Case 2:17-cv-00034-MCA-MAH Document 44 Filed 05/01/17 Page 1 of 23 PageID: 563

UNITED STATES DISTRICT COURT

DISTRICT OF NEW JERSEY

LISA KAROON and MANICKAM

GANESH, individually and on behalf of a
class comprised of common stock
shareholders of VirnetX,
Case No. 2:17-cv-00034-MCA-MAH
Plaintiffs,
Hon. Madeline Cox Arleo
- against -
Motion Return Date: May 1, 2017
THE GOLDMAN SACHS GROUP, INC.,
MERRILL LYNCH, PIERCE, FENNER &
SMITH, INC., CREDIT SUISSE (USA), ORAL ARGUMENT REQUESTED
INC., TD AMERITRADE, INC., PURSUANT TO L. CIV. R. 78.1(B)
CHARLES SCHWAB & CO., INC., BANK
OF NEW YORK MELLON CORP., and
DOES 1 through 100,

Defendants.

DEFENDANTS REPLY BRIEF IN FURTHER SUPPORT

OF THEIR JOINT MOTION TO DISMISS THE COMPLAINT

A. Ross Pearlson
CHIESA SHAHINIAN & GIANTOMASI PC
One Boland Drive
West Orange, New Jersey 07052
Counsel for Defendant
The Goldman Sachs Group, Inc.

(*Additional attorneys for Defendants

are listed on the next page)

May 1, 2017
Case 2:17-cv-00034-MCA-MAH Document 44 Filed 05/01/17 Page 2 of 23 PageID: 564

ADDITIONAL ATTORNEYS FOR DEFENDANTS

Richard C. Pepperman II (Admitted Pro Hac Vice) Philip S. Rosen

John G. McCarthy (Admitted Pro Hac Vice) ZEICHNER, ELLMAN & KRAUSE, LLP
SULLIVAN & CROMWELL LLP 103 Eisenhower Parkway
125 Broad Street Roseland, New Jersey 07068
New York, New York 10004 (973) 618-9100
Counsel for Defendant
The Goldman Sachs Group, Inc. Adam S. Hakki (Admitted Pro Hac Vice)
Daniel C. Lewis (Admitted Pro Hac Vice)
B. John Pendleton, Jr. Jeffrey D. Hoschander (Admitted Pro Hac
DLA PIPER LLP (US) Vice)
51 John F. Kennedy Parkway, Suite 120 SHEARMAN & STERLING LLP
Short Hills, New Jersey 07078 599 Lexington Avenue
Counsel for Defendant The Bank of New York New York, New York 10022
Mellon Corporation (212) 848-4000
Counsel for Defendant
Mark D. Knoll Credit Suisse (USA), Inc.
BRESSLER, AMERY & ROSS, P.C.
325 Columbia Turnpike
Florham Park, New Jersey 07932
Counsel for Defendant Merrill Lynch,
Pierce, Fenner & Smith Incorporated
Case 2:17-cv-00034-MCA-MAH Document 44 Filed 05/01/17 Page 3 of 23 PageID: 565

TABLE OF CONTENTS

Page

INTRODUCTION ...........................................................................................................................1

ARGUMENT ...................................................................................................................................3

I. SLUSA BARS ALL OF PLAINTIFFS CLAIMS ..............................................................3

II. THE COMPLAINTS GENERALIZED ALLEGATIONS DIRECTED AT

DEFENDANTS AS AN UNDIFFERENTIATED GROUP ARE INSUFFICIENT ...........7

III. PLAINTIFFS FAIL TO ALLEGE MARKET MANIPULATION .....................................9

IV. PLAINTIFFS FAIL TO STATE A RICO CLAIM ...........................................................10

A. Plaintiffs Do Not Adequately Allege a Pattern of Racketeering Activity .............10

B. Plaintiffs Do Not Adequately Allege Either a RICO Enterprise

or Defendants Knowing Participation in the Affairs of That Enterprise ..............10

C. Plaintiffs Do Not Adequately Allege a Direct Injury ............................................12

D. Plaintiffs Do Not Adequately Allege an Intent to Defraud....................................12

V. PLAINTIFFS FAIL TO STATE A CLAIM FOR CONSPIRACY ...................................13

VI. PLAINTIFFS COMMON-LAW CLAIMS FAIL AS A MATTER OF LAW ................14

A. Plaintiffs Fail to State a Claim for Unjust Enrichment ..........................................14

B. Plaintiffs Fail to State a Claim for Tortious Interference ......................................14

C. Plaintiffs Fail to State a Claim for Common-Law Fraud .......................................15

D. Plaintiffs Fail to State Claims for Aiding and Abetting

and Punitive Damages............................................................................................15

VII. THE COMPLAINT IMPROPERLY NAMES THREE PARENT COMPANIES

AS DEFENDANTS ...........................................................................................................16

CONCLUSION ..............................................................................................................................16
Case 2:17-cv-00034-MCA-MAH Document 44 Filed 05/01/17 Page 4 of 23 PageID: 566

TABLE OF AUTHORITIES

Page(s)

Cases

In re Amaranth Natural Gas Commodities Litig.,

587 F. Supp. 2d 513 (S.D.N.Y 2008)...................................................................................9, 13

Anderson v. Ayling,
396 F.3d 265 (3d Cir. 2005).....................................................................................................13

Anza v. Ideal Steel Supply Corp.,

547 U.S. 451 (2006) .................................................................................................................12

