United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 01-1369

___________

Jong E. Lee; Heide Sue Casavan; *

Darcie Molitor; Whitney McFarlin; *

George E. Faue; Patricia E. Faue; *

Janice McQuiston; Randolph G. *

Sunder; Phillip Thomas; Linda Grady; *

Mathias Faue; Desiree Swan; Ranjit C. *

Desai; Priyam R. Desai; Herbert A. *

Beron; Gordon E. Bennett; C. William *

Brown, Dr., Trustee on behalf of *

C. William Brown, M.D.P/S Trust, *

dtd 4/1/85; Charles Fisher; Judith *

Anne Jacobson; Ann M. Ritz; *

Joseph Cooper, *

*

Plaintiffs-Appellants, *

* Appeal from the United States

v. * District Court for the

* District of Minnesota

Ernst & Young, LLP, *

*

Defendant-Appellee. *

*

Summit Medical Systems, Inc., *

*

Defendant. *

*

--------------------------------------- *

*

Securities and Exchange Commission, *

*

Amicus on Behalf of Appellant. *
1

Section 11, 15 U.S.C. § 77k(a), provides the following:

In case any part of the registration statement, when such part

became effective, contained an untrue statement of a material fact or

omitted to state a material fact required to be stated therein or necessary

to make statements therein not misleading, any person acquiring such

security (unless it is proved that at the time of such acquisition he knew

of such untruth or omission) may, either at law or in equity, in any court

of competent jurisdiction, sue– 

(1) every person who signed the registration statement;

(2) every person who was a director of (or person

performing similar functions) or partner in the issuer at the

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___________

Submitted: October 17, 2001

Filed: June 18, 2002

___________

Before McMILLIAN, FAGG and BEAM, Circuit Judges.

___________

McMILLIAN, Circuit Judge.

This appeal arises from consolidated securities fraud lawsuits filed against

Summit Medical Systems, Inc. (“Summit”), Summit’s officers and directors, and

Summit’s public accountant-independent auditor, Ernst & Young (“E&Y”)

(collectively “defendants”) by Summit shareholders (“plaintiffs”) in the United States

District Court for the District of Minnesota. Following the entry of final judgment,

plaintiffs appeal from orders of the district court resulting in the dismissal, pursuant

to Fed. R. Civ. P. 12(b)(6), of their claim against E&Y for allegedly violating § 11 of

the Securities Act of 1933 (“the 1933 Act”), 15 U.S.C. § 77k,1

 by making materially
time of the filing of the part of the registration statement

with respect to which his liability asserted;

(3) every person who, with his consent, is named in the

registration statement as being or about to become a

director, person performing similar functions, or partner;

(4) every accountant, engineer, or appraiser, or any person

whose profession gives authority to a statement made by

him, who has with his consent been named as having

prepared or certified any part of the registration statement,

or as having prepared or certified any report or valuation

which is used in connection with the registration statement,

with respect to the statement in such registration statement,

report, or valuation, which purports to have been prepared

or certified by him;

(5) every underwriter with respect to such security.

If such person acquired the security after the issuer has made

generally available to its security holders an earning statement covering

a period of at least twelve months beginning after the effective date of

the registration statement, then the right of recovery under this

subsection shall be conditioned on proof that such person acquired the

security relying upon such untrue statement in the registration statement

or relying upon the registration statement and not knowing of such

omission, but such reliance may be established without proof of the

reading of the registration statement by such person.

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false and misleading statements and omissions in Summit’s registration statement

filed with the Securities and Exchange Commission (“SEC”) in connection with

Summit’s initial public offering in August 1995. See Joint Appendix, Vol. I, at 65-66

(Count III of the Amended and Consolidated Class Action Complaint (hereinafter

“the first amended complaint”)). For reversal, plaintiffs argue that the district court

(1) erred in holding as a matter of law that standing to bring the § 11 claim exists only
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for those plaintiffs who acquired their stock in the initial public offering, In re

Summit Med. Sys., Inc., Sec. Litig., 10 F. Supp. 2d 1068, 1070 (D. Minn. 1998) (In

re Summit), and (2) abused its discretion in denying their request to have a named

plaintiff, Whitney McFarlin, appointed as a lead plaintiff after the statutory sixty-day

period for requesting such appointments had expired. See Joint Appendix, Vol. II,

at 554-55 (Transcript of Proceedings (Nov. 20, 1998)). For the reasons discussed

below, we reverse the district court’s holding on the § 11 standing issue, decline to

address the lead plaintiff appointment issue, and remand the case to the district court

for further proceedings consistent with this opinion.

