II. ARGUMENT

A. The Language Chosen by the Drafters in Adapting Section 25400 from Section 9(a) of the Securities Exchange Act of 1934 Underscores Its Territorial Limitations

B. The Context, Historical Circumstances and Legislative History of Section 25400 Demonstrate That It Was Not Intended to Have Nationwide Application

1. The Legislative History Demonstrates that Section 25400 Was Drafted to Avoid Duplication of the 1934 Act

2. The Legislative History Demonstrates that Section 25400 Was Intended to Protect California Investors by Regulating Sales of Securities in California's Intrastate Market

3. Plaintiffs' Construction of Section 25400 Contravenes Nearly Thirty Years of Settled Practice in California

4. Plaintiffs' Construction of Section 25400 Would Upset the Policy Balance Struck in 1968 and Lead to Extreme Results Not Intended by the Legislature

C. Plaintiffs' Interpretation of Section 25400 Violates the Commerce Clause

1. Plaintiffs' Construction Violates the Commerce Clause by Allowing California to Directly Regulate Non-Intrastate Transactions

a. Plaintiffs' Construction Regulates Commerce Occurring Outside California

b. Plaintiffs' Construction Controls Conduct Beyond California's Boundaries

c. Plaintiffs' Construction Has the Practical Effect of Producing Inconsistent Legislation

2. Plaintiffs' Construction of Section 25400 Would Also Result in an Indirect Violation of The Commerce Clause

D. Federal Due Process Prohibits Nationwide Application of Sections 25400 and 25500

E. Because Nationwide Application of Section 25400 Prohibits Conduct the Reform Act Explicitly Seeks to Encourage, It Is Preempted

1. Section 25400 Stands as an Obstacle to the Accomplishment of the Reform Act's Purposes

a. The Purpose of the Reform Act

b. The Muzzling Effect of Section 25400

2. Other State Courts Have Acknowledged Preemption Under Similar Circumstances

3. The 1934 Act's Preemption of Inconsistent State Laws Is Firmly Established in the Decisions of the United States Supreme Court

4. Savings Clauses Do Not Permit Conflicting State Statutes

Cases

Allstate Ins. Co. v. Hague
     449 U.S. 302, rh'g denied, (1981) 450 U.S. 971

Arizona Corp. Comm'n v. Media Products, Inc.
     (Ariz.Ct.App. 1988) 158 Ariz. 463, [763 P.2d 527]

Arthur Young & Co. v. Mariner Corp.
     (Fla.Ct.App. 1994) 630 So.2d 1199

Baltimore Football Club, Inc. v. Superior Court
     (1985) 171 Cal.App.3d 352

Banton v. Hackney
     (1990) 557 So.2d 807

Barnett Bank of Marion County v. Nelson
     (1996) 116 S.Ct. 1103

Benjamin v. Cablevision Programming Investments
     (1986) 114 Ill.2d 150, [499 N.E.2d 1309]

BMW of North America, Inc. v. Gore
     (1996) 116 S. Ct. 1589

Brown-Forman Distillers Corp. v. New York State Liquor Authority
     (1986) 476 U.S. 573

Condon v. McHenry
     (Cal.Ct.App. Jun. 27, 1997) 97 C.D.O.S. 5071

CTS Corp. v. Dynamics Corp. of America
     (1987) 481 U.S. 69

Dahl v. Charles Schwab & Co., Inc.
     (Minn. 1996) 545 N.W.2d 918
     cert. denied (1997) 117 S.Ct. 176

Dyna-Med, Inc. v. Fair Employment & Housing Comm'n
     (1987) 43 Cal.3d 1379

Edgar v. MITE Corp.
     (1982) 457 U.S. 624

Eirman v. Olde Discount Corp.
     (Fla. App. May 21, 1997) 1997 Fla. App. LEXIS 5646

Enntex Oil & Gas Co. v. State of Texas
     (1978) 560 S.W.2d 494

Farmers & Merchants Bank v. Hamilton Hotel Partners
     (W.D.Ark. 1988) 702 F.Supp. 1417

Fickinger v. C.I. Planning Corp.
     (E.D.Pa. 1982) 556 F.Supp. 434

Foster v. Alex
     (1991) 213 Ill.App.3d 1001

Freedom Newspapers, Inc. v. Orange County Employees Retirement System Board of Directors
     (1993) 6 Cal.4th 821

Freightliner Corp. v. Myrick
     (1995) 514 U.S. 280, 115 S.Ct. 1483

Gade v. National Solid Wastes Mgmt Ass'n
     (1992) 505 U.S. 88

Gilman v. BHC Securities, Inc.
     (S.D.N.Y. Dec. 18, 1995) [1995-1996 Transfer Binder]
     Fed.Sec.L.Rep. (CCH) ¶ 99,051

Great Western United Corp. v. Kidwell
     (5th Cir. 1978) 577 F.2d 1256, 1280, rev'd on other grounds
     sub nom. Leroy v. Great Western United Corp. (1979) 443 U.S. 173

Guice v. Charles Schwab & Co., Inc.
     (N.Y. 1996) 89 N.Y.2d 31 [674 N.E. 2d 282]
     cert. denied (1997) 117 S. Ct. 1250

Haberman v. Washington Public Power Supply System
     (Wash. 1987) 109 Wash.2d 107

Healy v. Beer Institute, Inc.
     (1989) 491 U.S. 324

Hockey v. Medhekar
     (N.D.Cal. April 15, 1997) 1997 WL 203704

Hyde Park Partners, L.P. v. Connolly
     (1st Cir. 1988) 839 F.2d 837

In re Activision Sec. Litig.
     (N.D.Cal. 1985) 621 F.Supp. 415
     reconsid. denied (N.D.Cal. 1985) [1985-1986 Transfer Binder]
     Fed.Sec.L.Rep. (CCH) ¶ 92,397

In re Catanella and E.F. Hutton & Co. Sec. Litig.
     (E.D.Pa. 1984) 583 F.Supp. 1388

In re Victor Technologies Securities Litig.,
     (N.D. Cal. 1984) 102 F.R.D. 53
     aff'd, (9th Cir. 1986) 792 F.2d 862

International Paper Co. v. Ouellette
     (1987) 479 U.S. 481

Kelly v. Primeline Advisory, Inc.
     (Kan. 1995), 256 Kan. 978 [889 P.2d 130]

Kennecott Corp. v. Smith
     (3d Cir. 1980) 637 F.2d 181

L.P. Acquisition Co. v. Tyson
     (6th Cir. 1985) 772 F.2d 201

Lintz v. Carey Manor Ltd.
     (W.D.Va. 1985) 613 F.Supp. 543

McFarland v. Memorex Corp.
     (N.D.Cal. 1982) 96 F.R.D. 357

McKey v. Charles Schwab & Co., Inc.
     (1996) Case No. BC139314, Los Angeles County Superior Court

Mirkin v. Wasserman
     (1993) 5 Cal.4th 1082

National City Lines, Inc. v. LLC Corp.
     (8th Cir. 1982) 687 F.2d 1122

North Star Int'l v. Arizona Corp. Comm'n
     (9th Cir. 1983) 720 F.2d 578

Orman v. Charles Schwab & Co., Inc.
     (Ill.App. 1996) 285 Ill.App.3d 937, [676 N.E.2d 241],
     appeal allowed (1997) 172 Ill.2d 554 [679 N.E.2d 381]

Osborne v. Subaru of America, Inc.
     (1988) 198 Cal.App.3d 646

People v. Superior Court
     (1996) 13 Cal.4th 497

Peterson v. Ball
     (1931) 211 Cal. 461

Petition of Commission on Governorship of California
     (1979) 26 Cal.3d 110

Phillips Petroleum Co. v. Shutts
     (1985) 472 U.S. 797, cert. denied, (1988) 487 U.S. 1223

Pippenger v. McQuick's Oilube, Inc.
     (S.D.Ind. 1994) 854 F.Supp. 1411

Price v. Long Realty, Inc.
     (1993) 199 Mich. App. 461

Reno v. A.C.L.U.
     (U.S., 1997) 1997 U.S. LEXIS 4037

Rosenthal v. Dean Witter Reynolds, Inc.
     (Colo. 1995) 908 P.2d 1095

Scholes v. Tomlinson,
     (N.D. Ill. 1992) 145 F.R.D. 485

Simms Investment Co. v. E.F. Hutton Co.
     (M.D.N.C. 1988) 699 F.Supp. 543

South Carolina Nat'l Bank v. Stone
     (D.S.C. 1991) 139 F.R.D. 325

State ex rel. Corbin v. Goodrich
     (Ariz.Ct.App. 1986) 151 Ariz. 118, [726 P.2d 215]

State v. Hayes
     (Fla. App. 1975) 305 So.2d 819

Sullivan v. First Affiliated Securities, Inc.
     813 F.2d 1368, cert. denied (1987) 484 U.S. 850

Terry v. Yamashita
     (D. Hawaii 1986) 643 F.Supp. 161

Upton v. Trinidad Petroleum Corp.
     (1979) 468 F.Supp. 330

Van de Kamp v. Gumbiner
     (1990) 221 Cal.App.3d 1260

Walnut Creek Manor v. Fair Employment & Housing Comm'n
      (1991) 54 Cal.3d 245

Weinberger v. Jackson
     (N.D.Cal. 1984) 102 F.R.D. 839

Whalen v. Connelly
     (Iowa 1996) 545 N.W.2d 284

Allstate Ins. Co. v. Hague
     449 U.S. 302, rh'g denied, (1981) 450 U.S. 971

Arizona Corp. Comm'n v. Media Products, Inc.
     (Ariz.Ct.App. 1988) 158 Ariz. 463, [763 P.2d 527]

Arthur Young & Co. v. Mariner Corp.
     (Fla.Ct.App. 1994) 630 So.2d 1199

Baltimore Football Club, Inc. v. Superior Court
     (1985) 171 Cal.App.3d 352

Banton v. Hackney
     (1990) 557 So.2d 807

Barnett Bank of Marion County v. Nelson
     (1996) 116 S.Ct. 1103

Benjamin v. Cablevision Programming Investments
     (1986) 114 Ill.2d 150, [499 N.E.2d 1309]