Ashcroft v. Iqbal,
556 U.S. 662 (2009) .................................................................................................................10

ATSI Commcns, Inc. v. Shaar Fund, Ltd.,

493 F.3d 87 (2d Cir. 2007).........................................................................................................2

Chadbourne & Parke LLP v. Troice,

134 S. Ct. 1058 (2014) ..................................................................................................... passim

Cohen v. Stevanovich,
722 F. Supp. 2d 416 (S.D.N.Y. 2010)................................................................................12, 16

Eli Lilly & Co. v. Roussel,

23 F. Supp. 2d 460 (D.N.J. 1998) ............................................................................................14

Endovasc, Ltd. v. J.P. Turner Co., LLC,

No. 02-7313, 2004 WL 634171 (S.D.N.Y. March 30, 2004) ....................................................8

Freeman Invs., L.P. v. Pac. Life Ins. Co.,

704 F.3d 1110 (9th Cir. 2013) ...................................................................................................5

GFL Advantage Fund, Ltd. v. Colkitt,

272 F.3d 189 (3d Cir. 2001).......................................................................................................9

In re Harbinger Capital Partners Funds Investor Litig.,

No. 12-1244, 2015 WL 1439520 (S.D.N.Y. March 30, 2015) ..................................................5

Holmes v. Sec. Investor Prot. Corp.,

503 U.S. 258 (1992) .................................................................................................................12

Ingris v. Borough of Caldwell,

No. 14-855, 2015 WL 3613499 (D.N.J. June 9, 2015) ..............................................................7

-ii-
Case 2:17-cv-00034-MCA-MAH Document 44 Filed 05/01/17 Page 5 of 23 PageID: 567

In re Ins. Brokerage Antitrust Litig.,

618 F.3d 300 (3d Cir. 2010).....................................................................................................11

Interchange State Bank v. Veglia,

668 A.2d 465 (N.J. Super. Ct. App. Div. 1995).......................................................................13

Kaufman v. i-Stat Corp.,

754 A.2d 1188 (N.J. 2000).......................................................................................................15

Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit,

547 U.S. 71 (2006) ......................................................................................................... 1, 4-5, 6

Nanopierce Techs., Inc. v. Southridge Capital Mgmt.,

No. 02-0767, 2008 WL 1882702 (S.D.N.Y. April 21, 2008) ....................................................9

Nekritz v. Canary Capital Partners, LLC,

No. 03-5081, 2004 WL 1462035 (D.N.J. Jan. 12, 2004) ...........................................................6

Printing Mart-Morristown v. Sharp Elecs. Corp.,

563 A.2d 31 (N.J. 1989)...........................................................................................................14

Reves v. Ernst & Young,

507 U.S. 170 (1993) .................................................................................................................11

Rowinski v. Salomon Smith Barney Inc.,

398 F.3d 294 (3d Cir. 2005).......................................................................................................6

Segal v. Fifth Third Bank, N.A.,

581 F.3d 305 (6th Cir. 2009) .....................................................................................................7

Sheeran v. Blyth Shipholding S.A.,

No. 14-5482, 2015 WL 9048979 (D.N.J. Dec. 16, 2015)..........................................................7

Taylor v. Westor Capital Grp.,

943 F. Supp. 2d 397 (S.D.N.Y. 2013)......................................................................................10

United States v. Bestfoods,

524 U.S. 51, 61 (1998) .............................................................................................................16

VRG Corp. v. GKN Realty,

641 A.2d 519 (N.J. 1994).........................................................................................................14

Statutes & Rules

15 U.S.C. 78bb(f)(1)(B) .................................................................................................... 1, 5, 6-7

17 C.F.R. 240.10b-5 .......................................................................................................... 1, 4, 5-6

Fed. R. Civ. P. 8 .........................................................................................................................7, 15

-iii-
Case 2:17-cv-00034-MCA-MAH Document 44 Filed 05/01/17 Page 6 of 23 PageID: 568

Fed. R. Civ. P. 9 .....................................................................................................................7, 8, 15

-iv-
Case 2:17-cv-00034-MCA-MAH Document 44 Filed 05/01/17 Page 7 of 23 PageID: 569

INTRODUCTION

Plaintiffs Opposition presents no avenue to avoid dismissal under SLUSA, which bars

any putative class action that, like this one, is based on state law and alleges manipulative

conduct or material misrepresentations in connection with the purchase or sale of a covered

security. Relying on Chadbourne & Parke LLP v. Troice, 134 S. Ct. 1058 (2014), Plaintiffs

argue that SLUSA does not apply here because the alleged fraud did not occur in connection

with the purchase or sale of a covered security. But while that case held that SLUSA does not

apply to purchases of uncovered securities, VirnetX common stock is indisputably a covered

security. And contrary to Plaintiffs contention that the in connection with element is not

satisfied because they already owned their shares when Defendants alleged manipulative

conduct occurred, SLUSA preempts such claims by holders of covered securities. Merrill

Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 76 (2006). Indeed, Plaintiffs merits

argument as to why their market manipulation allegations satisfy the elements of SEC

Rule 10b-5 (while wrong) underscores that their claims necessarily satisfy the parallel in

connection with element of SLUSA. The Court also should reject Plaintiffs suggestion that

SLUSA preempts only claims based on alleged misrepresentations, because the language of

SLUSA itself encompasses allegations of any manipulative or deceptive device, 15 U.S.C.