Jurisdiction was proper in the district court based upon 28 U.S.C. § 1331.

Jurisdiction is proper in this court based upon 28 U.S.C. § 1291. The notice of appeal

was timely filed pursuant to Fed. R. App. P. 4(a).

Background

Summit is a corporation headquartered in Minneapolis, Minnesota, which

provides “clinical outcomes” medical database software and related products and

services. According to the first amended complaint, 2.5 million shares of Summit

common stock began trading publicly on August 4, 1995, at $9.00 per share.

Following the initial public offering, the Summit stock price increased even though

no profit was shown by Summit. A secondary public offering was made in June

1996. At the end of 1996, the Summit stock price began to decline, and it eventually

fell below the price at which the stock was initially offered to the public. On

March 3, 1997, Summit publicly disclosed that it had been improperly recognizing

revenues. Following an investigation, Summit announced that it planned to restate

its financial results dating back to 1994. On April 4, 1997, Summit filed revised

statements with the SEC showing the total revenues for the years 1994 and 1995, and

the first nine months of 1996, to be $5.6 million less than originally reported,

representing an 11% cumulative shortfall. See In re Summit, 10 F. Supp. 2d at 1069.
2

Because we are reviewing a dismissal pursuant to Fed. R. Civ. P. 12(b)(6), we

assume to be true the relevant factual allegations contained in the complaint. See

Abels v. Farmers Commodities Corp., 259 F.3d 910, 916 (8th Cir. 2001) (“We

assume, as we must in reviewing a dismissal for failure to state a claim, that all

factual allegations in the complaint are true.”). 

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Following Summit’s public disclosures, numerous lawsuits were brought

against defendants, resulting in the present consolidated action. See Joint Appendix,

Vol. I, at 1-8 (magistrate judge’s order consolidating complaints, appointing lead

plaintiffs, and approving lead counsel, pursuant to the Private Securities Litigation

Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u-4(a)). On August 25, 1997, the

lead plaintiffs in this consolidated case filed the first amended complaint. See id. at

17-77. In their factual allegations, plaintiffs averred that Summit initially filed a draft

registration statement and prospectus with the SEC on June 21, 1995, that Summit

thereafter filed several amendments to its draft registration statement and prospectus,

and that Summit filed its final registration statement and prospectus on August 7,

1995. See id. at 36. (Hereinafter “the registration statement” refers to the final

version filed by Summit on August 7, 1995.) According to the first amended

complaint, the registration statement identified E&Y as an “expert” which had

audited and certified Summit’s financial statements, and it set forth E&Y’s opinion

that Summit’s consolidated financial statements “presented fairly, in all material

respects, the consolidated financial position of [Summit] for the 1993 and 1994 fiscal

years, and the results of [Summit’s] consolidated operations and its consolidated cash

flows for 1992, 1993, and 1994, ‘in conformity with generally accepted accounting

principles [(“GAAP”)].’” Id. at 36-37.2

 In Count III of the first amended complaint,

plaintiffs asserted that, because of Summit’s premature recognition of revenue in

violation of GAAP and Summit’s own publicly-stated revenue recognition policies,

the registration statement contained materially false and misleading statements and

omissions regarding Summit’s actual financial status and accounting practices from

as early as 1994. See id. at 65. In their prayer for relief, plaintiffs sought, among

other things, monetary damages, attorneys’ fees, and their costs of litigation. Whitney
3

Section 12(2) of the 1933 Act is codified at 15 U.S.C. § 77l(a)(2).

4

The district court explained:

Because plaintiffs do not complain that they purchased their Summit

shares in the IPO, their Section 11 claim is dismissed for lack of

standing, and because the only claim against E&Y is premised on

Section 11, E&Y’s motion to dismiss is granted in its entirety. . . . None

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McFarlin, though not a lead plaintiff, was identified in the first amended complaint

as a named plaintiff. See id. at 20. 