BMW of North America, Inc. v. Gore
     (1996) 116 S. Ct. 1589

Brown-Forman Distillers Corp. v. New York State Liquor Authority
     (1986) 476 U.S. 573

Condon v. McHenry
     (Cal.Ct.App. Jun. 27, 1997) 97 C.D.O.S. 5071

CTS Corp. v. Dynamics Corp. of America
     (1987) 481 U.S. 69

Dahl v. Charles Schwab & Co., Inc.
     (Minn. 1996) 545 N.W.2d 918
     cert. denied (1997) 117 S.Ct. 176

Dyna-Med, Inc. v. Fair Employment & Housing Comm'n
     (1987) 43 Cal.3d 1379

Edgar v. MITE Corp.
     (1982) 457 U.S. 624

Eirman v. Olde Discount Corp.
     (Fla. App. May 21, 1997) 1997 Fla. App. LEXIS 5646

Enntex Oil & Gas Co. v. State of Texas
     (1978) 560 S.W.2d 494

Farmers & Merchants Bank v. Hamilton Hotel Partners
     (W.D.Ark. 1988) 702 F.Supp. 1417

Fickinger v. C.I. Planning Corp.
     (E.D.Pa. 1982) 556 F.Supp. 434

Foster v. Alex
     (1991) 213 Ill.App.3d 1001

Freedom Newspapers, Inc. v.
     Orange County Employees Retirement System Board of Directors
     (1993) 6 Cal.4th 821

Freightliner Corp. v. Myrick
     (1995) 514 U.S. 280, 115 S.Ct. 1483

Gade v. National Solid Wastes Mgmt Ass'n
     (1992) 505 U.S. 88

Gilman v. BHC Securities, Inc.
     (S.D.N.Y. Dec. 18, 1995) [1995-1996 Transfer Binder]
     Fed.Sec.L.Rep. (CCH) ¶ 99,051

Great Western United Corp. v. Kidwell
     (5th Cir. 1978) 577 F.2d 1256, 1280, rev'd on other grounds
     sub nom. Leroy v. Great Western United Corp. (1979) 443 U.S. 173

Guice v. Charles Schwab & Co., Inc.
     (N.Y. 1996) 89 N.Y.2d 31 [674 N.E. 2d 282]
     cert. denied (1997) 117 S. Ct. 1250

Haberman v. Washington Public Power Supply System
     (Wash. 1987) 109 Wash.2d 107

Healy v. Beer Institute, Inc.
     (1989) 491 U.S. 324

Hockey v. Medhekar
     (N.D.Cal. April 15, 1997) 1997 WL 203704

Hyde Park Partners, L.P. v. Connolly
     (1st Cir. 1988) 839 F.2d 837

In re Activision Sec. Litig.
     (N.D.Cal. 1985) 621 F.Supp. 415
     reconsid. denied (N.D.Cal. 1985) [1985-1986 Transfer Binder]
     Fed.Sec.L.Rep. (CCH) ¶ 92,397

In re Catanella and E.F. Hutton & Co. Sec. Litig.
     (E.D.Pa. 1984) 583 F.Supp. 1388

In re Victor Technologies Securities Litig.,
     (N.D. Cal. 1984) 102 F.R.D. 53
     aff'd, (9th Cir. 1986) 792 F.2d 862

International Paper Co. v. Ouellette
     (1987) 479 U.S. 481

Kelly v. Primeline Advisory, Inc.
     (Kan. 1995), 256 Kan. 978 [889 P.2d 130]

Kennecott Corp. v. Smith
     (3d Cir. 1980) 637 F.2d 181

L.P. Acquisition Co. v. Tyson
     (6th Cir. 1985) 772 F.2d 201

Lintz v. Carey Manor Ltd.
     (W.D.Va. 1985) 613 F.Supp. 543

McFarland v. Memorex Corp.
     (N.D.Cal. 1982) 96 F.R.D. 357

McKey v. Charles Schwab & Co., Inc.
     (1996) Case No. BC139314, Los Angeles County Superior Court

Mirkin v. Wasserman
     (1993) 5 Cal.4th 1082

National City Lines, Inc. v. LLC Corp.
     (8th Cir. 1982) 687 F.2d 1122

North Star Int'l v. Arizona Corp. Comm'n
     (9th Cir. 1983) 720 F.2d 578

Orman v. Charles Schwab & Co., Inc.
     (Ill.App. 1996) 285 Ill.App.3d 937, [676 N.E.2d 241],
     appeal allowed (1997) 172 Ill.2d 554 [679 N.E.2d 381]

Osborne v. Subaru of America, Inc.
     (1988) 198 Cal.App.3d 646

People v. Superior Court
     (1996) 13 Cal.4th 497

Peterson v. Ball
     (1931) 211 Cal. 461

Petition of Commission on Governorship of California
     (1979) 26 Cal.3d 110

Phillips Petroleum Co. v. Shutts
     (1985) 472 U.S. 797, cert. denied, (1988) 487 U.S. 1223

Pippenger v. McQuick's Oilube, Inc.
     (S.D.Ind. 1994) 854 F.Supp. 1411

Price v. Long Realty, Inc.
     (1993) 199 Mich. App. 461

Reno v. A.C.L.U.
     (U.S., 1997) 1997 U.S. LEXIS 4037

Rosenthal v. Dean Witter Reynolds, Inc.
     (Colo. 1995) 908 P.2d 1095

Scholes v. Tomlinson,
     (N.D. Ill. 1992) 145 F.R.D. 485

Simms Investment Co. v. E.F. Hutton Co.
     (M.D.N.C. 1988) 699 F.Supp. 543

South Carolina Nat'l Bank v. Stone
     (D.S.C. 1991) 139 F.R.D. 325

State ex rel. Corbin v. Goodrich
     (Ariz.Ct.App. 1986) 151 Ariz. 118, [726 P.2d 215]

State v. Hayes
     (Fla. App. 1975) 305 So.2d 819

Sullivan v. First Affiliated Securities, Inc.
     813 F.2d 1368, cert. denied (1987) 484 U.S. 850

Terry v. Yamashita
     (D. Hawaii 1986) 643 F.Supp. 161

Upton v. Trinidad Petroleum Corp.
     (1979) 468 F.Supp. 330

Van de Kamp v. Gumbiner
     (1990) 221 Cal.App.3d 1260

Walnut Creek Manor v. Fair Employment & Housing Comm'n
      (1991) 54 Cal.3d 245

Weinberger v. Jackson
     (N.D.Cal. 1984) 102 F.R.D. 839

Whalen v. Connelly
     (Iowa 1996) 545 N.W.2d 284
 

United States Constitution
     Amendment 14, §1 (Due Process Clause)
     Article I, § 8 (Commerce Clause)
     Article IV, § 1 (Full Faith and Credit Clause)
     Article VI, cl. [2] (Supremacy Clause)
 

15 U.S.C.
     § 77a
     § 77p
     § 77z-2
     § 78bb
     § 78i(a)
     § 78i(a)(1)-(5)
     § 78m(d)-(e)
     § 78n(d)-(f)
     § 78u-5
 

California Code of Civil Procedure
     Section 382
 

California Corporations Code
     Section 25008
     Section 25400
     Section 25400(a)-(e)
     Section 25401
     Section 25402
     Section 25500
     Section 25501
     Section 25502
 

I. INTRODUCTION

The notion that Section 25400 of the California Corporations Code merely requires that a misrepresentation be made in this State has precipitated the filing of an avalanche of duplicative and wholly unprecedented nationwide class actions in the trial courts of California. These cases purport to include as plaintiffs many thousands of non-California investors scattered throughout the United States who purchased their stock outside of California from non-California sellers, and who have no contacts with California.

The ruling in this case is thus critical to the citizens of California, whose overburdened court system was never intended to be a haven for national securities class actions, and whose economy depends on jobs and capital formation in this State. It is also vitally important to the many high technology companies, and venture capital and securities firms, that are now being targeted in this wave of new litigation.

Amici curiae the Securities Industry Association (the "SIA"), the National Venture Capital Association (the "NVCA") and the American Electronics Association (the "AEA") together represent more than 4,000 companies and firms whose interests will be most directly affected by the outcome of this case. Representing more than 760 securities firms, including investment banks, broker dealers and mutual fund companies, the SIA speaks for the backbone of the securities industry in California and throughout the United States. The NVCA's over 240-member venture capital firms provided more than 80% of the approximately $10 billion in professional venture capital raised for emerging growth companies in 1996. The AEA's 3000 member companies span the length and breadth of the high-technology industry that is driving job growth and capital formation in California.

For the compelling legal, constitutional and policy reasons presented herewith, the SIA, NVCA and AEA urge this Court to reject the invitation of Plaintiffs and Real Parties in Interest ("Plaintiffs") to, in effect, "federalize" California's securities law. The position advocated by Plaintiffs would contravene the language, purpose and legislative history of the principal statute at issue, California Corporations Code Section 25400, which was explicitly intended to protect California investors while avoiding unnecessary duplication of the federal scheme for regulating interstate securities transactions. Permitting nationwide securities class actions to be filed in California courts on behalf of thousands of non-California investors would upset the deliberate policy balance struck by the Legislature when Section 25400 was enacted. It would also embrace a result that was overwhelmingly rejected by the California voters less than a year ago. Finally, the construction advocated by Plaintiffs would bring Section 25400 into direct conflict with several provisions of the United States Constitution.

II. ARGUMENT

A. The Language Chosen by the Drafters in Adapting Section 25400 from Section 9(a) of the Securities Exchange Act of 1934 Underscores Its Territorial Limitations

The Securities Exchange Act of 1934 (the "1934 Act") is the primary federal securities statute regulating national securities markets and transactions.^1/ Consistent with the federal regulatory scheme, the preamble of Section 9(a) defines the territorial scope of the statute in terms of interstate commerce, national transactions and national securities exchanges:

It shall be unlawful for any person, directly or indirectly, by the use of the mails or any means or instrumentality of interstate commerce, or of any facility of any national securities exchange, or for any member of a national securities exchange . . . .

