Regents of Univ CA, et al v. Credit Suisse USA, et

United States Court of Appeals
Fifth Circuit
F I L E D
March 19, 2007
Charles R. Fulbruge III
Clerk
In the
United States Court of Appeals
for the Fifth Circuit
_______________
m 06-20856
_______________
REGENTS OF THE UNIVERSITY OF CALIFORNIA;
WASHINGTON STATE INVESTMENT BOARD;
SAN FRANCISCO CITY AND COUNTY EMPLOYEES’ RETIREMENT SYSTEM;
EMPLOYER-TEAMSTERS LOCAL NUMBERS 175 AND 505 PENSION TRUST FUND;
HAWAII LABORERS PENSION PLAN; STARO ASSET MANAGEMENT LLC;
AMALGAMATED BANK,
AS TRUSTEE FOR THE LONGVIEW COLLECTIVE INVESTMENT FUND;
ROBERT V. FLINT; JOHN ZEGARSKI; MERVIN SCHWARTZ, JR.;
STEVEN SMITH; ARCHDIOCESE OF MILWAUKEE;
GREENVILLE PLUMBERS PENSION PLAN;
NATHANIEL PULSIFER,
AS TRUSTEE OF THE SHOOTERS HILL REVOCABLE TRUST,
Plaintiffs-Appellees,
VERSUS
CREDIT SUISSE FIRST BOSTON (USA), INC.;
CREDIT SUISSE FIRST BOSTON LLC; PERSHING LLC;
MERRILL LYNCH & COMPANY, INC.;
MERRILL LYNCH PIERCE FENNER & SMITH, INC.;
Defendants-Appellants,
BARCLAYS PLC; BARCLAYS BANK PLC; BARCLAYS CAPITAL, INC.,
Appellants.

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2
_________________________
Appeals from the United States District Court
for the Southern District of Texas
m H-01-3624
__________________________
Before JOLLY, SMITH, and DENNIS,
Circuit Judges.
JERRY E. SMITH, Circuit Judge:
Having been granted leave to pursue an in-
terlocutory appeal, see FED. R. CIV. P. 23(f),
defendants challenge an order certifying a sin-
gle class of plaintiffs. Relying largely on Cen-
tral Bank, N.A. v. First Interstate Bank, N.A.,
511 U.S. 164 (1994), and its progeny, we re-
verse and remand.
I.
The facts are difficult to detail but easy to
summarize. Plaintiffs allege that defendants
Credit Suisse First Boston (“Credit Suisse”),
Merrill Lynch & Company, Inc. (“Merrill
Lynch”), and Barclays Bank PLC (“Barclays
Bank”) (collectively “the banks”) entered into
partnerships and transactions that allowed En-
ron Corporation (“Enron”) to take liabilities
off of its books temporarily and to book reve-
nue from the transactions when it was actually
incurring debt. The common feature of these
transactions is that they allowed Enron to mis-
state its financial condition; there is no allega-
tion that the banks were fiduciaries of the
plaintiffs, that they improperly filed financial
reports on Enron’s behalf, or that they en-
gaged in wash sales or other manipulative ac-
tivities directly in the market for Enron securi-
ties.
For example, plaintiffs allege that Merrill
Lynch engaged in what they dub the “Nigerian
Barges Transaction.” According to plaintiffs,
Enron wanted to “sell” its interest in electri-
city-generating barges off the coast of Nigeria
by the end of 1999 so that it could book reve-
nue and meet stock analysts’ estimates for the
calendar quarter. It could find no legitimate
buyer, so it contacted Merrill Lynch and guar-
anteed that it would buy the barges back with-
in six months at a premium for Merrill Lynch.
Six months later, Enron made good on its
guarantee; an Enron-controlled partnership
bought the barges from Merrill Lynch at a pre-
mium. When Enron reported its results for
1999, instead of booking the transaction as a
loan, the characterization that Enron’s outside
accountants state would have been appropriate
had they known of the side-agreement to buy
back the barges, Enron booked the transaction
as a sale and accordingly listed the revenue
therefrom in its year-end financial statement.
Plaintiffs allege that the banks knew exactly
why Enron was engaging in seemingly irra-
tional transactions such as this. They cite cer-
tain of the banks’ internal communications
they characterize as proving that the banks
were aware of the personal compensation En-
ron executives received as a result of inflating
their stock price through the illusion of reve-
nue and that the banks intended to profit by
helping the executives maintain that illusion.1
1 Plaintiffs quote from an e-mail between Mer-
(continued...)

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3
Likewise, plaintiffs allege that, although each
defendant may not have been aware of exactly
how each other defendant was helping Enron
to misrepresent its financial health, the defen-
dants knew in general that other defendants
were doing so and that Enron was engaged in
a long-term scheme to defraud investors and
maximize executive compensation by inflating
revenue and disguising risk and liabilities
through its partnerships and transactions with
the banks.
II.
This suit followed Enron’s collapse in 2001.
The first action was filed on October 22 of that
year; by December 12, 2001, the district court
had consolidated over thirty actions relating to
Enron securities and had designated the Re-
gents of the University of California as the lead
plaintiff. Years of discovery have ensued, and
tens of millions of documents have been pro-
duced.
Early in the litigation, the banks filed mo-
tions to dismiss, but the district court denied
them in a December 19, 2002, opinion. The
court reconsidered some of the issues relevant
to those motions in its opinion regarding class
certification, issued on June 5, 2006,2 in light
of intervening developments in appellate case-
law. The court justified its reconsideration,
stating that it had
the power to reconsider such interlocutory
decisions, especially in light of the limited
and much of it recent case law emerging on
scheme liability. Moreover . . . at class
certification, especially after such substan-
tial discovery as has been done here, the
court may look behind the pleadings at evi-
dence to determine whether a class should
be certified.
The court determined that a “deceptive act”
within the meaning of rule 10b-5(c)3 includes
participating in a “transaction whose principal
purpose and effect is to create a false appear-
ance of revenues.”
The district court decided that rule 10b-
5(a)’s prohibition of any “scheme . . . to de-
fraud” gives rise to joint and several liability
for defendants who commit individual acts of
deception in furtherance of such a scheme.
Implicit in that ruling is the conclusion that
plaintiffs have alleged that just such a scheme
existed.
The court’s theory of scheme liability con-
siderably simplified finding commonality
among the plaintiffs with respect to loss causa-
tion. The court stated that “a reasonable ar-
gument can be made that where a defendant
1(...continued)
rill Lynch employees “[A]t year-end (sic) when we
did this trade (the Nigerian barge transaction) . . .
Enron knew what were making at . . . the quarter
and year (which had great value in their stock
price, not to mention personal compensation).”
Communications between Credit Suisse employees
allegedly reveal similar scienter (“Osprey is a ve-
hicle enabling Enron to raise disguised debt which
appears as equity on Enron’s balance sheet . . . .”).
2 See Regents of the Univ. of Cal. v. Credit
Suisse First Boston (USA), Inc., 2006 U.S. Dist.
(continued...)
2(...continued)
LEXIS 43146 (S.D. Tex. 2006).
3 We follow securities law convention and refer
to the relevant statute and rule as § 10(b) and rule
10b-5 rather than as, respectively, 15 U.S.C. § 78j-
10(b) and 17 C.F.R. § 240.10b-5. Section 10(b)
refers to § 10(b) of the Securities Exchange Act of
1934.

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4
knowingly engaged in a primary violation of
the federal securities laws that was in further-
ance of a larger scheme, it should be jointly
and severally liable for the loss caused by the
entire overarching scheme, including conduct
of other scheme participants about which it
knew nothing.”
The district court concluded that plaintiffs
are entitled to rely on the classwide presump-
tions of reliance for omissions and fraud on the
market.4 The court held that the Affiliated Ute
presumption applies because the facts indicate
that the banks had failed in their “duty not to
engage in a fraudulent ‘scheme.’” The court
concluded, with respect to the fraud-on-the-
market presumption of reliance, that no pre-
liminary finding of market efficiency or inves-
tors’ reliance thereon need be made where
plaintiffs plead under rule 10b-5(a) (forbidding
deceptive devices, schemes, and artifices) and
10b-5(c) (prohibiting deceptive acts, practices,
and courses of business) rather than under the
more usual cause of action, rule 10b-5(b) (pro-
scribing misrepresentation).
A month after issuing its opinion on class
certification, the district court, after reviewing
plaintiffs’ revised class definition and trial plan,
issued its class certification order, dated July 5,
2006. It determined that, although the propor-
tionate liability provisions of the Private Secu-
rities Litigation Reform Act (“PSLRA”) are
generally problematic, there is no necessary
conflict between the court’s theory of liability
and that statute. See 15 U.S.C. § 78u-4(b)(4),
(f)(2). The court ordered defendants to pre-
pare a list of non-parties to whom they intend
to assign responsibility and declared that de-
fendants will bear the burden to prove non-
parties’ responsibility by a preponderance of
the evidence.
The district court certified a class of all per-
sons who purchased Enron securities between
October 19, 1998, and November 27, 2001,
and were injured thereby. The class seeks
damages of $40 billion, against which losing
defendants would be entitled to offset roughly
$7 billion obtained by plaintiffs in previous
settlements with former co-defendants. On
November 1, 2006, a motions panel of this
court granted defendants leave to appeal the
class certification order, and we sua sponte
expedited the appeal.
III.
Plaintiffs point out that we are not bound
by the motion panel’s decision to grant leave
to appeal; they urge that leave to appeal was
improvidently granted.5 We disagree.
This is a legally and practically significant
class certification decision, and the motions
panel properly allowed the appeal. The com-
mentary to rule 23(f) indicates that it is appro-
priate to grant leave to appeal an adverse de-
termination where (1) a “certification decision
turns on a novel or unsettled question of law”
or (2) “[a]n order granting certification . . .
may force a defendant to settle rather than in-
cur the costs of defending a class action and
run the risk of potentially ruinous liability.”
FED. R. CIV. P. 23(f) advisory committee note.
4 See Affiliated Ute Citizens v. United States,
406 U.S. 128 (1972) (presumptive reliance for im-
proper omissions); Basic Inc. v. Levinson, 485
U.S. 224 (1988) (adopting fraud-on-the-market
theory of reliance under certain conditions).
5 See United States v. Bear Marine Serv., 696
F.2d 1117, 1120 n.6 (5th Cir. 1983) (stating that a
merits panel is not bound by a motion panel’s dis-
cretionary grant of right to interlocutory appeal).

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5
Plaintiffs contend that, even if we are en-
titled to address defendants’ merits-based ar-
guments, those arguments are sufficiently in-
tertwined with the facts to counsel against in-
terlocutory appeal before a complete factual
record is established. Plaintiffs reason that the
banks have not yet been “cowed” into settling,
nor are they likely to be; the district court has
afforded procedural fairness to all parties; and
the panel should defer to its judgment by de-
clining to hear this appeal until after the dis-
trict court has entered a final judgment.
The fact that the banks have not yet been
persuaded to settle is no reason to decline a
rule 23(f) appeal; it means only that the litiga-
tion continues. As we have recognized, class
certification may be the backbreaking decision
that places “insurmountable pressure” on a de-
fendant to settle, even where the defendant has
a good chance of succeeding on the merits.
See Castano v. Am. Tobacco, 84 F.3d 734,
746 (5th Cir. 1996). Here, where plaintiffs
seek to hold the banks liable for nearly the en-
tirety of securities losses stemming from the
Enron collapse, settlement pressure appears to
be particularly acute, so it is appropriate to
provide appellate review before settlement
may be coerced by an erroneous class certifi-
cation decision.
Moreover, although the legal issues under-
lying the certification decision are intertwined
with the merit of plaintiffs’ theory of liability,
these broad legal issues are not especially con-
tingent on particular facts likely to be further
developed in the district court. This case gives
rise to unsettled questions of law concerning
the entanglement of the merits with the class
certification decision, as well as the district
court’s theory of “deceptive act” liability un-
derlying its finding that common issues of re-
liance predominate. Both of the Advisory
Committee criteria are met here, so we pro-
ceed to consider the rule 23(f) appeal.
IV.
We review class certification decisions for
abuse of discretion in “recognition of the es-
sentially factual basis of the certification in-
quiry and of the district court’s inherent power
to manage and control pending litigation. . . .
Whether the district court applied the correct
legal standard in reaching its decision on class
certification, however, is a legal question that
we review de novo.” Allison v. Citgo Petro-
leum Corp., 151 F.3d 402, 408 (5th Cir. 1998)
(citations omitted). Where a district court
premises its legal analysis on an erroneous un-
derstanding of governing law, it has abused its
discretion. See Unger v. Amedisys Inc., 401
F.3d 316, 320 (5th Cir. 2005). Albeit with the
best of intentions and after herculean effort,
the district court arrives at an erroneous un-
derstanding of securities law that gives rise to
its application of classwide presumptions of
reliance.
V.
We first consider the scope of our jurisdic-
tion. Plaintiffs accuse the banks of repackag-
ing this rule 23(f) appeal as a demurrer. They
point out that the scope of our review is “brid-
led by Rule 23(f).”6 They urge us to refuse to
consider the banks’ arguments concerning the
interpretation of § 10(b) and the prohibition of
aiding and abetting liability under that statute.7
They contend that we should accept the dis-
6 Bell v. Ascendant Solutions Inc., 422 F.3d
307, 314 (5th Cir. 2005) (declining to review, on
interlocutory appeal, a district court’s decision to
preclude plaintiffs’ expert from testifying as to
market efficiency).
7 See Cent. Bank, 511 U.S. at 177 (holding that
§ 10(b) does not provide for aiding and abetting
liability).

