Professional Documents
Culture Documents
Defendants.
A. Ross Pearlson
CHIESA SHAHINIAN & GIANTOMASI PC
One Boland Drive
West Orange, New Jersey 07052
Counsel for Defendant
The Goldman Sachs Group, Inc.
May 1, 2017
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TABLE OF CONTENTS
Page
INTRODUCTION ...........................................................................................................................1
ARGUMENT ...................................................................................................................................3
CONCLUSION ..............................................................................................................................16
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TABLE OF AUTHORITIES
Page(s)
Cases
Anderson v. Ayling,
396 F.3d 265 (3d Cir. 2005).....................................................................................................13
Ashcroft v. Iqbal,
556 U.S. 662 (2009) .................................................................................................................10
Cohen v. Stevanovich,
722 F. Supp. 2d 416 (S.D.N.Y. 2010)................................................................................12, 16
-ii-
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-iii-
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-iv-
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INTRODUCTION
Plaintiffs Opposition presents no avenue to avoid dismissal under SLUSA, which bars
any putative class action that, like this one, is based on state law and alleges manipulative
security. Relying on Chadbourne & Parke LLP v. Troice, 134 S. Ct. 1058 (2014), Plaintiffs
argue that SLUSA does not apply here because the alleged fraud did not occur in connection
with the purchase or sale of a covered security. But while that case held that SLUSA does not
security. And contrary to Plaintiffs contention that the in connection with element is not
satisfied because they already owned their shares when Defendants alleged manipulative
conduct occurred, SLUSA preempts such claims by holders of covered securities. Merrill
Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 76 (2006). Indeed, Plaintiffs merits
argument as to why their market manipulation allegations satisfy the elements of SEC
Rule 10b-5 (while wrong) underscores that their claims necessarily satisfy the parallel in
connection with element of SLUSA. The Court also should reject Plaintiffs suggestion that
SLUSA preempts only claims based on alleged misrepresentations, because the language of
The Opposition does not dispute that dismissal under SLUSA would obviate the need for
the Court to address the Complaints other fatal pleading failures. But should the Court choose
to reach them, Plaintiffs Opposition does not refute the arguments in Defendants Opening Brief.
Instead, the Opposition simply recycles and rests upon the threadbare legal conclusions in the
First, Plaintiffs efforts to excuse their admitted group pleading do not satisfy the
requirement that they allege what manipulative acts were performed, which defendants
performed them [and] when the manipulative acts were performed. ATSI Commcns,
Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 102 (2d Cir. 2007).
under SLUSA is warranted, Plaintiffs cannot satisfy the elements of market manipulation
through the Complaints bald assertions of naked short selling and painting the tape,
and the Opposition fails to identify any particularized allegations in the Complaint that
Third, the Opposition fails to save Plaintiffs RICO claim by identifying specific factual
activity, (ii) Defendants participation in the DTCC somehow transformed that legitimate
business organization into a RICO enterprise, (iii) the decline of VirnetXs stock price
was the direct result of Defendants alleged trades, and (iv) Defendants acted with
Fourth, the Opposition fails to point to any factual allegations in the Complaint that plead
Fifth, the scant four pages that Plaintiffs devote to defending their legally deficient
common-law claims (Opp. at 36-39) do not remedy any of the flaws identified by
Defendants, such as Plaintiffs failure to plead that (i) they conferred any benefit on
2
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Defendants, as required to plead unjust enrichment; (ii) they would have received a
specific anticipated benefit but for Defendants conduct, as required to plead tortious
Finally, Plaintiffs fail to explain why the three parent Defendantsthe Goldman Sachs,
Credit Suisse and BNY Mellon entities named in the Complaintare proper Defendants,
suggestion, Plaintiffs cannot wait until the conclusion of discovery to identify proper
Defendants.
ARGUMENT
Plaintiffs argue that SLUSA does not apply because (i) the claims of market
manipulation here are not in connection with the purchase or sale of a covered security and
(ii) the Complaint supposedly does not allege a material misrepresentation. Opp. at 1-2.
Plaintiffs do not dispute, however, that SLUSAs other elements are satisfied. They also do not
dispute that, if SLUSA does apply here, it applies equally to all of their claims.