The reason that the Legislature substituted "in this state" for "any means or instrumentality of interstate commerce, or any facility of any national securities exchange," etc., in defining the territorial scope of Section 25400 is obvious. There was no reason to duplicate -- and good reasons not to duplicate -- the national coverage already established in a virtually identical federal statute. Thus, the phrase "in this state" was used to limit the territorial scope of Section 25400 and ensure that (contrary to the result now advocated by Plaintiffs) it would not be applied on a nationwide basis. The simplest, most direct and "plainest" means of converting these national regulations into California regulations was to insert this limitation into the preamble, to qualify all of the substantive provisions that follow.

Attempting to cast doubt on the meaning of the Legislature's straightforward effort to limit the territorial scope of Section 25400, Plaintiffs argue that the plain meaning of the "in this state" limitation permits application of the statute throughout the United States -- including to transactions by non-California investors who purchase stock from non-California sellers through non-California brokers on national securities exchanges. Ironically, Plaintiffs' plain meaning argument is predicated on a convoluted discussion of "adverbial phrases," "operative verbs," "subordinate clauses," "self-contained thoughts," "introductory modifiers" and "introductory phrases." Ret. at 13-16. This tortured analysis, and Plaintiffs' understated concession that "the wording of Section 25400 could be improved and simplified" (Ret. at 13), conclusively demonstrate that one cannot divine the meaning of Section 25400 by attempting to dissect its grammar or diagram its sentences. In any event, the purpose, context, historical circumstances and legislative history of the statute make clear that the substitution of state territorial language for national language limits the statute's scope in order to avoid nationwide application.

B. The Context, Historical Circumstances and Legislative History of Section 25400 Demonstrate That It Was Not Intended to Have Nationwide Application

The historical context, purpose and explicitly articulated legislative intent of Section 25400 uniformly point to the same conclusion: the statute avoids duplication of the federal regulatory scheme and is not to be applied on a nationwide basis. Section 25400 is included in Part 5 of the Corporate Securities Act of 1968 (the "1968 Act"), entitled "Fraudulent and Prohibited Practices,"^2/ which the drafters repeatedly stated applies to securities "sold in the State of California" and in the "intrastate" market:

The prohibitions and penalties contained in the sections on Fraudulent and Prohibited Practices . . . apply to all securities sold in the State of California . . . .

* * * *

The fraudulent and prohibited practices enumerated in Part 5 are modeled upon existing Federal laws, both statutory and common law, which are applicable to all interstate securities transactions. The latter constitute by far the bulk of the securities market in California. The effort here is to more clearly define the acts which are malum prohibitum and to apply the prohibitions to the intrastate securities market which is the greater state regulatory problem when compared to the interstate market.

Plaintiffs' construction of Section 25400 flies in the face of this legislative mandate. No longer satisfied with the federal remedies that have been the bases for nationwide securities class actions throughout the life of Section 25400, Plaintiffs now seek to wrench Section 25400 from its context in order to federalize state law.

1. The Legislative History Demonstrates that Section 25400 Was Drafted to Avoid Duplication of the 1934 Act

Thus, when the 1968 Act was submitted to the Legislature, its introduction explicitly disclaimed any intention to duplicate the 1934 Act's extensive scheme for regulating securities traded in interstate markets:

The 1964 amendments to the Securities Exchange Act of 1934, greatly expanded the Federal regulatory efforts in connection with broker-dealers and securities traded in interstate markets. Such expansion is recognized in the Proposed Act to the extent that the State regulatory effort, while retaining substantive jurisdiction, will avoid unnecessary duplication with the expanded Federal regulatory scheme.

Accepting Plaintiffs' invitation to apply Section 25400 on a national scale would result in massive and entirely unnecessary duplication of the "Federal regulatory scheme" -- the very result that the drafters of Section 25400 stated that they were attempting to avoid. As is discussed in detail in Section II.E. below, such duplication is developing into a problem of staggering dimensions. In the wake of federal securities law reform, plaintiffs have begun to invoke state and federal remedies in identical, simultaneous state and federal national class actions. Indeed, the present litigation is only one of the many cases that fall into this ever-expanding category.

Even in the absence of the kind of explicit legislative mandate that is controlling here, this Court has been justifiably reluctant to stretch state law in a manner that would duplicate remedies available under federal securities statutes. Indeed, Mirkin v. Wasserman (1993) 5 Cal.4th 1082 specifically cautioned against expanding state law remedies to permit national class actions on securities claims (in that case, application of the "fraud-on-the-market" doctrine to claims brought under Civil Code Sections 1709 and 1710) when parallel federal remedies are already available:

Nor is it necessary to [apply the fraud on the market doctrine] in order to create a remedy for an unremedied wrong, or even to give plaintiffs the benefit of the doctrine they seek to apply. Plaintiffs already have remedies under federal and state securities laws. . . . Indeed, the parties inform us that a class action on behalf of Maxicare's investors under Rule 10b-5 has been filed in federal court.

* * * *

However, it does not follow that investors will be left without a remedy unless we adopt the fraud-on-the-market doctrine. Investors, including plaintiffs in this case, already have remedies under federal and state law. . . . Rule 10b-5, which we have already mentioned, affords plaintiff both a private right of action in federal court and a presumption of reliance . . . . Indeed, as we have also mentioned, a class action lawsuit under Rule 10b-5 based on the same events involved in this case has been filed in federal court.

Significantly, Mirkin considered and rejected a series of arguments that an expansive construction of Civil Code Sections 1709 and 1710 would remove "unnecessary barriers" to effective use of class action procedures in securities cases and provide a broader class of plaintiffs with the "advantages" of such remedies. Id. at 1103-05. In language directly applicable here, this Court further cautioned against adopting a construction that could "bring about difficulties" that the Legislature "apparently attempted to avoid," and against "expansion of the class of plaintiffs who can assert securities fraud remedies." Id. at 1108. Plaintiffs' construction of Section 25400 ignores both cautionary elements and would instead dramatical-ly expand the class of plaintiffs who can assert claims pursuant to California's securities laws.

2. The Legislative History Demonstrates that Section 25400 Was Intended to Protect California Investors by Regulating Sales of Securities in California's Intrastate Market

When Professor Harold Marsh, Jr., the principal draftsman of the 1968 Act,^5/ wrote to Senator Randolph Collier to explain the statute's purpose and effect prior to its enactment, he identified protection of "investors in the State of California," "the California investor" and "California investors" at least eight times. Letter of Harold Marsh, Jr., to Senator Randolph Collier ("Marsh Letter") (April 19, 1968) at 1-7 (App. Ex. D at 94-100).

Similarly, when discussing civil liabilities for violations of Section 25400 (and the other antifraud provisions included in Part 5 of the 1968 Act), the Summary of the Corporate Securities Law of 1968 (Proposed) from the Legislative Bill file of Sponsor ("Summary"), Assemblyman John Knox emphasized that "substantial rights are given to California investors. . . ." Summary at 18 (App. Ex. N at 796). Moreover, Professor Walter Olson, a member of the Drafting Committee, repeatedly characterized the purpose of the 1968 Act as "protecting California investors," "expansion of investor protections in California" and "expansion of the protection and remedies available to California investors" in a law review article published shortly after the Act was adopted. Olson at 75, 77, 95, 98. Focusing specifically on Section 25400 -- and on the two other sections that contain the "in this state" limitation -- Olson explained:

Sections 25400, 25401, 25402 of the new law create an entirely new area of statutory liability in California. While the conduct proscribed by these sections may, in many instances, violate existing principles of common law or similar provisions of the federal securities laws, they provide a significant expansion of the protection and remedies available to California investors.

Plaintiffs attempt to sidestep Section 25400's "in this state" limitation, and to extend Section 25400 to investors nationwide, by falling back on the remedy provisions of Section 25500. Ret. at 10-11. In short, they argue that Section 25500's use of the phrase "shall be liable to any other person" in describing the persons who can sue for a violation of Section 25400 demonstrates that the Legislature did not intend to impose limits on Section 25400. This argument fails for the simple reason that, as Defendants note in their Reply Memorandum to the Formal Return ("Reply") at 7-9, Section 25500 does not purport to -- and by its terms could not -- expand the scope of Section 25400. It merely provides a remedy for a violation of Section 25400, which already contains the territorial limitation.

Moreover, the legislative history, and this Court's decision in Mirkin, conclusively demonstrate that the reference to "any other person" in Section 25500 was not designed to extend the reach of Section 25400 throughout the United States. In fact, the phrase has nothing to do with territorial scope. It was included not to override the "in this state" limitation, but to make clear that (unlike Sections 25401 and 25402) Section 25400 does not require privity or reliance. Thus, in describing the "protection and remedies available to California investors," Olson explains that liability for a violation of Section 25400 extends to "any and all persons" because "neither privity nor reliance is required." Olson at 98 (emphasis added).

The fact that Section 25500's use of the phrase "shall be liable to any other person" addresses privity, and not territorial scope, was also recognized in Mirkin:

Nor is it correct, as plaintiffs also suggest, that liability under sections 25400 and 25500 requires privity of contract between the plaintiff and the defendant. The Legislature also knew how to write a statute that conditioned liability on privity. In section 25501 the Legislature did just that in these words: "Any person who violates Section 25401 shall be liable to the person who purchases a security from him or sells a security to him . . . ." Section 25500, in contrast, contains no such limitation; it provides more broadly that "[a]ny person who willfully participates in any action or transaction in violation of Section 25400 shall be liable to any other person who purchases or sells any security at a price which was affected by such act or transaction . . . ."

The weakness of Plaintiffs' position on this point is underscored by the fact that the substantive liability provisions of Sections 25400, 25401 and 25402 are all subject to the "in this state" limitation, while the parallel enforcement provisions of Sections 25500, 25501 and 25502 are cast both in terms of "any other person" (Section 25500, indicating that privity is not required) and "to the person who purchases a security from him or sells a security to him" (Sections 25501 and 25502, indicating that privity is required). Accepting Plaintiffs' argument would mean that the "in this state" limitation would be adhered to in suits brought under Sections 25401 and 25402 (whose enforcement provisions do not contain the "any other person" language), and not adhered to in suits brought under Section 25400.

