10(b) prohibits,”

(iii) what conduct “Section 10(b) . . . punishes,” and (iv) what were the “transactions . . . to

which § 10(b) applies.” Id. at 2877, 2884, 2887. After a detailed analysis of Section 10(b)’s

statutory language, the Supreme Court concluded that Section 10(b) does not apply

extraterritorially because, “[o]n its face, § 10(b) contains nothing to suggest it applies abroad.”

Id. at 2881; see also id. at 2881-83. That construction was not limited to civil cases because, as

the Supreme Court made clear, it did not turn on – and, in fact, was independent of – “the

additional elements of the 10b-5 private liability scheme.” Id. at 2881 n.5 (internal quotation

marks omitted). The controlling text of Section 10(b) is the same whether a violation is charged


10

in an indictment by a grand jury or in a civil complaint by a private plaintiff. Morrison

necessarily applies to all criminal and civil Section 10(b) cases by its very terms.

Moreover, the Supreme Court has already implicitly rejected any argument that Section

10(b) may apply extraterritorially in criminal but not civil cases. In Morrison, the Solicitor

General argued that Section 10(b) should apply extraterritorially in cases brought by the

Government – just as the Government has argued in Vilar and Mandell – expressly asserting that

Section 10(b) applied to “securities transactions that occur abroad” and “injure[] overseas

investors.” Compare Morrison Gov’t Br., 2010 WL 719337, at *14, 17,10 with Vilar Gov’t Br.,

2012 WL 1076169, at *100, and Mandell Gov’t Br., 2012 WL 6811426, at *39. The Supreme

Court flatly rejected the Solicitor General’s position, because (1) the argument had no “textual

support,” and the Supreme Court’s “function [is] to give the statute the effect its language

suggests, however modest that may be,” and (2) the argument “relied on cases we disapprove,

which ignored or discarded the presumption against extraterritoriality.” Morrison, 130 S. Ct.

at 2886-88.

C. Commonsense Principles Of Statutory Interpretation Mandate That Section 10(b) Of The Exchange Act Can Have Only One Meaning.

Any argument by the Government that Section 10(b) applies extraterritorially in criminal

cases both disregards the plain language of Morrison (and a long line of Supreme Court and

Second Circuit cases) and violates the commonsense principle of statutory interpretation that the

text of a statute can have only one meaning. “It is not at all unusual to give a statute’s

ambiguous language a limiting construction called for by one of the statute’s applications, even

though other of the statute’s applications, standing alone, would not support the same limitation.

10 Brief for the United States as Amicus Curiae Supporting Respondents, Morrison v. National Australia Bank

Ltd., 130 S. Ct. 2859 (2010) (No. 08-1191), 2010 WL 719337 (“Morrison Gov’t Br.”).


11

The lowest common denominator, as it were, must govern.” Clark v. Martinez, 543 U.S. 371,

380 (2005). As the Supreme Court has recognized, “we must interpret the statute consistently,

whether we encounter its application in a criminal or noncriminal context.” Leocal v. Ashcroft,

543 U.S. 1, 11-12 n.8 (2004).

Applying this principle, the Second Circuit has expressly held that the text of

Section 10(b) can have only one meaning: “The basic elements of proof for insider trading are

the same for civil and criminal enforcement actions, but criminal enforcement differs principally

with respect to the required intent and burden of proof.” United States v. Gansman, 657 F.3d 85,

91 n.7 (2d Cir. 2011); accord United States v. Gleason, 616 F.2d 2, 28 (2d Cir. 1979) (“It is also

settled that the same standards apply to civil and criminal liability under the securities law.”);

United States v. Chiarella, 588 F.2d 1358, 1369 n.16 (2d Cir. 1978) (“It is well-established that,

except for issues of intent and burden of proof, criminal and civil liability under the securities

laws are coextensive.”), rev’d on other grounds, 445 U.S. 222 (1980); In re Initial Pub. Offering