78bb(f)(1)(B), which Plaintiffs admittedly attempt to plead (although fail to do so adequately).

The Opposition does not dispute that dismissal under SLUSA would obviate the need for

the Court to address the Complaints other fatal pleading failures. But should the Court choose

to reach them, Plaintiffs Opposition does not refute the arguments in Defendants Opening Brief.

Instead, the Opposition simply recycles and rests upon the threadbare legal conclusions in the

Complaint, which is insufficient to withstand a motion to dismiss.

Case 2:17-cv-00034-MCA-MAH Document 44 Filed 05/01/17 Page 8 of 23 PageID: 570

First, Plaintiffs efforts to excuse their admitted group pleading do not satisfy the

requirement that they allege what manipulative acts were performed, which defendants

performed them [and] when the manipulative acts were performed. ATSI Commcns,

Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 102 (2d Cir. 2007).

Second, while Plaintiffs discussion of market manipulation underscores why dismissal

under SLUSA is warranted, Plaintiffs cannot satisfy the elements of market manipulation

through the Complaints bald assertions of naked short selling and painting the tape,

and the Opposition fails to identify any particularized allegations in the Complaint that

state an actionable claim for market manipulation.

Third, the Opposition fails to save Plaintiffs RICO claim by identifying specific factual

allegations in the Complaint, rather than impermissible legal conclusions, supporting

Plaintiffs unfounded assertions that (i) Defendants engaged in a pattern of racketeering

activity, (ii) Defendants participation in the DTCC somehow transformed that legitimate

business organization into a RICO enterprise, (iii) the decline of VirnetXs stock price

was the direct result of Defendants alleged trades, and (iv) Defendants acted with

specific intent to harm VirnetX shareholders.

Fourth, the Opposition fails to point to any factual allegations in the Complaint that plead

a plausible conspiracy among Defendants, offering no details of the supposed

conspiratorial agreement or what specific overt acts each Defendant purportedly

undertook in furtherance of that alleged conspiracy.

Fifth, the scant four pages that Plaintiffs devote to defending their legally deficient

common-law claims (Opp. at 36-39) do not remedy any of the flaws identified by

Defendants, such as Plaintiffs failure to plead that (i) they conferred any benefit on

2
Case 2:17-cv-00034-MCA-MAH Document 44 Filed 05/01/17 Page 9 of 23 PageID: 571

Defendants, as required to plead unjust enrichment; (ii) they would have received a

specific anticipated benefit but for Defendants conduct, as required to plead tortious

interference; and (iii) they reasonably relied on any alleged misrepresentation by

Defendants, as required to plead common-law fraud.

Finally, Plaintiffs fail to explain why the three parent Defendantsthe Goldman Sachs,

Credit Suisse and BNY Mellon entities named in the Complaintare proper Defendants,

making only vague references to their unidentified subsidiaries. Contrary to their

suggestion, Plaintiffs cannot wait until the conclusion of discovery to identify proper

Defendants.

ARGUMENT

I. SLUSA BARS ALL OF PLAINTIFFS CLAIMS.

Plaintiffs argue that SLUSA does not apply because (i) the claims of market

manipulation here are not in connection with the purchase or sale of a covered security and

(ii) the Complaint supposedly does not allege a material misrepresentation. Opp. at 1-2.

Plaintiffs do not dispute, however, that SLUSAs other elements are satisfied. They also do not

dispute that, if SLUSA does apply here, it applies equally to all of their claims.

In arguing that SLUSAs in connection with element is not satisfied here, Plaintiffs

assert that [t]he case at bar does not involve alleged misrepresentations that led to the purchase

or sale of securities by plaintiffs. Opp. at 4. Plaintiffs instead contend that they already

owned shares of VirnetX stock when the alleged fraud occurred and that therefore there is no

connection alleged between that supposed fraud and any decision to buy or sell VirnetX

common stock. Id. at 5 (emphasis in original). In advancing that argument, Plaintiffs state that

Chadbourne is directly on point. Id. at 1, 3. Contrary to Plaintiffs suggestion, however,

3
Case 2:17-cv-00034-MCA-MAH Document 44 Filed 05/01/17 Page 10 of 23 PageID: 572

Chadbourne did not overrule the prior Supreme Court or Third Circuit case law cited in

Defendants Opening Brief.

Rather, the question in Chadbourne was whether [SLUSA] encompasses a class action

in which the plaintiffs allege (1) that they purchase[d] uncovered securities (certificates of

deposit that are not traded on any national exchange), but (2) that the defendants falsely told the

victims that the uncovered securities were backed by covered securities. 134 S. Ct. at 1062

(emphasis in original). In deciding that narrow question, the Supreme Court interpreted the

phrase misrepresentation or omission of a material fact in connection with the purchase or sale

of a covered security. Id. at 1064. The Court held that [t]he phrase material fact in

connection with the purchase or sale suggests a connection that matters and that, for present

purposes, a connection matters where the misrepresentation makes a significant difference to

someones decision to purchase or to sell a covered security, not to purchase or to sell an

uncovered security, something about which [SLUSA] expresses no concern. Id. at 1066

(emphasis added). By contrast, Plaintiffs here contend that they bought and held VirnetX

common stock, an admittedly covered security, and they allege numerous violations of Section

10(b) of the Exchange Act and Rule 10b-5, not garden-variety fraud. Id. at 1068. Chadbourne

thus does not apply here.