3. Plaintiffs' Construction of Section 25400 Contravenes Nearly Thirty Years of Settled Practice in California

In addition to the long-standing recognition of the territorial limitation of Section 25400, there has been a clear acknowledgment (including by the counsel who represent Plaintiffs here) that the only way to expand its scope is to amend the statute. Proposition 211, the overwhelmingly unsuccessful California ballot initiative proposed and supported by the plaintiffs' securities class action bar in 1996, attempted to achieve the same practical result that Plaintiffs now seek from this Court. The initiative would have circumvented the territorial limitations imposed by Section 25400 (and its companion provisions) by adding a new section, 25400.1, to Part 5 of the 1968 Act. By dropping the "in this state" limitation, the proposed Section 25400.1 would have done away with the territorial limitations that Plaintiffs now assert were never there.^8/

The fact that Plaintiffs' counsel (and everyone else) recognized, accepted and acquiesced in Section 25400's territorial limitations -- and then attempted without success to abolish them -- speaks volumes. These post-enactment events are entitled to significant weight in construing Section 25400. See, e.g., Freedom Newspapers, Inc. v. Orange County Employees Retirement System Board of Directors (1993) 6 Cal.4th 821, 828-30 (conducting a detailed review of historical circumstances "both prior to and after" the enactment of the statute at issue).

4. Plaintiffs' Construction of Section 25400 Would Upset the Policy Balance Struck in 1968 and Lead to Extreme Results Not Intended by the Legislature

In explaining the "balanced judgment" reached in 1968, Professor Marsh cited (among other things) the need not to "discourage corporations from establishing their headquarters in this state, to the detriment of its economy," and the need "to give the greatest possible protection to California investors and at the same time to recognize that California cannot rule the United States." Marsh Letter at 5 (App. Ex. D at 48) (emphasis added).^9/ The balance struck in determining how far the statute "as a policy matter should" extend bears no resemblance to the unbridled construction now offered by Plaintiffs. Acceptance of that construction would destroy the delicate policy balance selected by the Drafting Committee and the Legislature, and lead to a variety of unintended results.

As this Court has also emphasized, in construing statutes courts should be especially careful not to expand their scope so as to upset legislative policy choices. See Mirkin, 5 Cal.4th at 1104-06. Indeed, Mirkin noted that the admonition against expanding statutory remedies applies with "particular force when the plea to expand liability concerns an area, such as securities fraud, in which the Legislature has already acted." Id. at 1105 (emphasis added). In elaborating upon this point, Mirkin cited the United States Supreme Court's warning that expansion of the class of plaintiffs who can assert securities fraud remedies will often do more harm than good: "[W]e are reminded of the admonition that `the inexorable broadening of the class of plaintiff who may sue in this area of the law will ultimately result in more harm than good.'" Id. at 1108 (quoting Ernst & Ernst v. Hochfelder (1976) 425 U.S. 185, 214-15, n.33). The Drafting Committee and Legislature determined that expansion of Section 25400 to include nationwide class actions by non-California investors would do "more harm than good." The harm that the Legislature sought to avoid has now emerged on an alarming scale.

The flood of unprecedented securities litigation filed in California courts on behalf of non-resident purchasers is the direct and inevitable result of the new-found contention that Section 25400 merely requires that a misrepresentation be made in this state. These nationwide class actions are based squarely on Plaintiffs' effort to "federalize" California law. They purport to include as plaintiffs many thousands of non-California investors scattered throughout the United States who purchased their shares outside of California, from a non-California seller through a non-California broker. During the first year following passage of the Reform Act, nationwide securities class action filings in California courts went from none to at least 41, 19 of which duplicated a parallel federal action (as does this case).^10/

The drafters of Section 25400 made abundantly clear that they did not intend to impose the burdens of nationwide securities class actions on the citizens and courts of California. Even if there were room for disagreement on this point, such a result would still encounter serious public policy obstacles. See generally Osborne v. Subaru of America, Inc. (1988) 198 Cal.App.3d 646, 662-64 ("Neither our busy trial courts nor our citizens who fund them can afford the luxury of volunteering to handle the nation's class actions.").

Nor is there any need to impose such burdens in order to remake the statute thirty years after it was enacted. Non-California investors who purchase securities throughout the United States have the national class action remedies of the federal judicial system, which has vast experience in the efficient handling of such cases.

A ruling from this Court expanding the scope of California's state securities laws would make California a haven for national securities class actions. This, in turn, would suppress capital formation^11/ in California's high technology sector (which would bear the brunt of such litigation due to the inherent volatility of its stock prices) and inhibit expansion of the companies that have led the way in generating job growth for California's citizens. There is no basis for foisting such burdens on defendants located in California, much less on those located outside the state.

The list of additional undesirable consequences that would accompany Plaintiffs' construction of Section 25400 is bounded more by imagination than any legal principle. For example, under Plaintiffs' construction, a New York resident who purchased stock in New York from a New York seller, through a New York broker, over the New York Stock Exchange, and who has no contacts with California, would be covered by Section 25400 (and included in a nationwide class consisting of many thousands of nonresidents who purchased stock under similar circumstances) if:

(1) He had invested in a California company;

(2) A non-California representative of a non-California company made an allegedly misleading statement during an industry conference in California;

(3) A non-California representative of a non-California underwriter or issuer made an allegedly misleading statement during a California stop on a nationwide "road show" in connection with an initial public offering;

(4) A California securities analyst issued a research report in California that incorporated an allegedly misleading statement attributed to a non-California representative of a non-California company;

(5) A statement made outside of California by a non-California representative of a non-California company during an interview with a reporter for a California newspaper was published in California; or, arguably,

(6) A statement made outside of California by a non-California representative of a non-California company was reported in California (and throughout the United States) by The Wall Street Journal or another national newspaper.

Plaintiffs' attempt to project the statute throughout the nation also runs afoul of several provisions of the United States Constitution. These Constitutional infirmities are discussed below.

C. Plaintiffs' Interpretation of Section 25400 Violates the Commerce Clause

The Commerce Clause tightly restricts states' ability to enact statutes which regulate interstate commerce because of "the Constitution's special concern with . . . the autonomy of the individual states within their respective spheres." Healy, 491 U.S. at 335-36. It does so because "`[i]t would be impossible to permit the statutes of [a state] to operate beyond the jurisdiction of that State . . . without throwing down the constitutional barriers by which all the States are restricted....'" BMW of North America, Inc. v. Gore (1996) 116 S.Ct. 1589, 1597, n.16 (quoting New York Life Ins. Co. v. Head (1914) 234 U.S. 149, 161).

Under the "two-tier approach" the United States Supreme Court uses to analyze whether statutes pass muster under the Commerce Clause,^13/ a state statute violates the Commerce Clause if it regulates interstate commerce or imposes one state's policies upon a sister state either directly or indirectly. Edgar, 457 U.S. at 643; Healy, 491 U.S. at 337 n.14; Brown-Forman Distillers Corp., 476 U.S at 579. By giving Section 25400 a nationwide scope, and allowing it to govern securities transactions made outside California, Plaintiffs' construction would allow California's Blue Sky laws to regulate interstate commerce (and impose burdens on other states) both directly and indirectly. Accordingly, this reading of the statute violates the Commerce Clause. See Ret. at 33-37. It cannot be adopted because, under settled law, statutes must be interpreted so as to preserve their constitutionality. Dyna-Med, 43 Cal.3d at 1387; Walnut Creek Manor, 54 Cal.3d at 68.

1. Plaintiffs' Construction Violates the Commerce Clause by Allowing California to Directly Regulate Non-Intrastate Transactions

(1) the statute applies to "commerce that takes place wholly outside of the State's borders, whether or not the commerce has effects within the State";

(2) the statute "directly controls commerce occurring wholly outside the boundaries of a State . . . regardless of whether the statute's extraterritorial reach was intended by the Legislature. The critical inquiry is whether the practical effect of the regulation is to control conduct beyond the boundaries of the State"; or

(3) the statute's "practical effect" is to produce "inconsistent legislation arising from the projection of one state['s] regulatory regime into the jurisdiction of another State."

a. Plaintiffs' Construction Regulates Commerce Occurring Outside California

Whether a statute violates the Commerce Clause depends on its territorial scope. Blue Sky laws pass constitutional muster when they "apply to dispositions of securities within the State...." Edgar, 457 U.S. at 641. They are unconstitutional, however, if they "regulate[] transactions which take place across state lines" and thus "could be applied to regulate a [transaction] which would not affect a single shareholder [from the regulating state]." Id. at 641, 642 (emphasis added); accord Brown-Forman Distillers, 476 U.S. at 580 (regulation of the out-of-state transactions of corporations who also sell in-state violates Commerce Clause). Under this standard, a statute that regulates the sales of securities in other states, or regulates purchasers in other states, conflicts with the Commerce Clause.^15/ Even the cases cited by Plaintiffs recognize that, to comply with the Commerce Clause, a statute can only regulate securities transactions made within the regulating state. See Ret. at 42-44.^16/

Plaintiffs' construction of Section 25400 would regulate purchases and sales of securities that take place outside California, even when made to non-California residents. See Ret. at 34. Such regulation would impermissibly interfere with interstate commerce both by regulating transactions made wholly outside California, and by regulating transactions made by non-California residents. See, e.g., Media Products, Inc., 158 Ariz. at 464, 467, 469 [763 P.2d at 527-28, 531, 533]; State ex. rel. Corbin, 151 Ariz. at 122 [726 P. 2d at 218].^17/ The California Legislature is not permitted to (and clearly did not intend to) make determinations about what constitutes securities fraud in connection with securities transactions made in other states.^18/

b. Plaintiffs' Construction Controls Conduct Beyond California's Boundaries

Plaintiffs' construction of Section 25400 could easily have the practical effect of making corporations monitor and limit their conduct nationwide to avoid the prospect of national class actions filed in California courts. It could also cause corporations to lose "whatever competitive advantage" they gain by conducting securities transactions in a state whose securities laws differ from those in California.

c. Plaintiffs' Construction Has the Practical Effect of Producing Inconsistent Legislation

Plaintiffs' construction would allow Section 25400 to regulate securities transactions made outside California, even though such transactions would also be governed by another state's Blue Sky laws. Because the laws of numerous other states have requirements for pursuing securities fraud actions that differ from and are inconsistent with Section 25400, such a construction would subject corporations to "inconsistent obligations" from different States for the same transaction.^19/ See Brown-Forman Distillers, 476 U.S. at 583; CTS Corp., 481 U.S. at 88. Subjecting non-California corporations to Section 25400 and the laws of the state in which they are properly regulated "create[s] just the kind of competing and interlocking local economic regulation that the Commerce Clause was meant to precude." Healy, 491 U.S. at 337.^20/

2. Plaintiffs' Construction of Section 25400 Would Also Result in an Indirect Violation of The Commerce Clause

Plaintiffs assert that a nationwide application of Section 25400 would serve two interests: (1) "protecting investors nationwide" (not simply in California); and (2) "deterring misconduct by fraudulent business operations in California." See Ret. at 2, 9, 40. Neither of these ostensible interests justifies the burdens of a nationwide application of Section 25400.

