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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK x In re ELAN CORPORATION SECURITIES LITIGATION GARY W. KLEINMAN, Plaintiff, -againstELAN CORPORATION, PLC, et al., Defendant. __________________________________________
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08 Civ. 08761 (AKH) 10 Civ. 05630

REPLY MEMORANDUM OF LAW IN FURTHER SUPPORT OF THE ELAN DEFENDANTS MOTION TO DISMISS THE COMPLAINTS

SHEARMAN & STERLING LLP Jaculin Aaron 599 Lexington Avenue New York, New York 10022-6069 (212) 848-4000 Fax: (212) 848-7179 Counsel for Defendants Elan Corporation, plc, G. Kelly Martin, and Lars Ekman

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TABLE OF AUTHORITIES CASES In re Alstom SA Sec. Litig., No. 03-CV-6595, 2010 WL 3718863 (S.D.N.Y. Sept. 14, 2010)........................................................................................2, 3, 4, 7 Copeland v. Fortis, 685 F. Supp. 2d 498 (S.D.N.Y. 2010) .........................................................5, 6 Cornwell v. Credit Suisse Grp., 666 F. Supp. 2d 381 (S.D.N.Y. 2009) ..........................................6 Cornwell v. Credit Suisse Grp., No. 08-CV-3758, 2010 WL 3069597 (S.D.N.Y. Jul. 27, 2010) ..................................................................................................3, 7 Elliot Associates L.P et al. v. Porsche Automobil Holding SE et al., No. 10 Civ. 0532 (HB) (S.D.N.Y. Dec. 30, 2010) .......................................................................................4, 5 Morrison v. Australia National Bank, 130 S. Ct. 2869 (2010).............................................. passim Plumbers' Union Local No. 12 Pension Fund v. Swiss Reinsurance Co., No. 08-CV-1958, 2010 WL 3860397 (S.D.N.Y. Oct. 4, 2010).......................................3, 6 In re SCOR Holding (Switz.) AG Litig., 537 F. Supp. 2d 556 (S.D.N.Y. 2008)..............................5 Sgalambo v. McKenzie, No. 09-CV-10087, 2010 WL 3119349 (S.D.N.Y. Aug. 6, 2010) .............3 In re Socit Gnrale Sec. Litig., No. 08-CV-2495, 2010 WL 3910286 (S.D.N.Y. Sept. 29, 2010)....................................................................................2, 3, 6, 7, 8 Stackhouse v. Toyota Motor Co., No. 10-CV-0922, 2010 WL 3377409 (C.D. Cal. Jul. 16, 2010) ......................................................................................................7 OTHER H. Bloomenthal & S. Wolff, Distribution compliance period - Regulation S and Am. Depositary Receipts, 3F Sec. & Fed. Corp. Law 27:172 (2d ed. Dec. 2010) ....................4

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Defendants Elan Corporation, plc (Elan), G. Kelly Martin, and Lars Ekman (the Defendants) respectfully submit this reply memorandum of law in response to Plaintiffs Opposition to the Elan Defendants Motion to Dismiss the Complaints (Plaintiffs Opposition or Pl. Opp.) and in further support of Defendants memorandum of law filed in connection with that motion (Def. Mem.). The complaints that are the subject of Defendants motion to dismiss are those filed in the actions In re Elan Corporation Securities Litigation (the Consolidated Complaint) and Kleinman v. Elan Corporation, plc, et al. (the Kleinman Complaint). PRELIMINARY STATEMENT Plaintiffs purport to bring claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the Exchange Act) on behalf of all purchasers of [Elan] publiclytraded stock or American Depositary Receipts (ADRs) and all purchasers of call options of [Elan]. Consolidated Complaint 1; Kleinman Complaint 1. These actions therefore seek relief on behalf of three categories of purchasers, namely: (1) all purchasers of Elan common stock, (2) all purchasers of Elan ADRs, and (3) all purchasers of Elan call options. In their opening brief, Defendants argued that the transactional test promulgated by the Supreme Court in Morrison v. Australia National Bank compels the dismissal of the claims of all three categories of purchasers. 130 S. Ct. 2869 (2010). Plaintiffs now seek to limit the class of plaintiffs they represent to only those investors that purchased Elan ADRs and call options on Elan ADRs on U.S. exchanges (collectively, the Remaining Plaintiffs). Pl. Opp. at 1-2. In so doing, Plaintiffs effectively concede that Morrison warrants the dismissal of all claims based on purchases of Elan equity securities (including Elan common stock) and any call options thereon that did not occur on a U.S. exchange. This Court should therefore dismiss these claims from the Consolidated Complaint and the Kleinman Complaint. See Pl. Opp. at 1, n.4. The Remaining Plaintiffs claims should be dismissed as well. Plaintiffs assert that because the Remaining Plaintiffs purchased Elan ADRs and call options on Elan ADRs on U.S.

