Case 1:06-cv-04053-LAK Document 65 Filed 05/30/08 Page 1 of 20

UN IVEI) STATE' S Di FR] cr co U Ri

SOUTHERN DISTRICT OF NEW YORK

Electronically Filed

IN Rh SEARS lIOLDINCIS CORPORATION No. 06 Civ, 4053 (JES)

SECURfl1ES LITIGATION
ECF Case

MEMO1ANDUM OF LA IN FIJRTIIER S1J?I'ORT OF DEFENDANTS

MOTION TO DISMI SS THE CONSOLIDATED CLASS ACT] ON CUrtPLA1rT

WACHTELL, LIPTON. ROS]N & KATZ

I Wsi52nd Strcct
New Yok New York 10O9
Telephone , (212) 403-1000
Facsimile- (212) 403-2000

A flortmys for Holdings

Crpc.'raikm. Edward S. Lirnp'ir dJulfun Day
 Case 1:06-cv-04053-LAK Document 65 Filed 05/30/08 Page 2 of 20

TABLE OF CONTENTS

Pe

PRELIMINARY STATEMENT ....................................................................................................1

STATEME1TOFFACTS .............................................................................................................

ARGUMENT----------------------------------------------------------------------------------------------------------------------------------- 5

1. PLAINTIFFS HAVE FAILED TO PLEAD ACTUAL

EcONOMIC LOSS . . ...................................................................................... . 6

A. The Complaint doc5 not allcge that any Plaintiff suffrcd an

out-of-pocket Ios .......- ........- ........- ..................................................- .......- ..........7
LLfJ
B. To the IcnI PIintiffs avId al a tI1siuun 11 they acquired
their shares at the same dLcourii and lack cognizable danacs ... ........ ............ Ii

C. Plaintiffs should not be pcnnittccL 10 mount a co]Iakra] aUck on

the Rankrupicy Court's Confirmation Order ...................................................13

CONCLUSION.................................................... .........................................................................15

Im
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TABLE OF AUTHORITIES

Law Pp

Amron v. Morgan StnIc I nv. Adyl5ws Inc., 464 F3d 33 d Cir 2006) ....... ........ ......... ....... 6-7

Burrows Y. Furct Labs.. Inc. 742 F.2d 54 (2d Cir. 1984) ........................................................ 9, 10

pwiiiq v. PrsIoç. 155 5W 336 (Tex. 20U)-------------------------------------------------------------------- 14 15

CarLisLe Ventures, Inc. v Banco EpanoI de Credito.. SA,

lTh 34 f0T (d Cr 1999) ........................................................................................... 7, . 10

Commercial Union Assurance Co- plc Milken,

17 F3d 608 (24 Cir. 1994) ................................................................................................. 71 9, 10

QLiM- EbO=s-, v. Broudia 544 U.S. 33 .2O0I1 ------------------------------------------------------------------ 6, 11

Oaiii.rio v.0tIzens Utik Cm 22 9 Fid 154 2d Cir 2000)...................................................... 4 ri.2

1JT v.Wixto 190 F.d 37 (2d Cir. I999) -------------------------------------------------------------------------- 7

In NCornerstone Prone Partners, L.P. Sec. Lfti! No C 03-2522,

20 W[ 1 l8(27 cal. May 3, 2006...................................................- ...........................Ii

In N IrnergLcI AqisLiLon Carp., 170 ELR. 63 2 Rankr N-D Ill. 1994 .......................................13

lii re 1.steie Lauder Co Se. Litig., No- 06 Civ 250, 2007 WL 1522620
(S.D.N.Y. May 21,2007) .... ...... ...... ...... ...... ......
99 99 9999 99 99,9 99 -------------------------------------------------------------

!P. Lawrence 1293 E3d6T5(2ICir.2O02) ................. . ......................................................15 n.I0

In rc Omnivirntj Tcc.1., No. C-cJ4-2297 20U8 WL 123936
(N.D. Cal. Jaw 9, 200)..............................................................................................................11

In.rFii. 90 F-2d 1107 (7th Cr 19) ...................................................................................13

11 3 Sec 1Jt, No 03 CLv 2298. 2006 )n 1029069

(S.D.N.Y. Apr, 19, 2006)................................................................. , ....................................11-12

Jn rth Uc_ New Hamhire. 43 F. 3d 763 List Cit. 1995)..................................14 1 IS

JMS Rural LP ' 0MG Capital P artncrs III, LP, No. 04 Cix'. S591,
2006 WL 19614V SJ1N.Y. July 6, 2006L afrd on
200 WL 22361 (S.D.N.Y. Aug. 4, 20(16).... ....... ..................................................................... X

Lev[e v. Sear Rothuc.k & Co.. 496 F. Spp. 2d 944 (N.D 111 2007)...................................12 n.8

LNC Irvs..!r. v, FIFIt Fidel j 92 Civ 75g4, 1997 WL

5223 (S.D.N.Y. Aug. 27 997)................................................................................................7

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Ooky v. f. Mi F2d ] 07 (2.iI C[r 199 1) ........................................................., ...................

Panos v. Island Gem Enters., Ltd. 1 K Supp 169 I995 .......................................