In arguing that SLUSAs in connection with element is not satisfied here, Plaintiffs
assert that [t]he case at bar does not involve alleged misrepresentations that led to the purchase
or sale of securities by plaintiffs. Opp. at 4. Plaintiffs instead contend that they already
owned shares of VirnetX stock when the alleged fraud occurred and that therefore there is no
connection alleged between that supposed fraud and any decision to buy or sell VirnetX
common stock. Id. at 5 (emphasis in original). In advancing that argument, Plaintiffs state that
3
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Chadbourne did not overrule the prior Supreme Court or Third Circuit case law cited in
Rather, the question in Chadbourne was whether [SLUSA] encompasses a class action
in which the plaintiffs allege (1) that they purchase[d] uncovered securities (certificates of
deposit that are not traded on any national exchange), but (2) that the defendants falsely told the
victims that the uncovered securities were backed by covered securities. 134 S. Ct. at 1062
(emphasis in original). In deciding that narrow question, the Supreme Court interpreted the
phrase misrepresentation or omission of a material fact in connection with the purchase or sale
of a covered security. Id. at 1064. The Court held that [t]he phrase material fact in
connection with the purchase or sale suggests a connection that matters and that, for present
uncovered security, something about which [SLUSA] expresses no concern. Id. at 1066
(emphasis added). By contrast, Plaintiffs here contend that they bought and held VirnetX
common stock, an admittedly covered security, and they allege numerous violations of Section
10(b) of the Exchange Act and Rule 10b-5, not garden-variety fraud. Id. at 1068. Chadbourne
Moreover, the Supreme Court has expressly held that SLUSA preempts so-called holder
claims, i.e., where alleged victims owned and continued to own securities that the defendants
fraud later caused to decrease in value. Dabit, 547 U.S. at 76 (internal quotation marks omitted).
Under Dabit, it is enough [for SLUSA preemption] that the fraud alleged coincide with a
other words, is deception in connection with the purchase or sale of any security, not
4
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omitted). Since Dabit, courts have recognized that it does not matter for SLUSA purposes
whether the alleged misconduct led to the plaintiffs purchase or sale. See, e.g., Freeman Invs.,
L.P. v. Pac. Life Ins. Co., 704 F.3d 1110, 1117 (9th Cir. 2013) (rejecting argument that the in
connection with requirement is satisfied only if [plaintiffs] bought or sold a security in reliance
does not depend on the plaintiffs being the direct purchasers of the covered security, or the
plaintiffs and the defendant being in a buyer-seller relationship . . . . [T]he scope of what is
precluded is broad, and includes far more than claims that the plaintiffs themselves were induced
to take a position in the covered security. In re Harbinger Capital Partners Funds Investor
Plaintiffs argument that their claims do not satisfy SLUSAs in connection with
element also ignores their contention that they have pled market manipulation in violation of
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Opp. at 23-25; see also Compl.
81. According to the Complaint, [n]aked short selling and painting the tape, as was done by
Defendants, . . . violated Rule 10b-5 . . . promulgated under Section 10(b) of the Securities
Exchange Act of 1934. Compl. 81. In SLUSA, not only did Congress use the same words
[in connection with] as are used in 10(b) and Rule 10b-5, but it used them in a provision that
appears in the same statute as 10(b). Dabit, 547 U.S. at 86. Indeed, the relevant language of
SLUSA and Rule 10b-5 is identical. Compare 15 U.S.C. 78bb(f)(1)(B) with 17 C.F.R.
1
In Chadbourne, the Supreme Court stressed that [w]e do not here modify Dabit. 134
S. Ct. at 1066.
5
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240.10b-5. As the Supreme Court held, those identical words are presumed to have the
same meaning. Dabit, 547 U.S. at 86 (internal quotation marks omitted). Thus, because the
Complaint attempts to plead a device, scheme, or artifice to defraud . . . in connection with the
purchase or sale of [a] security in violation of Rule 10b-5, 17 C.F.R. 240.10b-5(a), Plaintiffs
claims necessarily also satisfy the same in connection with element of SLUSA.