Sec. Litig., 241 F. Supp. 2d 281, 387-88 n.164 (S.D.N.Y. 2003) (“Rule 10b-5 is interpreted

identically in the civil and criminal contexts.”).11

II. TRANSACTIONS IN ELAN ADRS ARE FOREIGN TRANSACTIONS UNDER MORRISON.

In Morrison, the Supreme Court stated that “it is in our view only transactions in

securities listed on domestic exchanges, and domestic transactions in other securities, to which 11 Courts around the country have reached the same conclusion. See, e.g., United States v. Gordon, 710 F.3d

1124, 1142 n.20 (10th Cir. 2013) (“The primary distinction between 10b-5 actions in the civil and criminal context is that in the latter the ‘government must prove the offense beyond a reasonable doubt.’”) (quoting Gansman, 657 F.3d at 91 n.7); United States v. Boyer, 694 F.2d 58, 60 (3d Cir. 1982) (“The standard of proof for civil liability is lower than the proof beyond a reasonable doubt required for a criminal conviction. But there is no reason to suppose that in enacting criminal statutes prohibiting mail fraud or securities fraud the Congress intended that the [a substantive element] should be different than for civil liability for fraud.”); United States v. Charnay, 537 F.2d 341, 348 (9th Cir. 1976) (“[T]here is no reasonable basis for holding that some different interpretation [of Rule 10b-5] should apply to a criminal action than in a civil action. . . . [P]recedents established in civil cases interpreting Rule 10b-5 are applicable in criminal prosecutions under the Rule.”) (internal quotation marks omitted, second alteration in original), cert. denied, 429 U.S. 1000 (1976).


12

§ 10(b) applies.” 130 S. Ct. at 2884. Put differently, “the focus of the Exchange Act is not upon

the place where the deception originated, but upon purchases and sales of securities in the United

States,” because the Exchange Act does not reach “conduct in this country affecting exchanges

or transactions abroad.” Id. at 2884-85. Section 10(b), however, does not simply apply

whenever there is any transaction with some connection to the United States because, as the

Supreme Court recognized, “it is a rare case of prohibited extraterritorial application that lacks

all contact with the territory of the United States.” Id. at 2884 (emphasis in original). For that

reason, the Supreme Court warned that “the presumption against extraterritorial application

would be a craven watchdog indeed if it retreated to its kennel whenever some domestic activity

is involved in the case.” Id. (emphasis in original).

Here, Elan ADRs by definition represent Elan stock and, therefore, transactions in Elan

ADRs are effectively transactions in Elan stock. Those transactions in Elan stock – which

necessarily occurred outside of the United States – are the proper focus of this Court’s inquiry,

and those transactions cannot form the basis of a criminal violation of Section 10(b) under

Morrison.

A. Transactions In ADRs Are Foreign Transactions By Their Very Nature.

Both before and after the Supreme Court’s decision in Morrison, courts in this District

have held that Section 10(b) is inapplicable to ADR transactions because a “trade in ADRs is

considered to be a predominantly foreign securities transaction.” Société Générale, 2010 WL

3910286, at *6 (brackets and internal quotation marks omitted); Copeland v. Fortis, 685 F. Supp.

2d 498, 506 (S.D.N.Y. 2010). That is true even where the ADRs are purchased on a U.S.

exchange. Société Générale, 2010 WL 3910286, at *6 n.5. The reasoning behind such decisions

is straightforward.


13

In determining whether a given transaction is subject to Section 10(b), courts in this

District have rejected any “selective and overly-technical reading of Morrison that ignores the

larger point of the decision.” In re Alstom SA Sec. Litig., 741 F. Supp. 2d 469, 472 (S.D.N.Y.

2010). In so doing, they have recognized that “[t]he Supreme Court has routinely emphasized

the importance of ‘economic reality’ in determining whether derivative instruments fall within

the ambit of federal securities regulations.” Elliott Assocs. v. Porsche Automobil Holding SE,

759 F. Supp. 2d 469, 475-76 (S.D.N.Y. 2010) (citing Reves v. Ernst & Young, 494 U.S. 56, 63

n.2 (1990), and Tcherepnin v. Knight, 389 U.S. 332, 336 (1967)). Such courts – following the

Supreme Court – have made clear that “form should be disregarded for substance.” Elliott, 759

F. Supp. 2d at 476 (quoting Tcherepnin, 389 U.S. at 336); accord Alstom, 741 F. Supp. 2d

at 472-73 (the Supreme Court’s reasoning “reveals a focus on where the securities transaction

actually occurs, not the stock exchange where ministerial pre-purchase activities were directed”).