Defendants, including E&Y, moved to dismiss the first amended complaint on

several grounds. The district court granted in part and denied in part defendants’

motion to dismiss. In re Summit, 10 F. Supp. 2d at 1071. As to the § 11claim against

E&Y, the district court held, as a matter of law, that only those plaintiffs who

purchased their stock in the Summit initial public offering had standing to sue. See

id. at 1070. In support of this holding, the district court relied upon Gustafson v.

Alloyd Co., 513 U.S. 561 (1995) (Gustafson) (holding that aftermarket purchasers of

securities did not have a claim under § 12(2) of the 1933 Act3

). The district court

explained that the 1933 Act must be read as a whole and that, based upon the shared

legislative history and legislative intent behind § 11 and § 12(2) of the 1933 Act, “the

standing principles announced in Gustafson apply equally to Section 11 and 12

claims.” In re Summit, 10 F. Supp. 2d at 1071 (citing In re WRT Energy Sec. Litig.,

No. 96-CIV 3611, 1997 WL 576023, at *5 (S.D.N.Y. Sept. 15, 1997) (dismissing, for

lack of standing, a § 11 claim brought by aftermarket purchasers of securities, based

upon interpretation and application of Gustafson)). The district court dismissed the

§ 11 claim of all the named plaintiffs except for two (one of whom was McFarlin)

who appeared to have acquired their stock in Summit’s August 1995 initial public

offering. Id. As to the other plaintiffs, the district court dismissed their § 11 claim

without prejudice and with leave to replead the § 11 claim to establish standing

consistent with the district court’s interpretation of the statute. Id.4
of the putative class plaintiffs allege a purchase in the IPO, and it is

clear from the list of purchasers contained in the Complaint that only

two plaintiffs, Casvan and McFarlin, could have purchased Summit

stock in the IPO. Thus, the Section 11 claims for the remaining

plaintiffs are dismissed without prejudice, and with leave to replead,

should they have standing in accord with this opinion.

In re Summit Med. Sys., Inc., Sec. Litig., 10 F. Supp. 2d 1068, 1070-71 (D. Minn.

1998).

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Plaintiffs subsequently filed a Second Amended and Consolidated Class Action

Complaint (“the second amended complaint”), see Joint Appendix, Vol. II, at 352-

403, which again included under Count III a § 11 claim against E&Y and others.

This time, however, it was brought by the two plaintiffs who appeared to have

purchased their Summit shares in the August 1995 initial public offering, on behalf

of the members of the class who had purchased their Summit shares in the initial

public offering. See id. at 399-400. E&Y moved to dismiss the § 11 claim in the

second amended complaint, and the district court scheduled a hearing. At the

hearing, held on November 20, 1998, plaintiffs acknowledged that McFarlin was the

only named plaintiff who had purchased stock in Summit’s August 1995 initial public

offering, and they asked to have McFarlin appointed a lead plaintiff. The district

court orally denied plaintiffs’ request on the ground that it would be inconsistent with

the PSLRA to appoint McFarlin as a lead plaintiff at that point in the litigation. See

Joint Appendix, Vol. II, at 554-55 (Transcript of Proceedings) (“That, in my view,

both contravenes the words of the 60-day designation, and in fact contravenes the

strongly expressed spirit of Congress inherent in the passage of the [PSLRA].”).

Thereafter, pursuant to Fed. R. Civ. P. 12(b)(6), the district court dismissed plaintiffs’

§ 11 claim against E&Y as set forth in the second amended complaint. In re Summit,

No. 97-CV-558 (D. Minn. Nov. 24, 1998) (order). 

Following an agreement by the parties to settle the remaining claims against

Summit and its officers and directors, the district court entered an order approving the
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terms of the settlement and entering final judgment. Id. (Jan. 17, 2001) (judgment).

This appeal followed.

Discussion

Standing under § 11 of the 1933 Securities Act

We review the district court’s interpretation of a federal statute de novo. See

Hamilton v. Schriro, 74 F.3d 1545, 1551 (8th Cir.), cert. denied, 519 U.S. 874 (1996).

