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					                                          No. 08-35095


!                  IN THE UNITED STATES COURT OF APPEALS
                            FOR THE NINTH CIRCUIT

I              Thomas   R. Dreiling,     a shareholder      of INFOSPACE,       INC.,

I                                      Plaintiff-Appellant,
                                                VS.


!                              AMERICA ONLINE, INC.,                           FILED
                                a Delaware corporation,                          AU6 I 2 2008
                                   Defendant-Appellee,
I                                              and
                                                                              MOLLY O. DWYER, CLERK
                                                                               U.8. COURTOFAPPEAL8


I                                       InfoSpace, Inc.,
                                       Nominal Defendant.

I                  On Appeal from the United States District Court
                       for the Western District of Washington
I                 The Honorable     James L. Robart, U.S. District Judge
                                (Seattle, No. C05-1339JLR)
I
                APPELLANT       THOMAS         DREILING'S          REPLY BRIEF
I
    Richard E. Spoonemore                             David M. Simmonds (WSBA #6994)
I                           (WSBA #21833)
    Stephen J. Sirianni (WSBA#6957)                   6128 - 204 _ Drive N.E.
    SIRIANNI   YOUTZ MEIER & SPOONEMORE               Redmond,         WA 98053
I   719 Second Avenue, Suite 1100
    Seattle, WA 98104
                                                      Telephone:        (425) 417-5414
                                                      Facsimile:        (425) 898-9279

I   Telephone:
    Facsimile:
                (206) 223-0303
                (206) 223-0246

I                          Attorneys      for Appellant     Dreiling
                                             TABLE OF CONTENTS


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

I   ARGUMENT         ...........................................................................................................             3

              A SECTION 13(D) GROUP IS FORMED BY AN AGREEMENT
i                                                                                                                          TO
       I°



              ACT TOGETHER                  FOR THE PURPOSE                    OF ACQUIRING,
              HOLDING,            VOTING          OR DISPOSING                OF ISSUER SECURITIES.

i             "POOLING"
              THE LISTED OBJECTIVES,
                                    OF SHARES,              OR A GROUP              PURPOSE            BEYOND
                                                            IS NOT REQUIRED ...........................................                      3

I             A°      The District Court Improperly   Required the
                      Objectives of Acquiring,  Holding, Voting or
I                     Disposing   to Serve Some Larger Goal .......................................                                          3

              B,      Plaintiff         Need Not Prove that AOL and Jain
i                     "Acted"           as Beneficial Owners of Each Others'
                     Shares. All That Is Required Is An Agreement
I                    To Act Together for the Purpose of "Acquiring,
                     Holding, Voting or Disposing of" Issuer
                     Securities ........................................................................................                     4
i
       II.    AOL AND JAIN MANIPULATED INFOSPACE'S

!             ACCOUNTING ..........................................................................................                          8

       III.   A JURYCOULD FIND THAT JAIN AND AOL AGREED TO
I             ACT TOGETHER                  TO    ACQUIRE INFOSPACE                         SECURITIES           ........................   10


              A.     A Plaintiff is Not Required                              to State Every Theory
I                    of Recovery in a Complaint                               ......................................................        10


i                    A Group is Formed If Persons "Act Together" to
                     Acquire Issuer Securities Through Accounting
                     Manipulation  ...............................................................................                          11
l
                     Conduct Evidencing    Joint Coordination                                            in 1998

I                    is Relevant to Later Section 13(d) Group                                            Status ....................        12
I                     1.       Evidence of Group Conduct May Pre-
                               Date Registration ................................................................                  12
I                     2.       Evidence of Group Conduct May Pre-
                               Date Beneficial Ownership ................................................                          14
I            Do       If a Group is Formed to Acquire Securities, the

i                     Group is Subject to Section 16(b) Throughout
                      Period that Group Members Collectively                              Own
                                                                                                   the

                      More than 10 go............................................................................
                                    o
                                                                                                                                   16
I      IV.   A JURY COULD FIND THAT AOL AND JAIN HAD AN

I            AGREEMENT                 TO HOLD             AND DISPOSE                 OF INFOSPACE
             SECURITIES ............................................................................................               18


I      Vo    ADVERSE INFERENCES
             THE REFUSAL OF
                                                          SHOULD            HAVE BEEN DRAWN
                                               AOL's FORMER EXECUTIVES TO TESTIFY .................
                                                                                                                       FROM
                                                                                                                                   20

I            A.       There is Substantial Evidence Corroborating               the
                      Inferences to be Drawn From Keller and

I                     Colburn's  Fifth Amendment    Pleas ..........................................                               20

             B.       Plaintiff has No Duty to Demonstrate                                         Ongoing
I                     Loyalty Between AOL and its Former Executives.
                      .......................................................................................................      21

I      VI.   DREILING'S SECTION 16(B) ACTION AGAINST AOL IS
             NEITHER AN "EXPANSION"    OF THE STATUTE NOR AN "END

I            RUN"        AROUND              CENTRAL            BANK ...........................................................   23


    CONCLUSION           .....................................................................................................     27
I




                                                                      ii
                                              TABLE OF AUTHORITIES


I
                                                                  Cases
I   American Timber & Trading Co. v. First Nat. Bank of Oregon,
       690 F.2d 781 (9 th Cir. 1982) .............................................................................                 11
I
    Arrow Dist. Comp. v. Baumgartner,

I      783 F.2d 1274 (5th Cir. 1986) ...........................................................................                   26

    Bennett v. Schmidt,
I      153 F.3d 516 (7th Cir. 1998) .............................................................................                  11

    Brink's Inc. v. City of New York,
I       717 F.2d 700 (2a Cir. 1983) ..............................................................................                 22


I   Central Bank v. First Interstate                   Bank,
         511 U.S. 164 (1994) ...........................................................................................           24

I   Cutter & Buck Inc. v. Genesis Ins. Co.,
         306 F.Supp.2d            988 (W.D. Wash. 2004) .........................................................                  22

I   FDIC v. Fidelity & Deposit Co. of Md.,
       45 F.3d 969 (5th Cir. 1995) ...............................................................................                 22
I   In re World Access, Inc. Securities Litig.,
       119 F. Supp. 2d 1348 (N.D. Ga. 2000) ...........................................................                            20
I
    Jewelcorp Inc. v. Pearlman,

I      397 F.Supp. 221 (S.D.N.Y. 1975) ....................................................................                        24

    Kay v. Scientex Corp.,
I      719 F.2d 1009 (9th Cir. 1983) ...........................................................................                   24

    Lerner v. Millenco,            L.P.,
I       23 F.Supp.2d            337 (S.D.N.Y.            1998) .................................................................   26


I   LiButti v. United States,
       107 F.3d 110 (2a Cir. 1997) ..............................................................................                  22

I
                                                                     °.°
                                                                    III

I
I   Morales v. Quintel Entertainment,    Inc.,
       249 F.3d 115 (2a Cir. 2001) .....................................................................                                     passim
I   Mosinee Paper Corp. v. Rondeau,
      500 F.2d 1011 (7th Cir. 1974), rev'd on other grounds, 422 U.S. 49
i      (1975) ...................................................................................................................                     8


!   RAD Servs., Inc. v. Aetna Casualty & Sur. Co.,
      808 F.2d 271 (3 a Cir. 1986) ..............................................................................                                 21

I   Rosenberg v. XM Ventures,
       274 F.3d 137 (3 d Cir. 2001) ..................................................................                                     14, 15, 16

I   Roth v. Jennings,
       489 F.3d 499 (2a Cir. 2007) ..................................................................                                      14, 16, 21
I   Schaffer v. CC Investments, LDC,
       2002 WL 31869391, *2, *5-7 (S.D.N.Y. 2002) ................................................                                                14
I
    Schaffer v. CC Investments, LDC,

I      280 F. Supp.2d 128 (S.D.N.Y. 2003) ..............................................................                                          14