Moreover, the Supreme Court has expressly held that SLUSA preempts so-called holder

claims, i.e., where alleged victims owned and continued to own securities that the defendants

fraud later caused to decrease in value. Dabit, 547 U.S. at 76 (internal quotation marks omitted).

Under Dabit, it is enough [for SLUSA preemption] that the fraud alleged coincide with a

securities transactionwhether by the plaintiff or by someone else. The requisite showing, in

other words, is deception in connection with the purchase or sale of any security, not

4
Case 2:17-cv-00034-MCA-MAH Document 44 Filed 05/01/17 Page 11 of 23 PageID: 573

deception of an identifiable purchaser or seller. Id. at 85 (emphasis added and citations

omitted). Since Dabit, courts have recognized that it does not matter for SLUSA purposes

whether the alleged misconduct led to the plaintiffs purchase or sale. See, e.g., Freeman Invs.,

L.P. v. Pac. Life Ins. Co., 704 F.3d 1110, 1117 (9th Cir. 2013) (rejecting argument that the in

connection with requirement is satisfied only if [plaintiffs] bought or sold a security in reliance

on misrepresentations as to its value). As one court recentlyafter the Supreme Courts

decision in Chadbourneexplained, Dabit . . . read SLUSA broadly to hold that preclusion

does not depend on the plaintiffs being the direct purchasers of the covered security, or the

plaintiffs and the defendant being in a buyer-seller relationship . . . . [T]he scope of what is

precluded is broad, and includes far more than claims that the plaintiffs themselves were induced

to take a position in the covered security. In re Harbinger Capital Partners Funds Investor

Litig., No. 12-1244, 2015 WL 1439520, at *6 (S.D.N.Y. March 30, 2015).1

Plaintiffs argument that their claims do not satisfy SLUSAs in connection with

element also ignores their contention that they have pled market manipulation in violation of

Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Opp. at 23-25; see also Compl.

81. According to the Complaint, [n]aked short selling and painting the tape, as was done by

Defendants, . . . violated Rule 10b-5 . . . promulgated under Section 10(b) of the Securities

Exchange Act of 1934. Compl. 81. In SLUSA, not only did Congress use the same words

[in connection with] as are used in 10(b) and Rule 10b-5, but it used them in a provision that

appears in the same statute as 10(b). Dabit, 547 U.S. at 86. Indeed, the relevant language of

SLUSA and Rule 10b-5 is identical. Compare 15 U.S.C. 78bb(f)(1)(B) with 17 C.F.R.

1
In Chadbourne, the Supreme Court stressed that [w]e do not here modify Dabit. 134
S. Ct. at 1066.

5
Case 2:17-cv-00034-MCA-MAH Document 44 Filed 05/01/17 Page 12 of 23 PageID: 574

240.10b-5. As the Supreme Court held, those identical words are presumed to have the

same meaning. Dabit, 547 U.S. at 86 (internal quotation marks omitted). Thus, because the

Complaint attempts to plead a device, scheme, or artifice to defraud . . . in connection with the

purchase or sale of [a] security in violation of Rule 10b-5, 17 C.F.R. 240.10b-5(a), Plaintiffs

claims necessarily also satisfy the same in connection with element of SLUSA.

Finally, Plaintiffs assert that their claims would not be preempted by the SLUSA even

under Third Circuit caselaw existing prior to [Chadbourne], because material misrepresentations

are not elements of plaintiffs claims. Opp. at 6. That assertion not only is belied by the

allegations of Plaintiffs own Complaint, but also fundamentally misunderstands the scope of

SLUSA. Although the allegations ultimately are inadequate, the Complaint attempts to plead

multiple material misrepresentations by Defendants. See Opening Br. at 12-13 (citing Compl.

3, 42, 45, 52, 65, 76, 83). It does not matter for SLUSA preemption whether

misrepresentation is a legal element of a claim, so long as the SLUSA prerequisites are alleged

in one form or another, as they are here. Rowinski v. Salomon Smith Barney Inc., 398 F.3d 294,

300 (3d Cir. 2005).

More fundamentally, allegations of a material misrepresentation are not necessary to give

rise to preemption under SLUSA, which also bars claims based solely on allegations of

manipulative conduct. See Nekritz v. Canary Capital Partners, LLC, No. 03-5081, 2004 WL

1462035, at *3 (D.N.J. Jan. 12, 2004) (even though the Complaint does not on its face assert

causes of action labeled as fraud or misrepresentation, because plaintiff alleged a scheme

involving . . . deception, SLUSA applied). Plaintiffs assertion that there can be no preemption

absent a material misrepresentation (Opp. at 6) ignores the plain language of SLUSA itself,

which also encompasses any manipulative or deceptive device or contrivance. 15 U.S.C.

6
Case 2:17-cv-00034-MCA-MAH Document 44 Filed 05/01/17 Page 13 of 23 PageID: 575

78bb(f)(1)(B). Even Plaintiffs own case law acknowledges that SLUSA applies to claims for

both market manipulation and material misrepresentation. See Opp. at 6 (citing Segal v. Fifth

Third Bank, N.A., 581 F.3d 305, 311 (6th Cir. 2009) (SLUSA applies when gravamen of the

complaint includes allegations of fraud, manipulation and scheme)).

II. THE COMPLAINTS GENERALIZED ALLEGATIONS DIRECTED AT

DEFENDANTS AS AN UNDIFFERENTIATED GROUP ARE INSUFFICIENT.