5W I '- O0Et1iei, :30 US 16 193 9 -------------------------------------------------------------------------------------------13

Siiie-Snap Corp. v State St Bank & Trust C. 94 F2d 969

(2d Or- 1991) ....................................................................................... ................................ 13 ,

TttIie. Statutes and Kuk

3 Thomas Lc Hawn, Law of Scc. Rc. § 12.12[] ] 5Lh ccL 2OO) .. ........ ................ ....................... 9

ii U.S.0 112c()(7 ) ............... .......... ........ ... , 14

1U.S.C- 11 41(a) -----------------------------------------------------------------------------------------------------------------------

15U.S.0 Thj(b) ......................................................... ---

--------------------------------------------------------------7

17 CJ-1. i 240.1Qh- ----------------------------------------, -----------------, -------------------------------------

FedeaI Ruk of Civil Prcedute l2(b)() ........................................................................................ 6

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PRELIMINARY STATEMENT

In this pLILaLi've class action., brought on behalf of Iormcr shirchulders of Kmavt

CorpcialLLn who sold shares during the first sixtecri months foUo'wing K.irnu-11 s cmgetbee from

bankruptcy. Plaintiffs Fred P. Campci, Lornrd Cope. Plumbers and Pipelitters National Pension

Fuibd and the Mississippi Public Employccs Retirement Sysleni tectveIy. "Plaintiffs) aI1ee

that Edward S. Lampert and JWidr] Day - Kmart's Chairman iiid CEO respectively -

de1i.mtcly wirhhcld information about the value of KmerL real estate to suppre the price of

Kinari shares. Although Mr. Larnp.efl and Mr- 11a•' each we maj or investors in Kinart,

Plaintiffs implausibly contnd I]i1 they intenioiaIly suppressed the price of Krnart's shares out

of an tmepLaincid dc-sire 10 delay the naikeis realization that dw jnye.jnt finn run by Mr.

1..mpi-t had made a profitable ini.rerjt in Kmait during its bankruptcy.

At the hesthtg or the motion to dismiss the Consolidated Class Action Complaint
(LLC.m]afll this Court .reogttized that Plaintiffs' case - which is based in ubtantial pert or

aL]ct]ons macic by urutamed sources - -very thin" Tr. of Argument, Cam p o v Se

Hold] tins Corp., et al. No. 06 Civ. 4)53, Apr. 15. 2. at 61:10. Thus, the Court denied

DthndnLs 1 IIIOIIL1n EL dimniss wi th it prejudice; permitted Defendants to take discovery of

P1ItiiiI1 tijred sources and 'lirecteil thc parties to rc(urn to Court br a heajing on the

question of whether the infonnation pruividel by those sources is sufficient to slate a clairn for

reiief.

Sepiratiy. at the hearing on the motion to dimi. the Court raid the issue of

whether the ages P1ands seek are rccmcrablu as a matter of 1a1.%r

THE COURT - You were holding your shares at Ihe end of

N the class period?
20 MR lSNHOFER: No. The plaintiff hadsold- All
21 the people that we rcprescnt sold their shares before i]iat
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22 because that's what we represent, a cLass of se][crs who

23 premabIy would have reivci.1 more money for their
24 WE COURT: That's not a recognized theory of iarnages.
25 tbt you wc1d hve mccikyod more tnomy for your Shams if you
1 got back your investment by selling your share.% to ornebody
2 else, Where is your dinaes?
3 MR. EISENHOFER; Your Honor. I thiik It is a
4 recogmed
TE{E COURT No, 1 don't ihiiik so. I don't think what
youcould hac made[ ] is a masurc of danigcs. The qucstion i&
7 what loss did yoi actually suIIbr? And a loss is i loss.

Fdr ac 52;19-53; 7. At a iiubscq-ucn1 Confcrcnccwith the prIii On April 30 200 and by order

dated My I, 200. the Court dired the parties to sI.LbnhiI briefing or the dmwges itie. As
explained herein. Plthiiiffs have failed to aLlege any compeisaHe injury, thus. the Court should
dismiss the Com1iiti1 as a matter of Law, without regwd to whether or not the unnamed
-oures provided P]ahitffs with sufficient bss for the Complaint's, alt tions

The iwy that PLaiflftfs have ssrted - raniety. that they coLild have Wd their

Kmart thare.s at higher prices had they known the nith 1'about [lie value of Km= 's real estate

portfolio - is LnsufficLe.it to support a claim for relief for three independent reasons.

EiM hiantiffs have not alleged Lhat they suffered any atual 1 out-of-pocket Ic'ssca
a result of their stkn and subsquent sale of Knart shares as is required to state a claim

for $UTiliCS liat4. Plairiliffs Fred p Campo and Leorard Cope (together. the individual
PlalitIT") received shares through the bankruptcy that were worth approximately S 15 csh, bit

sold those shwas at a higher price Having profited on the shares at isuc1 Individu1 Plaintiffs
cannot as s matter of law, show cognizabT thmages- 5 1 riar1y, the Plumbers and Pipefitters

National Pension Fund and the Mississippi PuhlLc Employees Retirmcni Sytrn (together, the
ILl
niilutkat ttiffsl have no co.nizab1 damagcs they bought and sold their shae in the
open market W do not contend that they realized a loss,
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Second. although Plaintiffs claim that they sold their Knart shares at a "fraud

dicourn,' P[a[flff iec sily birei1 those sbams atflw same alleged disocunt,

therefore, could not have suffered env Ws as a result of the alleged fraud. As a mailer of law

and sirJlp!e logic, if Kmart's shares were"undervalued" wie.ii they were sold, they were also
jr3J1j1cJ1' when they were recejyed or purchased by Plaintiffs, and the identical

L'ndcrvLIuauon Al aNuiiiifion and dposi Lion would "cancel each othcr uL Icaing the PIairitift

With no loss.