    SEC v. Colello,
I        139 F.3d 674 (9th Cir. 1998) .............................................................................                               20

    Securities & Exchange Comm" n v. Antar,
1      15 F. Supp. 2d 477 (D. N.J. 1998) ...................................................................                                      20

    Warner Commc" ns, Inc. v. Murdoch,
      581 F.Supp. 1482 (D. Del. 1984) ...............................................................                                         23, 24


                                                                      Statutes

I   15 U.S.C. § 78c(a)(11)                   ...........................................................................................          13

    15 U.S.C. § 78m(d)(1)                    ...........................................................................................          13
I   15 U.S.C. § 78p(a)(1) .............................................................................................                           13

I   15 U.S.C. § 78p(b) .................................................................................................                          16



                                                                            iv
I
I                                                                  Regulations


I   17 C.F.R. § 240.13d-5                    ....................................................................................              passim

    17 C.F.R. § 240.16a-1(a)(1)                        .....................................................................................            6
I   17 C.F.R. § 240.16a-l                   (a) (2) .....................................................................................               6

I                                                           Other Authorities

I   EITF No. 96-18 ........................................................................................................                             9

    L. Loss, FUNDAMENTALSOF SECURITIESREGULATION (1983) ............................                                                                26
!
    Ownership Reports and Trading by Officers, Directors and Principal

I     Stockholders, SEC Release No. 34-26333, 53 Fed. Reg. 49997-02,
      1988 WL 268999 (1988) ...................................................................................                                     27

I   Peter J. Romeo & Alan L. Dye, SECTION 16(B) TREATISE (3d Ed.
        2008) ....................................................................................................................                      6

!
I
I
I
i
1
I
I
I
                                                                            V

I
i                                                 INTRODUCTION

              This case should         not have been taken from the jury. The jury could
I
    have found         that:    (a) communications           between        AOL and Jain evidenced                    an

I   agreement       to act together          to manipulate      InfoSpace's        accounting;         and

    (b) the agreement            was designed         to allow AOL to acquire               InfoSpace       stock
I   through      a warrant        agreement,       to hold that stock and then to dispose                      of it

I   in a market        artificially    inflated    by the manipulation.             If the jury so found,              it

    would      follow that Jain and AOL had formed                      a group      under        Section    13(d),
I   as implemented             by Rule 13d-5(b)(1).

I             AOL and the district            court, however,        maintain       that a Section          13(d)

    group     requires      more.      The district     court required         an 'agreement          among
i   group     members          that serves     some distinct        group     goal beyond          the objectives

!   listed in the Rule.          AOL asserts       that a group       can only exist if its members

    "pool"      their shares      or act as if they beneficially             own each other's          shares.
I            Neither     view can be squared            with Rule 13d-5(b)(1).               The sources         of


I   these additional           requirements        - common        fact patterns         in Section    13(d)

    cases or the purported             purpose      behind    Section       13(d) - do not support              a

I   departure      from the Rule's           plain language.         Simply     because       many      cases

    involve     groups      that seek to exercise         control     by pooling         shares     does not
I   mean      that control      is a legal prerequisite        to group        status.     Likewise,

I   although      the ultimate        purpose      behind    Section        13(d) is to alert the

    marketplace        to potential       shifts in corporate        control,     the text of the statute
I   demands       compliance          regardless      of whether      the group          members      actually

I   pool shares        to achieve      that, or any other, end.
I             Moreover,         nothing      supports        the view that evidence               of group       activity

I   which       pre-dates      either registration            of an issuer's        shares      or beneficial

    ownership         by all group         members           should     be ignored.          In fact, many       groups
I   make agreements              to acquire         shares    before an issuer          registers     its shares           and

I   before      all the group          members       own shares.          That evidence           is admissible            in

    determining            whether      a Section      13(d) group         exists after registration             and
I   after all members            have acquired           shares.

I             The district       court's     conclusion         that Section        16(b) liability     cannot          be

    predicated        on a joint manipulative                 scheme      (as opposed,           presumably,          to
I   inadvertence           or solo activity)         turns    the statute      on its head.         Section     16(b) is


I   an anti-fraud           (insider     trading)     statute    that, in order to serve its

    prophylactic           purpose,      does not impose              a scienter    requirement.         It is

I   perverse       to conclude          that a statute       designed       to deter fraud          should      not

    extend       to cases like this one, where                there happens           to be compelling
I   evidence       of intentional          wrongdoing           by two joint actors engaged                  in the very

I   evil that the statute            was designed            to combat.

             This case does not circumvent                      the primary         liability    requirement            of
I   Section      10(b).     Even if Section          16(b) contained          such a requirement,               it is

I   satisfied      here.     AOL and Jain both directly                  profited      from the short-swing

    trades      that they directly          made.      They were not mere brokers,                   bankers,
I   lawyers       or auditors          who helped       their clients to profit.             They are primary

I   actors      directly     subject     to the prohibitions            in Section      16(b).




                                                                2
I                                                ARGUMENT


I   Io       A SECTION
             TOGETHER
                             13(D)      GROUP IS FORMED
                             FOR THE PURPOSE
                                                                  BY AN AGREEMENT
                                                        OF ACQUIRING,        HOLDING,
                                                                                           TO ACT
                                                                                            VOTING
             OR DISPOSING           OF ISSUER    SECURITIES.        "POOLING"        OF SHARES,
I            OR A GROUP PURPOSE              BEYOND        THE LISTED      OBJECTIVES,     IS NOT
             REQUIRED.

I            ko
                     The District Court Improperly                   Required the Objectives
                     of Acquiring, Holding, Voting                   or Disposing to Serve
I                    Some Larger Goal.

             Contrary      to AOL's       suggestion,       the district   court grafted     requirements
I
    onto Section        13(d).    It required    that in acquiring,        holding     and disposing    of

I   issuer   securities,     the specifically      proscribed       objectives   must      themselves

    serve    some   larger       end.   As it explained:
I
                    The cases finding Section 16(b) liability, based on

i                   group formation
                    patterns    where
                                          under Section 13(d), involve fact
                                           the   defendants     attempted     to
                    capitalize  in some way, either by taking control of
I                   the company,       preventing     its sale, or otherwise
                    influencing   stock price, by agreeing        to pool their
I                   shares and voting, disposing
                    effectuate their common purpose.
                                                         or holding    them to


I   ER 14, Ins. 19-23 (emphasis              added).       It continued:

                    Global Intellicom is a good example               of a plaintiff
I                   pleading    sufficiently    a Section 13(d) group wherein
                    the    underlying        "common        objective"     was       to
I                   manipulate      stock, but also alleging sufficient facts
                    that the defendants        acquired,    held, voted or sold

I                   stock in furtherance
                    Absent      the     latter
                                                  of this common
                                                  allegations       there
                                                                          objective.
                                                                             is    no
                    Section 13(d) group.
I   ER 20, Ins. 13-19 (emphasis             added).

i
I
I          From the district            court's    perspective,       the agreement          to act together        to

I   acquire,        hold, vote or dispose         of securities       must be the means           to some

    ultimately        distinct     group    end. This was error.           As the Morales court held in
I   directly     addressing         this issue:

I                      Neither    provision    [Section13(d)(3)    nor Rule 13d-
                       5(b)(1)]    mandates     that    the narrow       object    of

i                      acquiring,
                       securities
                                      holding,     voting,
                                    must itself serve a broader
                                                                or disposing
                                                                       purpose
                                                                                   of
                                                                                   of
                       seeking    corporate    control    or otherwise     exerting
I                      influence over corporate affairs.

    Morales v. Quintel Entertainment,                  Inc., 249 F.3d 115, 124-25 (2d Cir. 2001).
I
               B.       Plaintiff  Need Not Prove that AOL and Jain "Acted"                               as

I                       Beneficial
                        Required
                                    Owners of Each Others' Shares.
                                   Is An Agreement
                                                                    All That
                                                     To Act Together for the
                                                                                                         Is


                        Purpose of "Acquiring,   Holding, Voting or Disposing
!                       of" Issuer Securities.