Plaintiffs concede, as they must, that Defendants are lumped together in the

Complaint, contending that such generalized group pleading is sufficient because Defendants

each engaged in identical conduct. Opp. at 17. But this does not excuse Plaintiffs of their

obligation to plead facts (i.e., which Defendant participated in which supposedly manipulative

trades and when), and it is insufficient simply to assert broadly that each Defendant engaged in

naked short selling and painting the tape. Id. Rather than providing each Defendant with

notice of its alleged misconduct, the Complaint improperly lumps Defendants together as a

group and asserts general common factual allegations against all of them. Sheeran v. Blyth

Shipholding S.A., No. 14-5482, 2015 WL 9048979, at *3 (D.N.J. Dec. 16, 2015) (dismissing

complaint under Rule 8); see also Ingris v. Borough of Caldwell, No. 14-855, 2015 WL 3613499,

at *16 (D.N.J. June 9, 2015) ([T]o the extent Plaintiff seeks to lump several defendants together

without setting forth what each particular defendant is alleged to have done, he has engaged in

impermissibly vague group pleading.). Plaintiffs thus fail to satisfy even the basic notice

pleading requirements of Rule 8, let alone the particularity requirements of Rule 9(b), which

apply here because every claim is predicated on allegations of fraud. See Compl. 73-75, 101,

104, 110, 116, 122, 128, 131, 134-36.

Next, Plaintiffs argue that even if the allegations might normally be considered

insufficient, they should be excused from the notice pleading requirements here because the

7
Case 2:17-cv-00034-MCA-MAH Document 44 Filed 05/01/17 Page 14 of 23 PageID: 576

necessary facts are within the exclusive control of Defendants and have been concealed by

Defendants. Opp. at 20. But even under the relaxed Rule 9(b) standard discussed in the case

law cited by Plaintiffs, see Opp. at 21 (citing Endovasc, Ltd. v. J.P. Turner Co., LLC, No. 02-

7313, 2004 WL 634171 (S.D.N.Y. March 30, 2004)), the Complaint still must allege what

manipulative acts were performed, which defendants performed them [and] when the

manipulative acts were performed. 2004 WL 634171, at *5. In dismissing the complaint there,

the Endovasc court explained:

The Complaint provides nothing more than generalized conclusory allegations of

a scheme, with a laundry list of terms purporting to identify what manipulative
acts were performed, all of which lump together the defendants. At no point in
the Complaint is a specific instance of trading by any defendant identified with
specificity. Such vague, conclusory allegations are insufficient.

Id. The courts language describes the Complaint in this case to a T. Plaintiffs citations to

Paragraphs 32, 43, 45, and 56 of the Complaint provide absolutely no connection between any

conduct by any particular Defendant and VirnetX stock.2

Lastly, Defendants alleged concealment is itself a fraud-based averment that must be

pled with particularity. Yet Plaintiffs only generally assert that Defendants concealed their

naked short sales through their relationship with the [DTCC] and its primary subsidiary,

National Securities Clearing Corporation. Compl. 33, 97. These allegations fail to plead

specific facts or identify any specific actions by any particular Defendant that resulted in the

supposed fraudulent concealment. The Opposition fails to explain how these (or any other)

allegations of the Complaint plead Defendants supposed concealment with the requisite

particularity.

2
Moreover, there are no allegations whatsoever in those paragraphs or throughout the
entire Complaint regarding specific actions committed by BNY Mellon.

8
Case 2:17-cv-00034-MCA-MAH Document 44 Filed 05/01/17 Page 15 of 23 PageID: 577

III. PLAINTIFFS FAIL TO ALLEGE MARKET MANIPULATION.

Plaintiffs do not dispute that all of their claims are predicated on allegations of market

manipulation. They also concede that to be actionable as market manipulation, short selling

must be willfully combined with something more to create a false impression of how market

participants value a security. Opp. at 7. Plaintiffs argue, however, that defendants naked

short selling, coupled with their dumping of VirnetX shares at key, critical moments of the day,

constitutes the something more. Id. at 8 (citing In re Amaranth Natural Gas Commodities

Litig., 587 F. Supp. 2d 513, 536 (S.D.N.Y 2008)).

Plaintiffs reliance on Amaranth is misplaced. The court in that case actually dismissed

claims for market manipulation against a family of hedge funds because plaintiffs failed to allege

any facts that create a strong inference of scienter. The court explained:

[A]lthough the Complaint contains a detailed description of the many trades in

which Amaranth acquired a substantial position in natural gas futures, it fails to
allege facts that give rise to a strong inference that Amaranth intended to
manipulate the market through these transactions. Plaintiffs allege that Amaranth
well knew that the acquisition of a large position would send an artificial signal
to the market. But entering into a legitimate transaction knowing that it will
distort the market is not manipulationonly intent, not knowledge, can transform
a legitimate transaction into manipulation . . . . Trading, in and of itself, does not
constitute market manipulation. Further, the details of the trade do not give rise
to a strong inference of scienter on behalf of any defendant. Without such an
inference, there is nothing to distinguish these transactions from legitimate trading.