ADRs are economically equivalent to, and in fact regarded by investors as a substitute

for, a foreign issuer’s stock that is traded abroad. See Sears, Roebuck and Co. v. Sears PLC, 752

F. Supp. 1223, 1224 n.2 (D. Del. 1990) (“United States investors use ADRs as a substitute for

trading the foreign security itself”); Lou Kling & Eileen Nugent, Negotiated Acquisitions of

Companies, Subsidiaries and Divisions, § 22.05 (2013) (ADRs “are held and traded by U.S.

investors in lieu of the underlying securities that the ADRs represent”); Joseph Velli, American

Depositary Receipts: An Overview, 17 Fordham Int’l L.J. S38, S39 (1993-1994) (“In many cases

the investor is not even aware that he is buying an ADR; all he really knows is that he’s investing

in [a foreign company.]”).

Investors purchase ADRs in lieu of a foreign issuer’s stock to “facilitat[e] [] share

transfers and conversion of dividends paid in a foreign currency” and to avoid “the unfamiliar


14

and sometimes less prompt clearance and settlement processes in the security’s foreign trading

market.” Exchange Act Release No. 6894, 1991 WL 294145, at *2, 6 (May 23, 1991); accord

Velli, 17 Fordham Int’l L.J. at S41 (“U.S. investors buy ADRs for three main reasons:

convenience, cost, and liquidity.”); David Blumental, Sources of Funds and Risk Management

for International Energy Projects, 16 Berkeley J. Int’l L. 267, 286 n.53 (1998) (“ADRs are a

convenient alternative to buying shares directly in overseas markets.”).

A former executive vice president of The Bank of New York (the depositary bank in this

case) provides an example of a typical ADR purchase, showing it to be a mere proxy for a

purchase of the foreign stock:

[The investor] calls up his broker . . . and says, “Buy me 1,000 Glaxo ADRs.” The broker, because there are no ADRs outstanding here, goes to the foreign market, in this case the London market, buys 1,000 Glaxo shares off the London exchange, deposits those actual shares with the depositary bank (for example The Bank of New York) and then the depositary bank issues 1,000 ADRs in the U.S. marketplace. So the shares are deposited by the broker and The Bank of New York would issue 1,000 ADRs. That’s how an ADR is created. . . . In the very next trade, if another investor calls up his broker and says, “I want to buy 500 Glaxo ADRs,” the broker has a choice: he can either buy the ADR that is already existing in the U.S. marketplace, or he can repeat the process just described by going to the London Stock Exchange.

Velli, 17 Fordham Int’l L.J. at S39-40. As this example demonstrates, ADRs are the functional

equivalent of trading the underlying stock on a foreign exchange. And, notably, the economic

reality is that ADRs are foreign transactions to which Section 10(b) does not apply. See Elliott,

759 F. Supp. 2d at 476 (quoting Morrison, 130 S. Ct. at 2882, 2884) (“Plaintiffs’ swaps were the

functional equivalent of trading the underlying VW shares on a German exchange. Accordingly,

the economic reality is that Plaintiffs’ swap agreements are essentially ‘transactions conducted

upon foreign exchanges and markets,’ and not ‘domestic transactions’ that merit the protection of

§ 10(b).”).


15

B. Transactions In The Elan ADRs At Issue Are Foreign Transactions.

As the Second Circuit has explained, “[a] securities transaction is domestic when the

parties incur irrevocable liability to carry out the transaction within the United States or when

title is passed within the United States.” Absolute Activist Value Master Fund Ltd. v. Ficeto, 677

F.3d 60, 69 (2d Cir. 2012). Elan ADRs are by definition “receipts” for the right to the stock of a

foreign issuer, which was traded on foreign exchanges and held by a foreign custodian – receipts

that may be redeemed for the foreign stock at any time. Liability was incurred and title passed

outside of the United States when Elan deposited the shares in The Bank of Ireland. That

investors purchased the foreign stock through ADRs issued in the United States is of no

consequence under Morrison. Transactions in Elan ADRs are foreign transactions to which

Section 10(b) does not apply.