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6
trict court’s view of the underlying theories of
liability as valid for purposes of this appeal.
The scope of our review is limited, but it is
not quite so circumscribed as plaintiffs say.
Although we may not conduct an independent
inquiry into the legal or factual merit of this
case as though we were reviewing a motion
under Federal Rule of CivilProcedure 12(b)(6)
or 56, we may address arguments that impli-
cate the merits of plaintiffs’ cause of action in-
sofar as those arguments also implicate the
merits of the class certification decision.
Rule 23(f) states that “[a] court of appeals
may in its discretion permit an appeal from an
order of a district court granting or denying
class action certification under this rule if ap-
plication is made to it within ten days after en-
try of the order.” FED. R. CIV. P. 23(f). The
text of the rule makes plain that the sole order
that may be appealed is the class certification;
“no other issues may be raised.” Bell, 422
F.3d at 314. The fact that an issue is relevant
to both class certification and the merits, how-
ever, does not preclude review of that issue.
After all, the Supreme Court has refused to
designate class certification decisions as col-
lateral orders subject to interlocutoryappellate
review, preciselybecause “the class determina-
tion generally involves considerations that are
enmeshed in the factual and legal issues com-
prising the plaintiff’s cause of action.” Coop-
ers & Lybrand v. Livesay, 437 U.S. 463, 469
(1978) (internal citations omitted). “The anal-
ysis under Rule 23 must focus on the require-
ments of the rule, and if findings made in con-
nection with those requirements overlap find-
ings that will have to be made on the merits,
such overlap is only coincidental.” Bell, 422
F.3d at 311. See also Unger, 401 F.3d at 320.
Our circuit’s conclusion that review of the
factual and legal analysis supporting the dis-
trict court’s decision is appropriate on review
of class certification enjoys widespread accep-
tance in the courts of appeals,8 and neither the
Supreme Court authority nor the Fifth Circuit
caselaw that plaintiffs cite for the proposition
that no merits inquiry is permitted is to the
contrary.9 Miller and Eisen (which cited Mil-
ler to establish the “no merits inquiry” rule)
addressed cases in which district courts had
conducted wide-ranging inquiries into the mer-
its of claims as part of the class certification
decision without reference to the criteria for
class certification.10 As the Bell rule cited
8 See In re Initial Pub. Offering Sec. Litig., 471
F.3d 24, 41 (2d Cir. 2006); Gariety v. Grant
Thornton LLP, 368 F.3d 356, 366 (4th Cir. 2004);
Newton v. Merrill, Lynch, Pierce, Fenner &Smith,
Inc., 259 F.3d 154, 166 (3d Cir. 2001) (quoting
5 JAMES W. MOORE ET AL., MOORE’S FEDERAL
PRACTICE § 23.46[4]: “[B]ecause the determina-
tion of a certification request invariably involves
some examination of factual and legal issues un-
derlying the plaintiffs’ cause of action, a court may
consider the substantive elements of the plaintiffs’
case . . . .”); Szabo v. Bridgeport Machs., Inc., 249
F.3d 672, 675-76 (7th Cir. 2001) (“The proposi-
tion that a district judge must accept all of the com-
plaint’s allegations when deciding whether to certi-
fy a class cannot be found in Rule 23 and has noth-
ing to recommend it . . . . Before deciding whether
to allow a case to proceed as a class action . . . a
judge should make whatever factual and legal in-
quiries are necessary under Rule 23 . . . and if
some of the considerations under Rule 23(b)(3) . .
. overlap the merits . . . then the judge must make
a preliminary inquiry into the merits.”).
9 See Eisen v. Carlisle & Jaquelin, 417 U.S.
156, 178 (1974); Miller v. Mackey Int’l, 452 F.2d
424, 427 (5th Cir. 1971).
10 See In re Initial Pub. Offering Sec. Litig.,
(continued...)

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7
above suggests, the prohibition against looking
into the merits applies only to such inquiries,
not to evaluations of the merits that overlap
with consideration of the requirements for
class certification. Id. In a rule 23(f) appeal,
this court can, and in fact must, review the
merits of the district court’s theory of liability
insofar as they also concern issues relevant to
class certification.11
VI.
Two of the banks’ arguments on appeal
have considerable implications for the substan-
tive legal merit of plaintiffs’ complaint. First,
the district court’s definition of “deceptive act”
underlies its application of the classwide pre-
sumption of reliance on fraud on the market.
Likewise, its broad theory of “scheme” liability
allows it to certify a single class of plaintiffs
whose losses were caused in common by the
scheme rather than to certify subclasses whose
losses were caused by the actions of individual
defendants. Both of these arguments are also
highly relevant to class certification, but we
address only the definition of “deceptive act,”
because it is dispositive of this appeal.
The district court’s definition of “deceptive
act” is integral to its conclusion that the re-
quirements for class certification are met.
Federal Rule of Civil Procedure 23(a) requires
plaintiffs seeking class certification to satisfy
four criteria that we have previously summa-
rized as (1) numerosity, (2) commonality,
(3) typicality, and (4) representativeness.12
Because no defendant seriously challenges
whether these prima facie requirements are
met, we do not discuss them further.
Once the rule 23(a) requirements are satis-
fied, a class may be certified if “[1] the court
finds that the questions of law or fact common
to the members of the class predominate over
any questions affecting only individual mem-
bers, and [2] that a class action is superior to
other available methods for the fair and effi-
cient adjudication of the controversy.” Rule
23(b)(3). We refer to these two requirements
respectively as the “predominance” and “supe-
riority” criteria.13
The district court’s theory of liability im-
plicates primarily the predominance require-
ment. To succeed on a claim of securities
fraud, a plaintiff must prove “(1) a material
misrepresentation or omission by the defen-
dant, (2) scienter on the part of the defendant,
(3) reliance, and (4) due diligence by the plain-
tiff to pursue his or her own interest with care
and good faith.” Unger, 401 F.3d at 322 n.2
(5th Cir. 2005) (citations omitted). A plaintiff
must prove not only that the fraud occurred
but that it proximately caused his losses. See
10(...continued)
471 F.3d at 24 (citations omitted).
11 See Langbecker v. Elect. Data Sys. Corp.,
476 F.3d 299, 306-07 (5th Cir. 2007) (considering
the scope of ERISA liability within the context of
a rule 23(f) appeal and stating that “[a]lthough fed-
eral courts cannot assess the merits of the case at
the certification stage, they must evaluate with
rigor the claims, defenses, relevant facts and ap-
plicable substantive law in order to make a mean-
ingful determination of the certification issues . . . .
Courts should not confuse rulings on the merits of
claims with the class certification decision . . . .
However, the district court’s threshold legal rulings
are essential to its conclusion that this case may be
maintained as a class action”) (citations and inter-
nal quotation marks omitted).
12 See id. at 307.
13 See Steering Committee v. Exxon Mobil
Corp., 461 F.3d 598, 600 (5th Cir. 2006).

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8
Dura Pharms., Inc. v. Broudo, 544 U.S. 336,
346 (2005).
Without its broad conception of liability for
“deceptive acts,” the district court could not
have found that the entire class was entitled to
rely on Basic’s fraud-on-the-market theory,
because the market may not be presumed to
rely on an omission or misrepresentation in a
disclosure to which it was not legally enti-
tled.14 The plaintiffs are likely correct that the
market for Enron securities was efficient and
that inherent in that conclusion is the fact that
the market price reflected all publicly available
information.15 But the factual probability that
the market relied on the banks’ behavior
and/or omissions does not mean that plaintiffs
are entitled to the legal presumption of reli-
ance.
Market efficiency was not the sole condi-
tion that the Court in Basic required plaintiffs
to prove existed to qualify for the classwide
presumption; the defendant had to make public
and material misrepresentations. See Basic,
485 U.S. at 248 n.27. If the banks’s actions
were non-public, immaterial, or not misrepre-
sentative because the market had no right to
rely on them (in other words, the banks owed
no duty), the banks should be able to defeat
the presumption. See Gariety, 368 F.3d at
369.
Without a classwide presumption of reli-
ance, plaintiffs would have to prove individual
reliance on defendants’ conduct. “[A] fraud
class action cannot be certified when individual
reliance will be an issue.” Castano, 84 F.3d at
745. Because, as we will explain, the district
court misapplies the Affiliated Ute presump-
tion, the fraud-on-the-market presumption is
the only presumption potentially available in
this case. Accordingly, the meaning of “de-
ceptive act” is critical to classwide certifica-
tion; classwide reliance stands or falls with it.
Erroneous presumptions of reliance were at
14 See Gariety v. Grant Thornton LLP, 368
F.3d 356, 369 (4th Cir. 2004) (remanding class
certification decision for consideration of whether
it was improperly predicated on aiding and abetting
liability under the guise of primary liability). The
plaintiffs’ attempt to distinguish Gariety on the
ground that it involved a thinly traded stock is un-
persuasive. Although the securities at issue were
arguably too thinly traded to warrant the presump-
tion of an efficient market (an issue addressed in
another section of the opinion, see id. at 367-68),
plaintiffs provide no alternative explanation why
the Gariety court also remanded with instruction to
consider the presumption of fraud-on-the-market
reliance in light of Central Bank. See Gariety, 368
F.3d at 369.
The principle that, to rely presumptively, the
market must be entitled to disclosure about the true
nature of defendants’ conduct, applies in the man-
ipulation setting as well as in the deception context.
See § 10(b) (prohibiting the employment of any
“manipulative or deceptive device” in connection
with the purchase or sale of registered securities).
As the Supreme Court has said with respect to
§ 14(e) of the Securities Exchange Act (declaring
it identical in relevant aspect to § 10), “[t]he use of
the term ‘manipulative’ provides emphasis and
guidance to those who must determine which types
of acts are reached by the statute; it does not sug-
gest a deviation from the section’s facial and pri-
mary concern with disclosure . . . .” Schreiber v.
(continued...)
14(...continued)
Burlington N. Inc., 472 U.S. 1, 8 (1985).
15 See generally Jonathan R. Macey and Geof-
frey P. Miller, Good Finance, Bad Economics: An
Analysis of the Fraud-on-the-Market Theory, 42
STAN. L. REV. 1059, 1077 (1990).

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9
the heart of the Supreme Court’s concern
when it ruled that § 10(b) does not give rise to
aiding and abetting liability.16 It is essential for
us to ensure that the district court does not
misapply aiding-and-abetting liability under the
guise of primary liability, through an overly
broad definition of “deceptive act[s],” and
thereby give rise to an erroneous classwide
presumption of fraud on the market.
VII.
We proceed to the merits of this limited
rule 23(f) appeal. With all respect for the dis-
trict court’s diligent efforts, its determination
that the Affiliated Ute presumption applies to
the facts of this case is incorrect. In Affiliated
Ute, the Court considered whether a group of
investors was required to prove reliance affir-
matively where it alleged that bank officers
bought their restricted stock without disclos-
ing the bank’s creation of a secondary market
in which the stock would be resold for profit.
See 406 U.S. at 133-39. The Court ruled that
the investors’ allegations were not based on
misrepresentation under what is now rule 10b-
5(b), but instead on a “‘course of business’ or
a ‘device, scheme or artifice’ that operated as
a fraud” under what are now rule 10b-5(a) and
(c). Id. at 153. The Court determined that,
unlike a mere transfer agent, these bankers had
a duty to disclose the existence of this second-
ary market to the plaintiffs. Id. at 152-53.
Where liability is premised on a failure to
disclose rather than on a misrepresentation,
“positive proof of reliance is not a prerequisite
to recovery. . . . This obligation to disclose
and the withholding of a material fact establish
the requisite element of causation in fact.” Id.
at 153-54. In Basic, 485 U.S. at 243, the
Court later summarized the rule of Affiliated
Ute thusly: “[W]here a duty to disclose mate-
rial information had been breached . . . the
necessary nexus between the plaintiffs’ injury
and the defendants’ wrongful conduct had
been established.”
For us to invoke the Affiliated Ute pre-
sumption of reliance on an omission, a plaintiff
must (1) allege a case primarily based on omis-
sions or non-disclosure and (2) demonstrate
that the defendant owed him a duty of disclo-
sure.17 The case at bar does not satisfy this
conjunctive test.
Assuming arguendo that plaintiffs’ case pri-
marily concerns improper omissions,18 the
banks were not fiduciaries and were not other-
wise obligated to the plaintiffs. They did not
owe plaintiffs any duty to disclose the nature
of the alleged transactions. The district court
agrees that the banks lacked any specific duty,
but, citing our caselaw, the court finds that the
16 See Cent. Bank, 511 U.S. at 180 (explaining
that aiding and abetting liability would permit
plaintiffs to “circumvent the reliance requirement,”
because a “defendant could be liable without any
showing that the plaintiff relied upon the aider and
abettor’s statements or actions”).
17 See Abell v. Potomac Ins. Co., 858 F.2d
1104, 1119 (5th Cir. 1988) (explaining that the Af-
filiated Ute presumption applies where “the defen-
dant has failed to disclose any information whatso-
ever relating to material facts about which the de-
fendant has a duty to the plaintiff to disclose”),
vacated on other grounds sub nom. Fryar v. Abell,
492 U.S. 914 (1989).
18 See Finkel v. Docutel/Olivetti Corp., 817
F.2d 356, 360 (5th Cir. 1987) (“Cases involving
primarily a failure to disclose implicate the first
and third subsections of Rule 10b-5; cases involv-
ing primarily a misstatement or failure to state a
fact necessary to make statements made not mis-
leading implicate the second subsection.”) (citation
omitted).