Third any claim by Plaintiffs that they suffered damages in this case because

Defendants undervalued Krnarts real cstaft amounts to an irnpcniiissiblc attack on the a[uation

of Krnan a assets approved by the Bankruptcy Court- The Individual Plaintiffs, who received

their shares in the hankrupty, and the higdtutioxiai Plaintiffs, who are meessariIy in privity with

somecinc who received abarca in the bankruptcy, are precluded from eha!1cning the valuc the

in pcy Court ascii bed to Krnari s assets and, by c(CrThiOn 1 their ihare.s.

STATEMENT OF FACTS

To secure approval of its plan of reorganization ('P1an). Kmant was required to

cIrnoF1ta1e It the Bankruptcy Court tha Kmarts val Lbe as a reoganizecl company was greater

thaai its value on a llqiidatiün basis- 11 U.S.0 1 129(a)7). Thus, along with its final,

court-approved disclosure statement filed on Feb. 2t + 2001 (DiscIosur StaLcrncnt 1 Krmcl )1

submined to the Bankruptcy Court a third-party valmilion outs Ml esIe and mlhr fixed 1isset

to that raJ uation. the 1 Iquidation value of thc.e assets 1lFas between $5933 59000 and
78,996,000, and the full value of those assets was ine more than double those amounts. See

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Disc]osure .5t#meti. i:KLcinha D.].' E. 1). App. B ct 3-13, In approvii K.arI's I[üi, the

aiikrupiey Cirt speiitic1Iy found thai the th[id-pr*)• appraisal of Kmart's real estate was

pe.rsLiasiv credible and accurate as of the dat it was prepared- Confirmation Order

(Kieinhaus Dec.l - ai 14 (emphasis added)

The day alter Kirjivt emerged from bankruptcy. the effleieit. piibl[cty-traded
market in shares of Krnart wmmoin stock = Compi- 1 174c) valmdslwe.q of thii stock at
a)T'<itThkIy 15 pci share. 2 which was wtbin the range of valoes attrib-ite4 by the Eürtkruptcy

COtLCE to KinarLs siarcs (scc Disc1our Stterncit(Keirhaus Dccl. Ex. I ., App. L) at I)

During the first week oft Jig after Km.an' eme.rgertce horn bankrupicy. Krnarts shares

reached a high price of $15-25 per share. See Exhibit A atEached hereto (listing historical stock
prices of Krnart Corporaion (predecssor to Sears Holdings Corporation (SHLD)) during the

class period).

PIuintflj Campo and Cope are individi.iaL investors who purchased Krnart bonds
that werc cxrhangcd for sha= of Kmatt commoli stock in connection w[th the company's

reorgai-ator vridei Chapter ii, CornpL 11 15. Cope sold 171 shares of Kinan common stock

on SEptembeF 23. 211O for $26 5 per share Campo sold 285 shircs of Kmart oonarnon sbx1

The KIeinhaus Declaiation1' rekrs lo the Declaration of Emil A- K]eiithaus in Support of

Dflrdar' Motion o t)irnss the Consolidated Class Action Complain liled with Defetdsnts
Qpcntn Brief (Dockcs Nos. 42 and

The. Court may corisiiJe'r public trading data in connettion with a ruoLion to dismiss. L YW
(}j j 228 F34 154, 166 n.g i:2d Cir, 2001 ([T]hc dsirLct 4urt may
taLejudLc[al notice of wcl]-publicized stuk prices without convexdng the motion to dismiss into
a motion for suJnmaryjucment.").
3
5Z Dccl- of Mark C Gardy in Support of the Motion of Frid P. Campo and Leonard
Cope for Appotnirnent a5 Lead Plaitiiiffs and Approval of Their S'c]cction of Lcs4 Counsel, 1 , X.
B (Dockel No, 16).

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on June 3 2003 ['or S [ 5.i& Both Cope and Campo, trfore sold their AW.V9 at i prc hove

thr. pnce at which thL1 hams first traded when Kniail emerged troti aakniptey.

The Plumbers and Pipefitters National Pension Fund (Plurnbcrs and PipefLtter 1 )

and the Mississippi Public Ernp1oyec Rciircrncni System ("MPERS') purchised Kmmt stock

after Krnari emerged from Inkniptcy. Plumbers and Pipertutrs has not dscleed chc pnict that

it paid for Kruart common stook, but It suld 37,5 75 shares on February 25, 2004 for S255 per

sharc. Thcrc is no a1lcatori that Plumbers tmd PipefiUers sold its shares at a loss.

MPERS engaged in various transactions involving the pur-chase and ae of hate

of Krnart conmon stock between December 2003 and June 2004; MPERS pwhasecI Kinart

common itock at prices between 23..t05 0 per shut and S3 0.0000 per share and sold those

shms at prloes bemneen $34,1522 per share and $62.2768 per sharc. The record Confirms,

therefore that MPERS likewise did sell its shares at a Loss.