Plaintiffs, with the support of the SEC as an amicus curiae, argue that the district

court erroneously interpreted § 11 of the 1933 Act when it held that only those

plaintiffs who acquired stock in the Summit August 1995 initial public offering have

standing to sue under § 11. Plaintiffs argue that aftermarket purchasers may bring a

claim under § 11 so long as they can “trace” their securities to the public offering

under the registration statement alleged to be false and misleading. See, e.g.,

Kirkwood v. Taylor, 590 F. Supp. 1375 (D. Minn. 1984) (allowing an aftermarket

purchaser to establish standing by “direct tracing” – that is, by showing that the

security was issued under the registration statement alleged to be defective, and not

under a different registration statement), aff’d, 760 F.2d 272 (8th Cir. 1985)

(unpublished table decision). Plaintiffs maintain that the district court erroneously

relied on the Supreme Court’s decision in Gustafson in rendering its decision.

Plaintiffs contend that, because Gustafson involved § 12(2) of the 1933 Act, not § 11,

its holding is limited to the question of what constitutes a “prospectus” under § 12.

Plaintiffs note that the majority of federal courts that have addressed this issue,

including the only two circuit courts of appeals to have ruled on it since Gustafson

was decided, have concluded that the Gustafson holding does not extend to § 11

claims. See Brief for Appellants at 14-16 (citing, e.g., Joseph v. Wiles, 223 F.3d

1155, 1159-61 (10th Cir. 2000) (Joseph); Hertzberg v. Dignity Partners, Inc., 191 F.3d

1076, 1080-82 (9th Cir. 1999) (Hertzberg)). In support of this view, plaintiffs

highlight differences between § 11 and § 12. For example, the language of § 12
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refers to “the person purchasing such security from him,” where “him” is the seller

of securities by prospectus. In comparison, § 11 refers more broadly to “any person

acquiring such security.” Plaintiffs argue that allowing § 11 standing for aftermarket

purchasers is consistent not only with the Supreme Court’s reasoning and disposition

in Gustafson, but also with the language of the statute, the legislative history of the

1933 Act, and a large body of case law that has traditionally permitted tracing under

§ 11. 

 

E&Y argues that the district court has correctly and appropriately applied

Gustafson to the present case. E&Y explains: “Gustafson was animated, not by

anything unique to Section 12(2), but by the structure of the entire 1933 Act and the

relationship of the 1933 Act to the 1934 Act and the overall statutory scheme.” Brief

for Appellee at 24. E&Y further argues that the reference to “such security” in § 11

can only mean a security being offered in a public offering pursuant to the registration

statement at issue. E&Y also contends that plaintiffs have mischaracterized the

difference between § 11 and § 12 of the 1933 Act. According to E&Y, the real

distinction between § 11 and § 12 is not who may sue but, rather, who may be sued.

See id. at 27. E&Y maintains that § 12 only allows sellers of securities to be potential

defendants, while § 11 contains a much broader list of potential defendants.

Nevertheless, under both § 11 and § 12, E&Y argues, a purchaser must have obtained

his or her security in a public offering, pursuant to the registration statement at issue,

in order to have standing to sue. E&Y also argues that allowing aftermarket

purchasers to establish standing through tracing will produce anomalous results. For

example, under the tracing theory, two investors in the secondary market who

purchase the exact same stock, at the exact same time, for the exact same price, can

have completely different remedies under § 11 depending on the origin of the shares

they purchased. E&Y contends it could not have been the intent of Congress to allow

this and other seemingly arbitrary remedial disparities under § 11. 
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This court has yet to rule upon the § 11 standing issue in a published opinion.

By affirming the district court’s pre-Gustafson decision in Kirkwood v. Taylor, we

have, however, upheld an interpretation of § 11 which allows aftermarket stock

purchasers to establish standing by tracing their securities to the registration

statement alleged to be defective. 