-- 9 of 42 --

10
presumption applies because the banks omitted
their duty not to engage in a fraudulent
scheme.19 Neither Smith nor any other of this
circuit’s cases is authority for that proposition.
As we will explain in more detail, “decep-
tion” within the meaning of § 10(b) requires
that a defendant fail to satisfy a duty to dis-
close material information to a plaintiff. Mere-
ly pleading that defendants failed to fulfill that
duty by means of a scheme or an act, rather
than by a misleading statement, does not
entitle plaintiffs to employ the Affiliated Ute
presumption. In Smith, this court discussed
only the first element of the Abell test recount-
ed above; Smith stands for the straightforward
proposition that a case brought under rule
10b-5(a) or (c) is more likely to be based pri-
marily on omission than is a case under rule
10b-5(b), which requires that a defendant af-
firmativelymake a misleading representation.20
In Smith, we never reached the second prong
of the Abell test, because we determined that,
even if there had been an omission, any pre-
sumption of reliance was rebutted (because the
plaintiff would have behaved identically had he
been aware of the omitted information). See
Smith, 845 F.2d at 1364.
Abell is the law of this circuit, and Smith is
not to the contrary. When it determined (cor-
rectly) that the banks owed no duty to the
plaintiffs other than the general duty not to en-
gage in fraudulent schemes or acts (that is, the
duty not to break the law), the district court
should have declined to apply the Affiliated
Ute presumption. Instead, it presumed what
the plaintiffs had only alleged: that reliance,
which is a specific, defining element of the rel-
evant legal violation, had in fact occurred.
The logic of Affiliated Ute is that, where a
plaintiff is entitled to rely on the disclosures of
someone who owes him a duty, requiring him
to prove “how he would have acted if omitted
material information had been disclosed” is un-
fair. Basic, 485 U.S. at 245. It is natural to
expect a plaintiff to rely on the candor of one
who owes him a duty of disclosure, and it is
fair to force one who breached his duty to
prove that the plaintiff did not so rely. Here,
however, where the plaintiffs had no expecta-
tion that the banks would provide them with
information, there is no reason to expect that
the plaintiffs were relying on their candor. Ac-
cordingly, it is only sensible to put plaintiffs to
their proof that they individually relied on the
banks’ omissions.
VIII.
Having determined that the Affiliated Ute
presumption is inapplicable, we proceed to re-
view the district court’s determination that Ba-
sic’s fraud-on-the-market presumption applies.
It does not; the court predicates its ruling on
an erroneous interpretation of § 10(b).
The banks launch a two-pronged attack on
the district court’s ruling with respect to fraud
on the market. First, they argue that the pre-
sumption was never properly established: The
19 Regents, 2006 U.S. Dist. LEXIS 43146, at
*102 (citing Smith v. Ayres, 845 F.2d 1360, 1363
& n.8 (5th Cir. 1988)).
20 The statement may be misleading for the rea-
son that the defendant has “omitt[ed] to state a ma-
terial fact necessary in order to make the state-
ments made, in the light of the circumstances under
which they were made, not misleading,” but to al-
lege a cause of action under rule 10b-5(b), a plain-
tiff still must allege that a defendant said some-
thing. See 17 C.F.R. § 240.10b-5(b); Smith, 845
F.2d at 1363 (stating that a rule 10b-5(b) “claim
always rests upon an affirmative statement of some
sort, reliance on which is an essential element
plaintiff must prove”).

-- 10 of 42 --

11
district court’s overly broad definition of “de-
ceptive act” led it inexorably to the mistaken
conclusion that the banks’ actions constituted
“misrepresentations” on which the market was
legally presumed to rely. Second, the banks
assert that, even if the plaintiffs did establish
the presumption, it was rebutted according to
this court’s standards.21 Because the district
court erred in ruling that the presumption had
been established, we do not address whether it
was rebutted.
In Basic, 485 U.S. at 245, the Court ac-
cepted the fraud-on-the-market theory that
courts could presume reliance where individu-
als who had traded shares did so “in reliance
on the integrity of the price set by the market,
but because of [defendant’s] material misrep-
resentations, that price had been fraudulently
[altered].” The presumption is founded on the
economic hypothesis that “the market is trans-
posed between seller and buyer, and ideally,
transmits information to the investor in the
processed form of the market price . . . . The
market is acting as the unpaid agent of the in-
vestor, informing him that given all the infor-
mation available to it, the value of the stock is
worth the market price.” Id. at 246 (citing In
re LTV Sec. Litig., 88 F.R.D. 134, 143 (N.D.
Tex. 1980)).
To qualify for the presumption, however, a
plaintiff must not only indicate that a market is
efficient, but also must allege that the defen-
dant made public and material misrepresenta-
tions; i.e., the type of fraud on which an effi-
cient market may be presumed to rely.22 These
plaintiffs have not alleged such fraud.
The district court’s conception of “decep-
tive act” liability is inconsistent with the Su-
preme Court’s decision that § 10 does not give
rise to aiding and abetting liability. An act
cannot be deceptive within the meaning of
§ 10(b) where the actor has no duty to dis-
close. Presuming plaintiffs’ allegations to be
true, Enron committed fraud by misstating its
accounts, but the banks only aided an abetted
that fraud by engaging in transactions to make
it more plausible; they owed no duty to En-
ron’s shareholders.
Section 10(b) does not give rise to aiding
and abetting liability.23 In Central Bank, the
Court emphasized that securities fraud liability
is an area of the law that demands certainty
and predictability. Secondary liability brings
neither; instead it gives rise to confusion about
the extent of secondary actors’ obligations and
invites vague and conflicting standards of
proof in divers courts. See Cent. Bank, 511
21 See Greenberg v. Crossroads Sys., Inc., 364
F.3d 657 (5th Cir. 2004); Nathenson v. Zonagen
Inc., 267 F.3d 400 (5th Cir. 2001).
22 See Greenberg, 364 F.3d at 661 (summariz-
(continued...)
22(...continued)
ing prerequisites for the Basic presumption as fol-
lows: “(1) [T]he defendant made public material
misrepresentations, (2) the defendant’s shares were
traded in an efficient market, and (3) the plaintiffs
traded shares between the time the misrepresenta-
tions were made and the time the truth was re-
vealed”). See also Gariety, 368 F.3d at 369 (re-
manding the class certification decision for con-
sideration of whether factor (1) had been improp-
erly satisfied by the erroneous application of aiding
and abetting liability).
23 Cent. Bank, 511 U.S. at 177 (declaring that
section 10(b) “prohibits only the making of a ma-
terial misstatement (or omission) or the commission
of a manipulative act. The proscription does not
include giving aid to a person who commits a man-
ipulative or deceptive act.”) (citations omitted).

-- 11 of 42 --

12
U.S. at 188. Unfortunately, the Court has left
some uncertainty in this regard.
Though the Court conclusively foreclosed
the application of secondary liability under
§ 10(b), it stated that secondary actors such as
investment banks and accountants can be liable
as primary violators in some circumstances.
Id. at 191. The Court has never, however,
precisely delineated the boundary between pri-
mary and secondary liability. As the district
court noted, the lower courts have struggled
to do so, and our circuit has not previously an-
nounced a standard that conclusively governs
this case.
Although plaintiffs try to reconcile the cas-
es, the Eighth and Ninth Circuits have split
with respect to the scope of primary liability
for secondary actors.24 The district court
adopts a rule advocated by the Securities and
Exchange Commission (“SEC”), in an amicus
curiae brief before the Ninth Circuit, under
which primary liability attaches to anyone who
engages in a “transaction whose principal pur-
pose and effect is to create a false appearance
of revenues.”25 We agree with the Eighth Cir-
cuit that the SEC’s proposed test (by which
we are not bound) is too broad to fit within the
contours of § 10(b).
The appropriate starting point is the text of
the statute. See Cent. Bank, 511 U.S. at 172-
73. Decisions interpreting the statutory text
place a limit on the possible definitions that
can be ascribed to the words contained in the
SEC’s rule promulgated thereunder.26 It is by
losing sight of the limits that the statute places
on the rule, and by ascribing, natural, diction-
ary definitions to the words of the rule, that
the district court and likeminded courts have
24 Compare Simpson v. AOL Time Warner Inc.,
452 F.3d 1040, 1048 (9th Cir. 2006) (“[T]o be lia-
ble as a primary violator of § 10(b) for participa-
tion in a ‘scheme to defraud,’ the defendant must
have engaged in conduct that had the principal pur-
pose and effect of creating a false appearance of
fact in furtherance of the scheme.”), petition for
cert. filed (Oct. 19, 2006) (No. 06-560) with In re
Charter Commc’ns, Inc., Sec. Litig., 443 F.3d
987, 992 (8th Cir. 2006) (“[A]ny defendant who
does not make or affirmatively cause to be made a
fraudulent statement or omission, or who does not
directly engage in manipulative securities trading
practices, is at most guilty of aiding and abetting
and cannot be held liable under § 10(b) or any sub-
part of Rule 10b-5.”), petition for cert. filed (July
7, 2006) (No. 06-43).
25 As defendants aver, the district court’s test in
this case is actually broader even than the Ninth
Circuit’s; Simpson did not adopt the SEC’s pro-
posed rule wholesale. Instead, the court there made
it plain that “[i]t is not enough that a transaction in
which the defendant was involved had a deceptive
purpose and effect; the defendant’s own conduct
contributing to the transaction or overall scheme
must have had a deceptive purpose and effect.”
Simpson, 452 F.3d at 1048. This distinction, how-
ever, is irrelevant for purposes of this appeal, be-
cause the defendants’ scienter in entering into the
transactions would be a common issue of fact
across all the plaintiffs.
We note also that the Ninth Circuit applied the
definition recounted above to “scheme” as well as
to “deceptive act.” Id. Because, however, our an-
alysis is ultimately predicated on the statute instead
of the rule, any distinction between subsections of
the rule is immaterial to our discussion.
26 See Ernst & Ernst v. Hochfelder, 425 U.S.
185, 214 (1976) (“[D]espite the broad view of the
Rule advanced by the [SEC] in this case, its scope
cannot exceed the power granted the Commission
by Congress under § 10(b).”).

-- 12 of 42 --

13
gone awry.27
Central Bank was informed by a series of
decisions construing the statute and narrowly
defining the scope of “fraud” in the context of
securities. In Ernst & Ernst, 425 U.S. 185 at
197, for example, the Court rejected the
SEC’s notion that securities fraud can be com-
mitted negligently; it has to be knowing. Even
more significantly for purposes of this case,
the Court later stated that “the language of
§ 10(b) gives no indication that Congress
meant to prohibit any conduct not involving
manipulation or deception.” Santa Fe Indus.
v. Green, 430 U.S. 462, 473 (1977). The
Court had already discussed “manipulation” in
Ernst & Ernst: “Use of the word ‘manipula-
tive’ is especially significant. It is and was vir-
tually a term of art when used in connection
with securities markets. It connotes intention-
al or willful conduct designed to deceive or de-
fraud investors by controlling or artificially af-
fecting the price of securities.” Ernst & Ernst,
425 U.S. at 199.
The Court further refined that definition by
stating that “[manipulation] refers generally to
practices, such as wash sales, matched orders,
or rigged prices, that are intended to mislead
investors by artificially affecting market activ-
ity.” Santa Fe, 430 U.S. at 476. Finally, when
evaluating the scope of liability for deceptive
omissions of disclosure in the context of insid-
er trading, the Court stated, “When an allega-
tion of fraud is based upon nondisclosure,
there can be no fraud absent a duty to speak.”
Chiarella v. United States, 445 U.S. 222, 234
(1980).
The Eighth Circuit, unlike the Ninth, has
correctly taken these decisions collectively to
mean that “‘deceptive’ conduct involves either
a misstatement or a failure to disclose by one
who has a duty to disclose.” Charter, 443
F.3d at 990. That court quoted the technical
definition of “manipulation” from Santa Fe
and stated that “any defendant who does not
make or affirmatively cause to be made a
fraudulent statement or omission, or who does
not directly engage in manipulative securities
trading practices, is at most guilty of aiding
and abetting and cannot be held liable under
§ 10(b) or any subpart of Rule 10b-5.” Id. at
992.
By this holding the court in Charter found
that there was no liability against vendors of
set-top cable boxes who had sold their boxes
to Charter at inflated prices subject to a kick-
back agreement whereby they would direct the
value of the price inflation back to Charter in
the form of advertising purchases. See id. at
989-90. The vendors were alleged to have
known that Charter was doing this to falsify its
accounts by depreciating its expenses, as capi-
tal investments, from the purchase of the set-
top boxes, but was booking the increased ad-
vertising fees as recurring revenue. See id. In
other words, the court dismissed the case on
facts extraordinarily similar to the facts that
are present here.28
27 See Simpson, 452 F.3d at 1048; SEC v.
Hopper, No. H-04-1054, 2006 U.S. Dist. LEXIS
17772, at *37 (S.D. Tex. Mar. 24, 2006); In re
Parmalat Sec. Litig., 376 F. Supp. 2d 472, 504
(S.D.N.Y. 2005); Quaak v. Dexia, S.A., 357 F.
Supp. 2d 330, 342 (D. Mass. 2005); In re Global
Crossing, Ltd. Sec. Litig., 322 F. Supp. 2d 319,
336-37 (S.D.N.Y. 2004); In re Lernout & Hauspie
Sec. Litig., 236 F. Supp. 2d 161, 173 (D. Mass.
2003).
28 The Eighth Circuit’s analysis finds support in
several prior cases in other circuits that had refused
to extend primary liability to secondary actors,
(continued...)