           According             to AOL, an agreement             to act together     to acquire,       hold,
I
    vote or dispose         of shares       is not enough         to establish     a group.      AOL argues

I   that a plaintiff       is additionally        required       to show that group           members

    "pooled"         their shares     or otherwise        acted in a manner          suggesting         that they
I   beneficially       owned       each other's       shares.     This theme       underlies      AOL's        brief.

I   AOL Br., p. 37 ("Absent                evidence     that AOL and Mr. Jain acted                as

    beneficial       owners       of one another's       InfoSpace       stock, plaintiff's       Section 16(b)
I   claim fails as a matter           of law.")       (emphasis      added); p. 38 (Plaintiff's

!   evidence        "did nothing       to establish      any beneficial          ownership      by AOL of

    Mr. Jain's InfoSpace            stock (or vice versa).");          p. 41 ("Section         13(d) requires
!   that group        members        act together      with respect       to the acquisition        of stock,



                                                             4
I   such that each is properly             considered        the beneficial      owner    of the other's

I   shares.").

            AOL improperly             reads    additional     language        into Rule 13d-5(b)(1),
I   arguing      that the relevant        test is whether       AOL and Jain "'agree[d]             to act

I   together      for the purpose        of acquiring,       holding,     voting     or disposing     of

    InfoSpace       securities'      such that 'the group        formed        thereby    [is] deemed         to
I   have acquired         beneficial     ownership,       ... as of the date of such agreement,                    of

I   all equity      securities     of that issuer     beneficially       owned      by any such

    persons.'"       AOL Br., p. 26 (emphasis             added).        Under     AOL's re-write        of
I   Rule 13d-5(b)(1),           the listed purposes       must further         be of a type "such        that"


I   group       members      receive    an ownership         benefit     from each other's       shares. 1

            To advance           its argument       AOL blends         the definition    of beneficial

I   ownership        under       Rule 16a-1(a)(1)     with the separate            - and inapplicable         -


I   definition

    owner
                    under

                of securities
                                Rule 16a-l(a)(2).

                                   is "any person
                                                       Under     Rule 16a-1(a)(2),

                                                       who, directly
                                                                                          a beneficial

                                                                             or indirectly,   through         any.

i   contract,      arrangement,        understanding,         relationship       or otherwise,      has or


I
        1 AOL argues this requirement    stems from cases finding groups in
I   which members pooled their ownership       interests.   AOL Br., pp. 27-28. It
    does not follow, however, that pooling is a legal requirement        for group

I   status. For example, most cases involve facts indicating       that group
    members were seeking to exert control over the issuer. Morales, 249 F.3d at
    124. That does not mean that intent to control the issuer is a prerequisite    to
I   existence of a group. Id. The statute and regulation      determine    group
    existence, not the fact patterns in AOL's cases. Id. at 124-25. ("The plain

I   language   of § 13(d)(3) demands only an agreement
    acquiring, holding, or disposing of securities .... ").
                                                            'for the purpose of



I
I
I   shares      a direct or indirect       pecuniary       interest      in the equity          securities."

I   17 C.F.R. § 240.16a-l(a)(2).              This definition,        linked     to pecuniary          interests     in

    securities,     does not apply here.            Id. (Rule 16a-1(a)(2)             applies      "other      than for
I   purposes       of determining         whether       a person      is a beneficial       owner         of more

I   than ten percent          of any class of equity           securities    .... ").

               Rather     than using the foregoing             definition      for all purposes           under
I   Section      16, the SEC set forth a different              test for insider        status      with respect

I   to 10 % group          ownership.        In that area, "the term beneficial                  owner      shall

    mean       any person      who is deemed           a beneficial      owner        pursuant       to
I   Section      13(d) of the Act and rules thereunder                   .... " 17 C.F.R. § 240.16a-


I   1(a)(1).

             This distinction          has been in effect since 1991, when                  the SEC divorced

!   the concept         of a pecuniary       benefit    from the definition             of beneficial

    ownership           for purposes     of determining          group      status:
I
                        Prior to the Commission's         1991 rule changes, courts

i                       generally     held that a member
                        group was not required
                                                                 of a Section13(d)
                                                        to aggregate   the securities
                        holding    of all group members          when determining
I                       his or her status as a ten percent owner, absent a
                        showing      that group      members     received    a direct
I                       pecuniary
                        These decisions
                                       benefit from other member's
                                              were effectively   overturned
                                                                           securities.
                                                                               by the

I                       Commission's
                        which incorporated
                                           adoption    in 1991 of Rute 16a-l(a)(1),
                                                  the Section 13(d) standards          of
                        beneficial    ownership     for purposes     of determining
I                       ten percent owner status.

    Peter J. Romeo          & Alan L. Dye, SECTION 16(B) TREATISE, § 2.0316], p. 159 (3 d
I   Ed. 2008) (emphasis            added).

I
                                                           6
I
I              Since 1991, under        Section       13(d) and Rule 13d-5(b)(1),                if there is an

I   agreement        to act together        related     to one of the listed purposes,                then the

    parties      are automatically         "deemed"        to beneficially          own each other shares.
I   No additional        showing       or "finding"        is necessary:

I                     When two or more persons agree to act together for
                      the purpose       of acquiring,    holding,    voting    or

!                     disposing of equity securities of an issuer, the group
                     formed     thereby shall be deemed to have acquired
                      beneficial ownership,    for purposes    of Section 13(d)
I                     and (g) of the Act, as of the date of such agreement,
                      of all equity shares of that issuer beneficially    owned
I                     by any such persons.

    17 C.F.R. § 240.13d-5(b)(1)               (emphasis      added).
I              The question       presented      here is whether           the Dreiling          has shown        an

I   agreement        to act together,        between      AOL and Jain, "for the purpose                     of

    acquiring,      holding,      voting     or disposing         of equity       securities."      The plain
I   language       of the Rule requires          nothing         more.    Morales, 249 F.3d at 124-25.


i              This construction       is consistent       with the legislative            and regulatory

    history.      Section 13(d)(3) was designed                  to "prevent        a group       of persons      who

i   seek to pool their voting              or other interests        in the securities           of an issuer

    from evading        the provisions          of the statute."          However,        it (and the
i
    implementing         regulation)        were drafted          in a prophylactic         manner       that

i   required       filing by any group          regardless        of whether        they were, in fact,

    pooling      their shares.      Morales, 249 F.3d at 124. The reporting                        requirement
i   is triggered      by accumulation           itself, without          regard     to the purpose       of the

i   acquisition      of shares:




                                                             7
I                      To this       observation        we       add    what       is self-evident
                       from the language      and legislative    history   of the
I                      Williams    Act,   the   reporting     requirements      of
                       Section 13(d) apply regardless       of the purchaser's

I                      purpose in acquiring the shares.

    Mosinee Paper Corp. v. Rondeau, 500 F.2d 1011, 1016 (7th Cir. 1974), rev'd on

I   other grounds, 422 U.S. 49 (1975) (emphasis                         added).      Lack of control-related


!   pooling      is no defense         under    Section      13(d)(3).     Under        Rule 13d-5(b)(1),       an

    agreement         to act together       to acquire,       hold or dispose           of shares    creates a

I   group      and reporting          is required      regardless        of the ultimate       intent     (or lack

    thereof)     of the members.
i   II.       AOL     AND     JAIN    MANIPULATED            INFOSPACE'S           ACCOUNTING.