First, as discussed above, the legislative history of the 1968 Act leaves no doubt that Section 25400 was intended to protect California investors, and was specifically not intended to protect "investors nationwide." Moreover, the Drafting Committee and Legislature said absolutely nothing about preventing fraud beyond the borders of the state. The very formulation of this would-be "local" interest displays its wrong-headedness. The welfare of non-residents is by definition not a local interest; were it otherwise, the local/non-local distinction would disappear. The U.S. Supreme Court made short shrift of this argument in Edgar:

the State has no legitimate interest in protecting nonresident shareholders. Insofar as the . . . law burdens out-of-state transactions there is nothing to be weighed in the balance to sustain the law.

Nor can Plaintiffs localize this distinctly non-local consideration by invoking a "floodgates-will-close" kind of argument, that capital will stop flowing into the state if California's Blue Sky laws are not available to non-residents. For nearly twenty-nine years (virtually the entire life of this statute), Section 25400 has not been applied to non-Californians, and there has been no impediment to capital formation in California. On the contrary, as the amici on this brief can attest, the danger that capital will stop flowing into California would arise if the companies that raise, invest, direct and receive that capital are subjected to unreasonable exposure to lawsuits filed in the courts of this State.

Out-of-state investors have always had, and will continue to have, other remedies available to them to address the kind of fraud alleged by Plaintiffs. Those remedies begin with the federal securities laws and extend to the Blue Sky laws and common law of a plaintiff's state of residence. The availability of such other remedies undermines Plaintiffs' assertion that Section 25400 must have a nationwide scope if it is to deter fraud in California. See Mirkin, 5 Cal.4th at 1090, 1101-02. A California corporation's potential liability under the antifraud provisions of the laws of any state -- not to mention the federal securities laws -- are (and have always been) more than sufficient to deter fraud. Accordingly, California "does not have an overriding regulatory policy need" to protect out-of-state investors. See Media Products, Inc., 158 Ariz. at 470 [763 P.2d at 534] (incidental burden is excessive when non-resident's state laws regulate offering); see also Reply at 30-31.

D. Federal Due Process Prohibits Nationwide Application of Sections 25400 and 25500

At a minimum, adopting Plaintiffs' construction of Section 25400 would require California's trial courts to engage in the difficult and burdensome process of examining the particulars of each class member's claim to determine whether the member may sue under Section 25400, or whether that member's claim must be brought under the law of another state. In class actions involving thousands, much less tens of thousands, of class members, the practical burdens created by Plaintiffs' unprecedented construction of Section 25400 are themselves sufficient to justify its rejection. Baltimore Football Club, Inc. v. Superior Court (1985) 171 Cal.App.3d 352, 363 ("When legal questions vary from state to state and hence require the trial court to make diverse legal rulings . . . in a multitude of jurisdictions, the questions of law necessarily would be more individual than common to all").

Under the Full Faith and Credit Clause and the Fourteenth Amendment's Due Process Clause, a California court may only apply California law if California has "a significant contact or significant aggregation of contacts, creating state interests, such that choice of its law is neither arbitrary nor fundamentally unfair." Phillips Petroleum Co. v. Shutts (1985) 472 U.S. 797, 818. The methodology for assessing the significance of such contacts has been provided in two Supreme Court decisions: Allstate Ins. Co. v. Hague 449 U.S. 302, rh'g denied, (1981) 450 U.S. 971, in which the modern methodology was enunciated, and Shutts, where it was applied in the class action context.

In Allstate, the insured, whose husband was killed in Wisconsin, brought suit in Minnesota to take advantage of that state's more favorable insurance law. Although at the time of the accident all parties were Wisconsin residents, the Supreme Court focused on three contacts between the parties and Minnesota: (1) the husband had worked in Minnesota for the 16 years preceding his death; (2) the insurer was, at all times, present and doing business in Minnesota; and (3) the widow, for bona fide reasons, had become a Minnesota resident prior to commencing legal action. Viewing these contacts together, the Court held:

[i]n sum, Minnesota had a significant aggregation of contacts with the parties and the occurrence, creating state interests, such that application of its law was neither arbitrary nor fundamentally unfair.

In Shutts, gas company investors, with royalty rights to leases from which Phillips produced gas, brought a class action in Kansas to recover interest on royalties that were suspended pending final administrative approval of a gas price increase. The class consisted of some 28,000 royalty owners residing in all 50 states, who owned rights to leases located in 11 states. However, Phillips owned property and conducted substantial business in Kansas, several hundred members of the plaintiff class were Kansas residents, and certain of the leases were located in Kansas.

In reversing the Kansas Supreme Court's decision to permit the application of Kansas law to the entire class' claims, the United States Supreme Court held that "the claims asserted by each member of the plaintiff class" "must have a `significant contact or significant aggregation of contacts'" with the state of Kansas. Shutts, 472 U.S. at 821 (quoting Allstate). In assessing whether the application of Kansas law was arbitrary or unfair, Shutts emphasized that Kansas lacked an "interest" in claims brought by residents of other states involving leases in other states, and that there was "no indication" that many of the parties "had any idea that Kansas law would control." Id. at 822.

The Court remanded the case for a determination, on a class-member-by-class-member basis, of the appropriate law to apply. Although the prospect of conducting this analysis for 28,000 class members across all 50 states obviously would consume enormous judicial resources, the Court held that it was constitutionally mandated. Specifically, Shutts held that the need to address constitutional limitations on choice of law

is not altered by the fact that it may be more difficult or more burdensome to comply with the constitutional limitations because of the large number of transactions which the State proposes to adjudicate and which have little connection with the forum . . . the constitutional limitations laid down in cases such as Allstate . . . must be respected even in a nationwide class action.

Plaintiffs' construction of Section 25400 contemplates claims brought by and on behalf of a multitude of persons who have no constitutionally significant contacts with this jurisdiction (1) against entities that may not be doing business in California,^25/ and (2) in connection with securities transactions made in all fifty states. The only contact plaintiffs require is that a defendant make a communication in California. Under the combined analyses of Allstate and Shutts, there can be little doubt that the innumerable transactions that plaintiffs would sweep into national securities class actions could not be subjected to California law.

While both Allstate and Shutts involved defendants who were present and doing business in the forum state, Plaintiffs' construction of Section 25400 does not require any such presence. Since jurisdictional contacts under Plaintiffs' version of Section 25400 would be even more attenuated than were the contacts in Shutts and Allstate, trial courts would be required to conduct the "difficult" and "burdensome" analysis mandated by the Supreme Court. After completing that analysis, the court would not be permitted to apply Section 25400 to many of the plaintiffs residing outside California.

This problem is compounded by the fact that, with the proliferation of modes of nationwide communications,^26/ it is probable that every disclosure of a material matter made by a publicly-traded company will appear in some medium that "reaches" California, whether by print (e.g., the Wall Street Journal), video (e.g., television), audio (radio) or electronic (e.g., the World Wide Web, e-mail, newsgroups, on-line services). By definition, releases of material information^27/ are the subject of virtually instantaneous nationwide dissemination, some portion of which will reach California. Since the only California contact that would be required under Plaintiffs' construction of Section 25400 is the making of such a communication in California, the residential or actual presence of the parties or transaction in California will be a matter of mere happenstance. Indeed, given the nationwide nature of investing and securities transactions, it is certain that most of the plaintiffs, defendants and transactions in cases such as this one will have no contact with California.

Plaintiffs' construction of Section 25400 would operate as an invitation to the nation's investors to sue in California, resulting in a thicket of choice-of-law questions that, under controlling Supreme Court authority, would have to be resolved on a class-member-by-class-member basis in each case. Because these class actions, as in Shutts, typically involve thousands of investors from all 50 states, the determination of which state's law to apply will, as the Supreme Court predicted, be "difficult" and "burdensome" to the point of overwhelming California's trial courts.

E. Because Nationwide Application of Section 25400 Prohibits Conduct the Reform Act Explicitly Seeks to Encourage, It Is Preempted

With the passage of the Reform Act, however, the antifraud provisions of California's securities laws are now indisputably in conflict with federal law.^31/ The starkest of these conflicts involves the Reform Act's Safe Harbor provisions. Because Section 25400 now directly conflicts with federal law, it is preempted.