-- 13 of 42 --

14
The Ninth Circuit came to a different con-
clusion. In Simpson, the defunct company
(Homestore.com) “bought revenue” byengag-
ing in the same type of round-trip transactions
that took place in Charter and are alleged to
have occurred here. Simpson, 452 F.3d at
1043-44. It paid inflated prices for shares or
services from thinly capitalized companies
looking to generate liquidity so they could go
public, in return for which it extracted side
agreements that the companies would pay
back the value of the inflation by buying ad-
vertising from AOL to be displayed at Home-
store’s AOL-based website. Like Charter,
Homestore would then list its payments to the
other companies as capital investments but
would characterize its advertising income from
them as recurring revenue. See id.
Although the defendants were dismissed be-
cause they did not meet the standard for liabil-
ity that the Ninth Circuit announced, the court
promulgated a standard very similar to the one
the instant plaintiffs urge us to adopt. The
court concluded:
[C]onduct by a defendant that had the prin-
cipal purpose and effect of creating a false
appearance in deceptive transactions as part
of a scheme to defraud is conduct that uses
or employs a deceptive device within the
meaning of § 10(b). Furthermore, such
conduct may be in connection with the pur-
chase or sale of securities if it is part of a
scheme to misrepresent public financial in-
formation where the scheme is not com-
plete until the misleading information is dis-
seminated into the securities market. Final-
ly, a plaintiff may be presumed to have re-
lied on this scheme to defraud if a misrepre-
sentation, which necessarily resulted from
the scheme and the defendant’s conduct
therein, was disseminated into an efficient
market and was reflected in the market
price.
Id. at 1052. See also In re Parmalat Sec. Lit-
ig., 376 F. Supp. 2d 472, 481-90 (S.D.N.Y.
2005).
The Ninth Circuit relied in part on a law re-
view article that had questioned the assertion
that a defendant could be liable only for its
own statements because § 10(b) forbids the
use of a “device” and rule 10b-5 condemns
those who act “indirectly.”29 What this rea-
soning overlooks is that the Supreme Court
had appeared to limit the scope of “deception”
rather than the scope of “device.”
The Supreme Court has defined “device” by
referring to a dictionary but has pointedly re-
fused to define “deceptive” in any way except
through caselaw: “[D]evice” means “(t)hat
which is devised, or formed by design; a con-
trivance; an invention; project; scheme; often,
a scheme to deceive; a stratagem; an artifice,”
and “contrivance” in pertinent part as “(a)
thing contrived or used in contriving; a
scheme, plan, or artifice.” In turn, “contrive”
in pertinent part is defined as “(t)o devise; to
plan; to plot . . . (t)o fabricate . . . design; in-
vent . . . to scheme . . . .” Ernst & Ernst, 425
U.S. at 199 n.20 (citing WEBSTER’S INTERNA-
28(...continued)
albeit in non-transactional scenarios. See Ziemba
v. Cascade Int’l, 256 F.3d 1194, 1205 (11th Cir.
2001); Wright v. Ernst & Young LLP, 152 F.3d
169 (2d Cir. 1998); Anixter v. Home-Stake Prod.
Co., 77 F.3d 1215 (10th Cir. 1996).
29 See Simpson, 452 F.3d at 1049 (citing Robert
Prentice, Locating That “Indistinct” and “Virtu-
ally Nonexistent” Line Between Primary and Sec-
ondary Liability Under Section 10(b), 75 N.C. L.
REV. 691, 731 (1997)).

-- 14 of 42 --

15
TIONAL DICTIONARY (2d ed. 1934)). Having
established the meaning of “device” (and re-
lying on it to hold that § 10(b) requires scien-
ter), the Court, in its other cases interpreting
§ 10(b), has established that a device, such as
a scheme, is not “deceptive” unless it involves
breach of some duty of candid disclosure.30
For this reason, defining “deceptive” by re-
ferring to the same dictionary the Court used
to define “device”SSthe approach taken by the
court in Parmalat, 376 F. Supp. 2d at 502,
and approvingly cited by the district court
a quoSSis improperly to substitute the author-
ity of the dictionary for that of the Supreme
Court. Likewise, plaintiffs’ reference to the
common law meaning of “deceptive” is fruit-
less; where the Supreme Court has authorita-
tively construed the pertinent language of the
statute giving rise to the plaintiffs’ cause of ac-
tion, the common law meaning of that lan-
guage is irrelevant.
Although some of our securities cases have
considered the common law where the Su-
preme Court has placed no gloss on the rel-
evant terms, none of this court’s decisions has
contradicted either the fundamental principle
just stated or the Supreme Court’s interpreta-
tion of “deceptive.”31 Because “device” is
modified by “deceptive,” no device can be il-
legal if it is not deceptive within the meaning
of the statute. Similarly, because the rule may
not be broader than the statute, this conclusion
as to the meaning of “deceptive device” pre-
cludes an interpretation of “indirectly” that
contradicts the accepted meaning of “decep-
tion.”32
The district court’s definition of “deceptive
acts” thus sweeps too broadly; the transactions
in which the banks engaged were not encom-
passed within the proper meaning of that
phrase. Enron had a duty to its shareholders,
but the banks did not. The transactions in
which the banks engaged at most aided and
abetted Enron’s deceit by making its misrepre-
30 See, e.g., Chiarella, 445 U.S. at 234-35
(“When an allegation of fraud is based upon non-
disclosure, there can be no fraud absent a duty to
speak. . . . We hold that a duty to disclose under
§ 10(b) does not arise from the mere possession of
nonpublic market information.”). See also United
States v. O’Hagan, 521 U.S. 642, 655 (1997)
(“Because the deception essential to the misappro-
priation theory involves feigning fidelity to the
source of information, if the fiduciary discloses to
the source that he plans to trade on the nonpublic
information, there is no ‘deceptive device’ and thus
no § 10(b) violation.”); id. at 656 (“The securities
transaction and the breach of duty thus coin-
cide. . . . A misappropriator who trades on the ba-
sis of material, nonpublic information, in short,
gains his advantageous market position through de-
ception; he deceives the source of the information
and simultaneously harms members of the investing
public.”) We take the quoted statements to mean
that “deception” occurs where the misappropriator
breaches his duty to his source, the act/scheme/-
omission (collectively “device”) is the trading of
the security without disclosure.
31 See Finkel v. Docutel/Olivetti, 817 F.2d 356,
359 (5th Cir. 1987) (referring to the common law
and determining that § 10(b) requires transaction
causation); Shores v. Sklar, 647 F.2d 462, 469 n.5
(5th Cir. May 1981) (en banc) (citing the Restate-
ment of Torts for the proposition that securities
fraud requires loss causation); Huddleston v. Her-
man & MacLean, 640 F.2d 534, 547 n.21 (5th Cir.
Unit A Mar. 1981) (citing Prosser as authority for
requirement of scienter in securities fraud), vacated
on other grounds, 459 U.S. 375 (1983).
32 See Cent. Bank, 511 U.S. at 173 (establishing
that rule 10b-5 may not exceed the scope of
§ 10(b)).

-- 15 of 42 --

16
sentations more plausible.33 The banks’ parti-
cipation in the transactions, regardless of the
purpose or effect of those transactions, did not
give rise to primary liability under § 10(b).
IX.
Having determined that the banks’ alleged
actions were not “misrepresentations” in the
sense of “deceptive acts” on which an efficient
market may be presumed to rely, we proceed
to consider whether they constituted manipula-
tion.34 They did not.
Manipulation requires that a defendant act
directly in the market for the relevant security.
The Supreme Court has cited a dictionary defi-
nition of the word but, at the same time, has
attached the caveat that, as used in securities
fraud law, it is “virtually a term of art.” Ernst
& Ernst, 425 U.S. at 199 & n.21. Although
the Court has not precisely defined the term
beyond providing a few examples such as wash
sales, matched orders, and rigged prices, then-
District Judge Higginbotham, in an influential
opinion issued shortly after Santa Fe, ex-
haustively analyzed the meaning of “manipu-
lation” and concluded that “[f]rom this study,
the following definition emerges: practices in
the marketplace which have the effect of either
creating the false impression that certain mar-
ket activity is occurring when in fact such ac-
tivity is unrelated to actual supply and demand
or tampering with the price itself are man-
ipulative.” Hundahl v. United Benefit Life
Ins. Co., 465 F. Supp. 1349, 1360 (N.D. Tex.
1979).
In Hundahl, Judge Higginbotham carefully
emphasized that such activity could not take
place outside the market for the relevant se-
curity and retain the title of manipulation; con-
duct that affects the marketplace indirectly can
violate § 10(b) only if it constitutes deception.
Id. at 1359, 1362. Like the Eighth Circuit, we
adopt Judge Higginbotham’s reasoning and
definition in full, and we are aware of no cir-
cuit that recognizes a broader definition. See
Charter, 443 F.3d at 992 n.2.
Plaintiffs argue that this course is fore-
closed to us by Schreiber v. Burlington Nor-
thern Inc., 472 U.S. 1, 6-7 (1985), and Shores.
We disagree. In Schreiber, 472 U.S. at 6, the
Court declared only that its definition of man-
ipulation, insofar as it had defined that term in
Ernst & Ernst, is consistent with both the dic-
tionary and the common law. So is Judge
Higginbotham’s.
In Hundahl, Judge Higginbotham thor-
oughly analyzed the common law history of
the term and concluded that the “manipula-
tion” cause of action was primarily concerned
with keeping free markets clear of interference
33 See Armstrong v. McAlpin, 699 F.2d 79, 91
(2d Cir. 1983) (explaining that before Central
Bank, aiding and abetting securities fraud required
proof of “(1) a securities law violation by a pri-
mary wrongdoer, (2) knowledge of the violation by
the person sought to be charged, and (3) . . . that
the person sought to be charged substantially as-
sisted in the primary wrongdoing”). We agree with
the court in Parmalat that whether the banks would
have been guilty of aiding and abetting, had their
actions taken place before Central Bank, is not
particularly important; if they have committed a
primary violation as well, the fact that their con-
duct could also be characterized as aiding and abet-
ting would not save them. See Parmalat, 376 F.
Supp. 2d at 493. What is important is that plain-
tiffs have not pleaded that the banks have commit-
ted the primary violation of employing a “deceptive
device.”
34 See § 10(b); Santa Fe, 430 U.S. at 473 (stat-
ing that “the language of § 10(b) gives no indi-
cation that Congress meant to prohibit any conduct
not involving manipulation or deception”).