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exchanges, Morrisons transactional test is satisfied. This argument ignores that courts applying Morrison have focused the inquiry on where the transaction actually occur[ed]. See, e.g., In re Alstom SA Sec. Litig., No. 03-CV-6595, 2010 WL 3718863, at *2 (S.D.N.Y. Sept. 14, 2010). As set forth in Defendants opening brief, because Elan ADRs represent ownership interests in foreign stock acquired by virtue of overseas transactions, purchases of Elan ADRs or call options on Elan ADRs cannot satisfy either prong of Morrisons transactional test. See Def. Mem. at 1620. Plaintiffs attempt to distinguish In re Socit Gnrale Securities Litigation the only case to squarely apply Morrisons transactional test to trades in ADRs is ineffective and incorrect. Judge Bermans holding expressly relied on the predominantly foreign locus of ADR transactions, and not, as Plaintiffs assert, on the fact that SocGens ADRs did not trade on an official American exchange. Finally, Plaintiffs argument that Section 10(b) should apply to transactions in Elan ADRs because Defendants availed themselves of the United States securities laws is an attempt at misdirection. The exclusive focus of Morrisons transactional test is where the transaction occurred; whether a party availed itself of the U.S. securities laws is irrelevant. Purchases of Elan ADRs and call options on Elan ADRs are not domestic transactions under Morrison. Thus, as is the case with respect to the Plaintiffs claims, the Remaining Plaintiffs claims should also be dismissed. ARGUMENT I. Plaintiffs Opposition Effectively Concedes That Morrison Compels Dismissal of Section 10(b) Claims Based on Purchases of Elan Equity Securities and Call Options Thereon That Did Not Occur on a U.S. Exchange Plaintiffs Opposition does not dispute Defendants argument that Morrison precludes the Section 10(b) claims by all purchasers of Elans common stock, which at all relevant times traded only on foreign exchanges. See Def. Mem. at 6-10. The transactional test promulgated by the Supreme Court in Morrison restricts Section 10(b)s applicability to the purchase or sale of a security [1] listed on an American stock exchange, and [2] the purchase or sale of any other