Structurally, transactions in Elan ADRs did not occur in the U.S. Elan ADRs were

created when ordinary shares issued by Elan (an Irish company) in Ireland, which were traded

principally on the Irish and London stock exchanges (not on any U.S. exchange), were deposited

in The Bank of Ireland in Ireland. Deposit Agreement, §§ 2.2, 2.3; Elan Form 20-F at 72. When

The Bank of Ireland received Elan’s ordinary shares, it notified The Bank of New York, which

was required to “execute and deliver” ADRs representing the authorized number of Elan

ordinary shares held by The Bank of Ireland. Deposit Agreement, §§ 2.2, 2.3. The operative

transaction for the issuance of Elan’s ADRs – i.e., the deposit of Elan ordinary shares with The

Bank of Ireland – was carried out in Ireland. The Bank of Ireland determined (1) the persons to

whom the ADRs would be delivered, and (2) the number of Elan ordinary shares ultimately

represented by those ADRs. Id. The only domestic entity involved in the issuance of Elan

ADRs, The Bank of New York, acted merely as an intermediary bound in all respects by the

transaction in Ireland. Id.


16

Economically, transactions in Elan ADRs also did not occur in the U.S. Elan ADRs were

readily exchangeable into Elan ordinary shares because ADR holders had the right to present

their ADRs to The Bank of New York at any time in return for Elan ordinary shares. Id. § 2.5

(Elan ADR holders were entitled to redeem their ADRs for “the amount of Deposited Securities

at the time represented by such [ADRs].”). For the application of Section 10(b) to turn on

whether an investor had redeemed its Elan ADRs for Elan ordinary shares (i.e., held Elan ADRs

as issued or Elan ordinary shares as redeemed) would promote form over substance, disregard

the economic reality of the transaction, and foster “the unpredictable and inconsistent application

of § 10(b) in transactional cases” – contrary to Morrison and a long line of prior Supreme Court

decisions. Morrison, 130 S. Ct. at 2880-81; supra at 6-7.

Another court in this District has already considered whether, under Morrison, Section

10(b) applies to the Elan ADRs at issue in this case. See In re Elan Corp. Sec. Litig., Nos. 08

CV 8761 (AKH), 10 CV 5630 (AKH) (S.D.N.Y.). Like others before it, that court eschewed a

“wooden application of Morrison” and asked “[w]hy, in a practical sense – not a wooden sense –

does it make sense for this District Court to assume jurisdiction of this case?” Transcript, In re

Elan, at 5:25-6:3.12 Although that court denied the defendants’ motion to dismiss the claims

pertaining to the ADRs pending the development of the full factual record, In re Elan, Nos. 08

CV 8761 (AKH), 10 CV 5630 (AKH), 2011 WL 1442328, at *1 (S.D.N.Y. Mar. 18, 2011), the

court focused on the derivative nature of ADRs and found that, if it could be shown “that the

ADRs are entirely derivative in value on the shares traded on the Irish exchange, not necessarily

12 This Court may take judicial notice of court transcripts. See Campos v. City of New York, No. 10 CV 493, 2010

WL 3912493, at *3 (S.D.N.Y. Sept. 13, 2010) (taking judicial notice of the transcript of a plea hearing from a “related litigation”); Coakley v. Jaffe, 49 F. Supp. 2d 615, 621-22 n.3 (S.D.N.Y. 1999) (taking judicial notice of the transcript of a state court proceeding because “a court may take judicial notice of related litigation”); Coggins v. Cnty. of Nassau, No. 07-CV-3624, 2008 WL 2522501, at *7 (E.D.N.Y. June 20, 2008) (“[C]ourts routinely take judicial notice – at the motion to dismiss stage – of transcripts of related judicial proceedings.”).


17

the company on the exchange, I might change my mind” and dismiss all claims on the ADRs

under Morrison because trading in ADRs would be foreign securities transactions. See

Transcript, In re Elan, at 9:3-6. The defendants did not make such a showing in moving to

dismiss the claims in In re Elan, but Mr. Martoma makes it here.