1. Section 25400 Stands as an Obstacle to the Accomplishment of the Reform Act's Purposes

a federal statute . . . create[s] a scheme of federal regulation "so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it." Alternatively, federal law may be in "irreconcilable conflict" with state law. Compliance with both statutes, for example, may be a "physical impossibility," or, the state law may "stand as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.'"

a. The Purpose of the Reform Act

In adopting the Reform Act -- after the only Congressional override of President Clinton's veto to date -- Congress sought to "protect investors, issuers, and all who are associated with our capital markets from abusive securities litigation" and recognized that "[a]busive litigation severely affects the willingness of corporate managers to disclose information to the marketplace." H.R. Conf. Rep. No. 104-369, 104th Cong., 1st Sess. 32, 42 (1995) ("Conf. Rep."). "Corporate managers," Congress found, "[f]ear that inaccurate projections will trigger the filing of securities class action lawsuit[s]." Id. at 43. The unwillingness of corporate managers "to discuss publicly their future prospects" injures "the investing public and the entire U.S. economy." Id. at 31-32. Congress repeatedly emphasized that its purpose and objective was to "encourage issuers to disseminate relevant information to the market without fear of open-ended liability," and characterized the effect of securities litigation in this context as "muzzling." Id. at 32, 42.

In the words of the Conference Committee:

Abusive litigation severely affects the willingness of corporate managers to disclose information to the marketplace. Former SEC Chairman Richard Breeden testified in a Senate Securities Subcommittee hearing on this subject: "Shareholders are also damaged due to the chilling effect of the current system on the robustness and candor of disclosure . . . Understanding a company's own assessment of its future potential would be among the most valuable information shareholders and potential investors could have about a firm." [¶] Fear that inaccurate projections will trigger the filing of a securities class action lawsuits has muzzled corporate management. One study found that over two-thirds of venture capital firms were reluctant to discuss their performance with analysts or the public because of the threat of litigation. Anecdotal evidence similarly indicates corporate counsel advise clients to say as little as possible because "legions of lawyers scrub required filings to ensure that disclosures are as milquetoast as possible, so as to provide no grist for the litigation mill" . . . The Conference Committee intends the statutory safe harbor protection to make more information about a company's future plans available to investors and the public.

b. The Muzzling Effect of Section 25400

While it is doubtful that claims based on such statements would even be brought in federal court today, if they were, they would in all probability not survive a motion to dismiss. See, e.g., Hockey v. Medhekar (N.D.Cal. April 15, 1997) 1997 WL 203704. As this case demonstrates, however, in California state courts, such claims are now pled on a nationwide scale, and routinely survive demurrers. See App. Ex. M at 774-76. Under these circumstances, a company such as Petitioner Diamond Multimedia will not be able "to discuss publicly its future prospects," as Congress intended, for fear that it will be sued in state court under Section 25400 -- precisely what happened in this case.^35/ Nationwide application of Section 25400 unquestionably "stand[s] as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress," Barnett, 116 S.Ct. at 1108, and is in "irreconcilable conflict" with federal law.

2. Other State Courts Have Acknowledged Preemption Under Similar Circumstances

The Guice court began by reviewing certain amendments to the 1934 Act empowering the SEC to "eliminate all unnecessary or inappropriate burdens on competition," to "pursue the goal to centralized trading of securities" and to "provide leadership for the development of a more coherent and rational regulatory structure to correspond to and to police effectively the new national market system." Guice, 89 N.Y.2d at 40. Acting pursuant to these amendments, the SEC had eliminated any requirement that confirmation statements show dollar amounts received as order flow payments. The reason for this change was that mandatory disclosure of specific monetary receipts might be unworkable and would, at the least, impose "an extreme burden" upon broker-dealers "to determine the amount of order flow received for each order in time for a confirmation" and entail expenses disproportionately high in relation to the potential benefits to customers. Id. at 43 (quoting 59 Fed. Reg. 55010 and n.39).

After concluding that New York law did require disclosure of the information in question, Guice determined that New York's law was preempted for two reasons that are particularly relevant here. First, if New York (and other states) imposed liability for failure to meet state-law standards stricter than those mandated by Congress and the SEC, brokers would have to tailor their disclosures to satisfy each state's laws, which "would inevitably defeat the congressional purpose of enabling the SEC to develop and police that `coherent regulatory structure' for a national market system." Guice, 89 N.Y.2d at 46. Were this to happen, the "carefully-crafted SEC disclosure requirements would have little, if any, influence." Id. at 41. Accordingly, the resulting "deleterious if not ruinous effects" upon Congressional policy were "alone sufficient to require preemption." Id. at 48.

Second, enforcement of New York's common law would thwart the will of Congress by eliminating the use of order flow payments altogether, as:

onerous stricter disclosure costs plus the threat of lawsuits all around the country, based on breach of common-law agency relationships, would likely result in many brokerage firms abandoning acceptance of order flow payments altogether, an even more drastic undermining of congressional objectives.

Plaintiffs' contention that there should be no preemption because compliance with state law disclosure standards would not prevent compliance with SEC regulatory disclosure requirements, and because greater disclosure promotes the same investor-protection purposes underlying the federal regulations, was rejected:

[e]ven if the goals of Federal and State law are the same, "[a] state law also is preempted if it interferes with the methods by which the federal statute was designed to reach this goal . . . [i]t would be extraordinary for Congress, after devising an elaborate [balanced regulatory] system that sets clear standards, to tolerate common-law suits that have the potential to undermine this regulatory structure."

Thus, Guice looked to the legislative history of amendments to the 1934 Act, identified Congress' objective, and concluded that the application of New York law would (1) "defeat the congressional purpose" and (2) result in the elimination of the practice the amendments sought to encourage. Application of this analysis leads to precisely the same result here.

As noted, Congress' specific purpose in enacting the Safe Harbor was to encourage corporate managers to "discuss publicly their future prospects" without fear of securities lawsuits. Nationwide application of Section 25400 unquestionably would defeat that purpose, and eliminate the practice that Congress sought to encourage, by penalizing and inhibiting forward-looking statements that would be immunized under the Reform Act. As the Report to the President emphasized, corporations are "reluctant to provide significantly more forward-looking disclosure beyond what they provided prior to enactment of the safe harbor [because they are] concerned about . . . potential liability under state law." Report to the President at 25.

Similarly, in the words of the Dahl court, enforcement of Section 25400 in the expansive, interstate manner advocated by Plaintiffs would affect a "widely utilized" practice -- public discussion of a company's future prospects -- and "have a significant impact on the securities markets nationwide." Decisions of such "national import," as the Minnesota high court rightly concluded, "are for the SEC and Congress." Dahl, 595 N.W.2d at 925-26.

3. The 1934 Act's Preemption of Inconsistent State Laws Is Firmly Established in the Decisions of the United States Supreme Court

4. Savings Clauses Do Not Permit Conflicting State Statutes

To begin with, these savings clauses negate only implied field preemption -- i.e., they are an expression by Congress that it did not intend to occupy the entire field of the legislation in question, thereby preventing the states from legislating in that area altogether. Edgar, 457 U.S. at 631 (notwithstanding 1934 Act savings clause, "a state statute is void to the extent that it actually conflicts with valid federal statute"); Gilman v. BHC Sec., Inc. (S.D.N.Y. Dec. 18, 1995) [1995-1996 Transfer Binder] Fed.Sec.L.Rep. (CCH) ¶ 99,051 at 94,245-56 ("[1934 Act savings clause] does not mitigate the force of conflict preemption"); see also Gade v. National Solid Wastes Mgmt Ass'n (1992) 505 U.S. 88, 108 ("under the Supremacy Clause, . . . any state law, however clearly within a state's acknowledged power, which interferes with or is contrary to federal law, must yield").

Thus, the savings clauses do not negate conflict preemption. They do not authorize the states to legislate in ways that actually conflict with the federal legislation. Indeed, the 1934 Act's savings clause makes this point expressly:

nothing in this Act shall affect the jurisdiction of the securities commission . . . of any State over any security or any person insofar as it does not conflict with the provisions of this Act or the rules and regulations thereunder.

In the present case, any possible inference negating implied preemption has been eliminated because nationwide enforcement of Section 25400 not only would have "the potential," but would inevitably actually "undermine [Congress' carefully crafted and balanced] regulatory structure." International Paper Co., 479 U.S. at 497. Accordingly, neither Act's savings clause prevents Section 25400 from being preempted.

III. CONCLUSION

With the reform of federal law, Congress made it more difficult for the plaintiffs' securities bar to bring meritless class actions. As a result, the plaintiffs are turning to the Blue Sky laws, and principally those of California, to replace their once-favored federal vehicle for litigation. To achieve the same in terrorem effect, however, Plaintiffs are now attempting to stretch California law so that it has the same nationwide scope as its federal analogue. Fortunately, the language and legislative history of Section 25400 stand in the way of this cynical effort.

Moreover, even if Plaintiffs' construction of Section 25400 did not fail for these reasons, it would still exhibit the constitutional infirmities specified above. Indeed, as this Court has recently noted, even where competing statutory interpretations are equally valid, when one is of dubious constitutionality and the second is not, the latter interpretation must be given full effect:

[C]onstitutional considerations necessarily inform our interpretation of the statutory language. "If a statute is susceptible of two constructions, one of which will render it constitutional and the other unconstitutional in whole or in part, or raise serious and doubtful constitutional questions, the court will adopt the construction which, without doing violence to the reasonable meaning of the language used, will render it valid in its entirety, or free from doubt as to its constitutionality, even though the other construction is equally reasonable. The basis of this rule is the presumption that the Legislature intended, not to violate the Constitution, but to enact a valid statute within the scope of its constitutional powers."

Plaintiffs' construction runs roughshod over the "in this state" requirement and produces significant constitutional conflicts at every turn. Congress has enacted a comprehensive legal framework to regulate the securities markets, and the federal judiciary has accrued decades of experience in handling nationwide securities litigation. The Court should refuse Plaintiffs' invitation to embark upon an identical course within the California judicial system without explicit guidance from the Legislature, particularly since it is clear that the Legislature never intended any such result, and to do so would result in intractable conflict with federal law.

Dated: July 23, 1997

Respectfully submitted, BROBECK, PHLEGER & HARRISON LLP   By             /s/   _________________________________      Tower C. Snow, Jr. Attorneys for Amici Curiae The Securities Industry Association, the National Venture Capital Association and the American Electronics Association

^1/ The other major federal securities statute, the Securities Act of 1933 (15 U.S.C. §§ 77a et seq.) ("the 1933 Act"), regulates public offerings.

^2/ Part 5 includes two other Sections, 25401 and 25402, both of which also contain the "in this state" limitation.

