The United States Court of Appeals for the Ninth Circuit, on remand from the United States Supreme Court, unanimously reversed the district court's denial of a technology company's (the "Company") motion to dismiss claims brought under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the "Securities Act"). Pirani v. Slack Techs., Inc., No. 20-16419 (9th Cir. Feb. 10, 2025). The case turned on whether plaintiff sufficiently pleaded that he had standing to bring Securities Act claims in respect of a direct listing in which shares registered under an allegedly misleading registration statement were made available in the market alongside unregistered shares. The Supreme Court, in a decision covered here, held that Section 11 requires plaintiffs to plead that they purchased securities traceable to the at-issue registration statement but did not address whether the complaint satisfied that requirement. The Supreme Court also declined to address whether the complaint sufficiently alleged standing to pursue a claim under Section 12(a)(2). We previously covered the Ninth Circuit's now-vacated decision, the Supreme Court's grant of the petition for certiorari to review the Ninth Circuit's decision, and the parties' oral argument before the Supreme Court.
With respect to the Section 11 claim, the Ninth Circuit held that plaintiff waived any argument that he could trace his share purchases to the allegedly misleading registration statement. In reaching this conclusion, the Ninth Circuit noted that plaintiff repeatedly argued throughout the litigation that "the concept of 'tracing' a share of stock—i.e., establishing a chain of title for a particular share back to the share's original owner—is a concept that no longer exists in today's market and is not possible."
All of plaintiff's arguments on waiver were rejected. First, plaintiff argued that the Supreme Court's silence on the issue of waiver was dispositive. The Ninth Circuit held, however, that the Supreme Court ordinarily does not address issues not resolved by lower courts, including waiver of arguments.
Second, plaintiff argued that his concessions on traceability were sufficiently narrow that he could still prevail by pleading tracing through a statistical analysis that he claimed to demonstrate the probability that he purchased registered shares. The Ninth Circuit was not convinced as a factual matter because it was plausible that plaintiff could have purchased all of his shares from a single seller of unregistered shares. The Court went on, however, to hold as a matter of law that the "theory of statistical tracing was contrary to its precedent," and the Court rejected plaintiff's proposal to adopt a burden-shifting framework that would require the Company to prove that the shares were not registered, holding that the burden of persuasion falls on the party seeking relief absent evidence of contrary Congressional intent.
Last, plaintiff argued that the Ninth Circuit should excuse his waiver. The Court held that this would unfairly prejudice the Company, who had been "forced to spend years—in the district court, this court, and the Supreme Court—litigating a statutory issue that was relevant only because of [plaintiff]'s concession that he could not establish traceability."
Although the Supreme Court cautioned the Ninth Circuit that Sections 11 and 12(a)(2) "contain distinct language that warrants careful consideration," and that they do not "necessarily travel together," the Ninth Circuit also concluded that plaintiff failed to plead standing to pursue a claim under Section 12(a)(2). That statute provides that "[a]ny person who ... offers or sells a security ... by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements ... not misleading ... shall be liable ... to the person purchasing such security." 15 U.S.C. §77l(a)(2) (emphasis added). The Ninth Circuit held that the phrase "such security" refers back to the "security" that was offered or sold "by means of a prospectus or oral communication." Because a sale "by means of a prospectus" only can happen in a registered offering, the Ninth Circuit held that Section 12(a)(2) "imposes the same traceability requirement as [S]ection 11."
Plaintiff raised three arguments that were rejected. Plaintiff first argued that the scope of Section12(a)(2) was broader than Section 11 because it referenced oral communications. The Ninth Circuit dismissed this argument, observing that the case did not involve oral communications and that such communications in any event must relate to a prospectus. Plaintiff also argued that Section 12(a)(2) expressly covers sales that are exempt from registration under Section 3 of the Securities Act and that it, therefore, should be read as also applying to sales exempt from registration under Section 4 covering the sales of unregistered shares of the Company in the direct listing. The Ninth Circuit noted that the Supreme Court rejected this argument in a previous case, holding that the specific reference to Section 3 in the statute cut against reading Section 12(a)(2) as applying to transactions that are exempt under Section 4. Finally, plaintiff argued that Section 12 applied because anyone buying shares would have looked at the prospectus even if they ultimately purchased unregistered shares. The Ninth Circuit, citing Yung v. Lee, 432 F.3d 142 (2d Cir. 2005), held that this argument failed because the unregistered securities did not need to be registered and their sales, therefore, could not have been "by means of a prospectus" as required by Section 12(a)(2) even if investors considered the prospectus in making their investment decisions.
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