In Slack Technologies, LLC v. Pirani,1 the Supreme Court on June 1, 2023, unanimously held that even in a case involving direct listing of both registered and unregistered securities, to state a claim under Section 11(a) of the Securities Act of 1933, a plaintiff must allege that he or she purchased securities issued pursuant to and traceable to the allegedly misleading registration statement. Justice Neil Gorsuch wrote the opinion for a unanimous Court.
Litigation Background
The underlying action arose from Slack Technologies' 2019 direct listing of both unregistered shares previously held by Slack employees, investors or others and registered shares issued pursuant to a registration statement on the New York Stock Exchange. During the direct listing, both categories of shares became publicly available. Plaintiff purchased Slack shares following the direct listing. When Slack's share price later dropped, plaintiff filed a class-action lawsuit alleging that Slack had violated Sections 11 and 12 of the 1933 Act by filing a materially misleading registration statement. However, plaintiff did not allege that the shares he purchased were among the registered shares subject to the registration statement.
Slack moved to dismiss the complaint, arguing that only individuals who hold shares issued pursuant to a false or misleading registration statement can bring a claim under Sections 11 and 12. Slack argued that plaintiff had failed to allege that he purchased shares traceable to the allegedly misleading registration statement and, therefore, could not bring claims under these sections of the 1933 Act.
The District Court denied the motion to dismiss but certified its decision for appellate review. A divided panel of the Court of Appeals for the Ninth Circuit affirmed the denial of the motion to dismiss.2 The dissent argued that Sections 11 and 12 require a plaintiff to plead and prove that he purchased securities registered under a materially misleading registration statement, which plaintiff had not done. The dissent further noted that many lower court cases have interpreted Section 11(a) as applying only to shares purchased pursuant to a registration statement. The Supreme Court granted certiorari to resolve this split of authority regarding the scope of Section 11(a).
The Supreme Court's Decision
The Court first considered the statute's text, in particular the language authorizing an individual to sue for a material misstatement or omission in a registration statement when he or she has acquired "such security." The Court determined that Section 11(a)'s language and grammar, read against the backdrop of the statute's context of focusing on particular securities and limiting damages, indicated that Section 11(a) was intended to be construed narrowly and applies only to a security registered under a particular registration statement alleged to contain a materially misleading statement or omission.
The Court further noted that, with the exception of the Court of Appeals in this case, every court of appeals that had considered the scope of Section 11 liability had found that to bring a claim under the statute, the plaintiff's securities must be "traceable" to the particular registration statement alleged to be false or misleading.3 The traceability requirement has historically created a significant barrier to Section 11 claims where there were also publicly traded securities issued under registration statements other than the allegedly defective registration statement. To circumvent this requirement, the plaintiff in Slack argued that Section 11 liability extends to securities that bear only a "minimal relationship" to a defective registration statement — an argument the Court rejected.
The Court also rejected plaintiff's contention that a broader reading of Section 11 would better fulfill the purpose of the 1933 Act by expanding liability for misstatements and omissions. The Court acknowledged that the 1933 Act is "limited in scope" and imposes strict liability on issuers for both intentional and negligent misstatements and omissions in a registration statement.4 By contrast, the Securities Exchange Act of 1934 permits claims — including Section 10(b) and Rule 10b-5 claims — involving any sale of a security but requires a plaintiff to prove scienter. In the Court's view, the designs of these statutes represent a "balanced liability regime" that allows a narrower set of claims with a lesser standard of proof to proceed under the 1933 Act and a broader set of claims with a higher standard of proof to proceed under the 1934 Act.
Finally, in light of its holding on plaintiff's Section 11 claims, the Court declined to adjudicate the merits of plaintiff's Section 12 claim and, in vacating and remanding to the Court of Appeals, cautioned that "the two provisions contain distinct language that warrants careful consideration."
Looking Ahead
The Court's decision reinforces a long line of lower court decisions holding that Section 11(a) claims must arise out of securities purchases traceable to a specific, allegedly defective registration statement. The Court declined to allow plaintiffs in direct listings to circumvent this requirement and refused to create an exception that would have potentially broadened the scope of Section 11 liability significantly.
Footnotes
1. 598 U.S. ___ (2023).
2. Pirani v. Slack Technologies, Inc., 13 F. 4th 940 (9th Cir. 2021).
3. See, e.g., In re Ariad Pharmaceuticals, Inc. Securities Litigation, 842 F.3d 744, 755–756 (1st Cir. 2016); Rosenzweig v. Azurix Corp., 332 F.3d 854, 873 (5th Cir. 2003); Lee v. Ernst & Young, LLP, 294 F.3d 969, 976–977 (8th Cir. 2002); Joseph v. Wiles, 223 F.3d 1155, 1159 (10th Cir. 2000), abrogated on other grounds, California Public Employees' Retirement System v. ANZ Securities, Inc., 582 U.S. 497 (2017); APA Excelsior III L. P. v. Premiere Technologies, Inc., 476 F.3d 1261, 1271 (11th Cir. 2007).
4. Herman & MacLean v. Huddleston, 452 U.S. 375, 382 (1983).
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