"Statistical Tracing" under Section 11 of the Securities Act Rejected in Federal Appeal


In the late 1990’s, after the U.S. Supreme Court limited the scope of Section 12 of the Securities Act in Gustafson v. Alloyd Company,1 and after the Private Securities Litigation Reform Act2 heightened pleading requirements under Section 10(b) of the Securities Exchange Act, securities litigators noted a marked increase in claims brought as putative class actions under Section 11 of the Securities Act, which imposes liability for even innocent material misstatements in public offering registration statements.3 Fueled by the IPO boom and subsequent market disappointments, this trend seemed only to increase after 2000. To enhance the in terrorem effect of what has been termed to be essentially a strict liability statute, lead plaintiffs and their counsel have routinely sought certification of huge Section 11 classes that include not only original offering investors but also aftermarket purchasers. In a high volume market, such an expansion of a Section 11 class into the aftermarket potentially can add hundreds of millions of dollars in putative damages. The Fifth Circuit Court of Appeals has now sharply curtailed the circumstances under which aftermarket purchasers may claim Section 11 standing, in its recent decision in Krim v. pcOrder.com, Inc.

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