^3/ Plaintiffs cite several inapposite cases in which courts in other states, construing different statutes with different legislative histories, have applied state securities statutes more broadly than the application that the California Legislature plainly intended for Section 25400. See Ret. at 42-46. Even if those cases were pertinent, (i) they all recognize limits on nationwide application of state securities statutes, and (ii) none of them would support the kind of unbounded application that Plaintiffs advocate here. See pp. 20-25 and notes 16-20, infra.

^4/ In interpreting statutory language, courts have long recognized the significance of letters and other correspondence from the drafters of a statute as strongly indicative of statutory meaning. Peterson v. Ball (1931) 211 Cal. 461, 476 (determining statutory meaning from commentary of draftsman of the Civil Code); Van de Kamp v. Gumbiner (1990) 221 Cal.App.3d 1260, 1275 (reliance on letters from draftspersons of the legislation); Petition of Commission on Governorship of California (1979) 26 Cal.3d 110, 117 (consideration of testimony before Legislature).

Indeed, the legislative history which is pertinent here has recently been extensively relied upon by this Court in interpreting California's securities statutes. Mirkin v. Wasserman (1993) 5 Cal.4th 1082, 1102-06 (discussing Marsh & Volk, Practice Under the California Securities Laws, and Olson, The California Corporate Securities Law of 1968 (1968) 9 Santa Clara Lawyer 75 ("Olson")).

^5/ See Mirkin, 5 Cal. 4th at 1103 & n.10.

^6/ Professor Grundfest is a former Commissioner of the United States Securities and Exchange Commission.

^7/ The federal courts that have addressed this issue have uniformly limited open-market claims under Section 25400 to those made by resident California purchasers. McFarland v. Memorex Corp. (N.D.Cal. 1982) 96 F.R.D. 357, 364 (Sections 25400 and 25500 "apply only to purchasers who buy a security in California. . . ."); In re Victor Technologies Sec. Litig. (N.D.Cal. 1984) 102 F.R.D. 53, 60, aff'd, (9th Cir. 1986) 792 F.2d 862 (limiting class of plaintiffs to California purchasers); Weinberger v. Jackson (N.D.Cal. 1984) 102 F.R.D. 839, 847 (pursuant to Section 25008, "[a]ftermarket purchasers not purchasing in California are not part of the class as to the California Corporations Code claims"); Scholes v. Tomlinson (N.D.Ill. 1992) 145 F.R.D. 485, 492-93 (refusing to certify class of purchasers where proposed class representative was Illinois resident with no alleged contact with California); In re Activision Sec. Litig. (N.D.Cal. 1985) 621 F.Supp. 415, 431-32, reconsid. denied (N.D.Cal. 1985) [1985-1986 Transfer Binder] Fed.Sec.L.Rep. (CCH) ¶ 92,397 (limiting class of plaintiffs to California purchasers).

^8/ Proposed Section 25400.1 appears in the current version of the California Corporations Code, with a notation that it would become operative if Proposition 211 were approved in the November 5, 1996 election.

^9/ Attempting to circumvent legislative history that is lethal to their position, Plaintiffs assert that this passage in the Marsh Letter is limited to reorganizations, recapitalizations and qualification of securities in California, and that it somehow does not apply to Section 25400. See Ret. at 29-31. This effort to pigeonhole Professor Marsh's comments is fundamentally misconceived. In addressing certain amendments proposed by the Attorney General's Office that covered recapitalization and reorganization standards for jurisdiction, and explaining why the Committee did not favor these amendments, Marsh articulated the basic rationale of the 1968 Act, which obviously applies to all issues of territorial scope.

^10/ Stanford Study at 7-8, see discussion supra at 12-13.

^11/ In the words of the principal draftsman and architect of the 1968 Act, such a ruling would "discourage corporations from establishing their headquarters in this state, to the detriment of its economy." Marsh Letter at 5 (App. Ex. D at 98).

^12/ See United States Constitution, Article I, § 8 (Commerce Clause).

^13/ Healy, 491 U.S. at 337 n.14; Brown-Forman Distillers Corp. v. New York State Liquor Authority (1986) 476 U.S. 573, 578-79; see also Edgar, 457 U.S. at 643.

^14/ A state's Blue Sky laws must comply with the Commerce Clause even though section 28(a) of the 1934 Act explicitly allows states to regulate securities transactions. See, e.g., Edgar, 457 U.S. at 641 (discussing Blue Sky laws and the Commerce Clause); CTS Corp. v. Dynamics Corp. of America (1987) 481 U.S. 69, 80 (discussing Indiana's Blue Sky law's compliance with the Commerce Clause); North Star Int'l v. Arizona Corp. Comm'n (9th Cir. 1983) 720 F.2d 578, 583; Arizona Corp. Comm'n v. Media Products, Inc. (Ariz.Ct.App. 1988) 158 Ariz. 463, 467 [763 P.2d 527]; State ex rel. Corbin v. Goodrich (Ariz.Ct.App. 1986) 151 Ariz. 118, 122 [726 P.2d 215] (all reviewing Arizona's Blue Sky law's compliance with the Commerce Clause).

^15/ See, e.g., Terry v. Yamashita (D. Hawaii 1986) 643 F.Supp. 161, 165 (Hawaii's control acquisition statute, which can be applied to regulate purchases even when no shareholder is a resident of the regulating state" and, therefore, has an extraterritorial effect, "comprises a direct burden on interstate commerce and is invalid"); Media Products, Inc., 158 Ariz. at 464, 467, 469 [763 P.2d at 527-28, 531, 533] (Arizona's Blue Sky law is unconstitutional as "improper interference with interstate commerce" because it regulates non-residents' purchases from an out-of-state corporation that has its principal place of business in Arizona); accord State ex rel. Corbin, 151 Ariz. at 122 [726 P.2d at 218] (if Arizona's securities fraud statute "sought to regulate the sale of securities outside Arizona, it would conflict with the Commerce Clause and would be unconstitutional;" statute upheld because it only regulates sales occurring in Arizona).

^16/ See, e.g., Ret. at 43-44, citing CTS Corp., 481 U.S. at 80, 93 (Indiana statute does not violate Commerce Clause because it applies only to corporations incorporated within Indiana and "every application . . . will affect a substantial number of Indiana residents"); Enntex Oil & Gas Co. v. State of Texas (1978) 560 S.W.2d 494, 497 (Texas Securities Act does not violate the Commerce Clause because it only applies to transactions in Texas); Haberman v. Washington Public Power Supply System (Wash. 1987) 109 Wash.2d 107, 134-36 [744 P.2d 1032] (Washington Securities Act does not violate Commerce Clause when applied to bonds issued in Washington).

^17/ Even cases cited by Plaintiffs (see Ret. at 42-44) make this same point: Enntex, 560 S.W.2d at 495 (law applies because offer originated in Texas); Benjamin v. Cablevision Programming Investments (1986) 114 Ill.2d 150, 163 [499 N.E.2d 1309] (sale of securities occurred in Illinois); Simms Investment Co. v. E.F. Hutton Co. (M.D.N.C. 1988) 699 F.Supp. 543, 546 (offer and/or acceptance occurred in state); Rosenthal v. Dean Witter Reynolds, Inc. (Colo. 1995) 908 P.2d 1095, 1104 (offer or sale must take place in Colorado); Lintz v. Carey Manor Ltd. (W.D.Va. 1985) 613 F.Supp. 543, 550 (statute governs sales within state); South Carolina Nat'l Bank v. Stone (D.S.C. 1991) 139 F.R.D. 325, 334 (trust at issue was established and administered in regulating state); Haberman, 109 Wash.2d at 135, [744 P.2d at 1053] (bonds were issued in regulating state); State v. Hayes (Fla. App. 1975) 305 So.2d 819, 821 (offer/sales of securities conducted in regulating state); Upton v. Trinidad Petroleum Corp. (1979) 468 F.Supp. 330, 333 (offer and acceptance of securities occurred in regulating state).

^18/ The fact that a California statute cannot regulate activities "outside [California's] borders" has recently been recognized by the California Court of Appeals in a different context. See Condon v. McHenry (Cal.Ct.App. Jun. 27, 1997) 97 C.D.O.S. 5071, 5072. In Condon, the court examined whether Business and Professions Code Section 6125 regulated the behavior of attorneys who practice California law outside California. Id. Although the court recognized California's interests in overseeing the "practice of law in the state" and ensuring that those who practice law in California do so competently, it ruled that § 6125 could not govern the practice of California law outside California. "[W]e doubt . . . that the Legislature is authorized to prevent an unlicensed person . . from plying California law or transmitting legal communications to anyone within the state, so long as the unlicensed person remains outside the state." Id. (emphasis added). Condon's determination that the Bus. and Prof. Code cannot regulate those practicing California law outside California is yet another example of why statutes such as Section 25400 cannot be construed to regulate securities transactions outside California.

^19/ For example, unlike many other states, New York does not allow private civil actions for securities fraud. See C.P.C. Int'l, Inc. v. McKesson Corp. (1987) 70 N.Y.2d 268, 275-76 [514 N.E.2d 116, 118]; see also note 20 supra.