Finally, Plaintiffs assert that their claims would not be preempted by the SLUSA even
under Third Circuit caselaw existing prior to [Chadbourne], because material misrepresentations
are not elements of plaintiffs claims. Opp. at 6. That assertion not only is belied by the
allegations of Plaintiffs own Complaint, but also fundamentally misunderstands the scope of
SLUSA. Although the allegations ultimately are inadequate, the Complaint attempts to plead
multiple material misrepresentations by Defendants. See Opening Br. at 12-13 (citing Compl.
3, 42, 45, 52, 65, 76, 83). It does not matter for SLUSA preemption whether
misrepresentation is a legal element of a claim, so long as the SLUSA prerequisites are alleged
in one form or another, as they are here. Rowinski v. Salomon Smith Barney Inc., 398 F.3d 294,
rise to preemption under SLUSA, which also bars claims based solely on allegations of
manipulative conduct. See Nekritz v. Canary Capital Partners, LLC, No. 03-5081, 2004 WL
1462035, at *3 (D.N.J. Jan. 12, 2004) (even though the Complaint does not on its face assert
involving . . . deception, SLUSA applied). Plaintiffs assertion that there can be no preemption
absent a material misrepresentation (Opp. at 6) ignores the plain language of SLUSA itself,
6
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78bb(f)(1)(B). Even Plaintiffs own case law acknowledges that SLUSA applies to claims for
both market manipulation and material misrepresentation. See Opp. at 6 (citing Segal v. Fifth
Third Bank, N.A., 581 F.3d 305, 311 (6th Cir. 2009) (SLUSA applies when gravamen of the
Plaintiffs concede, as they must, that Defendants are lumped together in the
Complaint, contending that such generalized group pleading is sufficient because Defendants
each engaged in identical conduct. Opp. at 17. But this does not excuse Plaintiffs of their
obligation to plead facts (i.e., which Defendant participated in which supposedly manipulative
trades and when), and it is insufficient simply to assert broadly that each Defendant engaged in
naked short selling and painting the tape. Id. Rather than providing each Defendant with
notice of its alleged misconduct, the Complaint improperly lumps Defendants together as a
group and asserts general common factual allegations against all of them. Sheeran v. Blyth
Shipholding S.A., No. 14-5482, 2015 WL 9048979, at *3 (D.N.J. Dec. 16, 2015) (dismissing
complaint under Rule 8); see also Ingris v. Borough of Caldwell, No. 14-855, 2015 WL 3613499,
at *16 (D.N.J. June 9, 2015) ([T]o the extent Plaintiff seeks to lump several defendants together
without setting forth what each particular defendant is alleged to have done, he has engaged in
impermissibly vague group pleading.). Plaintiffs thus fail to satisfy even the basic notice
pleading requirements of Rule 8, let alone the particularity requirements of Rule 9(b), which
apply here because every claim is predicated on allegations of fraud. See Compl. 73-75, 101,
Next, Plaintiffs argue that even if the allegations might normally be considered
insufficient, they should be excused from the notice pleading requirements here because the
7
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necessary facts are within the exclusive control of Defendants and have been concealed by
Defendants. Opp. at 20. But even under the relaxed Rule 9(b) standard discussed in the case
law cited by Plaintiffs, see Opp. at 21 (citing Endovasc, Ltd. v. J.P. Turner Co., LLC, No. 02-
7313, 2004 WL 634171 (S.D.N.Y. March 30, 2004)), the Complaint still must allege what
manipulative acts were performed, which defendants performed them [and] when the
manipulative acts were performed. 2004 WL 634171, at *5. In dismissing the complaint there,
Id. The courts language describes the Complaint in this case to a T. Plaintiffs citations to
Paragraphs 32, 43, 45, and 56 of the Complaint provide absolutely no connection between any
pled with particularity. Yet Plaintiffs only generally assert that Defendants concealed their
naked short sales through their relationship with the [DTCC] and its primary subsidiary,
National Securities Clearing Corporation. Compl. 33, 97. These allegations fail to plead
specific facts or identify any specific actions by any particular Defendant that resulted in the
supposed fraudulent concealment. The Opposition fails to explain how these (or any other)
allegations of the Complaint plead Defendants supposed concealment with the requisite
particularity.
2
Moreover, there are no allegations whatsoever in those paragraphs or throughout the
entire Complaint regarding specific actions committed by BNY Mellon.