ARGUMENT

To state a claim for securities fraud under Section 0(b) of the See.iriIes

Ehrne Act of] 934 (xhange Act"'),IS flS .0 § 7j(b), and RuIc 1 Ob-5 prornuLgaLed

lheretiiider, 17 C.F.R. § 240. 1 OS, a plaintiff is required to plead the following clerncits; l) a

See id., Ex. A.

Ce&fioation of Named Mantiff Pursuant 1° Federal Securities Laws at Schedule A,

Declaration of Sitnue] I-I. Rtidmi in Sippoii of the Motion of Plumbers and Pipefiters t
Consolidation, Appointment as Lead Phiiiti if mid for Approval of Selection of Lid Counsel,
Ex. B (Dtidet No, 13)

See Dec] araUon of Geoffrey C. )r's in Support of MPERSs Motion for Consolidation,
for [Es Appointment as Lead Plaintiff and for the Approval of SLectiori of Cowisel Ex A,
5hedt.ite A (Dxkel No 19)-
 Case 1:06-cv-04053-LAK Document 65 Filed 05/30/08 Page 10 of 20

material misrepresentation(or omission); 2 s.cienter. i.e, a \TongfiJl state of mind; 3 a

: :

connection with the purchase QF sale of a security; (4) reliance - (5) economic loss; and (6)

Loss causation, i.e... a causal conhleefion between the material misrepresentation and the loss.'

DL.Lra Phamis.J v Broudo. 544 US 41-42 (2005) (internal citaIions quotation marks

and emphases cimitied). This memorandum focuses on the fifth and sixth of thcsc c1cmnts -

rIrrI[y 1 c c onomic loss and bs mu s at i on - which Plaint] ITS have IalkJ to plea fts reqkil rW by

____ and prony.

i'oirr I

PLAI Nil FPS HAVE FAILED TO PLEAD ACTUAL. ECONOMIC LOSS

In Dura Phaniacctitica].s. Inc. v Broudo the SupTcmt Court rejete4 an

.

in y-estorg aacn ipi to p itad It:; ca us allori ad wonom ic Loss by mer1y alleging that the price of

a scurkv was inflated due t an alleged misrepre sentation. The Court concluded, that the

]ainLiflinvestor wai ob]iga1d. in his comLirn. to " provide a defe ndant with sonie indication

of the loss and tht cau sa l eoime.1ioii that the plairttUftiiis in mind-" 544 U. S_ at 47 The Court

rcognizid that "al lowing a plaLnIifTto forgo g'ig emy irdieation of the economic loss and

proximate cause that the plaintiff has in mind would brine about Iiann of the vary sort the

slalittcs sck to avoid" - namaly1 pcnnittin a pluintilrwith a latge]y growcless claim to

simply take up the Liin uf a number of 011wr p.eole, with he right to do so representing an in
tcITor1m inircmcnl of Lhc settlemeiit valu e , rather than a teasotiahy founded hope that the

[dscovry] procis wilt rcvl relevant evdertee..' j4 (emphasis and alteration in original;

tniuiial cpJotation marks omitted).

The Scorid Circuit has hewjt closely to Dura For instance in Aruron v Morgan

5 tai lleg y en roule to aflinning an order of the District Court Jimiag a

federaL se~curit[es action under Federal Rule DI CIA] ProcIure I 2(b)(5). he Court explained

In
 Case 1:06-cv-04053-LAK Document 65 Filed 05/30/08 Page 11 of 20

that. to survive a rnotwci to disrriis. i plali ntiff mui adqiat[v nIIcgi " thal[i s'.WTcd an

coriomic loss and that the di:kFidaM's frudlnt 000duct was the PromrtaIe cau the

pIaiti ft's loss. 464 F3d 38. 34J (24 Cr. 20(b)- Here, Plaintiffs have failed to meet thaI

burden: (a) they do not allege = actual, out-of-rocket toss; {b) they fail to show lital even if

they had sflëred any actual loss it could have been caused by TJeIbrdwits 1 alleged

misstatements or omissions, which would have affected the asIioti price ofPlaintiffs'

to the sm extent as they affected the sale pi-ic; and (c) they put Ibrwaid a theory of econornk

Ims - natriely, that they sold their shams at a dkixnint to their -true' value - that is a direct,

co]atera1 attack on the Bankruptcy Couris order conf irining Kaian s Chapter 1 1 Plan.

A. The Coin plaint dum not allege that any Pltiin(iff suffered
an out-of-pocket loss.

T]ic cind C'j xiiil adhems to an 1-of-p.,ckci nivaLivreluenil of Jamaes iii lOb-

.5 ii':3rL, C'LlIjIi. \CTLI.IITS Tii', V. I3::lflcL.I F 176 E3d 6G l,. 6$ (2d

Cr 1999) resot1iiig that the pioper measure of damages in a llTh-5 action cannot be based on

iLue speculation," and is the"difference, if any, between the pricc paid and the prioc rcecivcd

on resale1 ); Commercial Union Assurance Co plc v. Milkcn 17 F3d 60 60 (2d Cf r. I994

(Plaintiffs suffered no out-of-pocket loss since theb jnvcstinnb were iii]Iy repid11 and

thereforelLplainlffs can prove no damages' e also Exchange Act ' 28(a), 15 U.S.C.

