Ninth Circuit Decision on Negative Causation

In Hildes v. Arthur Andersen LLP (, the Ninth Circuit issued an important decision regarding negative causation under Section 11 of the Securities Act of 1933.  Under Section 11, plaintiffs need not plead causation.  Nonetheless, defendants can obtain a dismissal if they can demonstrate facts from the complaint on the indisputable public record which affirmatively disprove causation.  Here, the district court dismissed Section 11 claims against Peregrine's outside directors based on negative causation.  The plaintiff had agreed to vote his shares in favor of a merger of Harbinger Corp. in which he owned shares and Peregrine, Inc. before Peregrine issued the disputed registration statement.  Accordingly, the district court held that causation could not be established.  The Ninth Circuit reversed.  The Ninth Circuit reasoned that, even though plaintiff had agreed to vote his shares in favor of the merger, he was not irrevocably bound to sell his shares because the sale would necessarily be consummated only if the merger were consummated, and, plaintiff alleged, the merger would not have been consummated if Peregrine had not made material misstatements about its financial condition in its registration statement.  Plaintiff's allegations that the merger would not have been consummated were premised on what plaintiff asserted the board and other shareholders would have done had the truth been disclosed.  While inherently speculative, the Ninth Circuit credited the allegations that the merger would not have been consummated as "plausible" and thus sufficient to survive a motion to dismiss. The case unfortunately sets a low bar for pleading around negative causation under Section 11.

The Second Circuit Strictly Enforces Time Limits for Securities Claims

This week, the Second Circuit issued a very significant ruling regarding the time period during which securities cases must be brought.  In Police and Fire Retirement System of the City of Detroit v. IndyMac MBS, Inc. (, the Second Circuit held that so-called American Pipe tolling does not apply to the statute of repose for filing claims under the Securities Act of 1933.  Specifically, the Securities Act requires that civil claims brought thereunder must be filed within one year of plaintiff's discovery of the claim or within three years of the offering at issue, whichever occurs first.  The Second Circuit held that the three year period is a hard limit not subject to a well accepted form of tolling, so-called American Pipe tolling. In American Pipe, the Supreme Court held that statute of limitations for the claims by class members is tolled -- it does not run -- while a class action purporting to advance those claims is pending.  Otherwise, putative class members might be forced to file individual claims while waiting for class certification; otherwise, if class certification were denied, it might by then be too late for individual class members to file individual actions.  The Second Circuit held that the three year repose period under the Securities Act is so strict that this American Pipe tolling rule does not apply to it.

While technical and perhaps esoteric, the no tolling rule as significant implications.  In the IndyMac case itself, plaintiffs failed to include a named plaintiff for each and every one of the over 100 securities offerings at issue.  Accordingly, the claims with respect to offerings for which there was no named class representative were dismissed.  Absent the statute of repose, this problem would be easily remedied; plaintiffs would simply add class representatives for the additional offerings.  But, by the time of the ruling the three year statute of repose had run and the pendency of the class action the Second Circuit held did not extend the time period to file.

More common application of this rule may come in the form of opt outs.  Often, institutional and individual plaintiffs will remain part of a putative class action to see how the class action will proceed and how favorable a settlement might be.  If unsatisfied, the institutions or individuals can "opt out" of the class and file individual actions.  It is now clear that these would-be individual plaintiffs will have to opt out and file an individual action before the three-year statute of repose runs.  Accordingly, this new rule will impact opt out decisions and timing.

The rule will also almost certainly not be limited to Securities Act claims.  The more common securities claims under Section 10(b) of the Securities-Exchange Act and Rule 10b-5 are subject to a functionally identical five year statute of repose.  Therefore, this same rule will apply to Exchange Act claims.

Finally, the rule may also apply to other forms of tolling, possibly even contractual tolling agreements.  This ruling calls all forms of tolling into question with respect to the statutes of repose applicable under the Securities and Exchange Acts.  Plaintiffs will sometimes agree not to name certain defendants in exchange for a tolling agreement in the event that later discovered facts reveal a compelling reason to add that defendant.  Such agreements may be ineffective after the statute of repose date.

In sum, this decision will give defendants opportunities to argue that certain securities cases are time barred.  More importantly, perhaps, it will force plaintiffs to make more rapid decisions on class certification, opting out and other critical decisions in the life of securities actions.

Ninth Circuit Rejects “Tracing” Allegations in Section 11 Securities Case

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.