I             The district       court concluded          that "there      is evidence       to support

    Mr. Dreiling's          first allegation        of concerted       activity,     i.e., to secretly     influence
!   the corporate        affairs     of InfoSpace       by creating        artificial    revenues        and

I   earnings        .... " ER 16, Ins. 8-11. There           are a raft of emails          between        Jain and

    AOL discussing            a scheme      to "front-load"            AOL's payments           to InfoSpace         to
l   create     the illusion      of a penalty       so that AOL's warrants               could be expensed

I   in 1998.     See e.g. ER 242 ("The whole                 idea of accelerated           payment        was to

    take care of penalty             that you will end up paying               us in case you terminated
I   the contract       for any business         reason.");        ER 181; ER 240; ER 379. Jain even

I   admitted        that "part       of the thing is trying         to mitigate"        the effect of a penalty.
    ER 352-53.

I             AOL argues         that there was no impropriety.                    AOL Br., pp. 15-17. It

    asserts    that because          the payments        in the final version           of the Agreement
I
    were not guaranteed,              AOL was subject             to a penalty.         AOL Br., p. 16. It then

I
                                                             8
I
I   argues       that the contractual           penalty      was sufficient        under      the relevant

I   accounting          standard      because     there was a hypothetical                 circumstance           under

    which       AOL would           be subject     to a "real"        $2 million     penalty.        AOL Br., pp.
I   16-17.       AOL's     argument         rests on the erroneous            assumption          that the

I   performance           hurdles      in the final Agreement              were real.       It also ignores          the

    requirements          of the relevant         accounting          standard.
I              AOL's     performance          hurdles      were set so low as to be meaningless.

I   ER 328 (Jain to AOL:               "you can pick the number                   of searches     to be small

    enough        that you will meet them for sure...');                    ER 324 ("we would                use a
i   lower      search     guarantee...');        ER 326 (concerning               "lowering      warrant          vesting


I   levels"      in connection        with penalty          provision).       As part of the scheme,                Jain

    and AOL created             performance            hurdles       that were illusory.         AOL was never,

I   in reality,     at "risk"      for meeting         any of the performance               targets.

               In any event,        it is irrelevant      whether       the payments          were
I   "guaranteed"           or not.     Whether         the cash payments            were contingent           upon

i   reaching       performance          goals has nothing             to do with whether           there is a

    sufficient     penalty      in the Agreement             as defined       by EITF No. 96-18.             The
I   accounting          standard      makes      it clear that the loss of cash payments                     and

I   warrants       is not sufficient        to create a sufficient           penalty     for nonperformance.

    ER 230 (Example             6); ER 901 ("Forfeiture               of the consideration             received     or to
I   be received         does not represent             a sufficiently      large disincentive            under     the

I   rule.");     ER 217. There must be a substantial                      freestanding        penalty,      beyond

    forfeiture     of performance-based                 cash or warrants,          before     the warrant          can
I

                                                                 9
I   be expensed          at the time of contracting              rather     than at the time of

I   performance.           ER 230; ER 901; ER 888-89.

              Finally,    AOL argues         that there is a single hypothetical                 circumstance
I   under      which it would         have been subject            to a real penalty.         The

I   circumstance          it posits, however,         could never occur because,                 in fact, the

    hurdles       were manipulated.            Moreover,         the relevant        test is whether         a
I   counterparty          is always     subject     to a penalty          for non-performance.              ER 224;

I   ER 229-30; ER 888. That was not the case here.                             ER 889-91.

    III.      A   JURY   COULD      FIND     THAT    JAIN   AND     AOL       AGREED      TO ACT       TOGETHER

I             TO ACQUIRE         INFOSPACE        SECURITIES.


              A.         A Plaintiff is Not Required                to State Every Theory              of
I                        Recovery in a Complaint.


I             AOL argues         that "the first time plaintiff              presented      a theory        that AOL

    and Mr. Jain formed             a group     to allow AOL to acquire                  InfoSpace      securities

I   was in plaintiff's        opposition       to AOL's       summary          judgment       motion."           AOL

    Br., p. 39. It then asserts that it was "surprised"                        by Dreiling's        theory,
I   which      it claims contradicts          his version        of the facts.

I             AOL is wrong.           The district     court, over two years before                  entering

    summary         judgment,       recognized       that Dreiling's          Section     16(b) allegations
I   included       joint activity     to acquire      InfoSpace           shares.   ER 61 ("Construed             in

I   the light most favorable               to Mr. Dreiling,        it is reasonable        to infer from         the

    facts   alleged      that AOL and Jain had an agreement                         to acquire      and hold
I   InfoSpace       securities      and then sell those same securities                   at a profit.")

I   (emphasis       added).       The details       of the agreement            between      AOL and Jain




                                                            10
I   were also set forth in exacting                 detail in answers        to AOL's       discovery.         SER

I   204-6; SER 215-17.

              AOL is not, as it claims, "entitled                 to summary       judgment         on the
I   'acquire'        theory     because    it was not alleged           in the Complaint."           AOL Br.,

I   p. 38. A complaint              is not required      to allege all, or any, of the facts entailed

    by a claim.         Nor must a complaint             set forth every legal theory               of recovery.
I   Bennett      v. Schmidt,       153 F.3d 516, 518 (7th Cir. 1998).             This issue is one of fair

I   notice - notice that AOL indisputably                      received.     American       Timber & Trading

    Co. v. First Nat. Bank'ofOregon,                690 F.2d 781, 786"(9th Cir. 1982) ("A party
I   need not plead             specific   legal theories      in the complaint,          so long as the other


I   side receives
    SER 215-7.
                          notice as to what is at issue in the case."); ER 61; SER 204-6;



I               B.      A Group is Formed If Persons "Act Together"                            to
                        Acquire Issuer Securities Through Accounting
I                       Manipulation.

           AOL argues              that "alleged      accounting        manipulation        is insufficient         to
I   state a Section 16(b) claim."                 AOL Br., p. 39. Accounting              manipulation,

I   standing         alone,     may not create      a group       under    Rule 13d-5(b)(1).          However,

    an agreement              to "act together"     by manipulating          the accounting           of an issuer
I   in order to allow one, or both, participants                     to acquire     securities       creates    a

I   cognizable         group.      Rule 13d-5(b)(1)        prescribes      an agreement        to "act

    together     for the purpose           Of acquiring..,        equity    securities     of an issuer .... "
I   17 C.F.R. § 240.13d-5(b)(1)              (emphasis        added).      Here, the agreement           to act


I   together         was the agreement         between       AOL and Jain to create the illusion                    of

    a penalty        so that InfoSpace        could expense         the warrants         at 1998 prices.       No

I
                                                             11
I
I   deal would        have been entered             into unless        the warrants       could be expensed

I   in that manner.           ER 6, Ins 12-18; ER 344; ER 356-57.                     Moreover,       a key

    component         of the White Pages            Agreement          was AOL's         right to acquire       5%
I   of InfoSpace          under    a warrant      agreement.           ER 290-311.        See also ER 284; ER

I   109; ER 328; ER 324. A reasonable                      jury could conclude            that a purpose        of

    the "agreement           to act together"         -     to manipulate        InfoSpace's       accounting        -
I   was to allow AOL to acquire                  InfoSpace         shares     under     the warrant

I   agreement.          The district     court erred by not sending                   this issue to the jury.

              C.        Conduct       Evidencing   Joint Coordination                   in 1998 is
I                       Relevant      to Later Section 13(d) Group                    Status.

             AOL mischaracterizes               Dreiling's        claim as to when         AOL and Jain
I   formed       a group     under     Section     13(d).      The issue is not, as AOL argues,

I   whether        AOL and Jain were a Section                  13(d) group       in August       of 1998. AOL

    Br., pp. 43-44, 48. The matching                  trades      at issue occurred         from November
I   1999 through          May 2000.        Thus, the relevant           issue is whether          AOL and Jain

I   were a group          prior to those trades.

             Dreiling      relies on evidence             of coordination        in 1998 between           AOL and
I   Jain to show that a Section 13(d) group                       came into existence           once AOL


I   began     to acquire       InfoSpace       securities.        That evidence        is properly

    considered       despite       the fact that it occurred           prior to InfoSpace's           registration

I   of its securities       and prior to AOL's              February        1999 acquisition       of shares.