The Supreme Court’s 1995 Gustafson decision has added a new dimension to

the debate, and the result among the federal district courts has been a divergence of

views concerning the continued viability of the tracing doctrine. Compare, e.g., In

re Twinlab Corp. Sec. Litig., 103 F. Supp. 2d 193, 202 (E.D.N.Y. 2000) (“Standing

under Section 11 is not limited to purchasers who directly participated in the public

offering covered by the allegedly misleading registration statement and prospectus.”),

with Gannon v. Continental Ins. Co., 920 F. Supp. 566, 575 (D.N.J. 1996) (“There is

no allegation that any of these acquisitions were pursuant to an initial public offering

and plaintiff alleges, in his complaint that he purchased [the stock] ‘on the open

market.’ Such a purchase is by definition not pursuant to an initial public offering

and as such he has no cause of action under [§ 11].”). Both of the two federal courts

of appeals that have considered this standing issue since Gustafson – the Ninth and

Tenth Circuits – have, as noted above, held that § 11 claims can be brought by

aftermarket purchasers who are able to trace their securities to the registration

statement alleged to be defective. See Joseph, 223 F.3d at 1159-61; Hertzberg, 191

F.3d at 1080-82. Prior to Gustafson, the First and Second Circuits had indicated a

similar view. See Versyss Inc. v. Coopers & Lybrand, 982 F.2d 653, 657-58 (1st Cir.

1992) (holding that, by operation of merger law, securities of acquired company

ceased to exist upon their relinquishment to the acquiring company and therefore no

§ 11 claim could be asserted by the acquiring company against the accountant for the

acquired company even though, ordinarily, “under section 11, accountants are held

to demanding standards when they certify registration statements and are liable to

remote purchasers well beyond more predictable common law limits”) (emphasis

added), cert. denied, 508 U.S. 974 (1993); Barnes v. Osofsky, 373 F.2d 269, 271-72
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(2d Cir. 1967) (assuming that § 11 allows claims based upon tracing to the

registration statement in question, but rejecting the even broader interpretation urged

by the appellant, which would provide a cause of action for purchasers of securities

“of the same nature” as those issued pursuant to the registration statement in

question).

 

We begin our present analysis with the language of the statute itself. As we

have previously explained:

 

If the plain language of the statute is unambiguous, that language is

conclusive absent clear legislative intent to the contrary. Therefore, if

the intent of Congress can be clearly discerned from the statute’s

language, the judicial inquiry must end. If, on the other hand, the

language of a statute is ambiguous, we should consider “the purpose, the

subject matter and the condition of affairs which led to its enactment.”

When the meaning of a statute is questionable, it should be given a

sensible construction and construed to effectuate the underlying

purposes of the law. 

Dowd v. United Steelworkers, 253 F.3d 1093, 1099 (8th Cir. 2001) (Dowd) (quoting

United States v. McAllister, 225 F.3d 982, 986 (8th Cir. 2000)). 

Section 11(a) provides in relevant part: 

In case any part of the registration statement, when such part became

effective, contained an untrue statement of a material fact or omitted to

state a material fact required to be stated therein or necessary to make

statements therein not misleading, any person acquiring such security

(unless it is proved that at the time of such acquisition he knew of such

untruth or omission) may, either at law or in equity, in any court of

competent jurisdiction, sue . . . .
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15 U.S.C. § 77k(a) (emphasis added). The phrase “any person acquiring such

security” is not only broad on its face but, more importantly, is broad when compared

to the language of § 12(2), the provision at issue in the Gustafson decision. Section

12(2) provides that any person who “offers or sells a security” by means of a

“prospectus or oral communication” containing a materially false or misleading

statement or omission shall be liable “to the person purchasing such security from

him” (subject to exceptions not pertinent herein). 15 U.S.C. § 77l(a)(2).

Section 12(2), therefore, expressly requires privity between the issuer and the

purchaser of the security at issue. Section 11, by contrast, has no comparable

language – it simply refers to “any person acquiring such security,” with “such

security” referring to a security registered under the registration statement alleged to

be defective. We perceive the absence in § 11 of limiting language similar to that

found in § 12(2) to indicate Congress’s intent to convey a relatively broader meaning.