^20/ Some of the significant differences between Section 25400 and its analogues in other states include the following:

(1) Unlike Section 25400, many states have a privity requirement which limits the class of plaintiffs to those who purchase or sell a security directly to or from the specific defendant. Compare Mirkin, 5 Cal.4th at 1104 with Comment on § 33(A)(1) of Tex. Rev. Civ. Stat. Ann. art. 581-33 (A-B) (West 1964 & Supp. 1996) (Texas requires privity); Arthur Young & Co. v. Mariner Corp. (Fla.Ct.App. 1994) 630 So.2d 1199, 1204 (Florida requires privity); In re Catanella and E.F. Hutton & Co. Sec. Litig. (E.D.Pa. 1984) 583 F.Supp. 1388, 1441 (New Jersey requires privity); Fickinger v. C.I. Planning Corp. (E.D.Pa. 1982) 556 F.Supp. 434, 437 (Pennsylvania requires privity); Whalen v. Connelly (Iowa 1996) 545 N.W.2d 284 (Iowa requires privity);

(2) Unlike Section 25400, many states limit recovery to those plaintiffs who rely on a misstatement. Compare Mirkin, 5 Cal.4th at 1102, with Price v. Long Realty, Inc. (1993) 199 Mich. App. 461, 470 (Michigan requires reliance); Pippenger v. McQuick's Oilube, Inc. (S.D.Ind. 1994) 854 F.Supp. 1411, 1427 (Indiana requires reliance); Foster v. Alex (1991) 213 Ill.App.3d 1001, 1006 (Illinois requires reliance);

(3) Unlike Section 25400, many other states do not require a plaintiff to establish defendant's intent. See Banton v. Hackney (1990) 557 So.2d 807 (no intent required under Alabama law); Farmers & Merchants Bank v. Hamilton Hotel Partners (W.D.Ark. 1988) 702 F.Supp. 1417 (under Arkansas law, negligence is sufficient); and

(4) Many states employ widely different statutes of limitations. See, e.g., C.S.G.A.< § 36b-29(f) (Conn. has a one-year limit); VA Code ANN. § 13.1-522D; Code of Ala. § 8-6-19(f); LSA-RS51:714(c)(1); Miss. Code ANN. § 75-71-717 (Virginia, Alabama, Louisiana and Mississippi have a two-year limit); Kelly v. Primeline Advisory, Inc. (Kan. 1995), 256 Kan. 978 [889 P.2d 130]; 6 Del. C. § 7323(e) (Kansas and Delaware have a three-year limit); 1 C.A. § 502.504, HI St. ANN § 485-20.5; A.C.A. § 23-42-106(f) (Iowa, Hawaii and Arkansas have five-year limits).

^21/ "Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State." United States Constitution, Article IV, §1. The inquiry under this provision of the Constitution is federal in nature and ensures that the forum state respects the sovereignty of the other states whose interests are implicated.

^22/ "No State . . . shall deprive any person of life, liberty, or property, without due process of law. . . ." United States Constitution, Amendment 14, §1. The inquiry under the Fourteenth Amendment addresses the litigants' interests in a fair adjudication of their rights.

^23/ The issue of personal jurisdiction is entirely distinct from the question of the constitutional limitations on choice of law. Phillips Petroleum Co. v. Shutts (1985) 472 U.S. 797, 821, cert. denied, (1988) 487 U.S. 1223.

^24/ The determination that the laws of multiple states will govern may well indicate that there are not sufficient "common questions of law," thereby rendering such matters unfit for class treatment. Cal. Code of Civ. Proc. § 382; see Osborne, 198 Cal.App.3d 646.

^25/ Even if the defendants in this action were deemed California residents, the named plaintiffs and a significant percentage of the plaintiff class are not, and a corresponding percentage of the transactions in question did not take place in California. Consequently, even this case, which is relatively well connected to California, presents choice-of-law issues.

^26/ "The Internet is a unique and wholly new medium of worldwide human communication." Reno v. A.C.L.U. (U.S., 1997) 1997 U.S. LEXIS 4037, *12.

^27/ Each of the alleged misrepresentations in this matter was ostensibly "material," (Plaintiffs' Complaint, App. Ex. A at 43), and, to be actionable, must be. Cal. Corp. Code § 25400.

^28/ See supra at 12-13.

^29/ See note 7, supra.

^30/ Courts have historically simply assumed that California's Blue Sky laws only reach intrastate activity and, therefore, present no preemption issue. See, e.g., Sullivan v. First Affiliated Securities, Inc. 813 F.2d 1368, 1373, cert. denied (1987) 484 U.S. 850 ("federal securities laws do not preempt state securities laws that regulate intrastate offerings of securities and affect interstate commerce only incidentally").

^31/ The fact that California's antifraud statutes prohibit conduct that the federal securities laws now immunize is confirmed by the dramatic increase in the number of securities fraud class actions filed in state court coinciding with the passage of the Reform Act.

The Stanford Study identifies a number of factors that have caused plaintiffs to file shareholder class actions in state court, and concludes that there has been a "significant shift of activity from federal to state court." Stanford Study at ii. In particular, the Stanford Study concludes that the cases being filed in state court are ones that would not fare well in federal court by reason of the Reform Act. Id. Significantly, a greatly disproportionate number of these actions have been filed in California state courts. Id. at Appendix B1-B4 (finding that 40 of the 73 state court complaints filed in the first year after Reform were filed in California.)

In its Report to the President and the Congress on the First Year of Practice Under the Private Securities Litigation Reform Act of 1995 (April 1997) (the "Report to the President"), the Office of the General Counsel of the Securities and Exchange Commission reported that "the most significant development in securities litigation post-Reform Act" may be the increase in the number of securities class actions filed in state court. Significantly, the Report to the President found that "state complaints . . . are more likely to be based solely on forecasts which have not materialized" and "many of the state cases are filed parallel to a federal court case in an apparent attempt to avoid provisions of the Reform Act." Id. at 2. According to two studies considered by the SEC, filings of shareholder class actions in state court increased 100% in the first year after the Reform Act's passage. Id. at 68-69.

^32/ The preemption doctrine derives from the Supremacy Clause of the United States Constitution, which provides that federal laws "shall be the supreme Law of the Land . . . any Thing in the Constitution or Laws of any State to the Contrary notwithstanding." United States Constitution, Article VI, clause 2. By this language, Congress is vested with the power to supersede state statutory, regulatory and common law. See, e.g., Freightliner Corp. v. Myrick (1995) 514 U.S. 280, 115 S.Ct. 1483, 1487-88; International Paper Co. v. Ouellette (1987) 479 U.S. 481, 496.

^33/ The Safe Harbor for forward-looking statements is set forth in Section 27A of the 1933 Act, 15 U.S.C. § 77z-2, and Section 21E of the 1934 Act, 15 U.S.C. § 78u-5. Section 21E of the 1934 Act, provides, in pertinent part:

(c)SAFE HARBOR (1) Except as provided in subsection (b), in any private action arising under this title that is based on an untrue statement of a material fact or omission of a material fact necessary to make the statement not misleading, a person referred to in subsection (a) shall not be liable with respect to any forward-looking statement, whether written or oral, if and to the extent that --

(A) the forward-looking statement is --

(i) identified as a forward-looking statement, and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement; or

(ii) immaterial; or

(B) the plaintiff fails to prove that the forward-looking statement --

(i) if made by a natural person, was made with actual knowledge by that person that the statement was false or misleading. . . .

^34/ Forward-looking statements are defined to include, inter alia, the following:

(A) a statement containing a projection of revenues, income (including income loss), earnings (including earnings loss) per share, capital expenditures, dividends, capital structure, or other financial items;

(B) a statement of the plans and objectives of management for future operations, including plans or objectives relating to the products or services of the issuer;

(C) a statement of future economic performance, including any such statement contained in a discussion and analysis of financial condition by the management or in the results of operations included pursuant to the rules or regulations of the Commission;

(D) any statement of the assumptions underlying or relating to any statement described in subparagraph (A), (B) or (C);

(E) any report issued by an outside reviewer retained by an issuer, to the extent that the report assesses a forward-looking statement made by the issuer; or

(F) a statement containing a projection or estimate of such other items as may be specified by rule or regulation of the Commission.

^35/ As noted in the Report to the President, "[c]ompanies have been reluctant to provide significantly more forward-looking disclosure beyond what they provided prior to enactment of the safe harbor . . . Companies are primarily concerned about . . . potential liability under state law." Report to the President at 5.

^36/ Courts in at least four other states have reached the same conclusion in cases involving similar facts. Orman v. Charles Schwab & Co., Inc. (Ill.App. 1996) 285 Ill.App.3d 937, [676 N.E.2d 241], appeal allowed (1997) 172 Ill.2d 554 [679 N.E.2d 381]; McKey v. Charles Schwab & Co., Inc. (1996) Case No. BC139314, Los Angeles County Superior Court; Gilman v. BHC Securities, Inc. (S.D.N.Y. Dec. 18, 1995) [1995-1996 Transfer Binder] Fed.Sec.L.Rep. (CCH) ¶ 99,051; Eirman v. Olde Discount Corp. (Fla. App. May 21, 1997) 1997 Fla. App. LEXIS 5646.

^37/ Dahl reached the same conclusion for largely the same reasons, noting that:

compliance with the . . . requirements of Minnesota law might put an end to the practice of order flow payments, which is allowed under federal law. Thus, the remedy respondents seek could frustrate the objectives of the SEC and Congress.

given the complicated and intricate nature of the securities industry, anything affecting a practice as widely utilized as this one will have a significant impact on the securities markets nationwide. Whether this impact will be positive or negative is not for this court to judge. It is sufficient for us to identify the national import and possible effect of our decision and recognize that decisions with such a reach are for the SEC and Congress.

^38/ See, e.g., Hyde Park Partners, L.P. v. Connolly (1st Cir. 1988) 839 F.2d 837, 852; Great Western United Corp. v. Kidwell (5th Cir. 1978) 577 F.2d 1256, 1280, rev'd on other grounds sub nom. Leroy v. Great Western United Corp. (1979) 443 U.S. 173; National City Lines, Inc. v. LLC Corp. (8th Cir. 1982) 687 F.2d 1122; see also Kennecott Corp. v. Smith (3d Cir. 1980) 637 F.2d 181; L.P. Acquisition Co. v. Tyson (6th Cir. 1985) 772 F.2d 201.

^39/ The Williams Act, which regulates tender offers and takeover bids, is codified at 15 U.S.C. §§ 78m(d)-(e) and 78n(d)-(f), corresponding to Sections 13(d) and (e) and 14(d)-(f) of the 1934 Act.

^40/ 15 U.S.C. § 77p; 15 U.S.C. § 78bb.

^41/ As the New York Supreme Court in Guice put it: "[s]ubstantially similar savings clauses have been interpreted as . . . leaving the courts to determine when any given State regulation is impliedly preempted because it prevents compliance with the Federal law or the full achievement of congressional objectives." Guice, 89 N.Y.2d at 49-50.