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security in the United States. 130 S. Ct. at 2888. By its terms, the sole determinant of this bright-line two-part test is the location of the transaction. See id. at 2885 (stating that it is the foreign location of the transaction that establishes [Section 10(b)s] inapplicability). Morrison not only precludes claims by so-called foreign-cubed plaintiffs, but by all purchasers of securities on a foreign exchange or otherwise outside of the United States, regardless of the purchasers nationality or location. See Def. Mem. at 8-10. Every lower court to consider the issue has reached this result. See id.; see also Plumbers Union Local No. 12 Pension Fund v. Swiss Reinsurance Co., No. 08-CV-1958, 2010 WL 3860397, at *9 (S.D.N.Y. Oct. 4, 2010); In re Socit Gnrale Sec. Litig., No. 08-CV-2495, 2010 WL 3910286, at **9-10 (S.D.N.Y. Sept. 29, 2010); Alstom, 2010 WL 3718863, at *2; Sgalambo v. McKenzie, No. 09-CV-10087, 2010 WL 3119349, at *17 (S.D.N.Y. Aug. 6, 2010); Cornwell v. Credit Suisse Grp., No. 08-CV-3758, 2010 WL 3069597, at *3 (S.D.N.Y. Jul. 27, 2010). Morrison compels the dismissal of the Sections 10(b) and 20(a) claims of all putative class members that purchased their Elan securities on foreign exchanges or otherwise outside of the United States. Plaintiffs, finally recognizing Morrisons bright-line two-part test, now seek to represent only those investors that purchased Elan ADRs and call options on Elan ADRs on U.S. exchanges. In so doing, Plaintiffs effectively concede that Morrison requires the dismissal of claims based on purchases of Elan equity securities (including Elan common stock) and any call options thereon that did not occur on a U.S. exchange. II. The Remaining Plaintiffs Claims, Which Are Based on Predominantly Foreign Transactions, Cannot Satisfy Morrisons Transactional Test Plaintiffs assert that because the Remaining Plaintiffs purchased Elan ADRs and call options on Elan ADRs on U.S. exchanges, Morrisons transactional test is satisfied. This argument ignores the fact that lower courts applying Morrison have appropriately focused on where the transaction actually occurr[ed], and not on whether some aspect of the transaction may be domestic. See Def. Mem. at 15-16; Cornwell, 2010 WL 3069597, at *2; Alstom, 2010

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WL 3718863, at *2; see also Morrison, 130 S. Ct. at 2884 ([i]t is a rare case of prohibited extraterritorial application that lacks all contact with the territory of the United States the presumption against extraterritorial application would be a craven watchdog indeed if it retreated to its kennel whenever some domestic activity is involved in the case) (emphasis in original). Because Elan ADRs represent ownership interests in foreign deposited stock acquired by virtue of the foreign transfer of that stock, transactions in Elan ADRs do not actually occur on a domestic exchange or in the United States. See Def. Mem. at 12-20. Not surprisingly, Plaintiffs Opposition fails to adequately address these arguments. ADRs are substitute trading vehicle[s] for foreign securities, enabling a holder to transfer title to the underlying foreign securities by transferring the ADR. H. Bloomenthal & S. Wolff, Distribution Compliance Period Regulation S and Am. Depositary Receipts, 3F Sec. & Fed. Corp. Law 27:172 (2d ed. Dec. 2010); see also Def. Mem. at 12-14. Elan ADRs trade domestically only as a matter of form, operating as mechanisms of convenience designed to facilitate foreign trade. See Def. Mem. at 12-14. Because Elan ADRs are issued only to evidence ownership interests in foreign deposited shares, trades in Elan ADRs are not domestic transactions under either prong of Morrisons test. See id. Plaintiffs sole attempt to address this point is their argument buried in a footnote that the underlying foreign transfers necessary to create Elan ADRs are some event ancillary to an otherwise domestic transaction. See Pl. Opp. at 10, n. 11. Plaintiffs reasoning is backwards. Absent the underlying foreign transaction, the ADR cannot be issued. More specifically, Elan ADRs are literally receipts for ownership interests in the deposited foreign stock, such that they are designed to be readily exchangeable into the stock itself at any time. See Def. Mem. at 16-20. The court in Elliot Associates L.P et al. v. Porsche Automobil Holding SE et al., No. 10CV-0532 (HB) (S.D.N.Y. Dec. 30, 2010), recently addressed a similar issue. That court considered whether plaintiffs swap agreements, which were executed in the U.S., but for which the reference entity was VWs shares traded on a German exchange, constituted domestic transactions under Morrison. Id. at 11-12. The court reasoned that even though the swap 4

