In order to prevail under Section 11 of the Securities Act, plaintiff-investors must establish that they either purchased securities directly in an offering or that the securities they purchased in the after-market are directly traceable to the shares of stock sold in the offering. Suing under Section 11 is highly advantageous for plaintiff-investors because it is much easier to win under Section 11 than in a securities fraud case brought under Section 10(b) of the Securities-Exchange Act, the usual alternative. On January 3, the Ninth Circuit issued an opinion on an issue of first impression: what must a plaintiff plead regarding tracing in order to survive a motion to dismiss? In In re Century Aluminum Sec. Litig., plaintiffs did not buy in the offering but alleged that their shares could be traced to the offering. The Ninth Circuit held that such an allegation was not enough because Century Aluminum had other outstanding shares plaintiffs could have bought. Accordingly, the Ninth Circuit held that plaintiffs’ claim was properly dismissed in the absence of specific facts establishing that their shares could be traced to the offering. The Ninth Circuit acknowledged that the shares might have come from the offering and that some probably were – but plaintiffs nonetheless had to establish facts so showing.
The practical implication of In re Century Aluminum is that plaintiff-investors must be able to establish tracing through their own investigation without the benefit of lawsuit-related discovery in order to proceed because the tracing facts must be known and pled in the complaint. Qs a practical matter, the decision likely sounds the death knell in the Ninth Circuit for Section 11 cases brought by plaintiffs other than direct purchasers in an offering or purchasers in the secondary market where there were no previous offering (and thus no previously outstanding securities) by the issuer.