587 F. Supp. 2d at 539-40 (emphasis added).3

3
By contrast, the Amaranth court declined to dismiss market manipulation claims against
two individuals who allegedly discussed influencing prices for specific trades. 587 F. Supp. 2d
at 540. The Complaint here contains no such allegations, nor does it identify a single trade by
any particular Defendant. Moreover, it does not allege that any particular Defendant injected
inaccurate information into the market or created a false impression of market activity. GFL
Advantage Fund, Ltd. v. Colkitt, 272 F.3d 189, 205 (3d Cir. 2001); see also Nanopierce Techs.,
Inc. v. Southridge Capital Mgmt., No. 02-0767, 2008 WL 1882702, at *2 (S.D.N.Y. April 21,
2008) (Mere sales do not inject false information into the marketplace, nor can a party inject
false information into the marketplace . . . simply by selling stock on the open market.).

9
Case 2:17-cv-00034-MCA-MAH Document 44 Filed 05/01/17 Page 16 of 23 PageID: 578

Similarly here, the Complaints generalized allegations of massive share dumping by

market participants (Opp. at 16 (citing Compl. 56)) are insufficient to convert legitimate

trading into market manipulation. See Taylor v. Westor Capital Grp., 943 F. Supp. 2d 397, 403-

404 (S.D.N.Y. 2013) (dismissal is appropriate if it is impossible to tell what manipulative acts

were performed, who performed them, when they were performed, what securities were involved,

and what effect this scheme had on the market for those securities). Because all of Plaintiffs

claims are predicated on an inadequately pled theory of market manipulation, the Complaint

should be dismissed in its entirety for this additional reason.

IV. PLAINTIFFS FAIL TO STATE A RICO CLAIM.

The Opposition largely ignores the many fatal defects in Plaintiffs RICO claim, each of

which independently mandates dismissal.

A. Plaintiffs Do Not Adequately Allege a Pattern of Racketeering Activity.

The Opposition does not address Defendants arguments that the Complaint fails to allege

a pattern of racketeering activity. Instead, Plaintiffs simply repeat the legal conclusions asserted

in the Complaint, baldly asserting that Defendants purported naked short selling and painting

the tape are alleged to be illegal. Opp. at 24. Such conclusory allegations are insufficient.

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) ([L]abels and conclusions or a formulaic

recitation of the elements of a cause of action will not do.).

B. Plaintiffs Do Not Adequately Allege Either a RICO Enterprise

or Defendants Knowing Participation in the Affairs of That Enterprise.

Plaintiffs concede that they must plead both a RICO enterprise and Defendants

knowing participation in the affairs of that enterprise. Opp. at 25, 27. Plaintiffs also

acknowledge that the supposed enterprise herethe DTCCplays a legitimate and important

role in stock transactions. Id. at 25. Plaintiffs nevertheless assert that [i]t is precisely because

10
Case 2:17-cv-00034-MCA-MAH Document 44 Filed 05/01/17 Page 17 of 23 PageID: 579

the DTCC also plays [such a] role in stock transactions that it can be a RICO enterprise. Id.

But Plaintiffs cannot satisfy the enterprise and participation elements of their RICO claim

simply by pointing to a legitimate entity with which Defendants have some connection. Indeed,

the Third Circuit rejected a similar theory in a case cited by Plaintiffs:

We agree with the District Court that the allegation that defendants took
advantage of an opportunity to meet provided by a legitimate enterprise in the
normal course of its business does not meanor plausibly implythat
defendants were participating in the conduct of the enterprise. By extension, the
allegation that defendants utilized such an opportunity to plot or discuss or
otherwise facilitate a pattern of racketeering activity does not, without more,
plausibly imply that defendants conducted the enterprises affairs through a
pattern of racketeering activity. If it did, any coffee house or hotel with
conference facilities could, as the District Court rightly recognized, be made into
a RICO enterprise merely by dint of the fact that racketeers used the facility as a
meeting place.

In re Ins. Brokerage Antitrust Litig., 618 F.3d 300, 380 (3d Cir. 2010) (cited in Opp. at 25).

In addition, Plaintiffs argument that they have satisfied the participation element by

alleging that Defendants act as DTCC member clearing firms and were associated with the

DTCC on a high, managerial and supervisory level is unavailing. See Opp. at 27-28. As

Plaintiffs own authority recognizes, the Complaint must allege that Defendants played some

part in directing the enterprises affairs through a pattern of racketeering activity. Reves v.

Ernst & Young, 507 U.S. 170, 177-79 (1993). Those allegations are entirely lacking here. The

Complaint instead alleges only that two of the DTCCs twenty directors were affiliated with

Defendants, neither of whom was a member of the DTCCs management. Compl. 87, 89.

Plaintiffs also fail to explain how this minimal involvement in the DTCC relates specifically to

the alleged racketeering activity. Mere association with an enterprise is not enough to satisfy

RICOs participation element. In re Ins. Brokerage Antitrust Litig., 618 F.3d at 370. There must

be a nexus between the conduct of [the enterprises] affairs and the pattern of racketeering

activity. Id. at 371. No such nexus is alleged here.

11
Case 2:17-cv-00034-MCA-MAH Document 44 Filed 05/01/17 Page 18 of 23 PageID: 580

C. Plaintiffs Do Not Adequately Allege a Direct Injury.

In arguing they have alleged a direct injury, Plaintiffs rely on the conclusory assertion

that [t]he lost value of VirnetX shares was a direct result of defendants naked short selling and

manipulative scheme to depress the price of the stock. Opp. at 29-30. But Plaintiffs fail to

plead any facts that plausibly allege that the decline in VirnetXs stock price over a four-year

period was the direct result of Defendants unspecified trading activity. Nor do Plaintiffs explain

how, in the absence of any alleged purchases and sales of VirnetX stock by them during the

relevant period, they will be able to prove causation and damages without resorting to the sort of

intricate, uncertain inquiries that can easily overrun[] RICO litigation. Anza v. Ideal Steel

Supply Corp., 547 U.S. 451, 460 (2006). Even accepting as true the Complaints allegations,

the link is too remote between the stock manipulation alleged and Plaintiffs purported harm to

sustain a RICO claim. Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258, 271 (1992).