-- 16 of 42 --

17
but does not reach all conduct that might con-
stitute deception or breach of fiduciary duty.
See Hundahl, 465 F. Supp. at 1359-62. The
Court in Schreiber, 472 U.S. at 7, citing Santa
Fe, adopted a similar limited construction to
determine that not all breaches of state law fi-
duciary duty constituted manipulation for pur-
poses of the federal securities laws. The fact
that the Supreme Court’s definition of “manip-
ulation” is consistent with the dictionary’s
does not mean that it is coextensive with it;
“manipulation” is a term of art, and it applies
only to conduct that takes place directly within
the market for the relevant security.
Our holding in Shores requires somewhat
more explanation. In that case, we adopted
the “fraud-created-the-market” theory, where-
by actors who introduced an otherwise unmar-
ketable security into the market by means of
fraud are deemed guilty of manipulation, and
a plaintiff can plead that he relied on the integ-
rity of the market rather than on individual
fraudulent disclosures. Shores, 647 F.2d at
469-70 & n.8. We determined that lawyers
and other secondary actors involved in prepar-
ing the fraudulent statements that facilitated in-
troduction of the otherwise unmarketable se-
curity could be liable for the plaintiff security
purchaser’s loss. See id.
Shores does not preclude the decision we
reach in this case. The basis of the fraud-cre-
ated-the-market theory is that the fraudster
directlyinterfered with the market by introduc-
ing something that is not like the others: an
objectively unmarketable security that has no
business being there.35 This is qualitatively
different from what the banks are alleged to
have done, namely engage in transactions else-
where that gave a misleading impression of the
value of Enron securities that were already on
the market.36 Moreover, in Shores the manip-
ulation happened when the bogus security was
introduced into the market; lawyers and other
secondary actors were rendered liable for hav-
ing conspired to achieve that end.37 In the
wake of Central Bank, however, conspiracy is
no longer a viable theory of § 10(b) liability, so
that aspect of Shores has been overruled.38
35 See Abell, 858 F.2d at 1122 (explaining that
under Shores, “the test of ‘not entitled to be mar-
keted’ [is met] only where the promoters knew the
(continued...)
35(...continued)
enterprise itself was patently worthless”).
36 At oral argument, plaintiffs’ counsel contend-
ed that in Finkel v. Docutel/Olivetti, 817 F.2d 356
(5th Cir. 1987), this court expanded the fraud-on-
the-market presumption from Shores to reach cir-
cumstances like the case at bar. In fact, Finkel es-
tablished, pre-Basic, that the fraud-on-the-market
presumption applies to allegations of deceptive
omissions within the limited meaning of “decep-
tive” that we have described above. Id. at 362.
We did not broaden the concept of manipulation.
Likewise, plaintiffs’ citation of SEC v. Zandford,
535 U.S. 813, 819 (2002), misses the mark. De-
ception, as occurred in that case, need not coincide
with a defendant’s activity in the market for the
relevant securities; manipulation must so coincide.
37 See Shores, 647 F.2d at 469 (“[Plaintiff’s]
burden of proof will be to show that (1) the defen-
dants knowingly conspired to bring securities onto
the market which were not entitled to be market-
ed.”) (emphasis added).
38 See Dinsmore v. Squadron, Ellenoff, Plesent,
Sheinfeld & Sorkin, 135 F.3d 837, 842 (2d Cir.
1998); In re GlenFed, Inc. Sec. Litig., 60 F.3d
591, 592 (9th Cir. 1995). See also Cent. Bank,
511 U.S. at 201 n.12 (Stevens, J., dissenting)
(“The Court’s rationale would sweep away the de-
cisions recognizing that a defendant may be found
(continued...)

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18
Nothing in today’s decision contradicts our
precedent. Applying the Hundahl definition of
manipulation, we conclude that the banks’
actions are not alleged to be the type of manip-
ulative devices on which an efficient market
may be legally presumed to rely because the
banks did not act directly in the market for
Enron securities.
X.
As the Supreme Court did in Central Bank,
it may be worth taking into account certain
policy considerations to determine whether our
interpretation of § 10(b) plausiblyaccords with
the will of Congress. Defendants do, after all,
escape liability for alleged conduct that was
hardly praiseworthy. According to plaintiffs,
defendants could have pulled the plug on the
Enron fraud; instead they profited from it
while large numbers of people eventually lost
an aggregate sum in the tens of billions of
dollars.
Ultimately, however, the rule of liability
must be either overinclusive or underinclusive
so as to avoid what Hundahl called “in terror-
em settlements” resulting from the expense
and difficultyof, even meritoriously, defending
this kind of litigation. Hundahl, 465 F. Supp.
at 1363.39 Strict construction of § 10(b)
against inputting aiding and abetting liability
for secondary actors under the rubric of “de-
ceptive acts” or “schemes” gives rise to the
type of certainty that the Court sought in Cen-
tral Bank. The banks may exaggerate the
length of the parade of horribles they present
wherein defendants are continually taken out
of and put back into endless securities cases
based on, shifting, ad hoc, fact-based percep-
tions of liability influenced by plaintiffs’ skill at
artful pleading.
But the fact that the banks may be on to
something serious might be best demonstrated
by the fact that in Simpson, 452 F.3d at 1050,
the court attempted to distinguish Charter as
addressing an arms-length transaction not sub-
ject to primary liability, i.e., a ruling consistent
with its own. If there is a distinct difference
between the culpability of defendants’ actions
based on the pleadings in those two cases, it is
not apparent to us and is likely beyond the un-
derstanding of good-faith financial profession-
als who are attempting to avoid liability.
This is not to say that the instant matter
should be decided in accord with this court’s
policy preferences. We mention policy only to
demonstrate that, even considering the scope
of the Enron disaster, Congress was not irra-
tional to promote plain legal standards for ac-
tors in the financial markets by limiting sec-
ondary liability. As the Eighth Circuit has
said,
To impose liability for securities fraud on
one party to an arm’s length business trans-
action in goods or services other than se-
curities because that party knew or should
have known that the other party would use
the transaction to mislead investors in its
stock would introduce potentially far-
reaching duties and uncertainties for those
engaged in day-to-day business dealings.
Decisions of this magnitude should be made
by Congress.
38(...continued)
liable in a private action for conspiring to violate
§ 10(b) and Rule 10b-5.”).
39 Again we quote Judge Higginbotham, finding
his words in Hundahl, 465 F. Supp. at 1363, ap-
plicable to this case: “This suit is hardly of the
strike variety. The plaintiffs [were] substantial
shareholders. They are represented by distin-
guished and able counsel. It is the precedential
force of the rule that is here addressed.”

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19
Charter, 443 F.3d at 992-93.
XI.
The necessity of establishing a classwide
presumption of reliance in securities class ac-
tions makes substantial merits review on a rule
23(f) appeal inevitable. A classwide presump-
tion of reliance is not only crucial to class cer-
tification, it prima facie establishes a critical
element of the substantive tort. Reliance “pro-
vides the requisite causal connection between
a defendant’s misrepresentation and a plain-
tiff’s injury.” Basic, 485 U.S. at 243. Where
the plaintiffs’ several interactions with the mar-
ket are alleged to supply the basis for their
joint reliance on defendants’ conduct, we must
examine carefully the third leg of that meta-
phorical triangle: the legal nature of defen-
dants’ interactions with the market.
If, as is probably the case here, that legally
appropriate examination makes interlocutory
appeals in securities cases practically disposi-
tive of the merits, we take comfort in two ob-
servations. First, the availability of broad pre-
sumptions in this area means that the legal
merit of securities cases is somewhat less likely
than that of other cases to be contingent on
facts that have been only incompletely devel-
oped at the time of class certification. Second,
as we observed in Castano, 84 F.3d at 746,
class certification is often practically disposi-
tive of litigation like the case at bar. If the cer-
tification decision is so entangled with the
merits as to make interlocutory appeal disposi-
tive of the substantive litigation, it is inciden-
tally but perhaps happily more likely that the
legal merit and practical outcome of securities
cases will coincide.
We recognize, however, that our ruling on
legal merit may not coincide, particularly in the
minds of aggrieved former Enron shareholders
who have lost billions of dollars in a fraud they
allege was aided and abetted by the defendants
at bar, with notions of justice and fair play.
We acknowledge that the courts’ interpreta-
tion of § 10(b) could have gone in a different
direction and might have established liability
for the actions the banks are alleged to have
undertaken. Indeed, one of our sister cir-
cuitsSSthe NinthSSbelieves that it did. We
have applied the Supreme Court’s guidance in
ascribing a limited interpretation to the words
of § 10, viewing the statute as the result of
Congress’s balancing of competing desires to
provide for some remedy for securities fraud
without opening the floodgates for nearly un-
limited and frequently unpredictable liability
for secondary actors in the securities markets.
In summary, the Affiliated Ute presumption
of classwide reliance cannot apply here. Like-
wise, the district court, albeit with the best of
intentions, misapplied the fraud-on-the-market
presumption; the facts alleged do not consti-
tute misrepresentations on which an efficient
market may be presumed to rely.
Because no class may be certified in a
§ 10(b) case without a classwide presumption
of reliance, our analysis of reliance disposes of
this appeal. We decline to address whether,
had defendants’ actions been misrepresenta-
tions on which the market was presumed to
rely, they would have been appropriately
grouped together as a unitary scheme giving
rise to common issues of loss causation among
the class members. Likewise, we abstain from
addressing the manageability of the district
court’s plan to implement the proportionate
liability provisions of the PSLRA.
The order certifying a class is REVERSED
and REMANDED for further proceedings as
appropriate. The motion to stay the trial is
DENIED. The mandate shall issue forthwith.

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1See In re Charter Commc’ns, Inc. Sec. Litig., 443 F.3d 987 (8th Cir. 2006).
2The majority notes that the investment banks’ alleged conduct was “hardly praiseworthy,” but it
brushes the significance of its decision to immunize their conduct aside by noting that “[u]ltimately,
. . . the rule of liability must be either overinclusive or underinclusive.” See supra, at ___.
20
DENNIS, Circuit Judge, concurring in the judgment:
I concur in the judgment reversing the district court’s certification order, but I do so on grounds
different from those assigned by the majority. I respectfully disagree with the majority as to the issues
upon which it decides the case. Although I ultimately agree that the certification order must be
reversed, I do not believe that the law necessarily prevents the plaintiffs from prosecuting this case
as a class action, and, as I explain below, I would remand the case to the district court for further
consideration of whether the criteria for certification have been satisfied.
The majority today holds that secondary actors (such as the investment banks involved in this case)
who act in concert with issuers of publicly-traded securities in schemes to defraud the investing public
cannot be held liable as primary violators of Section 10(b) or Rule 10b-5 unless they (1) directly make
public misrepresentations; (2) owe the issuer’s shareholders a duty to disclose; or (3) directly
“manipulate” the market for the issuer’s securities through practices such as wash sales or matched
orders. In doing so, the majority aligns this court with the Eighth Circuit1 and immunizes a broad
array of undeniably fraudulent conduct from civil liability under Section 10(b), effectively giving
secondary actors license to scheme with impunity, as long as they keep quiet.2
Although, as I explain below, I cannot agree with the majority’s cramped interpretation of the
statutory language of section 10(b), in my view, the majority commits a significant error by even

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3Plaintiffs also seek to rely on the Affiliated Ute presumption of reliance. See Affiliated Ute Citizens of
Utah v. United States, 406 U.S. 128 (1972). I do not disagree with the majority’s conclusion that the Affiliated
Ute presumption does not apply in this case. See supra, at ___.
21
reaching this issue. Because the issue on which the majority opinion bases its decision today — a
significant and unsettled question about the scope of primarily liability under Section 10(b) — is
unnecessary to a determination of whether the plaintiffs have satisfied the prerequisites for
maintaining a class action under Federal Rule of Civil Procedure 23, we should not consider it on this
interlocutory appeal of class certification.
The investment banks have, however, raised two substantial issues that are related to the district
court’s Rule 23 inquiry. The banks argue that the plaintiffs are not entitled to the fraud-on-the-
market presumption of reliance because they have not satisfied the requirements of this court’s
decision in Greenberg v. Crossroad Systems, Inc., 364 F.3d 657 (5th Cir. 2004),3 and that the district
court erred when it concluded that any defendant found to have knowingly violated the securities laws
could be held jointly and severally liable for all of the plaintiffs’ losses in connection with Enron’s
multi-year fraudulent scheme. Greenberg, in my view, is inconsistent with prior precedents of the
Supreme Court and this court insofar as it purports to relieve securities defendants of the burden of
rebutting the fraud-on-the-market presumption. On the latter point, however, I conclude that the
district court erred by construing too broadly the joint and several liability provision of the Private
Securities Litigation Reform Act of 1995 (the “PSLRA”), 15 U.S.C. § 78u-4. I would remand the
case to the district court to determine whether, applying the correct legal standard, common damages
issues continue to predominate over individual issues and whether the case can be tried in a
manageable fashion.
I.