8
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Plaintiffs do not dispute that all of their claims are predicated on allegations of market
manipulation. They also concede that to be actionable as market manipulation, short selling
must be willfully combined with something more to create a false impression of how market
participants value a security. Opp. at 7. Plaintiffs argue, however, that defendants naked
short selling, coupled with their dumping of VirnetX shares at key, critical moments of the day,
constitutes the something more. Id. at 8 (citing In re Amaranth Natural Gas Commodities
Plaintiffs reliance on Amaranth is misplaced. The court in that case actually dismissed
claims for market manipulation against a family of hedge funds because plaintiffs failed to allege
any facts that create a strong inference of scienter. The court explained:
3
By contrast, the Amaranth court declined to dismiss market manipulation claims against
two individuals who allegedly discussed influencing prices for specific trades. 587 F. Supp. 2d
at 540. The Complaint here contains no such allegations, nor does it identify a single trade by
any particular Defendant. Moreover, it does not allege that any particular Defendant injected
inaccurate information into the market or created a false impression of market activity. GFL
Advantage Fund, Ltd. v. Colkitt, 272 F.3d 189, 205 (3d Cir. 2001); see also Nanopierce Techs.,
Inc. v. Southridge Capital Mgmt., No. 02-0767, 2008 WL 1882702, at *2 (S.D.N.Y. April 21,
2008) (Mere sales do not inject false information into the marketplace, nor can a party inject
false information into the marketplace . . . simply by selling stock on the open market.).
9
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market participants (Opp. at 16 (citing Compl. 56)) are insufficient to convert legitimate
trading into market manipulation. See Taylor v. Westor Capital Grp., 943 F. Supp. 2d 397, 403-
404 (S.D.N.Y. 2013) (dismissal is appropriate if it is impossible to tell what manipulative acts
were performed, who performed them, when they were performed, what securities were involved,
and what effect this scheme had on the market for those securities). Because all of Plaintiffs
claims are predicated on an inadequately pled theory of market manipulation, the Complaint
The Opposition largely ignores the many fatal defects in Plaintiffs RICO claim, each of
The Opposition does not address Defendants arguments that the Complaint fails to allege
a pattern of racketeering activity. Instead, Plaintiffs simply repeat the legal conclusions asserted
in the Complaint, baldly asserting that Defendants purported naked short selling and painting
the tape are alleged to be illegal. Opp. at 24. Such conclusory allegations are insufficient.
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) ([L]abels and conclusions or a formulaic
Plaintiffs concede that they must plead both a RICO enterprise and Defendants
knowing participation in the affairs of that enterprise. Opp. at 25, 27. Plaintiffs also
acknowledge that the supposed enterprise herethe DTCCplays a legitimate and important
role in stock transactions. Id. at 25. Plaintiffs nevertheless assert that [i]t is precisely because
10
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the DTCC also plays [such a] role in stock transactions that it can be a RICO enterprise. Id.
But Plaintiffs cannot satisfy the enterprise and participation elements of their RICO claim
simply by pointing to a legitimate entity with which Defendants have some connection. Indeed,
We agree with the District Court that the allegation that defendants took
advantage of an opportunity to meet provided by a legitimate enterprise in the
normal course of its business does not meanor plausibly implythat
defendants were participating in the conduct of the enterprise. By extension, the
allegation that defendants utilized such an opportunity to plot or discuss or
otherwise facilitate a pattern of racketeering activity does not, without more,
plausibly imply that defendants conducted the enterprises affairs through a
pattern of racketeering activity. If it did, any coffee house or hotel with
conference facilities could, as the District Court rightly recognized, be made into
a RICO enterprise merely by dint of the fact that racketeers used the facility as a
meeting place.
In re Ins. Brokerage Antitrust Litig., 618 F.3d 300, 380 (3d Cir. 2010) (cited in Opp. at 25).
In addition, Plaintiffs argument that they have satisfied the participation element by
alleging that Defendants act as DTCC member clearing firms and were associated with the
DTCC on a high, managerial and supervisory level is unavailing. See Opp. at 27-28. As
Plaintiffs own authority recognizes, the Complaint must allege that Defendants played some
part in directing the enterprises affairs through a pattern of racketeering activity. Reves v.
