Chapter 15 - § 15.7 • LIABILITY UNDER REGISTRATION STATEMENTS, § 11
| Jurisdiction | Colorado |
§ 15.7.1—Background
Section 11 of the 1933 Act imposes liability on certain persons associated with a 1933 Act registration statement that contains false or misleading statements or omissions. Section 11 was designed by Congress to ensure that persons "responsible for statements upon the face of which the public is solicited to invest its money" tell the truth.87
This derived from the fact that (according to the House committee report) half of the $50 billion of new securities offered for sale during the decade after World War I proved to be worthless, and Congress placed the blame for this largely with the brokers and dealers: "The flotation of such a mass of essentially fraudulent securities was made possible because of the complete abandonment by many underwriters and dealers in securities of . . . standards of fair, honest, and prudent dealing."88
§ 15.7.2—Elements Of A § 11 Claim
The elements of a claim under § 11(a) of the 1933 Act are, in addition to the jurisdictional allegations described above, as follows:
1) An untrue statement of a material fact or an omission to state a material fact required to be stated in the registration statement or necessary to make the statements therein not misleading. Allegations under § 11 must be pled with particularity,89 and the Second Circuit holds that the PSLRA pleading standards apply: the complaint must plead facts resulting in a strong inference that the alleged false or misleading statements were made with actual knowledge of their falsity.90 Where the court determines that the complained of statements were not misleading, there is no need to consider whether they were material. Where there is no duty to disclose other items, the failure to disclose does not provide a basis for liability.91
2) The plaintiff acquired a security subject to that registration statement. Note that this does not require that the plaintiff have acquired the security directly from the issuer or the underwriter pursuant to the registration; it is sufficient under § 11 if aftermarket purchasers can trace their securities to an allegedly false representation statement. See Lee v. Ernst & Young LLC,92 where the issuer was required to restate financial statements included in a registration statement two years after the registration statement.93 When the aftermarket securities issued pursuant to the registration statement are commingled with other securities previously in the market, it may be difficult for the plaintiff to prove standing. In Krim v. pcOrder.com, Inc.,94 the court found that the plaintiffs lacked standing in a case where 99 percent of the shares derived from the registration statement and experts testified that there was nearly 100 percent probability that the plaintiffs held IPO shares. The court said, "these general statistics say nothing about the shares that a specific person actually owns and have no ability to separate those shares upon which standing can be based from those for which standing is improper."95
3) The defendant is:
a) A person who signed the registration statement;
b) A director of, partner in, or person who performs similar functions for the issuer at the time of filing the part of the registration statement with respect to which liability is asserted;
c) A person who, with his or her consent, was named in the registration statement as being or about to become a director, person performing similar functions, or partner of the registrant;
d) An accountant, engineer, or appraiser, or any person whose profession gives authority to a statement made by him or her who has, with his or her consent, been named as having prepared or certified any part of the registration statement, or having prepared or certified any report or valuation that is used in connection with the registration statement; or
e) An underwriter with respect to such security.
Each of the different classes of defendants has a different burden and "due diligence" defense to § 11 claims as discussed in more detail below.
The plaintiff must show actual reliance on the untrue statement or omission only if the issuer has made generally available to its security holders an earnings statement covering a period of 12 months beginning after the effective date of the registration statement. Reliance is not generally an element of a § 11 or § 12(a)(2) action, and a purchaser has no duty to investigate a seller's possible fraud or to verify a statement's accuracy.96
The Southern District of New York held that a person who had not signed a registration statement was not liable under § 11 when the prospectus was found to contain materially misleading statements and omissions.97
The Ninth Circuit has ruled that the particularity requirements of F.R.C.P. 9(b) apply to claims brought under § 11 when they sound in fraud.98 On the other hand, the Eighth Circuit held that liability under § 11 is "virtually absolute" so that a claim need not be pleaded with the specificity necessary for a fraud claim.99
§ 15.7.3—Damages Under § 11
The court may award damages under § 11 of the 1933 Act as defined in § 11(e), which provides that the amount recoverable is the difference between the amount paid for the security (not exceeding the amount at which it was offered to the public) and the value of the securities at the time of suit. In addition, the court can award attorney fees and costs as the court feels appropriate if the court believes a suit or the defense of a suit is without merit. The filing date of the original complaint is the measurement date for damages, even when the original complaint did not contain a § 11 claim.100
When a purchaser of the securities sells the securities for a profit, the purchaser cannot maintain an action under § 11.101
In McMahan & Co. v. Wherehouse Entertainment, Inc.,102 the court held that "benefit of the bargain" damages were not recoverable under § 11 claims, although they may be recoverable under § 10(b). In that case, debenture holders reasonably believed that their conversion rights entitled them to a better result than actually proved to be the...
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