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4Fed. R. Civ. P. 23(f) provides:
A court of appeals may in its discretion permit an appeal from an order of a district court
granting or denying class action certification under this rule if application is made to it within
ten days after entry of the order. An appeal does not stay proceedings in the district court
unless the district judge or the court of appeals so orders.
22
Our inquiry on this interlocutory appeal under Rule 23(f)4 is limited to determining whether the
district court erred in certifying the case as a class action. See Bell v. Ascendant Solutions, Inc., 422
F.3d 307, 314 (5th Cir. 2005) (stating that Rule 23(f) permits a party to “‘appeal only the issue of
class certification; no other issues may be raised’”) (quoting Bertulli v. Indep. Ass’n of Cont’l Pilots,
242 F.3d 290, 294 (5th Cir. 2001)). We are not permitted to go beyond the issues necessary to class
certification and rule on the merits of plaintiffs’ claims. See Unger v. Amedisys, Inc., 401 F.3d 316,
321 (5th Cir. 2005) (“Class certification hearings should not be mini-trials on the merits of the class
or individual claims.”); see also Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 177 (1974) (noting that
courts cannot “conduct a preliminary inquiry into the merits of a suit” on class certification).
It is clear, though, that a district court cannot certify a class action unless it finds that the plaintiffs
have satisfied all of the requirements of Rule 23(a) and of one of the three subsections of Rule 23(b).
To fulfill that obligation, it is often necessary for the district court to go “beyond the pleadings” and
“understand the claims, defenses, relevant facts, and applicable substantive law in order to make a
meaningful determination of the certification issues.” Castano v. Am. Tobacco Co., 84 F.3d 734, 744
(5th Cir. 1996). In addition, to the extent that issues relevant to the ultimate merits of the case are
also necessary to the district court’s determination of one or more of the requirements of Rule 23,
the district court can, and must, consider those issues at the class certification stage. See Bell, 422
F.3d at 311-12; see also In re Initial Pub. Offering Sec. Litig., 471 F.3d 24, 41 (2d Cir. 2006)

-- 22 of 42 --

5It is important to note that the factual findings made by the district court at the class certification
stage are not binding on the trier of fact at trial. See Initial Pub. Offering, 471 F.3d at 41 (“[T]he
determination as to a Rule 23 requirement is made only for purposes of class certification and is not
binding on the trier of facts, even if that trier is the class certification judge.”); Unger, 401 F.3d at 323
(stating that “the court’s determination for class certification purposes may be revised (or wholly
rejected) by the ultimate factfinder”); Gariety v. Grant Thornton, LLP, 368 F.3d 356, 366 (4th Cir.
2004) (“The findings made for resolving a class action certification motion serve the court only in its
determination of whether the requirements of Rule 23 have been demonstrated.”).
6The district court initially held that secondary actors can be liable under Section 10(b) and Rule
10b-5 based on deceptive acts not involving a direct public misstatement or a duty to speak when it
denied certain defendants’ motions to dismiss the Section 10(b) claims against them. See In re Enron
Corp. Sec., Derivative & ERISA Litig., 235 F. Supp. 2d 549, 590-94 (S.D. Tex. 2002). In its
opinion on class certification, the court reconsidered (and ultimately adhered to) its earlier views in
light of recent developments in the case law, noting that it had “the power to reconsider such
interlocutory decisions.” See In re Enron Corp. Sec., Derivative & ERISA Litig., No. H-01-3624,
2006 U.S. Dist. LEXIS 43146, at *155 n.84 (S.D. Tex. June 5, 2006). The district court did not,
however, indicate at any point that it believed that its decision on that issue was relevant to any
(continued...)
23
(“[T]here is no reason to lessen a district court’s obligation to make a determination that every Rule
23 requirement is met before certifying a class just because of some or even full overlap of that
requirement with a merits issue.”).5 By the same token, any such issues are also necessarily within
the scope of our review on an interlocutory appeal of a district court’s decision to certify a class.
Like the district court, however, this court can consider issues relevant to the merits of the plaintiffs’
claims only to the extent that such consideration is necessary to determine whether the proposed class
satisfies the requirements of Rule 23. See Initial Pub. Offering, 471 F.3d at 41 (“[A] district judge
should not assess any aspect of the merits unrelated to a Rule 23 requirement.”) (emphasis added).
In the majority’s view, one of the issues that this court can review on this interlocutory appeal is
the district court’s conclusion that a secondary actor can be held liable as a primary violator of
Section 10(b) and Rule 10b-5 for its participation in a scheme to defraud, even though it does not
make a direct public misrepresentation or have a duty to speak.6 According to the majority, the

-- 23 of 42 --

6(...continued)
specific requirement of Rule 23.
24
district court’s determination that secondary actors can violate Section 10(b) and Rule 10b-5 by
engaging in “deceptive” acts without making a public misrepresentation or having a duty to speak
implicates Rule 23(b)(3)’s requirement that “questions of law or fact common to the members of the
class predominate over any questions affecting only individual members.” Fed. R. Civ. P. 23(b)(3).
Without that finding, the majority states, the district court could not have concluded that the plaintiffs
were entitled to a classwide presumption of reliance, and individual issues of reliance would
overwhelmthe common, classwide issues, rendering class treatment inappropriate. Thus, the majority
variously characterizes the district court’s ruling on the scope of Section 10(b) liability as “integral”
or “critical” to its class certification decision.
The majority opinion labors to create the impression of a relationship between the district court’s
decision that securities plaintiffs can state a Section 10(b) claim against a secondary actor who did
not make any affirmative misstatements and the issue of whether the plaintiffs are entitled to rely on
the fraud-on-the-market presumption of Basic Inc. v. Levinson, 485 U.S. 224 (1988). According to
the majority, because the banks did not make public misstatements and had no duty to disclose vis-a-
vis Enron’s shareholders, their participation with Enron in fraudulent transactions that lacked any
independent business purpose is beyond the reach of Section 10(b); because the banks’ conduct is not
actionable under Section 10(b), the plaintiffs cannot invoke a classwide presumption of reliance; and
because reliance cannot be presumed on a classwide basis, individual issues of reliance predominate
over common issues. In sum, the upshot of the majority’s reasoning is that plaintiffs are not entitled
to maintain a class action because the conduct for which they seek to recover — to take the

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25
majority’s example, Merrill Lynch’s alleged conduct in connection with the so-called “Nigerian
Barges Transaction” — is not actionable under Section 10(b).
With the reasoning that underlies the majority’s view set out in this manner, it becomes apparent
that any link between the district court’s liability ruling and its application of the fraud-on-the-market
presumption is tangential at best. The question of whether the banks can be subject to Section 10(b)
liability without making public misrepresentations is by no means necessarily related to the
applicability of the fraud-on-the-market presumption of reliance. Although it is true that the fraud-
on-the-market presumption requires that there be a public misrepresentation upon which the market
can rely, in this case, there were certainly public misrepresentations that arose out of the banks’
allegedly fraudulent transactions with Enron; the rub, of course — and the banks’ primary argument
for why they are not subject to Section 10(b) liability — is that Enron, not the banks, conveyed the
misrepresentations to the market. According to the banks, because they made no public statements,
they are, at worst, aiders and abettors of Enron’s fraud. The plaintiffs counter by asserting, among
other things, that the banks’ allegedly fraudulent conduct is not immunized simply because their joint
scheme to defraud affected the market only through Enron’s public statements.
The majority’s leap to reach and resolve this dispute — which is strictly a question about the
substantive reach of Section 10(b) — at the certification stage overlooks a key fact: Regardless of
whether this court ultimately agrees with the district court that the banks’ alleged actions are
“deceptive” acts within the meaning of Section 10(b), those actions affected the market via Enron’s
public misrepresentations. Thus, this court can determine whether the plaintiffs are entitled to the
fraud-on-the-market presumption without delving into the district court’s decision that the banks’
conduct is covered by Section 10(b). Viewed in this light, there is little doubt that in this case the

-- 25 of 42 --

26
element of transaction causation, or reliance, can be satisfied by the market’s reliance on Enron’s
public representations of its financial health and/or its statements about the transactions in question.
See Simpson v. AOL Time Warner Inc., 452 F.3d 1040, 1052 (9th Cir. 2006) (“[A] plaintiff may be
presumed to have relied on th[e] scheme to defraud if a misrepresentation, which necessarily resulted
from the scheme and the defendant’s conduct therein, was disseminated into an efficient market and
was reflected in the market price.”); In re Parmalat Sec. Litig., 376 F. Supp. 2d 472, 509 (S.D.N.Y.
2005) (applying fraud-on-the-market presumption to claims against secondary actors even though
onlyissuer made public misrepresentations to the market). Accordingly, this court can assess whether
a classwide presumption of reliance applies in this case without first considering the district court’s
merits ruling on the scope of Section 10(b) liability. I would therefore find that the latter issue is
beyond the permissible scope of our limited, interlocutory review under Rule 23(f).
The majority is, of course, correct in some sense — if the banks engaged in no conduct within the
reach of Section 10(b), then the plaintiffs cannot prevail against them in a class action. But the
plaintiffs’ inability to proceed under such circumstances would have nothing to do with the need to
prove reliance on an individual basis. When this court decides, on a common, classwide basis, as the
majority does today, that the banks’ alleged conduct is non-actionable as a matter of law, it is dubious
to then claim that we are actually finding only that individual issues of reliance predominate over
common issues. Under the majority’s reasoning, individual questions of reliance do not predominate;
rather, reliance is simply irrelevant, because no plaintiff can, on an individual or a class basis, establish
that the banks engaged in any actionable conduct.
The mere fact that the resolution of a merits issue against a putative class of plaintiffs would, by
definition, preclude the maintenance of a class action simply cannot be sufficient to warrant review

-- 26 of 42 --

27
of that issue on an interlocutory appeal. Under such a rule, the resolution of any Rule 12(b)(6) issue
would then become fair game for Rule 23(f) review. The D.C. Circuit has rejected just such a “but-
for” approach to Rule 23(f) appeals. In In re: Lorazepam & Clorazepate Antitrust Litigation, 289
F.3d 98, 107 (D.C. Cir. 2002), the court refused to grant a Rule 23(f) appeal despite the petitioner’s
assertions that the plaintiff class members lacked antitrust standing to maintain the suit. In a passage
that is particularly pertinent to this case, the court explained that Rule 23(f) does not permit review
of every issue that, if resolved against the plaintiffs, would destroy the class action:
Mylan’s effort to recast its Rule 12(b)(6) arguments as a challenge to class
certification on the ground that a class of direct purchasers lacks antitrust standing,
is to no avail. That Mylan’s argument as to antitrust standing may dispose of the class
as a whole and thereby preclude a lawsuit by direct purchasers goes well beyond the
purpose of Rule 23(f) review because it is unrelated to the Rule 23 requirements. The
fact that Mylan’s challenge would be dispositive of the class action is not unlike a
variety of issues of law on the merits of a class action because of the very nature of
commonality; review of such issues would expand Rule 23(f) interlocutory review to
include review of any question raised in a motion to dismiss that may potentially
dispose of a lawsuit as to the class as a whole. This result would inappropriately mix
the issue of class certification with the merits of a case, which do not warrant
interlocutory review pursuant to Rule 23(f). What matters for purposes of Rule 23(f)
is whether the issue is related to class certification itself . . . .
Id. (internal citation omitted).
The relationship between the banks’ potential Section 10(b) liability and class certification in this
case is no closer than the relationship between antitrust standing and class certification described in
Lorazepam. Despite the majority’s claims to the contrary, as I explained above, whether the banks’
conduct can give rise to a Section 10(b) action under any circumstances need not be decided in order
to determine whether the plaintiffs are entitled to invoke Basic’s presumption of reliance, and it is
therefore not sufficiently related to any of Rule 23’s class action requirements to warrant
interlocutory review.

-- 27 of 42 --

7Section 10(b) also prohibits any “manipulative” device or contrivance, but I do not take issue with the
majority opinion’s conclusion that the banks’ alleged conduct in this case was not “manipulative,” as that term
is used in Section 10(b). See supra, at ___.
8Although this issue is commonly framed as whether liability can be imposed consistent with the Central
Bank decision, Central Bank itself establishes relatively little about the reach of Section 10(b). The plaintiffs
in that case alleged only that Central Bank aided and abetted a violation of Section 10(b); the plaintiffs did not
claim that the bank was liable as a primary violator of the statute. See Central Bank, 511 U.S. at 191
(“Respondents concede that Central Bank did not commit a manipulative or deceptive act within the meaning
of § 10(b).”).
28
II.
Even were it appropriate for this court to consider whether the banks’ alleged conduct can
constitute a primary violation of Section 10(b) and Rule 10b-5, the majority errs by defining the term
“deceptive” in Section 10(b) in an unduly restrictive fashion.
Based on language gathered from inapposite Supreme Court decisions, the majority opinion
concludes that the Supreme Court has defined “deceptive” in a manner that both departs from the
plain meaning of the word and reduces Section 10(b)’s flexible prohibition on “directly or indirectly”
using or employing any “deceptive device or contrivance”7 to a much more circumscribed prohibition
that applies only to specific misrepresentations or omissions in breach of an affirmative duty to speak.
Having arrived at this narrow definition of deceptive acts, the majority opinion then finds that,
because the banks did not make misrepresentations or have a duty to speak, Section 10(b) does not
reach their conduct, and imposing liability on them would be indistinguishable from the type of aiding
and abetting liability barred by Central Bank of Denver, N.A. v. First Interstate Bank of Denver,
N.A., 511 U.S. 164 (1994).8
Such a narrow interpretation of Section 10(b) is neither compelled nor justified by Supreme Court
precedent. The majority’s conclusion hinges almost entirely on its determination that a court
considering the reach of Section 10(b) cannot give the term “deceptive” (in the phrase “manipulative

