On
- Section 11 standing is limited to persons who purchase securities that are the direct subject of (i.e., “traceable” to) the allegedly misleading registration statement. Section 11 requires claimants to demonstrate that their shares were initially offered to the public by the issuer under the allegedly misleading registration statement or amendment thereto.
- Section 12(a)(2) of the Securities Act permits claims against a seller of a security by prospectus only by persons purchasing the security from that seller, thereby limiting the class of potential plaintiffs to those who purchased the security directly from the issuer of the prospectus, as well as certain solicitors deemed to be statutory sellers due to a direct relationship with the purchasers.
In Jensen, the plaintiffs alleged that the ETF's registration statements and amendments (“offering documents”) issued or filed between 2012 and 2015 were false or misleading because the offering documents failed to disclose the risks associated with using stop-loss orders with ETF shares in light of the possibility of flash crashes, such as the flash crash that occurred in
The investors purchased their ETF shares in the secondary market. Because the investors were unable to trace their purchases back to the allegedly misleading offering documents, the court affirmed the trial court's holding that the plaintiffs lacked standing to assert a claim under Section 11. The court also held that, because the plaintiffs did not allege sufficient direct contact with the ETF and other defendant-respondents (e.g., the ETF's adviser and principal underwriter) - particularly in view of the fact that the investors purchased their ETF shares in the secondary market - the investors lacked standing to bring a claim under Section 12(a)(2).
Observations
The
Jensen is an intermediate appellate court decision, and the plaintiffs have filed an appeal to the
Another open question is whether Jensen's reasoning, even if embraced by other courts, will improve the chances of getting a motion to dismiss granted on standing grounds. To date, the case law has been quite forgiving at the pleading stage to plaintiffs regarding the tracing requirement. The plaintiffs' Section 11 claims in Jensen were dismissed only after a bench trial focused on the issue.
Footnote
1. 44 Cal. App. 5th 618, 2020 Cal. App. LEXIS 61, 2020 WL 373299.
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