Ernst & Young, 507 U.S. 170, 177-79 (1993). Those allegations are entirely lacking here. The
Complaint instead alleges only that two of the DTCCs twenty directors were affiliated with
Defendants, neither of whom was a member of the DTCCs management. Compl. 87, 89.
Plaintiffs also fail to explain how this minimal involvement in the DTCC relates specifically to
the alleged racketeering activity. Mere association with an enterprise is not enough to satisfy
RICOs participation element. In re Ins. Brokerage Antitrust Litig., 618 F.3d at 370. There must
be a nexus between the conduct of [the enterprises] affairs and the pattern of racketeering
11
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In arguing they have alleged a direct injury, Plaintiffs rely on the conclusory assertion
that [t]he lost value of VirnetX shares was a direct result of defendants naked short selling and
manipulative scheme to depress the price of the stock. Opp. at 29-30. But Plaintiffs fail to
plead any facts that plausibly allege that the decline in VirnetXs stock price over a four-year
period was the direct result of Defendants unspecified trading activity. Nor do Plaintiffs explain
how, in the absence of any alleged purchases and sales of VirnetX stock by them during the
relevant period, they will be able to prove causation and damages without resorting to the sort of
intricate, uncertain inquiries that can easily overrun[] RICO litigation. Anza v. Ideal Steel
Supply Corp., 547 U.S. 451, 460 (2006). Even accepting as true the Complaints allegations,
the link is too remote between the stock manipulation alleged and Plaintiffs purported harm to
sustain a RICO claim. Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258, 271 (1992).
Plaintiffs concede that they must plead that Defendants acted with a specific intent to
defraud them. See Opp. at 31-32. In contending that they have satisfied this element, Plaintiffs
simply repeat their theory that fails to deliver create counterfeit shares that depress the price of
a security. Id. at 31. But Plaintiffs ignore the SECs position that fails to deliver do not create
counterfeit shares (see Opening Br. at 7-8), as well as the courts opinion in Cohen v.
Stevanovich, 722 F. Supp. 2d 416, 423-26, 428-29 (S.D.N.Y. 2010), which rejected this identical
theory. More importantly, Plaintiffs fail to identify any allegations in the Complaint that
12
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Defendants engaged in particular trades of VirnetX stock with the specific intent of depressing
Plaintiffs also contend that they have adequately alleged scienter because the Complaint
asserts that defendants paint[ed] the tape by dumping huge blocks of VirnetX stock. Opp. at
31-32. But the Complaint does not actually allege any such activity by any particular Defendant.
themselves give rise to a strong inference of scienter on behalf of any defendant. Amaranth,
Plaintiffs further argue that scienter can be pled by alleging facts establishing a motive
and an opportunity to commit fraud. Opp. at 32. They speculate that Defendants were
motivated to (i) remove core costs from their securities lending business, (ii) ingratiate
themselves with their clients, (iii) enhance their competitiveness, and (iv) avoid costs that
would have been incurred by defendants to borrow stock. Id. at 33. But these purported
motivations could well apply to any entity engaged in prime brokerage activities and do not
suggest that any Defendant had a specific intent to defraud Plaintiffs. See Interchange State
Bank v. Veglia, 668 A.2d 465, 474 (N.J. Super. Ct. App. Div. 1995); Anderson v. Ayling, 396
Plaintiffs concede that their RICO conspiracy and civil conspiracy claims require them to
allege (i) an underlying wrong, (ii) the details of the conspiratorial agreement, and (iii) specific
overt acts that each Defendant undertook in furtherance of the purported conspiracy. See Opp. at
4
Plaintiffs argue that allegations that Defendants generally engag[ed] in illegal naked
short selling bolsters their scienter allegations. Opp. at 33 (emphasis added). But the
Oppositions references to fines and other allegations completely unrelated to VirnetX stock add
nothing. See Opening Br. at 16-17.