-- 28 of 42 --

9Reference to the common, dictionary definition is, incidentally, the approach that the Supreme Court has
used to define the words “manipulative,” “device,” and “contrivance.” See Ernst & Ernst v. Hochfelder, 425
U.S. 185, 199 & nn.20-21 (1976).
10It is unsurprising that the Supreme Court’s decisions generally speak of misrepresentations or omissions,
as they are typically the means through which fraudulent conduct reaches the market. As Judge Kaplan
remarked in Parmalat, “[A]ny deceptive device or practice, other than one involving manipulative trading
activity, logically requires that somebody misrepresent or omit something at some point, even though the device
could entail more than the misrepresentation.” Parmalat, 376 F. Supp. 2d at 497.
11Also central to those cases, however, was the Chiarella court’s observation that entering into a transaction
on the basis of unequal information, while perhaps unfair, is not inherently fraudulent or deceptive in any sense
of those words. See Chiarella, 445 U.S. at 232 (“[N]ot every instance of financial unfairness constitutes
fraudulent activity under § 10(b).”); id. at 233 (“[N]either the Congress nor the Commission ever has adopted
a parity-of-information rule.”).
29
or deceptive device or contrivance”) its commonly understood, or dictionary, meaning,9 because the
Supreme Court has told us that a defendant acts deceptively only if it makes a misrepresentation or
remains silent in the face of a duty to disclose. The majority opinion relies primarily on Chiarella v.
United States, 445 U.S. 222 (1980), and United States v. O’Hagan, 521 U.S. 642 (1997), to support
this narrow view of the statutory language. The majority’s view is not implausible — some
statements in Chiarella, O’Hagan, and other cases can be read together to support the majority’s
position10 — but neither is it compelling, and the passages upon which the majority relies fall far short
of establishing that the Supreme Court has limited Section 10(b)’s prohibition on “deceptive”
practices exclusively to misrepresentations or omissions.
Neither Chiarella nor O’Hagan purported to hold that a person can never engage in “deceptive”
action through conduct, rather than speech or nondisclosure. In those cases, the Court held that a
person who trades on non-public information violates Section 10(b) only if he breaches a duty to
disclose, either to the source of the information or to the other party to the trade. See O’Hagan, 521
U.S. at 654-56; Chiarella, 445 U.S. at 235.11 Those cases, however, dealt only with insider trading

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30
— the defendants in those cases were prosecuted only for their silence, i.e., their failure to disclose
that they possessed material information that other investors in the market did not possess. Neither
of those cases involved allegations of a multi-party scheme to defraud. Here, by contrast, the
plaintiffs assert that the banks engaged in a scheme with Enron whereby they structured and entered
into wholly fraudulent transactions that were designed for the sole purpose of falsifying Enron’s
financial results. Nothing in Chiarella or O’Hagan forecloses the conclusion that Section 10(b) can
reach “deceptive” conduct that is not in the form of a misrepresentation or omission in cases, like this
one, that involve large-scale schemes to defraud.
Nor do any of the Supreme Court’s other decisions establish that fraudulent conduct is beyond the
reach of Section 10(b) simply because it affects the market only through the misrepresentations of
another participant in the fraudulent scheme. As noted above, Central Bank itself did not reach this
question because the plaintiffs in that case asserted only that the defendant’s conduct amounted to
aiding and abetting. Moreover, language from other of the Court’s opinions affirmatively indicates
that “deceptive” conduct need not always be in the form of a misrepresentation or an omission. See
Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 475-76 (1977) (explaining that the Court’s prior cases
all “included some element of deception,” and did not “support the proposition . . . that a breach of
fiduciary duty by majority stockholders, without any deception, misrepresentation, or nondisclosure,
violates the statute and the Rule”) (emphasis added).
Because the Supreme Court has not, as the majority opinion maintains, narrowly defined the term
“deceptive” to capture only direct misrepresentations or omissions, this court must construe the
disputed statutory language “not technically and restrictively, but flexibly to effectuate its remedial
purposes.” SEC v. Zandford, 535 U.S. 813, 819 (2002) (internal quotation marks omitted). In light

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12Although those courts that have found that Section 10(b) can reach conduct of the type alleged here have
developed different formulations of the standard for liability, see Simpson, 452 F.3d at 1048 & n.5, I agree
with the majority that any such distinctions are not relevant to this interlocutory appeal. See supra, at ___
n.25.
31
of this canon of interpretation, I see no basis for the majority opinion’s strict, narrow reading, and
I agree with the district court, the Ninth Circuit, Judge Kaplan, and the SEC that Section 10(b)’s
prohibition on directly or indirectly employing any “deceptive device or contrivance” can reach
secondary actors who, with scienter, engage in fraudulent transactions that are used to inflate an
issuer’s financial results. See Simpson, 452 F.3d at 1050 (“If a defendant’s conduct or role in an
illegitimate transaction has the principal purpose and effect of creating a false appearance of fact in
the furtherance of a scheme to defraud, then the defendant is using or employing a deceptive device
within the meaning of § 10(b).”); Enron, 2006 U.S. Dist. LEXIS 43146, at *167-74 (adopting SEC
view “that a deceptive act includes a transaction whose principal purpose and effect is to create a false
appearance of revenues, which can be accomplished by acts as well as by words”) (internal quotation
marks omitted); Parmalat, 376 F. Supp. 2d at 502-03.12
III.
The investment banks also assert that the district court erred by failing to apply this court’s
decision in Greenberg v. Crossroad Systems, Inc., 364 F.3d 657 (5th Cir. 2004), to determine
whether the plaintiffs could proceed under the fraud-on-the-market theory. In Greenberg, a panel
of this court held that plaintiffs who seek to invoke the fraud-on-the-market presumption of reliance
must show both that the misrepresentations made to the market were “non-confirmatory,” i.e., that
they did not simply confirm the market’s expectations, and that the misrepresentations actually

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13This required showing is in addition to Basic’s requirements that plaintiffs show that (1) there were
material, public misrepresentations; (2) the securities in question traded in an efficient market; and (3) the
plaintiffs traded in the securities in question between the date of the misrepresentations and the date on which
the truth was disclosed to the market. See Greenberg, 364 F.3d at 661.
32
affected the market price of the securities in question. See id. at 665-66.13
In its June 5, 2006 opinion, the district court declined to apply Greenberg to this case. The district
court concluded that Greenberg applies only to cases under Rule 10b-5(b) involving misrepresenta-
tions, not to cases like this one involving a scheme to defraud under Rule 10b-5(a) or (c). See Enron,
2006 U.S. Dist. LEXIS 43146, at *287-88. On appeal, the plaintiffs proffer several additional
reasons why Greenberg does not mandate reversal. Plaintiffs assert that (1) Greenberg does not apply
to cases like this one, where the alleged scheme to defraud stems from the defendants’ fraudulent
efforts to conceal from the market information that would show that the issuer is not actually meeting
the market’s expectations; (2) Greenberg should not be read to saddle plaintiffs with the burden of
showing that the alleged misrepresentations actually changed the market price of the issuer’s
securities; and (3) Greenberg’s requirements have, in any event, been satisfied in this case.
I agree with the plaintiffs that this court cannot use Greenberg to relieve the defendants of the
burden, allocated to them in Basic and in subsequent decisions of this court, of rebutting the fraud-on-
the-market presumption. In Basic itself, the Supreme Court was unmistakably clear that the
defendant has the burden of rebutting the presumption of reliance:
Any showing that severs the link between the alleged misrepresentation and either the
price received (or paid) by the plaintiff, or his decision to trade at a fair market price,
will be sufficient to rebut the presumption of reliance. For example, if [defendants]
could show that the “market makers” were privy to the truth about the merger
discussions here with Combustion, and thus that the market price would not have
been affected by their misrepresentations, the causal connection could be broken: the
basis for finding that the fraud had been transmitted through market price would be
gone.

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33
Basic, 485 U.S. at 248; see also id. at 245 (“Arising out of considerations of fairness, public policy,
and probability, as well as judicial economy, presumptions are also useful devices for allocating the
burdens of proof between parties.”). The clear import of Basic was not lost on this court. In Fine
v. American Solar King Corp., 919 F.2d 290, 299 (5th Cir. 1990), this court recognized that the
defendant could rebut Basic’s presumption of reliance only by showing: “(1) that the nondisclosures
did not affect the market price, or (2) that the Plaintiffs would have purchased the stock at the same
price had they known the information that was not disclosed; or (3) that the Plaintiffs actually knew
the information that was not disclosed to the market.”
This court’s more recent decisions, including Greenberg, have at least professed fidelity to Basic’s
burden-shifting approach. In Greenberg, the court described the fraud-on-the-market presumption
as follows:
Under this theory, reliance on the statement is rebuttably presumed if the plaintiffs can
show that (1) the defendant made public material misrepresentations, (2) the
defendant’s shares were traded in an efficient market, and (3) the plaintiffs traded
shares between the time the misrepresentations were made and the time the truth was
revealed. The Defendants may rebut this presumption by “[a]ny showing that severs
the link between the alleged misrepresentation and either the price received (or paid)
by the plaintiff, or his decision to trade at fair market price[.]”
Greenberg, 364 F.3d at 661-62 (quoting Basic, 485 U.S. at 247) (alterations in original) (internal
citations and footnote omitted). In parts IV and V of its opinion, however, the Greenberg panel
changed course and found that it is actually the plaintiffs’ affirmative burden to show, as a
prerequisite to the application of the presumption, that the defendant’s misrepresentation actually
moved the market price of the security in question:
We are satisfied that plaintiffs cannot trigger the presumption of reliance by simply
offering evidence of any decrease in price following the release of negative
information. Such evidence does not raise an inference that the stock's price was
actually affected by an earlier release of positive information. To raise an inference

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34
through a decline in stock price that an earlier false, positive statement actually
affected a stock's price, the plaintiffs must show that the false statement causing the
increase was related to the statement causing the decrease.
Id. at 665; see also id. at 663 (referring to the plaintiffs’ “burden in a fraud-on-the-market case to
show that a stock’s price was actually affected by an allegedly false statement”).
Greenberg appears to have mistakenly relied on this court’s earlier decision in Nathenson v.
Zonagen Inc., 267 F.3d 400 (5th Cir. 2001), as the authority for its decision to relieve securities
defendants of the burden of rebutting the fraud-on-the-market presumption. In Nathenson, a panel
of this court held that “where the facts properly considered by the district court reflect that the
information in question did not affect the price of the stock then the district court may properly deny
fraud-on-the-market based recovery.” Nathenson, 267 F.3d at 415. Nathenson did not, however,
expressly purport to convert the defendant’s burden of rebutting the fraud-on-the-market presumption
— by, for example, showing that the alleged misrepresentation had no effect on the market price of
the security — into a burden on the plaintiff to show that the misrepresentation did affect the price
of the security. Rather, the panel in Nathenson simply determined that a district court did not err
when it found that the allegations of the plaintiffs’ complaint affirmatively demonstrated that the
misrepresentations in question did not affect the price of the issuer’s stock. Id. at 414, 417-18. In
other words, the plaintiffs in Nathenson affirmatively pleaded themselves out of the fraud-on-the-
market presumption. Thus, Nathenson lends no support to the view that securities plaintiffs can
invoke the fraud-on-the-market presumption only if they first affirmatively demonstrate that the
market moved in response to the alleged misrepresentation.
Because the Greenberg panel’s decision to reallocate the burdens in fraud-on-the-market cases
conflicts not only with Basic, but also with earlier decisions of this court, such as Fine, I would follow

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14Greenberg also purports to require that the plaintiffs establish that the defendant’s false statement was
“non-confirmatory” — i.e., that it did not simply confirm the market’s preexisting expectations about, for
example, the size of the issuer’s quarterly earnings — before the fraud-on-the-market presumption can apply.
See Greenberg, 364 F.3d at 665-66. According to the Greenberg panel, the market cannot rely on allegedly
false “confirmatory” statements because “confirmatory information has already been digested by the market
and will not cause a change in the stock price.” Id.; see also id. at 666 (“Because the presumption of reliance
is based upon actual movement of the stock price, confirmatory information cannot be the basis for a fraud-on-
the-market claim.”).
This requirement from Greenberg appears to be based on a misinterpretation of this court’s earlier decision
in Nathenson. The Nathenson panel stated that, in certain “special circumstances,” such as when an issuer
provides false information that confirms the market’s expectations, the market can rely on those false
statements, even though the market price may not change at the time of the false “confirmatory” statement.
See Nathenson, 267 F.3d at 319. Rather, the statement’s effect on the market price will show only when the
falsity of the statement is later disclosed and the market price declines. See id.
This makes sense: if the market expects earnings of $1.00 per share, then the share price might not move
in response to a false public statement confirming that the issuer earned $1.00 per share (even though the issuer
in fact lost $.50 per share). The lack of movement does not, however, mean that the false statement had no
actual effect on the share price. Had the issuer truthfully disclosed its loss of $.50 per share to a market that
expected earnings of $1.00 per share, the share price would have declined, rather than remaining steady; the
false “confirmatory” statement actually affected the share price by keeping it artificially high in a situation
where a truthful statement would have caused the share price to decline. As the Nathenson court suggested,
the effect that the false statement had on the share price in such a case can be shown when the falsity of the
statement is disclosed and the share price declines. See id.
Thus, there appears to be no basis in Nathenson or otherwise for Greenberg’s conclusion that false
“confirmatory” statements can never support a claim proceeding under a fraud-on-the-market theory.
35
those decisions and hold that the defendant retains the burden of rebutting Basic’s presumption of
reliance. See, e.g., Modica v. Taylor, 465 F.3d 174, 183 (5th Cir. 2006) (“‘When panel opinions
appear to conflict, we are bound to follow the earlier opinion.’”) (quoting H&D Tire & Auto.-
Hardware, Inc. v. Pitney Bowes Inc., 227 F.3d 326, 330 (5th Cir. 2001)); cf. Unger, 401 F.3d at 322
n.4 (“[I]t is the Supreme Court’s job to overrule Basic, in the absence of outright conflict with the
Private Securities Litigation Reform Act.”) (citation omitted). The banks do not appear to have
satisfied that burden on the record before us.14
IV.
The banks argue that the district court erroneously determined that any defendant found to have
knowingly violated the securities laws could be held jointly and severally liable for all of the losses