See Gustafson, 513 U.S. at 577 (comparing language in § 12(2) to § 17(a) of the 1933

Act, and explaining that the presence of limiting language in § 12(2) requires a

narrow construction, just as the absence of such limiting language in § 17(a) results

in a broader construction). In other words, we read § 11’s plain language to state

unambiguously that a cause of action exists for any person who purchased a security

that was originally registered under the allegedly defective registration statement –

so long as the security was indeed issued under that registration statement and not

another. Therefore, even in light of Gustafson, § 11 is broad enough to encompass

some aftermarket purchasers, subject, of course, to the long-recognized requirement

that the plaintiff must directly trace his or her security to the allegedly defective

registration statement at issue in the case, as was required in Kirkwood v. Taylor.

Accord Joseph, 223 F.3d at 1159; Hertzberg, 191 F.3d at 1080. In addition, we note

that, under § 11(e), damages are generally calculated as the difference between the

amount paid for the security, not exceeding the price at which the security was

offered to the public, and the price of the security at the time the lawsuit was filed or

the security was disposed of in the market. See 15 U.S.C. § 77k(e). It would be

unnecessary to limit the price to no more than the price offered to the public if the
5

The plaintiff need only show that the registration statement, upon becoming

effective, contained an untrue statement of a material fact or omitted to state a

material fact that either was required or was necessary to render the statement not

misleading. See 15 U.S.C. § 77k(a).

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cause of action were limited to participants in the initial public offering. Similarly,

§ 11(g) – which expressly caps the maximum amount recoverable to the price offered

to the public – would likewise be superfluous if only those who participated in the

initial public stock offering could bring a § 11 claim. See id. § 77k(g). 

We next consider whether there is clear legislative intent contrary to our

interpretation of § 11. See Dowd (“If the plain language of the statute is

unambiguous, that language is conclusive absent clear legislative intent to the

contrary.”). The purpose and scope of the 1933 Act was to regulate the initial

distribution of securities. See Gustafson, 513 U.S. at 571. Central to the regulatory

scheme was the requirement that publicly-offered securities be registered with the

SEC. The importance of the registration statement to Congress’s regulatory and

enforcement framework is indicated by the standard imposing liability for materially

false and misleading misstatements or omissions, without a scienter requirement.5

 By

making the cause of action available to anyone who purchased stock that was

originally issued under the registration statement in question, not just those who

actually participated in the initial public offering, Congress enhanced the incentive

for compliance and bolstered the mechanism for enforcing § 11. Our interpretation

of § 11 is also consistent with the recognition that a material misstatement or

omission in connection with an initial public offering can adversely affect aftermarket

purchasers. Accord Joseph, 223 F.3d at 1160. However, to protect issuers of

publicly-traded securities against abuses of the process, Congress additionally

incorporated a requirement for certain aftermarket purchasers to prove that they relied

on the registration statement in question. See 15 U.S.C. § 77k(a) (“If such person

acquired the security after the issuer has made generally available to its security

holders an earning statement covering a period of at least twelve months beginning
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after the effective date of the registration statement, then the right of recovery under

this subsection shall be conditioned on proof that such person acquired the security

relying upon the such untrue statement in the registration statement or relying upon

such registration statement and not knowing of such omission, but such reliance may

be established without proof of the reading of the registration statement by such

person.”). Finally, requiring aftermarket purchasers to show that their securities can

be traced to the allegedly defective registration statement further ensures fidelity to

the statutory purpose, and we again emphasize that tracing is a requirement of

aftermarket purchaser standing under § 11 in this circuit. See, e.g., Kirkwood v.

Taylor, 590 F. Supp. at 1378-79. 

Conclusion

We hold in the present case that standing to pursue a claim against E&Y

pursuant to § 11 of the 1933 Act exists for aftermarket purchasers of Summit stock

who can make a prima facie showing that the Summit shares they purchased can be

traced to the registration statement alleged to be false and misleading. Accordingly,

we reverse the district court’s holding to the contrary. In light of our holding on the

§ 11 standing issue, we reverse the dismissal of plaintiffs’ § 11 claim and decline to

reach the issue of whether the district court abused its discretion in denying plaintiffs’

request for the appointment of Whitney McFarlin as a lead plaintiff. The case is

remanded to the district court for further proceedings consistent with this opinion.

A true copy.

Attest:

CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.