I                    1.        Evidence of Group Conduct
                               Registration.
                                                                            May PreDate



I            AOL argues           that Section     16(b) only applies            to persons     who are

    beneficial      owners        of more than 10% of any class of shares                     registered

I
                                                             12
I
I
I   pursuant       to Section       12 of the Act. AOL Br., p. 42. This is true, but it.misses

I   the point.       There is no dispute            that InfoSpace's            shares    were registered,          and

    that Jain and AOL owned,                    collectively,      more than 10% of InfoSpace's
I   common         stock, when        AOL engaged               in short-swing       transactions       between

I   November         1999 and May 2000.

               The issue is whether            pre-registration         agreements         between      AOL and
I   Jain is evidence          of group        existence.     The district        court said no. ER 18, fn.

    11. This was error.
i



               A group      can exist under         Rule 13d-5(b)(1)            prior to registration.           The
I   Rule uses the unqualified                 term "equity         securities      of an issuer."       17 C.F.R.


I   § 240.13d-5(b)(1).            This term is defined             by statute     to include      all "stock or

    similar     security"        of a company.         It is not limited         to securities      registered

I   under      Section     12. See 15 U.S.C. § 78c(a)(11).                A group        is formed      under       the

    Rule if there is an agreement                 to act together        to acquire,       hold, vote or
I   dispose       of equity      securities     irrespective        of whether       those securities        are

I   registered.       See generally, Dreiling              Br., p. 39-40.

              However,        until registration,          there is no obligation           for a group       to file
I   under      Section 13(d).        15 U.S.C. § 78m(d)(1).              Section     16(b) is similar.        Once

i   registration      occurs,      a group       owning       more than 10% of those securities                     is

    required       to file under      Section      16(a) and is prohibited               from trading       on the
I   short-swing          under    Section 16(b).           15 U.S.C. § 78p(a)(1),          (b).

I             Sections     13 and 16 would            be undermined             if pre-registration         group

    activity     was ignored.         Shareholders           groups     could      coordinate       post-
I   registration      purchases        and sales just prior to registration                  and then claim



                                                              13
I
I   that no filings were necessary                  (and short-swing            trading-was         allowed   with

I   impunity),       because      all of the planning              took place just prior to registration.

    That is what          occurred     here.     InfoSpace          was on the cusp of going public
I   when     AOL and Jain coordinated                     their activities.      ER 340-42.         The

i
    coordination          was designed          to (and did) (1) allow AOL to acquire                     InfoSpace

    shares     in the post-registration             period,        and (2) artificially     drive up
I   InfoSpace's        share price after registration                 so that AOL and Jain could hold

I   and then sell into an inflated                market.       That evidence         cannot       be ignored.

                     2.        Evidence of Group Conduct                    May Pre-Date
I                              BeneJicfal Ownership.

             Relying        on Rosenberg v. XM Ventures,                 274 F.3d 137 (3d Cir. 2001), AOL
I   argues      that each member           of a group         must hold beneficial            ownership       of

I   issuer     securities     before     its entry into that group.             AOL Br., pp. 43-44.           AOL

    then jumps        to the conclusion           that evidence          of group     formation       is irrelevant
I   if it predates      the point      at which         all group      members      have acquired

I   beneficial     ownership.          Were AOL correct,               courts    could never,        as a matter      of

    law, consider         group      formation          evidence     that predated        the acquisition        of
I   beneficial     ownership         by all group          members.        However,        courts     can and do


I   consider      such evidence.          See Roth v. Jennings, 489 F.3d 499, 512 (2d Cir.

    2007); Morales, 249 F.3d at 125-126; Schaffer v. CC Investments,                                LDC, 2002

I   WL 31869391,            *2, *5-7 (S.D.N.Y. 2002) (court considers                     letter, memoranda,


I   time records,

    group      member
                          and other communications

                             purchased         issuer
                                                                      that occurred       before

                                                          stock); Schaffer v. CC Investments,
                                                                                                     any alleged

                                                                                                          LDC, 280

I   F. Supp.2d       128, 133 (S.D.N.Y.            2003) (clarifying          that no alleged        group

    member       in Schaffer owned             issuer     stock prior to initial purchase).
I
                                                              14
I
!
I            Each of these cases involves                 the same-fact         pattern:     alleged       group

I   members         communicated             with each other, and engaged                   in conduct       relevant

    to group       status,     before all group         members        acquired      beneficial      ownership                 of
I   issuer      stock.     That is our fact pattern,           and will often be the case when                      the

I   group       is formed       to acquire      securities.     One can easily imagine               situations            in

    which       a non-beneficial          owner       plots for months        with beneficial          owners,           all

    in advance           of (1) the registration         of the issuer's      securities,      and (2)

I   subsequent           purchases       and sales that take advantage                of inside     information.

    Why should             this conduct      be ignored?           And why shouldn't            the 1998
I   conduct       of AOL and Jain "form the basis"                    for Dreiling's         allegations       of


I   group       activity     here?

             The only authority              cited by AOL, Rosenberg, is inapposite.                     The

I   plaintiff     in Rosenberg did not allege that any group                       conduct        occurred       before


I   its members

    formed
                           acquired      beneficial     ownership.

                  on the same day as the initial purchase
                                                                         Rather,      the alleged

                                                                              by its members.
                                                                                                        group

                                                                                                         (One of the

I   group       actors did not even exist until that day.)                    Rosenberg, 274 F.3d at 147.

    The issue,       as framed          by the Rosenberg court, was whether                   either alleged
I   group       member        was a beneficial         owner       (and therefore      a potential         group

I   member        and statutory           insider     under    Section   16(b)) before         the first

    "transaction           in issue."     Id. at 147. Because         neither     alleged     group      member
I   was a beneficial           owner      of stock prior to the initial short-swing                   trade,

I   plaintiff's     claim failed.

             Here, AOL admits               that it was a beneficial          owner        as of February           1,
I   1999, when           it first acquired      InfoSpace       securities.      The "first transaction              in



                                                              15
I
I   issue" --i.e., the first short-swirtg                 trade-occurred             after that acquisition.

I   Under       Rosenberg, AOL was eligible                  to become        a group        member       any time

    after February            1, 1999-well        before     its first short-swing            trade.     Rosenberg
i   does not address,             and has nothing           to say about,          whether      to disregard

I   Dreiling's        evidence      that a group          was in the process           of forming        in the
    summer           of 1998.

i               D.       If a Group is Formed               to Acquire        Securities,       the Group

i                                                                 the Period that
                         is Subject to Section 16(b) ThroughoutMore than 10%.
                         Group Members Collectively      Own


I             Quoting         the final sentence          of Section    16(b), AOL argues               that

    "[p]laintiff       must show that AOL was a more than 10 % owner                                    of InfoSpace

I   stock by virtue           of its purposed         'group'      membership          'both    at the time of the

    purchase         and sale, or the sale and purchase                  of the security.'"            AOL Br.,
!   p. 46. From this it argues                that it has no liability         if plaintiff      cannot        show that

i   AOL-Jain          group     activity     continued       for the entire duration             of the relevant

    short-swing          trades     (i.e., from November             1, 1999 to May 10, 2000).
I             AOL's      argument          was specifically        rejected     in Roth.       As the Second

    Circuit     explained,        "Section      16(b) itself      contains     no provision            as to who     is an

    insider."        Roth, 489 F.3d         at 513.    It imposes      liability     upon      a "beneficial

    owner"       who     violates       its provisions.         15 U.S.C.     § 78p(b).       It is Sections       16(a)

    and Rule 16a-l(a)(1)             that indicate         the term "beneficial           owner" in

    Section      16(b) can include           a group       that collectively        owns more than 10%. Id.