7k hhai (1 [miting damages to the amount of a p]ainhifT a"actual damages on account of thc• act

complained. or (emphasis added)), Gurary v Winthouc 1 190 F.3d 37,46 (24 Cir 199)

(cornmon scnsc application of section 28a) oI the Exi.hange Act requires actual damages);

LNC liw,. Inc. v, F6M Fielfty Bk, Nn 92 C]v 75&4-1997 WL 52828. at ON IS.D.N.Y.

Aug. 2 1997 (explaining that "[u]ncLcr the Securities Echauge Act, atui1 damages are

measured by out-of-pocket b'). A plaintiff. thcre1.ire, cannot state a cLaLrn for securiuie

fraud by speculariveLy positing that, in the absence of fraud, he would have made an even greater

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rGI on the saic i-jfci.urjjj at isi,ic. C'rIj.L, 1. 76 1-- . 10 a.1 60 (concluding that tl,]esise

CrIisIc rognzcd u profit from thc of the I3nesio st0k 1 Carlisle dkl not suffer

icmp.ensabIe bnages entitling it to reeover j at 607 ("Carlisle did not suffer compenshle
damages beaue it recouped its entire I nvestment as wI] as a smal[ profit, when it resold the
aneslo hires7). In other words, where a plaintiff does not incur an actua' lass as a result of in

alleged misrepresentation s the pLa[ntiff suffers no cognizable dainaes under Rullo I Ob-5. Sec In

rc Estc Laudcr Cos. S. Litig.1 No. )t Civ, 250 207 WL. 1 522620, at * S.D.N.Y. May

2007) (grant -1 rig a rnoLion to disnñas a seenritics fraud complaint; "[als it is per1èii1y plain that

plaintiff would havc profcd ilhc sold after Sptcrn1xr 1], 20061 may have profited even if he

so Id before Septenr 11, 2006, and may we]I profit in the future if h has not yet sold, uh

complaint patently fails to plead loss causation for this reason aonir (foolnoW omitted)).

Hem, the Complaint does not allege that any Plaintiff sold his or it shares at a

loss. The lnidiiidua] Plaintiffs are alleged to have sold their shares for more tharj their valix as

of Krnart's cmrgnce r-m bwtknLpy! MPERS is alleged to have made a profit on its -thares.

and Plumb= and Pipefitters cks notdicloic the price paid for its shares, prec1uJng any

inference of loss. AtisnL ally allegaticin ofiul-f-pke1 lows on Knifl stock. Plaintiffs' uIe

lOb-S claim (aiLs aaa matiet of Law, && JIMS Rural 1.? i' GMU Capital Partners III, LP No

04 Ck'. 5 131, 2006 wL 16742, at 41 3 (S.D.N.Y July 6 2006) (because pIaintiffhas ncicctcd

to indicate exactly how it suliked ai" its Rule 1Ob-5 claim fails as a rnattcr of law"

(emphasis in original)), afrd on reonsiderationi 2006 WI 2239I (S.D.N.T. Aug. 4. 2006);

.se also ['anos v. Island Gem Entyrs., Ltd., NIY.I O F. Sutpp 169, 176 (SDNY 1995)

1
Plaintiffs ciLv allege 1osss vis--vis the aniciunis tbc Individual P1ritL±Th paid for
(= compi. ¶ which were dischared by courl ordcr in the bankruptcy and
are not at issue here. The Complaint lwks any a1letion that any Plaintiff lost money on the
sale of Kmart stock-

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grai1lrng El i ti resirLt p14rnifft 1 potetfli1 reo''erj' and reasi.niig that

IeteI1flt.s -owrecth p( ous That in m o st brought under the. 1934 Act defrauded buyers

are restricted to recovering so11y thdr out-of-pocket losses" because "under most crcurns.tances

benefit-of-the-bargain damages are highly speculative'); 3 Thomas Lee Hazen Law of Sec. Re..

12-12[ 1 ] (Sth ed. 200) 9iIure to alIge or prove actual damages vAl I result in 1isnii&aI of

any lOb-S damage clair&')

Any 1.]Him by PIittifls that they shu]J have made niC'r' rnoiey ihas they did on

sales of .Kmrt eomtnoii dock i S ir too s .eciihfli v Lc) -stpport a damages award. in Oofskv v.

ZipL the Second Circuit held thar benefit-of-the-bargaLn damages - the diffcrrice between

the niarkot vIijc if a sccurjtF and the value that would have eisted absent in alleged

rnr.cprcsenLation - re rcc.ovcNb]c ori1y when [hcy can be csLiblishccl with rconabk

certainty" - for example, in the lirnitcd situation . whcr m.reprcsncion is made in the

tender offer and proxy solicitation FnaWrWs as 10 [he corisidcration to bc fGrtheoming iqxrn an

intended rnerer." 645 F.2J 107, t 14 (191). Subscquent cascs have confined QaQfki to its

speiflc fet .nd rcjctcd drna awards in favor ofFLinLff whc did nt ]oe motcy t'ii

[heir invesrneris. 5= c.LjJ. 176 F.3d at &ii (Carlisle did not stiffer compensabLe damages
eittfliig it to recover the dift'ererice between the purchase price and the irue value' of the

stock at the time of purc.hase..); Commercial Union, 17 F.3d at 614 benefii1th-bgain' 1

damages only avaiLable when'they can be calculated with rcsc'nab1c crtainty); Dnw V.