D. Plaintiffs Do Not Adequately Allege an Intent to Defraud.

Plaintiffs concede that they must plead that Defendants acted with a specific intent to

defraud them. See Opp. at 31-32. In contending that they have satisfied this element, Plaintiffs

simply repeat their theory that fails to deliver create counterfeit shares that depress the price of

a security. Id. at 31. But Plaintiffs ignore the SECs position that fails to deliver do not create

counterfeit shares (see Opening Br. at 7-8), as well as the courts opinion in Cohen v.

Stevanovich, 722 F. Supp. 2d 416, 423-26, 428-29 (S.D.N.Y. 2010), which rejected this identical

theory. More importantly, Plaintiffs fail to identify any allegations in the Complaint that

12
Case 2:17-cv-00034-MCA-MAH Document 44 Filed 05/01/17 Page 19 of 23 PageID: 581

Defendants engaged in particular trades of VirnetX stock with the specific intent of depressing

the price of VirnetX stock, thereby injuring Plaintiffs.4

Plaintiffs also contend that they have adequately alleged scienter because the Complaint

asserts that defendants paint[ed] the tape by dumping huge blocks of VirnetX stock. Opp. at

31-32. But the Complaint does not actually allege any such activity by any particular Defendant.

In addition, without particularized allegations of an intent to defraud, legitimate trades do not by

themselves give rise to a strong inference of scienter on behalf of any defendant. Amaranth,

587 F. Supp. 2d at 539-40.

Plaintiffs further argue that scienter can be pled by alleging facts establishing a motive

and an opportunity to commit fraud. Opp. at 32. They speculate that Defendants were

motivated to (i) remove core costs from their securities lending business, (ii) ingratiate

themselves with their clients, (iii) enhance their competitiveness, and (iv) avoid costs that

would have been incurred by defendants to borrow stock. Id. at 33. But these purported

motivations could well apply to any entity engaged in prime brokerage activities and do not

suggest that any Defendant had a specific intent to defraud Plaintiffs. See Interchange State

Bank v. Veglia, 668 A.2d 465, 474 (N.J. Super. Ct. App. Div. 1995); Anderson v. Ayling, 396

F.3d 265, 270 (3d Cir. 2005).

V. PLAINTIFFS FAIL TO STATE A CLAIM FOR CONSPIRACY.

Plaintiffs concede that their RICO conspiracy and civil conspiracy claims require them to

allege (i) an underlying wrong, (ii) the details of the conspiratorial agreement, and (iii) specific

overt acts that each Defendant undertook in furtherance of the purported conspiracy. See Opp. at
4
Plaintiffs argue that allegations that Defendants generally engag[ed] in illegal naked
short selling bolsters their scienter allegations. Opp. at 33 (emphasis added). But the
Oppositions references to fines and other allegations completely unrelated to VirnetX stock add
nothing. See Opening Br. at 16-17.

13
Case 2:17-cv-00034-MCA-MAH Document 44 Filed 05/01/17 Page 20 of 23 PageID: 582

34-36. By merely repeating the facially inadequate allegations in the Complaint, see id.,

Plaintiffs do not address Defendants showing that (i) Plaintiffs fail adequately to allege any

underlying unlawful conduct, (ii) the Complaints conspiracy allegations are entirely conclusory,

and (iii) no specific overt acts are alleged to have been taken by any particular Defendant. See

Opening Br. at 28-29.

VI. PLAINTIFFS COMMON-LAW CLAIMS FAIL AS A MATTER OF LAW.

A. Plaintiffs Fail to State a Claim for Unjust Enrichment.

Plaintiffs argue that they have sufficiently pled unjust enrichment because a benefit

supposedly was conferred on Defendants when VirnetXs stock price was depressed. Opp. at 36

(citing no cases). That argument misses the point. Plaintiffs do not plead that they conferred any

benefit that unjustly enriched Defendants, which is a required element to state an unjust-

enrichment claim under New Jersey law. See VRG Corp. v. GKN Realty, 641 A.2d 519, 527 (N.J.

1994); Eli Lilly & Co. v. Roussel, 23 F. Supp. 2d 460, 496 (D.N.J. 1998). Plaintiffs claim for

unjust enrichment thus fails in its entirety.

B. Plaintiffs Fail to State a Claim for Tortious Interference.

Plaintiffs argue that they had a reasonable expectation of economic advantage because

their purchases of VirnetX stock assured [them] that they would reap financial benefit if the

market value of their stock increased. Opp. at 37 (citing no cases). But Plaintiffs fail to plead

any specific anticipated benefit or that, if there had been no interference[,] there was a

reasonable probability that [they] would have received the anticipated economic benefits.