              Whether         a group      exists, and its duration,           are ultimately           defined     by

    Section      13(d) and Rule 13d-5(b)(1),                not by Section          16(b).     Id. Under
I
    Section      13(d) and Rule 13d-5(b)(1),                a group     exists if there is an agreement

I
                                                              16
I
!
    to act together          for the purpose        of acquiring,         holding,       or disposing         of issuer

    shares.      The use of the disjunctive                is significant      and indicates,             for example,

    that a group         can be formed          solely through           an agreement          to act together         to

    acquire      shares.      Id. Under       Section      13(d), that group            does not somehow

    cease to exist upon           completion        of its share acquisition.              As the Second

    Circuit      correctly     noted,     to conclude        otherwise       would       ignore      the disjunctive

    "or" in Rule 13d-5(b)(1).                Id. at 514.

               As a result,     once a group        is formed        under     Section     13(d), its individual

    members         are subject     to Section      16(b)'s short-swing              prohibition           as long as

    they collectively          own more that 10% of the issuer's                     shares.        Id.

              This approach        is required       by the statutory           scheme.         It also serves        the

    purpose        behind     Section 16(b).        If a defendant          initially    acquired          stock while

    acting     as a group       member,        his later sales of stock could              easily be based on

    inside     information-regardless                of whether          the acquisition-related              group

    activity     continued       to exist.     Id. ("These        provisions      appropriately             address

    the Congressional            concern       that such short-swing             sales may have been

    based      on access to inside           information.").

              Applying        this reasoning,       AOL and Jain:            (1) "acted        together"       in 1998

    for one or more of the purposes                  found        in Rule 13d-5(b)(1)           -     acquiring,

    holding,       or disposing         of InfoSpace       securities;      (2) collectively         owned      more

    than 10% of InfoSpace               stock before        the first short-swing           transaction         on

    November         1, 1999; and (3) continued                to collectively          own more than 10% of

    InfoSpace       stock "at the time of the matching                    short-swing          transaction[s],"

    i.e., during     the six months          following       November          1, 1999.     There is no



                                                             17
I   requirement        that plaintiff        adduce      additional       evidence       of group      activity

i   during      the six-month         period     of short-swing           trading.     It is sufficient     that

    plaintiff    presents     evidence         that a group        was initially       formed    for the
I   purpose       of acquiring,       holding       or disposing        of securities.       Once a group            is

I   formed      and the 10% collective              ownership         requirement        satisfied,     group

    members        are deemed         insiders      subject      to Section     16(b) as long as they
I   continue      to collectively        own 10% of issuer            securities,      regardless      of whether

I   there is any continuing              group      activity.

    IV.      A JURY COULD            FIND    THAT     AOL AND JAIN HAD AN AGREEMENT
I            TO HOLD        AND    DISPOSE       OF INFOSPACE           SECURITIES.


             As noted       above,     a jury could       conclude        that one of the purposes              of
I   AOL and Jain's agreement                   to act together       was to enable AOL to acquire

I   IrdoSpace      stock.     See Section III, B, above. That, however,                    was not the only

    purpose.
I            AOL, in internal          emails,      concedes       that its "sole" concern            was driving

I   LrdoSpace's      stock price.           ER 794 ("Do you have thoughts                  on who internally

    might understand              the best means         of affecting        [IrdoSpace's]      stock price in
i   this space,     since that's       the sole goal .... "); ER 796 (AOL admits                    to "fishing"


I   for ways to do business              with InfoSpace            because     "[i]f their stock rises we

    get more dough");             ER 74 (attempting             to do a deal "to generate

I   analyst/investor          interest      in IrdoSpace").

             It is not surprising           that AOL was very interested                 in obtaining       a
I   "benefit    from [InfoSpace's]             stock price"        when      Jain proposed       the accounting

I   scheme.       ER 182. Nor is it surprising                  that AOL would          agree to enter into

    "Amendment          1" - an amendment                which      provided         AOL with no econornic
I
                                                              18
i
i   benefit      other than to prop up InfoSpace                    stock price when         InfoSpace         was at

I   risk for not meeting             analysts'      expectations.           ER 219; ER 393; ER 390-91; ER

    788-90; See Dreiling             Br., pp. 22-25.        AOL could only obtain             the "benefit
I   from our stock price,"              however,       if it held its InfoSpace          securities,      and later

I   di_sposed      of them in a market              that was unaware            of what AOL and Jain both

    knew:       that InfoSpace's          purported         profitability      was an illusion.2
I             Under       the plain language          of Rule 13d-5(b)(1),          an agreement          to pump

I   up InfoSpace's           stock price with the purpose                   of then selling when        the stock

    price is inflated        is an agreement           "to act together         for the purpose        of...
I   holding..,          or disposing      of equity      securities     of an issuer."


I             AOL and the district               court suggest      that absent      an agreement           to sell

    on a specific         day, or within         a very narrow        time period,       there can be no

!   agreement           to act together     for the purpose           of disposing       of securities.        ER 10-

    11; AOL Br., p. 51. Nothing                   in Rule 13d-5(b)(1)          demands      that the
I   agreement           to act together     have,     as its purpose,         the disposition       of shares     on

I   a specific     day or a within          a narrow        time period.

              Insider     trading,     which      Section     16(b) is ultimately        designed      to
I   prevent,      can occur in two ways.               Insiders       may know       of a specific     event,

I
I       2 AOL and Jain held and then each disposed of approximately       $200
    million worth of shares in the first six months of 2000. This was precisely
    when InfoSpace's    expenses were underreported    due to the manipulation.
!   $68 million - the amount InfoSpace's    expenses were understated    during
    that time - was no small matter. It eclipsed InfoSpace's   reported revenues

I   of $43.6 million for the same period. ER 518; ER 110; ER 121-35; ER 812; ER
    817; ER 889.



                                                              19
I   such as the lack of FDA approval                       for a new drug, which              when      publicly

I   known        will immediately          move the stock price.                 Courts     and the SEC also

    recognize,        however,       that insider        trading     may occur through            a systematic,
I   multi-faceted          fraud     designed      to artificially      inflate    the price of a company's

I   stock over a period             of years.      See e.g. Securities & Exchange Comm'n                      v. Antar,

    15 F. Supp. 2d 477 (D. N.J. 1998) (defendants                             liable in $27 million        insider
I   trading      scheme      over nearly         three-year        period);     In re World Access, Inc.

I   Securities       Litig., 119 F. Supp. 2d 1348, 1356 (N.D. Ga. 2000) (insiders                              selling

    $38 million        over 21-month            period     states claim for insider           trading      when
I   insiders        were aware       of ongoing          misrepresentations          to the market).           That


i   type of prolonged              and systemic          manipulation          does not require         sales on a

    specific     day, just during         a specific       period     when       the market     is manipulated.

i   A jury could conclude               that happened          here.


I   V.        ADVERSE
              REFUSAL
                            INFERENCES
                           OF   AOL's     FORMER
                                                SHOULD        HAVE
                                                          EXECUTIVES
                                                                        BEEN DRAWN
                                                                              TO TESTIFY.
                                                                                             FROM       THE




I              A.      There is Substantial Evidence Corroborating the
                       Inferences to be Drawn From Keller and Colburn's
                       Fifth Amendment     Pleas.
I             A district    court in a civil case may draw                     adverse     inferences     when        a

I   witness      invokes     the Fifth Amendment.                   SECv.       Colello, 139 F.3d 674, 677 (9th

    Cir. 1998).       An inference        of impropriety            is proper     when      "evidence         in
I   addition        to the adverse      inference"         supports      the conclusion.         Id. at 678.

I             AOL admits           that Dreiling     "cites to independent                evidence

    purportedly         supporting       his claim that AOL assisted                     Mr. Jain in accounting
I   improprieties."          AOL Br., p. 55. The district                court concluded             that "there      is

I
                                                              20
I
i   evidence        to support       Mr. Dreiling's        first allegation       of concerted         activity,       i.e.,

I   to secretly       influence      the corporate         affairs     of InfoSpace      by creating       artificial

    revenues         and earnings       .... " ER 16, lns. 8-11. The Fifth Amendment
I   inference        Dreiling     seeks flows         directly       from these facts.