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agreements were executed in the U.S., the fact that the economic value of [the] securities-based swap agreements [was] intrinsically tied to the value of VWs foreign shares must play a role in determining whether a transnational swap agreement may be afforded the protection of 10(b). Id. at 12. The court ultimately held that plaintiffs swap agreements were not domestic transactions under Morrison because they were the functional equivalent of trading the underlying VW shares on a German exchange.1 Id. As set forth above, Elan ADRs similarly derive their existence and value from underlying overseas transactions in foreign-traded stock. Thus, for purposes of Morrisons transactional rule, it is the domestic issuance and purchase of Elan ADRs that is some event ancillary to what are otherwise predominantly foreign transactions. The fact that transactions in ADRs are predominantly foreign has been recognized by both pre- and post-Morrison courts. See Def. Mem. at 13-14. Plaintiffs argue that the pre-Morrison decisions cited by Defendants are not relevant because those courts applied the old effects test to conclude that trades in ADRs are predominantly foreign. See Pl. Opp. at 9-10. This is incorrect. The pre-Morrison cases Defendants cited, including Copeland v. Fortis, 685 F. Supp. 2d 498 (S.D.N.Y. 2010), did not apply the effects test in order to conclude that transactions in ADRs are predominantly foreign rather, these courts found that because transactions in ADRs are predominantly foreign, application of the effects test was necessary to determine Section 10(b)s extraterritorial reach. See Def. Mem. at 13-14; see also In re SCOR Holding (Switz.) AG Litig., 537 F. Supp. 2d 556, 561 (S.D.N.Y. 2008) (stating that when a court [was] confronted with transactions that on any view [we]re predominantly foreign, the Second Circuit required courts to apply the conduct or effects tests to determine the extraterritorial reach of Section 10(b)) (internal quotation marks and citations omitted). For

The court also based its decision in part on its reasoning that it was loath to create a rule that would make foreign issuers with little relationship to the U.S. subject to suits here simply because a private party in this country entered into a derivatives contract that reference[d] the foreign issuers stock. Id. at 13.

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example, in Copeland, the court determined that because [t]rade in ADRs is considered to be a predominantly foreign securities transaction, plaintiffs in that case were required to make a showing under the old effects test that the alleged securities fraud produced substantial effects in the United States. 685 F. Supp. 2d at 506. Similarly, in Cornwell v. Credit Suisse Group, the court determined its subject-matter jurisdiction was questionable because purchases of ADRs might still be considered predominantly foreign transactions, and so subsequently analyzed whether the old effects test could be satisfied. 666 F. Supp. 2d 381, 395 (S.D.N.Y. 2009) (internal citations omitted). Consideration of the fact that transactions in ADRs are predominantly foreign therefore does not resurrect the old effects test to the contrary, it speaks directly to the question of the location of the transaction, the exclusive focus of Morrisons transactional test. Accordingly, the court in Socit Gnrale the only case to apply Morrison to this issue held that because transactions in ADRs are predominantly foreign, they cannot satisfy Morrisons transactional test. 2010 WL 3910286, at *6; Def. Mem. at 14-15. Plaintiffs attempt to distinguish this case is incorrect and ineffective. Although Judge Berman noted that SocGens ADRs were traded over-the-counter in a less formal market with lower exposure to U.S.resident buyers, Plaintiffs are wrong that his decision relied on that fact. 2010 WL 3910286, at *6; Pl. Opp. at 7. First, Plaintiffs misguided interpretation is belied by the express language in Socit Gnrale, in which Judge Berman stated that: [T]he court concludes that the Exchange Act is inapplicable to UFCWs ADR transactions. That is, the Court finds that, because trade in ADRs is considered to be a predominantly foreign transaction, Section 10(b) is inapplicable. 2010 WL 3910286, at *6 (emphasis added) (internal citations omitted); see also id. at **6-7 (Trade in SocGen ADRs is a predominantly foreign securities transaction Accordingly, UFCWs claims are also dismissed.) (internal citations omitted). Plaintiffs Opposition conveniently fails to address this critical portion of the decision. See Pl. Opp. at 7.