13
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34-36. By merely repeating the facially inadequate allegations in the Complaint, see id.,
Plaintiffs do not address Defendants showing that (i) Plaintiffs fail adequately to allege any
underlying unlawful conduct, (ii) the Complaints conspiracy allegations are entirely conclusory,
and (iii) no specific overt acts are alleged to have been taken by any particular Defendant. See
Plaintiffs argue that they have sufficiently pled unjust enrichment because a benefit
supposedly was conferred on Defendants when VirnetXs stock price was depressed. Opp. at 36
(citing no cases). That argument misses the point. Plaintiffs do not plead that they conferred any
benefit that unjustly enriched Defendants, which is a required element to state an unjust-
enrichment claim under New Jersey law. See VRG Corp. v. GKN Realty, 641 A.2d 519, 527 (N.J.
1994); Eli Lilly & Co. v. Roussel, 23 F. Supp. 2d 460, 496 (D.N.J. 1998). Plaintiffs claim for
Plaintiffs argue that they had a reasonable expectation of economic advantage because
their purchases of VirnetX stock assured [them] that they would reap financial benefit if the
market value of their stock increased. Opp. at 37 (citing no cases). But Plaintiffs fail to plead
any specific anticipated benefit or that, if there had been no interference[,] there was a
reasonable probability that [they] would have received the anticipated economic benefits.
Printing Mart-Morristown v. Sharp Elecs. Corp., 563 A.2d 31, 37 (N.J. 1989). They also fail to
plead malice or scienter or that Defendants had knowledge of Plaintiffs purported economic
advantage or contract(s). See Opp. at 37. Rather than respond to Defendants arguments,
Plaintiffs simply assure the Court that more than ample facts are pled without identifying what
14
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those supposed ample facts are. Id. That conclusory assurance is insufficient to plead a claim
Plaintiffs do not dispute that they must plead, among other things, reasonable reliance to
state a common-law fraud claim under New Jersey law. Opp. at 37. Plaintiffs assert that this
element is met because they relied upon the integrity of the securities market (id.), which they
assert is a permissible theory of reliance in manipulation cases under New Jersey law (id. at 38).
But the New Jersey Supreme Court has squarely rejected the fraud on the market theory of
Kaufman v. i-Stat Corp., 754 A.2d 1188, 1200-01 (N.J. 2000). That decision is fatal to Plaintiffs
D. Plaintiffs Fail to State Claims for Aiding and Abetting and Punitive Damages.
Plaintiffs argue that [t]here are no grounds to dismiss the aiding and abetting claim on
the basis that no underlying claim exists because valid RICO and other state claims have been
alleged. Opp. at 39. For the reasons explained above, however, Plaintiffs fail to allege valid
underlying claims. With respect to their claim for punitive damages, Plaintiffs argue that [i]t
will be up to a jury to determine whether . . . defendants acted with actual malice. Id. That
contention, which ignores the pleading requirements of Rules 8 and 9, is wrong. Plaintiffs
claims for aiding and abetting and punitive damages therefore both fail.
15
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Plaintiffs argue that The Goldman Sachs Group, Inc., Credit Suisse (USA), Inc., and The
Bank of New York Mellon Corporation are proper defendants because, through the use of
unidentified subsidiaries, they concealed their illegal trading activity. Opp. at 39. As the court
in Cohen noted, however, these parent corporations are not proper party defendants if they were
not engaged in the activities alleged in the Complaint. 722 F. Supp. 2d at 421 n.1. It also is a
general principle of corporate law that a parent corporation is not liable for the acts of its
subsidiaries. Id. (citing United States v. Bestfoods, 524 U.S. 51, 61 (1998)). Plaintiffs cannot
wait until the conclusion of discovery to determine whether one or more subsidiaries should be
joined in this action or substituted for [Defendants]. Opp. at 40. The Complaint must identify
CONCLUSION
For the foregoing reasons, as well as those in Defendants Opening Brief, the Complaint
should be dismissed in its entirety for lack of subject-matter jurisdiction because Plaintiffs
claims are barred by SLUSA. In the alternative, the Complaint fails to state a claim upon which
16
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Mark D. Knoll
BRESSLER, AMERY & ROSS, P.C.
325 Columbia Turnpike
Florham Park, New Jersey 07932
Counsel for Defendant Merrill Lynch,
Pierce, Fenner & Smith Incorporated
Philip S. Rosen
ZEICHNER, ELLMAN & KRAUSE, LLP
103 Eisenhower Parkway
Roseland, New Jersey 07068
(973) 618-9100
17