Fpret Labs, Inc., 742 F2d 54, EO (2d Cr 1984)

4 dccli ning 10 apply Os1sky in the cortex 0 a

sellers' class where appdLants proposed c]airn is bascd on Ihc value the sLiiCk p(lrtedLy

would have had if Forest's true financial comditiori had b*eri publicly knoi- at The time of the

lraI1saetioJ, iLiat1y El seoiilaiive ppoLiLon" As the Second Circuit explained in Bayrov v.

Forest Labs.. Inc , benelit-of-the-bargain damages arc only available 'there predi'at on lithe
-

bargain that was acival ly tnick. not on a bargain whose terms must be supplied by hypothes

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about what the parties wcnild have donc if the circtim.es sorrouridi tig their tranuction had

iircrt," 742 F.2d t Q; accord Conimerc.LiL UnLoi, 17 P3d at 614-15 irejectixi.g a

measure o[' damages based on extrapolation of the returns the Partnership would have earned "

and explaining that ]be concept of recovery ofd rnaes for a benefii-of-thc-baraiii is

founded on the ag,eemeru nade not on a proposed hypothetcaI agreernmt built on outside

eirldence and on speculation regarding what the parlies might have done or rcccivcd had the

cLrcurnstances surrDunding the agreement been cLiffcreni (crnpLiaiis in originid and iriin:iaJ

quotation marks ornittd)).

Here, as in the Second Circuit cases in which speculativc, lncfii-of-th-bargain

damages Lijave bem reected as a matter of low, any damages suffered by Flatntiffs as a result of
the iIIged tiet of KmrtTs real estate 1.ralue cannot possibly be established "with
rea'.)nabIL certainly-" Thus. P]a5nLiffs are I Lrnited as a matter of law to out-of-pocket darnac

ariif having ii!cd 10 a] kg any .slLchi damacs, thcir ulai= cnit be dsmis-ed See. Barrow, 742

F .2d at 60 (affirming an order grtuiing a motion to dismiss a ncurities fraud complaint because
IL[I]ht jsi i ,at whether appellants were entitled to assunie that the market price of th Forczst

stock in 1969 refEeieied Forets true financial iidition, but instead whether they have suffered

Legally compensabic darnagts as a rcsut orthe fact that Li d4 not"); see aj w Carl isle, 176 F.3d at

607 (reversing the Di strict Ccii.irt' judgment awaMiig damages to Carlisle where CarlisLe hias

cited no case in which a court awded a purchaser of shares the difference between the purchase

price ad the acWl iri.i value of tEe shares at the time of the purchasc when the pur-chwr hd

already sold the shares at a profit").

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B. To the extent Plaintiffs sold itt a fraud disount they

acquired their shares iii the same d Icount and lack
cuguii&ible drnig

Qjir that P1a4iiffs benLflted from the steadily increasing price or Kmari harea

during the Class Pe.rod, they canmol allege an actual ]oss because they have not suffered one.

Instead P]einl[fTh complain that tIiy could have proIitcd more from the sale of their Kinart

5ham in thabsc'ricc of an aticcd "fraud dtscciunl. 1' As matter of Law! however, PIanUs
eaJinet show ftny Jamaes Mulling from that suppuscd fraud diowttF because, hsid on (he

f4cls al kd in the Cornplain( the al1ecd dcfrimcnt suffcrd by Plaintiffs from the fraud

dscount' when they sold Kmiirt sham (ic, a chcapr sales price) would exactly offset the

bcnclit realized by Plaint -] iTs from the "fraud discount" when thcy acquired Krnad shares (j1 ii

cheaper prc1iase

In Dura, the Sipwmc Court held that, where a pi.Erchascr in a IOh-5 me LLI[
the
shares quickly heforc the relevant truth bcgins to Lck out, the mis preicnIIon will not have led

to any loss. 544 US dl 342. Under Dura ihcrefrc 1 a purhsr alleging the existence of a

"fraud premium" can state a c Laim for securitLes fraud only If he holds his shares mlii the 1ra4

prernium is mo longer prekni. I& InxQiuiijvsion Tcchs,, N- C-04-2297 2M WI..

123931. at 116 aLI) Ciii, Jan. 9. 202) (class members who bought and sold afl of their

shares during the Class Period and held none at. the time of the purportedly corrective disclosure'

hRd no y[ cLaim); In re Cornerionc Propnc Partm.rs L .S.-JjIj. No, C 03-:2522, 2006

W 11 90267, at (N.D. Cal. May 3 200 (Hcr, sinve rrcJve disclosure is alleged to

have occurred only from July 2001 onwards under Dura there cai1 be no loss c3usiitki1 for

plaintiffs who purchased and sold stock at the inflated share pi-wc 1:11-Lot to that dicksure, and

thus these plainti ffs may not recover at au]?) In re ProtietlLnk Sec Liti., No. 03 Civ.