              An agreement           under      Section    13(d) may be nothing             more than an

    informal        understanding            (which    may be inferred         from circumstantial

    evidence).        Roth, 489 F.3d at 508; Morales, 249 F.3d at 124. A fact finder                               may

    infer here that there was an agreement                           to manipulate      InfoSpace's

    accounting         and that the purpose              of the accounting           manipulation        - or the

    informal        understanding            between      AOL and Jain - was so that AOL could

    acquire      InfoSpace        securities,     and then hold and dispose                of securities       into a

    market      artificially      inflated      by the manipulation.            Explicit    communications

    identifying        these goals is not necessary.                  There is plenty      of collaborating


i   evidence         to support adverse inferences from the failure                        of Keller     and
    Colburn         to testify on these same subjects.

i              B.       Plaintiff     has No Duty to Demonstrate   Ongoing                          Loyalty
                        Between       AOL and its Former Executives.

I             AOL argues          that plaintiff       is required       to demonstrate       a relationship            of

    loyalty     between         AOL, and Keller and Colburn.                   AOL Br., pp. 54, 57. AOL

    cites no authority           from this circuit         in support       of its argument.         The district

    court did not require             such proof.

              A plaintiff       does not have the burden                 of proving     loyalty     between        a
I   witness      and an opposing             party     before     a negative    inference     against      that

I   party     can be drawn.          See RAD Servs., Inc. v. Aetna Casualty & Sur. Co., 808

    F.2d 271, 276 (3a Cir. 1986) (failure                  of party      to demonstrate       continuing
I
                                                                21
I
i   loyalty     between      witness         and former        employer        did not prevent        drawing        of

I   adverse      inference        against     employer);        FDIC v. Fidelity & Deposit Co. of Md.,

    45 F.3d 969, 978 (5th Cir. 1995) (non-party                       witness     Fifth Amendment
I   invocation        is admissible          as an adverse         inference     against   party    with which

!   it has no special relationship);                 Brink's Inc. v. City of New York, 717 F.2d 700,

    710 (2d Cir. 1983) (fact that invokers                    of the privilege        are no longer
I   employees         of the defendant           and are, in part, adverse             to the employer

I   defendant         does not bar using their refusals                  to testify   as vicarious

    admissions          of their former        employer).          District    courts in this district        have

I   followed      this approach.             Cutter & Buck Inc. v. Genesis Ins. Co., 306 F.Supp.2d


I   988, 1005 (W.D. Wash. 2004).

              The only circuit        court case cited by AOL, LiButti v. United States, 107

!   F.3d 110 (2d Cir. 1997), does not require,                       as AOL claims, that the "party

    seeking     the adverse         inference        must     demonstrate        a relationship       of loyalty
I   between      the non-party          and the party          against     whom       the inference      is to be

i   imputed."         AOL Br., p. 55. Rather,               the court listed a number              of "non-

    exclusive     factors    which          should    guide     [a] trial court."      LiButti, 107 F.3d at
I   123. One of those factors                 was whether          it would     be "likely"    that "the non-

I   party     witness     would..,          render    testimony       in order     to damage       the

    relationship.'3         Id.
i
I
        3 Another factor, not mentioned   by AOL, was "whether     the non-party

I   witness was a key figure in the litigation and played a controlling
    respect to any of its underlying  aspects."
                                                                           role in
                                                LiButti, 107 F.3d at 123-24.

I
                                                              22
I
I              There is no evidence         that Keller and Colburn              would       havepersonally

I   benefited       from testimony         adverse       to AOL.      AOL's     liability     is based   on

    Keller's      and Colburn's        actions.     Thus, it is reasonable          for a jury to infer
I   that, were they to answer              truthfully      rather     than invoking         the privilege,      the

I   answers       would      benefit   plaintiff,    not AOL.         Regardless      of any ongoing

    loyalty      between      these witnesses        and their former          employer,       Keller and
I   Colburn       have no incentive         to testify     in a way that would              favor plaintiff     to

I   the detriment           of AOL.

    VL         DREILING'S      SECTION      16(B) ACTION         AGAINST        AOL IS NEITHER
I             AN "EXPANSION"
               CENTRAL      BANK.
                                       OF THE STATUTE           NOR    AN "END      RUN"       AROUND




I             AOL offers a parade of horribles                  to suggest     that Dreiling's       theory,     if

    viable,     will "discourage        business        partners from accepting              stock as form of
I   payment"        and "imperil"         the "survival"         of start-up    companies.         AOL Br.,

I   pp. 32, 40. A legitimate            business      transition      between      two companies          does

    not involve       an agreement         between       an outside      entity and an issuers'          CEO to
i   manipulate        the issuers'     accounting.         It is that fact that sets this case apart.

I             A business       deal between         an outside      entity and an issuer          Will not

    generally      create a group         under Rule 13d-5(b)(1).              That is because       an issuer
I   cannot be a member              of a group.      Warner Commc'ns, Inc. v. Murdoch,                   581


I   F.Supp. 1482, 1499 (D. Del. 1984).                  Nor will communications                with an

    insider     of the issuer       (even one with large holdings)               to further      a legitimate

I   business      deal subject the outside            entity to Section 16(b). Id.


I             However,       an insider

    entity if the insider acts against
                                            of an issuer        can form a group

                                                    the interests      of the issuer
                                                                                         with an outside

                                                                                            with an intent to

I
                                                           23
I
i   personally        benefit      himself.      Id. at 1499-1500; Jewelcorp Inc. v. Pearlman, 397

I   F.Supp.       221, 250 (S.D.N.Y. 1975).             If an outside        entity enters       into an

    agreement         to act with that insider           to further       that personal      benefit,   then
I   Rule 13d-5(b)(1)             can - and should        - apply.        Warner Commc'ns,          581 F.Supp        at

I   1499-1500;        Jewelcorp, 397 F.Supp.            at 250. Here, a jury could conclude                  that

    Jain was acting for himself,                 not InfoSpace,         in proposing      and then
I   implementing               the accounting      scheme.         See generally Dreiling         Br., pp. 52-6.

I   (For example,          concealing         the scheme       from InfoSpace's          "damn      accountant"

    is not indicative            of an intent    to further        InfoSpace's      legitimate    business
I   interests.       ER 181; ER 354-55; ER 468; ER 472-76; ER 438-40.)


i             A jury could find, based              on the emails alone             (e.g. ER 181-82; ER 242;

    ER 240; ER 379; ER 381), that AOL knew                           of the scheme       and agreed        to act

!   with Jain to implement                  it. AOL had more than the mere potential                    to trade

    on inside       information.            See Kay v. Scientex       Corp., 719 F.2d 1009, 1013 (9th Cir.
I   1983).       It actually      traded,     knowing     that InfoSpace           was vastly     unreporting

I   its expenses        and that its profitability            was illusory.         AOL also knew          that Jain

    was a significant            shareholder       of InfoSpace,        and that Jain believed          that the
I   scheme        would        boost InfoSpace's        stock price.       ER 182. If AOL had not

I   agreed       to work with Jain to manipulate                    InfoSpace's      accounting      so it could

    acquire,      hold and dispose             of InfoSpace        securities,     AOL would       not be
I   subject      to Section       16(b).

i             AOL asserts          that Dreiling     is using Section            16(b) to "end-run"        Central

    Bank v. First Interstate           Bank, 511 U.S. 164 (1994) (no Section                  10(b) aider and
I   abettor      liability).      AOL Br., p. 32. Similarly,             the district    court concluded



                                                              24
I   that "[t]he purpose              of Section      13(d) was not to provide               another     means       of

I   litigating      securities      fraud .... " ER 15, lns. 22-23.              See also ER 20, Ins 17-19

    ("The court is not persuaded                    that two parties        acting together           to manipulate
I   stock price by utilizing                questionable       accounting         methods      and other similar

i   activities,      give rise to a Section             13(d) group.")