First, the Deposit Agreement governing the Elan ADRs demonstrates that, by definition,

Elan ADRs are entirely derivative of Elan ordinary shares traded on foreign exchanges. As

discussed above, Elan ADR holders were entitled to redeem their ADRs for “the amount of

Deposited Securities at the time represented by such [ADRs].” Deposit Agreement, § 2.5. They

also were entitled to dividends and voting rights “pertaining to the amount of Stock representing

Ordinary Shares or other Deposited Securities.” Id. §§ 4.1, 4.7. Therefore, the value of Elan

ADRs and the rights of Elan ADR holders were entirely derivative of the underlying Elan

ordinary shares.

Second, a simple comparison of the publicly available prices of Elan ADRs to the

publicly available prices of Elan ordinary shares traded on the Irish and London stock exchanges

shows that Elan ADRs are wholly derivative of Elan ordinary shares.13

13 This Court may take judicial notice of publicly available securities prices. See Acticon AG v. China N. E.

Petroleum Holdings Ltd., 692 F.3d 34, 37 n.1 (2d Cir. 2012) (“We are entitled to take judicial notice of well publicized stock prices without converting the motion to dismiss into one for summary judgment.”); Ganino v. Citizens Utils. Co., 228 F.3d 154, 166 n.8 (2d Cir. 2000) (“The New York Stock Exchange data mentioned in the opinion below were not attached to the Complaint as an exhibit or incorporated by reference into the Complaint. Nonetheless, the district court may take judicial notice of well-publicized stock prices without converting the motion to dismiss into a motion for summary judgment.”).


18

Where, as here, “the economic value of [a derivative] is intrinsically tied to the value of the

reference security, the nature of the reference security must play a role in determining whether

[the derivative] may be afforded the protection of § 10(b).” See Elliott, 759 F. Supp. 2d at 476.

Since the economic value of Elan ADRs is “intrinsically tied” to the value of Elan ordinary

shares, which are foreign securities traded only on foreign exchanges, Elan ADRs are not subject

to Section 10(b) under Morrison. See, e.g., Cornwell v. Credit Suisse Grp., 729 F. Supp. 2d 620,

623-26 (S.D.N.Y. 2010) (“[T]he Morrison opinions indicate that the Court considered that under

its new test § 10(b) would not extend to foreign securities trades executed on foreign exchanges

even if purchased or sold by American investors, and even if some aspects of the transaction

occurred in the United States.”).

$0

$5

$10

$15

$20

$25

$30

$35

$40

1/3/2006 4/6/2006 7/9/2006 10/11/2006 1/13/2007 4/17/2007 7/19/2007 10/21/2007 1/23/2008 4/26/2008 7/29/2008

Ireland

London

ADR

Elan ADR and Stock Prices1/3/06 – 7/29/08

Source: Bloomberg; CRSPNote: Elan Ireland and London share prices are in USD as calculated by Bloomberg.

Price


19

CONCLUSION

For the foregoing reasons, Mr. Martoma respectfully requests that this Court dismiss all

charges related to transactions in Elan securities in Counts One and Two and provide such other

and further relief as the Court deems just and proper.

Dated: June 28, 2013

Respectfully submitted, GOODWIN PROCTER LLP /s/ Richard M. Strassberg Richard M. Strassberg (RS5141) John O. Farley (JF4402) Daniel P. Roeser (DR2380) The New York Times Building 620 Eighth Avenue New York, NY 10018 T: 212-813-8800 F: 212-355-3333 [email protected] Roberto M. Braceras (RB2470) 53 State Street Boston, MA 02109 T: 617-570-1000 F: 617-523-1231 [email protected] Attorneys for Defendant Mathew Martoma


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CERTIFICATE OF SERVICE

I hereby certify that a copy of the foregoing documents, filed through the CM/ECF system, will be sent electronically to the registered participants as identified on the Notice of Electronic Filing (NEF) and paper copies shall be served by first class mail postage prepaid on all counsel who are not served through the CM/ECF system on June 28, 2013.

/s/ Richard M. Strassberg___________ Richard M. Strassberg (RS5141)


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