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Second, exposure to U.S. resident-buyers is a factor irrelevant to Morrisons transactional test, for which the sole focus is the location of the transaction. Indeed, in Morrison, the Supreme Court noted that one reason why the conduct test should no longer be used is that it was held to apply differently depending on whether the harmed investors were Americans or foreigners. Morrison, 130 S. Ct. at 2879; see also Def. Mem. at 15. Third, Plaintiffs argument that Socit Gnrale was wrongly decided is a direct result of Plaintiffs misreading of Judge Bermans decision. See Pl. Opp. at 7, n.9. Specifically, Plaintiffs assert that because SocGens ADRs were unquestionably traded in the United States, the Socit Gnrale court simply ignored the second part of the Morrison test, which extended Section 10(b)s reach to misconduct in connection with the purchase or sale of any other security in the United States. Id. (citing Morrison, 130 S. Ct. at 2888). But as set forth above, Judge Bermans rationale in Socit Gnrale relied on the predominantly foreign locus of ADR transactions, and not on whether the ADRs traded on over-the-counter markets as opposed to on an official American exchange. Judge Berman therefore did not ignore the second prong of Morrisons test but rather concluded that, as predominantly foreign transactions, trades in ADRs could not satisfy that prong. Unlike Socit Gnrale, the three cases construing Morrison cited by Plaintiffs as purportedly supporting a contrary conclusion do not directly address Morrisons application to trades in ADRs. See Pl. Opp. at 7-8. In Stackhouse v. Toyota Motor Company, the court ultimately appointed an ADS holder as the lead plaintiff but did so without ever squarely applying Morrisons transactional test to the ADR transactions at issue. No. 10-CV-0922, 2010 WL 3377409, at *2 (C.D. Cal. Jul. 16, 2010), As for Cornwell and Alstom, in both cases defendants moved for dismissal based on Morrison only with respect to the Section 10(b) claims brought by plaintiffs that purchased their stock on a foreign exchange, and not with respect to the claims of the ADR purchasers. See Cornwell, 2010 WL 3069597, at *1; Alstom, 2010 WL 3718863, at *1; Pl. Opp. at 8. The defendants therefore did not raise and the courts had no occasion to consider whether Morrisons transactional test precluded the ADR purchasers 7

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claims. Socit Gnrale is the only case to have expressly addressed this issue; as discussed above, that case unequivocally held that trades in ADRs, even if they occurred in the U.S., are predominantly foreign and therefore cannot satisfy Morrisons transactional test. The above arguments apply with equal force to purchases of call options on Elan ADRs. Def. Mem. at 16. Like Elan ADRs, call options on Elan ADRs are necessarily derivative of underlying overseas deposits of Elans foreign-issued stock to a foreign custodian. See id. As a result, the actual locus of these transactions under Morrison whether purchased on the New York Stock Exchange or on other U.S. exchanges is predominantly foreign, not domestic. Claims based on these transactions therefore likewise cannot satisfy Morrisons transactional test. Finally, Plaintiffs argument that Section 10(b) should apply to the Remaining Plaintiffs claims because Defendants ch[ose] to submit [themselves] to the listing requirements and regulatory oversight of the Exchange Act is an attempt at misdirection. See Pl. Opp. at 11. The sole determinant of Morrisons transactional test is the location of the transaction. See Def. Mem. at 6-7. Whether Defendants did or did not avail themselves of the U.S. securities laws is irrelevant. As set forth above and in Defendants opening brief, under Morrison, trades in Elan ADRs or call options on Elan ADRs are not domestic transactions. Plain and simple this ends the inquiry. The Remaining Plaintiffs claims must be dismissed.

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CONCLUSION For the foregoing reasons, the Defendants motion to dismiss should be granted and the Consolidated Complaint and the Kleinman Complaint should be dismissed with prejudice.

Dated: January 7, 2011

Respectfully submitted,

SHEARMAN & STERLING LLP

By:

s/ Jaculin Aaron_____________ Jaculin Aaron 599 Lexington Avenue New York, New York 10022-6069 (212) 848-4000 Fax: (212) 848-7179 Counsel for Defendants Elan Corporation, plc, G. Kelly Martin, and Lars Ekman

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CERTIFICATE OF SERVICE I, Jaculin Aaron, hereby certify that on January 7, 2011, I caused the foregoing to be electronically filed with the Clerk of the Court using the CM/ECF system, which will send notification of such public filing to all counsel registered to receive such notice. s/ Jaculin Aaron Jaculin Aaron