               These assertions         fail for two reasons.            First, the evidence            shows      that
I   AOL is a primary              violator,      not a mere aider and abettor.                AOL will not be

I   held liable for trades            made       by Jain-     it will be held liable for its own

    conduct        and its own trades.             See Dreiling       Br., p. 35 fn. 110. AOL acted as a
I   primary        violator      in: (a) reaching          understandings          with Jain to form a group


I   and manipulate            the issuer's        stock; (b) directly          acquiring,     holding     and

    disposing        of that stock consistent              with that agreement;             and (c) directly

!   profiting       from that scheme.

               Second,    the district        court's    position,     taken     to its logical      conclusion,         is
I   that Section         16(b) groups         who work        together      to acquire,      hold or dispose             of

i   an issuers       stock through            illegitimate     means     should         be exempt,     while

    groups        working        together     in legitimate        ways should          be subject     to the
I   statute.      This undermines              the intent     of Section       16(b).

I              The Fifth Circuit        rejected        the notion     that modern          economic      reality

    requires       restricting      the scope of Section             16(b) in derogation          of Congress's
I   original      purpose.        It noted      that the proponents            of this approach

I                     ... display
                      intended]
                                       apparent     scorn    for the [originally
                                   moral and political opinion factor.'       'Why

i                     should the public enter into the market,' Professor
                      Loss writes,      'if the rules of the game make it
                      perfectly   legitimate    for insiders    (and their friends
I
                                                              25
I
I                    and business             associates)          to    play       with    marked
                     cards?'

I   Arrow Dist. Comp. v. Baumgartner,                    783 F.2d 1274, 1282 (5th Cir. 1986)


I   (quoting      L. Loss, FUNDAMENTALS OF SECURITIESREGULATION,                                607 n.8 & 9,

    608 (1983)).

I            Professor      Loss's     metaphor         is apt. At the card game here at issue,

    both AOL and Jain sat at the table.                    Both entered           the game.    Both used
I   marked       cards.     Both won lots of money                 in so doing.        AOL did not merely

I   mark the cards for others,              provide       for the card table or serve the drinks.                   It

    was a key player           and profiteer-a            primary       violator.
I            At its core, the premise             that joint fraudulent             conduct   cannot     give rise

I   to a group      is an attack        on group       theory      itself.   It is beyond     cavil that

    fraudulent      activity       can form the basis for a group's                  common     objective.        See,
!   e.g., Lerner v. Miltenco,          L.P., 23 F.Supp.2d            337, 338, 344 (S.D.N.Y.         1998)

I   (defendant       allegedly        participated       in group       "for the purpose        of artificially

    maintaining       the market         price"      of issuer's     securities      and to evade       reporting
I   requirements;          group      had formed        similar      alliances      to manipulate       stock price

I   of other companies;            allegations        were sufficient).

            It is not surprising          that Section       16 group        members        sometimes      engage

I   in fraudulent         behavior.       Congress       was concerned            about various      forms    of
    fraud    when    it enacted        Section    16:
I
                     In some cases, insiders     manipulated  the market
I                   price of their stock and caused the company
                    follow   financial  policies  calculated  to produce
                                                                         to

                     sudden changes in market prices. To combat these
I                    abuses,   Congress  enacted    section16  to require



                                                            26
I                      reports     of securities transactions by insiders and to
                       provide      for the recovery of any short-swing  profits.
I   Ownership         Reports and Trading by Officers, Directors and Principal

I   Stockholders,        SEC Release        No. 34-26333,          53 Fed. Reg. 49997-02 at 49998, 1988

    WL 268999 (1988) (emphasis                     added).
i            AOL nevertheless             asks this court to adopt             the district   court's       judicial


I   exception         to longstanding           group   theory:      that third parties       who work with

    insiders        in a group     capacity      (i.e., who meet the statutory             10% ownership

I   threshold        and agree      to act together          for a common        purpose      of acquiring,


I   holding

    conduct
                    or disposing

                    is manipulative.
                                       of issuer    stock) should

                                            This putative
                                                                          be exempt

                                                                   exception
                                                                                        if the group

                                                                                 is both dangerous            and

I   wrong.


I                                                  CONCLUSION

             For the reasons           stated    above,      this Court     should:

I             (1)      reverse     the district     court's     grant     of summary       judgment;         and


I            (2)       remand      for trial.

             RESPECTFULLY                SUBMITTED             this 11 th day of August,        2008.

I                                                         SIRIANNI         YAOUTZ                       •

I
                                                                        Spoonemore,
                                                          "_'cc/hdx,6_'E.                     WSBA #21833
I                                                         Stephen       J. Sirianni,   WSBA #6957

I                                                                               and

                                                          David      M. Simmonds           (WSBA #6994)
I
                                                          Attorneys        for Appellant      Dreiling
I
                                                              27
I
I
i                            CERTIFICATE OF COMPLIANCE
                            PURSUANT   TO CIRCUIT RULE 32-1

I
    I certify that:
I
I          The brief is:

                           Proportionately     spaced,   has a typeface   of 14 points    or
I                          more and contains      6,964 words.


I                 or is

                  D        Monospaced,       has 10.5 or fewer characters     per inch and

I                          contains                words   or               lines of text.

                  or is
I                 D        In conformance      with the type specifications     set forth at

I                          Fed. R. App. P. 32(a)(5) and does not exceed

                           pages.
I
           DATED: August 11, 2008.
I
I                                                                   E. Spoonemore


I
I
I
I
I
I
                                          CERTIFICATE                 OF SERVICE

           I, Richard E. Spoonemore,  hereby certify that I am a member of the
I   bar of this Court, and that on August 11, 2008, I caused APPELLANT       THOMAS
    DREILING'S REPLYBRIEFto be served pursuant      to Rule 25(b), F.R.A.P., by
I   mailing copies of same to the following counsel:

          Michael D Hunsinger                                                [x]   By United   States Mail

I         THE HUNSINGER LAW FIRM
          100 S. King Street, Suite         400
                                                                             [x]   By Email
                                                                                   mike hunsingerlawyers@yahoo.com
          Seattle, WA 98104                                                        camille hunsingerlawyers@yahoo.com

I                 Counsel for America      Online,    Inc.

          George      A. Borden,      J. Andrew      Keyes,                  [x]   By United   States   Mail

1         Amanda   MacDonald,
          and Dane H. Butswinkas
                                 Marcie              R. Ziegler,             [x]   By Email
                                                                                   gborden@wc.com, akeyes@wc.eom,
          WILLIAMS & CONNOLLY, LLP                                                 amacdonald@we.eom,

I         725 - 12th Street, N.W.
          Washington,    DC 20005
                                                                                   mziegler@we.eom,     dbutswinkas@we.eom


              Counsel for America Online,             Inc.

I         Douglas W. Greene                                                  [x]   By United   States   Mail
          WILSON SONSINI GOODRICH & ROSATI, PC                               [x]   By Email

I         701 Fifth Avenue,
          Seattle,    WA
                            Suite 5100
                              98104
                                                                                   dgreene@wsgr.com

               Counsel for InfoSpace,       Inc.

I
           In addition,          I have caused                        and fifteen copies of the
                                                             the original
I   APPELLANT
    Express
                     THOMAS
                  (Priority
                                      DREILING'S
                                Overnight)
                                                       REPLY BRIEF to be forwarded   by Federal
                                                     this day to the Clerk of the Court addressed                        as
    follows:
I          Office of the Clerk

I          U.S.      COURT      OF APPEALSt           NINTH        CIRCUIT
           95 Seventh           Street
           San Francisco,              CA 94103
I
           DATED:August                   11, 2008, at Seattle; _//gton                        ......___.._
I                                                                     ////$/_
                                                                     Y f l_cchard E. Spoonemore

I

				
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