Printing Mart-Morristown v. Sharp Elecs. Corp., 563 A.2d 31, 37 (N.J. 1989). They also fail to

plead malice or scienter or that Defendants had knowledge of Plaintiffs purported economic

advantage or contract(s). See Opp. at 37. Rather than respond to Defendants arguments,

Plaintiffs simply assure the Court that more than ample facts are pled without identifying what

14
Case 2:17-cv-00034-MCA-MAH Document 44 Filed 05/01/17 Page 21 of 23 PageID: 583

those supposed ample facts are. Id. That conclusory assurance is insufficient to plead a claim

for tortious interference.

C. Plaintiffs Fail to State a Claim for Common-Law Fraud.

Plaintiffs do not dispute that they must plead, among other things, reasonable reliance to

state a common-law fraud claim under New Jersey law. Opp. at 37. Plaintiffs assert that this

element is met because they relied upon the integrity of the securities market (id.), which they

assert is a permissible theory of reliance in manipulation cases under New Jersey law (id. at 38).

But the New Jersey Supreme Court has squarely rejected the fraud on the market theory of

reliance in language that is not limited to claims for misrepresentations or omissions:

Accepting fraud on the market as proof of reliance in a New Jersey common-law

fraud action would undercut the public interest in preventing forum-shopping,
weaken our law of indirect reliance, and run contrary to the policy direction of the
Legislature and Congress. We decline to expand our law regarding satisfaction of
the reliance element of a fraud action on the basis of a complex economic theory
that has not been satisfactorily proven. In so holding, we note that plaintiff had
available to her an adequate federal remedy perfectly suited to her complaint. She
chose not to pursue it.

Kaufman v. i-Stat Corp., 754 A.2d 1188, 1200-01 (N.J. 2000). That decision is fatal to Plaintiffs

theory of reliance, requiring that their common-law fraud claim be dismissed.

D. Plaintiffs Fail to State Claims for Aiding and Abetting and Punitive Damages.

Plaintiffs argue that [t]here are no grounds to dismiss the aiding and abetting claim on

the basis that no underlying claim exists because valid RICO and other state claims have been

alleged. Opp. at 39. For the reasons explained above, however, Plaintiffs fail to allege valid

underlying claims. With respect to their claim for punitive damages, Plaintiffs argue that [i]t

will be up to a jury to determine whether . . . defendants acted with actual malice. Id. That

contention, which ignores the pleading requirements of Rules 8 and 9, is wrong. Plaintiffs

claims for aiding and abetting and punitive damages therefore both fail.

15
Case 2:17-cv-00034-MCA-MAH Document 44 Filed 05/01/17 Page 22 of 23 PageID: 584

VII. THE COMPLAINT IMPROPERLY NAMES THREE PARENT COMPANIES

AS DEFENDANTS.

Plaintiffs argue that The Goldman Sachs Group, Inc., Credit Suisse (USA), Inc., and The

Bank of New York Mellon Corporation are proper defendants because, through the use of

unidentified subsidiaries, they concealed their illegal trading activity. Opp. at 39. As the court

in Cohen noted, however, these parent corporations are not proper party defendants if they were

not engaged in the activities alleged in the Complaint. 722 F. Supp. 2d at 421 n.1. It also is a

general principle of corporate law that a parent corporation is not liable for the acts of its

subsidiaries. Id. (citing United States v. Bestfoods, 524 U.S. 51, 61 (1998)). Plaintiffs cannot

wait until the conclusion of discovery to determine whether one or more subsidiaries should be

joined in this action or substituted for [Defendants]. Opp. at 40. The Complaint must identify

proper defendants, and Plaintiffs have failed to do so.

CONCLUSION

For the foregoing reasons, as well as those in Defendants Opening Brief, the Complaint

should be dismissed in its entirety for lack of subject-matter jurisdiction because Plaintiffs

claims are barred by SLUSA. In the alternative, the Complaint fails to state a claim upon which

relief can be granted, and thus should be dismissed with prejudice.

Dated: May 1, 2017 Respectfully submitted,

/s/ A. Ross Pearlson

A. Ross Pearlson
CHIESA SHAHINIAN & GIANTOMASI PC
One Boland Drive
West Orange, New Jersey 07052

16
Case 2:17-cv-00034-MCA-MAH Document 44 Filed 05/01/17 Page 23 of 23 PageID: 585

Richard C. Pepperman II (Admitted Pro Hac Vice)

John G. McCarthy (Admitted Pro Hac Vice)
SULLIVAN & CROMWELL LLP
125 Broad Street
New York, New York 10004
Counsel for Defendant
The Goldman Sachs Group, Inc.

B. John Pendleton, Jr.

DLA PIPER LLP (US)
51 John F. Kennedy Parkway, Suite 120
Short Hills, New Jersey 07078
Counsel for Defendant
The Bank of New York Mellon Corporation

Mark D. Knoll
BRESSLER, AMERY & ROSS, P.C.
325 Columbia Turnpike
Florham Park, New Jersey 07932
Counsel for Defendant Merrill Lynch,
Pierce, Fenner & Smith Incorporated

Philip S. Rosen
ZEICHNER, ELLMAN & KRAUSE, LLP
103 Eisenhower Parkway
Roseland, New Jersey 07068
(973) 618-9100

Adam S. Hakki (Admitted Pro Hac Vice)

Daniel C. Lewis (Admitted Pro Hac Vice)
Jeffrey D. Hoschander (Admitted Pro Hac Vice)
SHEARMAN & STERLING LLP
599 Lexington Avenue
New York, New York 10022
(212) 848-4000
Counsel for Defendant
Credit Suisse (USA), Inc.

17