2295. 2006 WL 102906. at • 1 SNV. Apr. 19. 2006) ([A]s a maticr of purc log -1c, l the
 Case 1:06-cv-04053-LAK Document 65 Filed 05/30/08 Page 16 of 20

mOniejit the transaction takes p]acc the plaintiff has suf1crd no loss. the inflated purchase
;

ymexn is offset by ownership of a share that at that instant sses cqrAivalent 'ikie")

The exact same logic applies to th[s case, whrc Plaintiffs allcge that they sold

their shams t"fraud di :junL WIieLher Flainitifa acquired thcir sIiarci though the

bmkrupLy proct:-qs or thereafter in the open market, the market was. according to Plaintiff,

laboring under the same misconmpti=3 about Kmartts re-al estate value as it was whci Plaintiffs

sold theiT share. Aecordirigly, whatever the amount of the alleged &aud discount," it was

otitanL, and Plaintiffs siiflreJ no cognizable darn

Defining the p&amctcrs of putative class In Pevie ' Sears, Roebuck &. Co., the 1JS.
District Court for the Northern D[stiict of Illinois granted a miMiorl for class certificaiLon in part
and declined to apply the reasoning of Dura in that con1cx( lo all mmberi of the putative class
that sciLJ sIiarei aiter alleged merger discussions became material but bcforc they Wffe dise[Oed
496 F. Supp 2d 944 (2007), in so ruling, and without ciiaiion to any thoriy, the Court
concILfrcled dial at kast sonic mcmbcrs of the pxive -class who lvght shares before the secret
merger negotiations allegedly became material, and sold thcm aftcr the ngo1iations bcnie
material but bcforc they wcrc d igelomiL may have been damaged. I'! at 94. Wliatcvcr the
merits of this decision on class certification, it is 'who]ly inapposite F.ere where the
L
claim is that
Kmnart share pri-es wele depressed throughout the entire c.]ass period bocaus Oj th allegedly
wrongful nondisclosure othe supposed "truevalue' of Krnart's real estate hold iiigs, The Le'ie
decision is also irrelevant to. if not at odds with, the 5eeuncl Circuit case law, discusscd supr
Part [A.. that requires a plaintiff to p[cI out-of-pockcL loss to sti:Ite a claim for securities fraud
md holds that a plaifltiff cannot satisfy his obligation ioplcd proper damages by contendiri
that hu should Imv received an even greater profit than that he already epijoyed

Plaintiffs aIlee that the truth began to LLk5 out11 as of June 4 2004, Cornpl. ¶ M. Any
Plainliti that sold after the leak began rcecivd the benefit of the alleged fraud discount" in
the atIsitiori of the shares and something closer to the supposed ' -true value. of the shares
upon the sale, thus enjoying a windfalL and certainly not sulfcring any drrtage.

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C. PlIrnI11 Jioulci It be permitted to mount a collateral

uILMk en thv Rnkrup1ey Court's ConfIrmation Order.

Under long-s.u1td law ,.a baitkruptcy courOs order confirming n plan of

reorganization is treated as a linal JLlIgrner1L given preclusive effect under the doctrine of res

udicata. S.a Stoll v. Gott1ieb 305 U.S. 165. 170-71 (1938) Sure-Snap Corp. Y.

& Trust Co.. 94 g F.2d 969, 873 (24 Cir. 1991). Thus, "1y attempt by the. parties or those it

privity with them to re1Iiate any of the mtes that were misd 21ccuId ]ive See.ti raised in a
Chapter II case is flatly barrecL 2XI32M 948 1,4 at 873 (emphasis in original and internal

quotation marks omitted); 11 U.S.C. § I I41() (LL[F]

pro'istors of a coiitirmed plan

bind the debtor. any cntty iuing scci.rities under the pIri any entity acquir -Yng property .rnder

the plan, and any creditor, equiLy .;ei.i.!ry hoiJer. or i.jier:.I ptrner in the debr. whether or not

the elam or rntersI of such creditor,equity eurity holder. or general partner is impaired under

the pPat uO whether crr not s=h creditor, equity security holder, or e.nera1 partner has accepted
the plan"). Here, Individual Plaintiffs who received Kmart sh&rcs through the barkruptcy

process - as well as the Instituiional PlairiL[ffs, who bouhc shares in the open market and arc

necessarily in privily with creliiors who acquired such shares through the bankruptcy proem -

arc prcicbdcd from Ghalicngirig the Bnkrupty Court's valuation of Km1's r e al e4.ate interts.

SCC SILr-c,-Sna 948 F .2d at oafrrned plan bi rids eredi tors and those i n pt[''1ty with thent

lo all the plan's peovisions"(emphis in origi.na])); = ghg !i tie pence, 90 Id 1107, 1110

{lih Cit. l9)) [Ijiistead ofattaId rig the valuation head-on at ihe confirmation hearing

Vwcestlter has c1oseri a col Lateral attack on the conflrniatLon order where valuation may not be

ec}rLteste4.T'j; In re Emerald AejuLsition Corp.. 170 WR. 632 644 Bankr. N.D. Ill. 1994) (LLk1 its
Valuation Claims. Artra assai!s the valuation lcslirnoriy accepted by the court in the Ib.nkruptcy1

proceeding and the role of the Director Defendants in pmpounthng Much testimony. The proper

forum in which to object to the testimony was the bnPripiv court dur[ng the [bankruptcy]

proceedin).