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15Among the factors to be considered in determining whether Rule 23(b)(3)’s superiority requirement is
satisfied are “the difficulties likely to be encountered in the management of a class action.” Fed. R. Civ. P.
23(b)(3).
16See also Amy J. St. Eve & Bryce C. Pilz, The Fault Allocation Provisions of the Private Securities
Litigation Reform Act of 1995 — A Roadmap for Litigants and Courts, 3 N.Y.U. J.L. & Bus. 187, 194 (2006)
(stating that prior to the PSLRA, “[c]ourts recognized an implied theory of joint and several liability in Section
10(b) and Rule 10b-5 claims”); Marc I. Steinberg & Christopher D. Olive, Contribution and Proportionate
Liability Under the Federal Securities Laws in Multidefendant Securities Litigation After the Private Securities
Litigation Reform Act of 1995, 50 SMU L. Rev. 337, 339-40 (1996) (“[I]f co-defendants were adjudged liable
in a federal securities action, plaintiffs were entitled to recover the total judgment from any of the subject
defendants.”); Stuart M. Grant et al., The Devil Is in the Details: Application of the PSLRA’s Proportionate
Liability Provisions Is so Fraught With Uncertainty that They May Be Void for Vagueness, 1505 PLI/Corp.
83, 85 (2005) (“[Until 1995], each defendant found to have violated the federal securities laws could be
required to pay the full amount of any judgment to the plaintiff, regardless of whether that defendant was the
primary violator or merely one of many violators.”).
36
caused by Enron’s entire overarching fraudulent scheme. The banks assert that without this
erroneous legal conclusion, the district court could not have found that the proposed class satisfied
Rule 23(b)(3)’s predominance requirement or the manageability aspect of Rule 23(b)(3)’s superiority
requirement.15
Before the enactment of the PSLRA, the general rule in Section 10(b) actions was that defendants
found to have violated Section 10(b) or Rule 10b-5 were jointly and severally liable for all of the
plaintiff’s damages. See, e.g., Musik, Peeler & Garrett v. Employers Ins. of Wausau, 508 U.S. 286,
292 (1993) (noting that violators “share joint liability for that wrong under a remedial scheme
established by the federal courts”); TBG, Inc. v. Bendis, 36 F.3d 916, 927 (10th Cir. 1994); G.A.
Thompson & Co. v. Partridge, 636 F.2d 945, 963 (5th Cir. 1981); Ross v. Licht, 263 F. Supp. 395,
411 (S.D.N.Y. 1967).16 The legislative history of the PSLRA suggests that Congress was concerned
about the unfairness that could result from the application of the traditional joint and several liability
rule in many cases. See H.R. Rep. No. 104-369, at 37 (1995) (Conf. Rep.), 1995 U.S.C.C.A.N. 730,
736 (“Under current law, a single defendant who has been found to be 1% liable may be forced to

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37
pay 100% of the damages in the case.”); S. Rep. No. 104-98, at 20 (1995), 1995 U.S.C.C.A.N. 679,
699 (“Under joint and several liability, each defendant is liable for all of the damages awarded to the
plaintiff. Thus, a defendant found responsible for only 1% of the harm could be required to pay 100%
of the damages.”). To combat this perceived unfairness, as part of the PSLRA, Congress enacted 15
U.S.C. § 78u-4(f), which replaced the existing joint and several liability regime with one of
proportionate liability and limited joint and several liability to defendants who knowingly violate the
securities laws. 15 U.S.C. § 78u-4(f)(2)(A) provides that any defendant “against whom a final
judgment is entered in a private action shall be liable for damages jointly and severally only if the trier
of fact specifically determines that such covered person knowingly committed a violation of the
securities laws.” If no knowing violation is found, the statute provides that the defendant “shall be
liable solely for the portion of the judgment that corresponds to the percentage of responsibility of
that [defendant].” Id. § 78u-4(f)(2)(B).
The banks assert that, under these statutory provisions, a defendant who knowingly violates
Section 10(b) can be jointly and severally liable only for the damages caused by conduct in which that
defendant knowingly participated. Anything more, the banks argue, would run afoul of the PSLRA’s
requirement that the plaintiff must “prov[e] that the act or omission of the defendant alleged to violate
this chapter caused the loss for which the plaintiff seeks to recover damages,” id. § 78u-4(b)(4), and
would be tantamount to imposing liability for conspiracy to violate Section 10(b). See Dinsmore v.
Squadron, Ellenoff, Plesent, Sheinfeld & Sorkin, 135 F.3d 837, 841 (2d Cir. 1998) (stating that, post-
Central Bank, there is no cause of action for conspiracy to violate Section 10(b)). As the banks
would have it, then, even if they were found to have knowingly violated Section 10(b), they could
be held jointly and severally liable for only those damages that the plaintiffs suffered specifically as

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17The district court also correctly noted that there is a paucity of authority addressing this issue. See Enron,
2006 U.S. Dist. LEXIS 43146, at *222.
38
a result of the transactions in which the banks participated with Enron. The plaintiffs, on the other
hand, assert that because the alleged conduct of the banks, Enron, and others was all part of a single
fraudulent scheme, any knowing violator can be held jointly and severally liable for harm caused by
the other scheme participants.
In considering whether the proposed class satisfied the requirements of Rule 23(b)(3), the district
court rejected the banks’ argument and determined that the PSLRA permits courts to broadly impose
on knowing violators joint and several liability for all of the damages caused by a fraudulent scheme
as a whole:
The Court finds that a reasonable argument can be made that where a defendant
knowingly engaged in a primary violation of the federal securities law that was in
furtherance of a larger scheme, it should be jointly and severally liable for the loss
caused by the entire overarching scheme, including conduct of other scheme
participants about which it knew nothing. Indeed, express joint and several liability
in the statute is a meaningless concept if it is limited to a defendant’s own wrongdo-
ing. This Court acknowledges that it has previously questioned whether liability for
conduct caused by all the scheme participants is compatible with the “knowing”
requirement under § 78u-4(f)(2)(A). Nevertheless, the Court observes that the
PSLRA not only replaced joint and several liability with proportionate liability except
when the conduct was “knowing”, but established a right to contribution under §
78u-4(f)(8) to provide a remedy for unfairness, and, with a similar result, the
judgment reduction formula embodied in § 78u-4(f)(2)(A) [sic]. Accordingly this
Court concludes that Lead Plaintiff may pursue its claims for joint and several liability
against those Defendants found to be primary violators in the scheme, as a whole.
Enron, 2006 U.S. Dist. LEXIS 43146, at *222-23 (emphasis added) (internal citation omitted).17
The text of the PSLRA’s joint and several liability provision does not, on its own, resolve this
issue. Section 78u-4(f)(2)(A) does not purport to define the scope of joint and several liability;
rather, that provision simply places limits on who can be subject to joint and several liability. The

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39
statute’s legislative history, however, indicates that Congress intended that the potentialscope of joint
and several liability would remain the same as it was under the pre-PSLRA law. See H.R. Rep. No.
104-369, at 38, 1995 U.S.C.C.A.N. at 737 (“The Conference Report imposes full joint and several
liability, as under current law, on defendants who engage in knowing violations of the securities
laws.”); S. Rep. No. 104-98, at 22, 1995 U.S.C.C.A.N. at 701 (same).
Under the pre-PSLRA practice described above, any defendant found to have violated Section
10(b) or Rule 10b-5 was jointly and severally liable for all of the damages suffered by the plaintiff;
no distinction was made based on what portion of the plaintiff’s damages were caused by, or traceable
to, any specific defendant’s conduct. See TBG, Inc., 36 F.3d at 927 (“Liability in Rule 10b-5 cases
is strictly joint and several and is never allocated among individual defendants in deciding the
plaintiff’s claim.”); Ross, 263 F. Supp. at 411 (finding joint and several liability for Section 10(b)
claim because “the participation of each defendant was essential to the success of the scheme and
there is no way to apportion guilt”); see also 5 Alan R. Bromberg & Lewis D. Lowenfels, Bromberg
& Lowenfels on Securities Fraud and Commodities Fraud § 8.48 (2d ed.) (“[A]ny person found to
have any liability whatsoever, no matter how insignificant, could be liable to plaintiffs for the total
damages caused by all the misconduct.”). Accordingly, there appears to be no support for the banks’
assertion that any joint and several liability must be limited to joint and several liability for only the
damages caused directly by the specific transactions in which they participated with Enron.
Therefore, if the plaintiffs could succeed in proving at trial that the conduct alleged amounted to a
single, overarching fraudulent scheme (as opposed to, as the banks assert, a number of separate and
distinct fraudulent schemes), they should be permitted to recover damages jointly and severally from
any knowing violator, and the scope of that joint and several liability should not be limited to the

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18This court does not need to decide whether any defendant could be jointly and severally liable
for damages caused by the actions of others if the plaintiffs could not prove that all of the conduct
they allege was part of a single fraudulent scheme. In their brief, the plaintiffs concede that a
defendant can be jointly and severally liable only for the damages caused by a scheme in which it
participates.
40
damages caused directly by that defendant’s participation in the scheme.18
The banks are correct, however, that the scope of joint and several liability for a knowing violation
of Section 10(b) must be informed by the reach of Section 10(b) itself. In particular, it seems
fundamental that a defendant cannot be jointly and severally liable to a plaintiff unless that defendant
is, in fact, primarily liable to that plaintiff. In other words, assuming that a jury finds that the banks
knowingly violated Section 10(b) through their alleged participation with Enron in a scheme to
defraud Enron’s investors, they can be held jointly and severally liable for all of the scheme-related
losses suffered by any investor who was harmed in some way by their conduct, but the banks cannot
be held responsible for the losses of any investors to whom they are not primarily liable under Section
10(b).
In a multi-defendant securities class action such as this one, where presumably thousands of
investors were harmed by a number of different acts committed by different defendants over a period
of several years, not every plaintiff will have been harmed by every defendant. For example, if a
particular defendant, who was previously uninvolved with the scheme, first structured or participated
in a fraudulent transaction to falsely inflate Enron’s financial results near the end of the class period,
that defendant could not be held liable under Section 10(b) to any investors who purchased Enron
stock (the price of which may have already been inflated by the fraudulent acts of other defendants)
before that transaction. Since those investors purchased their stock before the defendant engaged
in any fraudulent conduct, they could not state a Section 10(b) claim against it, because they would

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19The plaintiffs expressly concede this point in their briefs, as they state that no defendant can be liable for
damages from before the date on which it violated Section 10(b).
20In the example given, if the defendant knowingly violated Section 10(b), it could be jointly and severally
liable to any investors who purchased Enron stock after its fraudulent conduct and before the disclosure of the
truth, even if those investors were also harmed by the conduct of other participants in the scheme.
41
be unable to show either that the defendant’s conduct caused them to purchase Enron stock at an
inflated price (the element of reliance, or transaction causation) or that it caused them any harm (the
element of loss causation). To make the defendant jointly and severally liable for the damages of
those investors would, therefore, effectively expand the defendant’s underlying Section 10(b) liability
to encompass plaintiffs who could not otherwise state a claim against it.19 It would simply be
inconsistent with the elements of a Section 10(b) claim to hold a knowing violator jointly and
severally liable for the damages of any plaintiff to whom it is not primarily liable under Section
10(b).20
That the fraud in this case is alleged to have been the result of a single, overarching scheme to
defraud does not alter this conclusion. After Central Bank, a defendant can be liable under Section
10(b) only if it commits a primary violation of the statute. See Central Bank, 511 U.S. at 191. Under
the district court’s open-ended interpretation of the PSLRA’s joint and several liability provision,
however, a defendant’s knowing violation of the securities laws could not only increase the damages
for which it can be liable, but could also make that defendant responsible for the damages of plaintiffs
who were harmed exclusively by the conduct of others, and to whom that defendant could not
otherwise be liable at all. This, in my view, exceeds the permissible bounds of primary liability under
Section 10(b) and amounts to the impermissible imposition of conspiracy liability. See Dinsmore, 135
F.3d at 841.
Because the district court’s class certification decision was based, in part, on this legal error, I

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42
would reverse the decision to certify the class on this ground only and remand the case to the district
court to consider whether, in light of the proper interpretation of the PSLRA’s joint and several
liability provision, the proposed class still satisfies the predominance and superiority requirements of
Rule 23(b)(3).
CONCLUSION
Consequently, I concur in the judgment reversing the district court’s certification order, but I do
so only for the reasons assigned herein. I would remand the case to that court for additional
consideration of whether, in light of this opinion, this case meets Rule 23’s requirements for class
certification.

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