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 Case 1:06-cv-04053-LAK Document 65 Filed 05/30/08 Page 18 of 20

The value of 1cniart re-al eiMe interest as t K mart's enirgere trcirn

bankruptcy - the, prc.ise maNT as to wiiçh Plaintiffs c[a[m misMtements QF arnissior4 were

made., causIng them dainagee - was adjudicated by the Bankruptcy Court Indeed, because the

Bankruptcy Code requires that a debtors claimho[Jers receive at least as much property through

Chapter 11 plan as in a hypothetical 1kuidation 1 _c ii LT.SC, j 1129(a)(7)(A)(ii' that issue

had to be adjudieat.cd. In compliance with that requirenient the Bankruptcy Court squarely

detcrniined that Kmans creditors would receive more property in the form of new Kinart eujty

than if Kniaji's assets, inducting leasehold and fee interests, were sold. See Confirmation Order

(K [cinhaus Dec] Ex. 2) at 14. Th Court also hc]d that [tIhc I qutdacion ana[yii in .Apperi.1 69

13 10 the DicIosuce .St mtt" iiehdiii.g Ri,c6wE,o4 Gemlt% -J's vol uatico of Kmojfs real estite
M between $593,359,010 and $7 F 967000 on a [iquidalion basis and the supporting evidence

"are peNuask'e. credihie and ?ccurate as of the daws such evidence was prepared, presnied, or

proffered. U_ (emphms wed)_

Courts havc not hcsitatcd to dimss or cnjoin attacks on eonfinintion ordms that

masquerade as independent fraud c I ai rn& In Browning Frostok 1 for exam pie, a former Chapter

II debtor's junior bondholders sued a senior bondholder and the debtor's former management

for fraud two years after the debtor emerged from bankmptcy, aI]eing that the defendants

caused the court to undervalue the debtor by conceaIin a cost-savings plan that would bc

implemented seven months aller confirmation. 165 S.W.3d 336 341-42 (Tx. 2005). As in this

caw, plaintiffs' claims in Browning "necessarily tum[cd] upon what Ihjudgrncnt of the

bankniplv court should have n" wiih rcpi 10 valuacl or of the debtor. 1d at 347- In

dismi-.i rig the Pwsi.iL the Con cocIu'cted that the plaintiffs' fraud claims "coiistitute[dT an
impe:rtiiible collateral attack on the bankruptcy's confirmation order." 14 at 349.

Similarly, in I n 0 Public Service Co- of New Hampshire. the Court of Appeals

1Iirme4 cl I3aiikriptey Coit order enjoining a securities action brought by pr-bankruptey

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 Case 1:06-cv-04053-LAK Document 65 Filed 05/30/08 Page 19 of 20

ireIiIIei-. v1'I':} al kged tIkc rivate plan roporenLS1 iieiJ wdi.]y kw Financial projections

so as to posh down the dbiovs projected mowimWn vhe, 43 FJd 76, 7-67 (16t Cit.

1995) The Court concluded that the brinIriptcy disclosures at issue wee open to allck

[during the bankruptcy pr edLngs],1 and that the shrhoIders poiritted] to noihiiig in the way
of newly dioveied evidence that could explain why ihe criticisms now made could not hive

Iiccn HtWitcd at the (irne" a at 767

As in BrwArning aid in re the Complaint before this Cowl strikes

at the heart ofih'e Bankruptcy Counfunction - j, the va]uitkbn of the debtor's property.

See Sire-Snaj. 94 F-2d at 875 ( [flundameniI to [] bnki-upty court i ilr4rg of how much
(iFe debtorl owed[ I]s a finding of how mwh [the debloti had - what vestigial worth its
business had reiained 1 Plaintiffs would only be, able to establish that they sold Kmirt shares at

a kiss - which they do not allege, even conclusorily - by attaddng the third-party valuation

adoitcd by the Bankruptcy Court in its Confirmation Order and contcndirig thai the shares

PI-minil ffs rcccivod in the bnkrupev werc actually worth more at the timc than the Bankruptcy

Court eoclude1 those shwrs were worth Such a nkd aItck on the Cinfluinatioi OJrr nrns

afoul of basic prec]usion pnci1c. LG

CONCLUSION

For each of the reasons staled above, the Complaint should be dismissed without

leave to anicrd.

LO
Insofar as PlairiiilTh aim to dmoristrate they ftit moriy 11 on Kmaii sFire. they haw
never made any effort Lo seek relief from the Bankruptcy Court's Con ri inaiior Order. Platfliifs
cannot evade their obligation to do so siniply by assening this new action in the District Court.
CI'. In re Lawrence, 29:1 F.3d 615, 624 (24 Cir. 2002) (pct-sale-order securities fraud claims
brought in Bankruptcy Court effectively seeking relief from Bankupty Cctr' sale order)

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 Case 1:06-cv-04053-LAK Document 65 Filed 05/30/08 Page 20 of 20

DBtd New Y]%, New York Rcqcctfti]Ly jjiJ

May 30. I
WACI-IT L. LIPTON, ROSEN & KATZ

Diiid B An - DA-6932)
Izear
Emil A. Kleirthatis (K-671)
Jmithan E. Goftirn (IG-057)

1 WOOS 2rntStxeit
Nw York, NY 10019
Telephone (212) 403-1000
Fao,jimile , (2 12) 4032000

Atiorrevs .for Defrndans Searx Ikkth,gL

Ctrp41rUth. Edward S Lwirt and
Adian flr

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