Opinion ID: 31529
Heading Depth: 3
Heading Rank: 5

Heading: Rubinstein is distinguishable

Text: 83 Although the plaintiffs rely heavily on this Court's holding in Rubinstein that predictive statements can be actionable, a comparison to Rubinstein (a pre-PSLRA case) underscores why these pleadings are not sufficient. In that case, a defendant oil company performed initial tests on a new natural gas well, and announced extremely favorable tests results: Analysts commented that these test results suggested that the well and the field in which it was located were extremely valuable, possibly one of the largest onshore discoveries of natural gas in recent years. 20 F.3d at 163. Officers of the company echoed the analysts' favorable predictions, and the company's stock reached a record high. Id. Plaintiffs alleged that the test results provided no basis for these statements, and that the defendants had failed to disclose material information — certain measurements of a pressure decrease — which would cast serious doubt on the projections. Id. While the price was high, defendants allegedly exercised their stock options, and then immediately sold most of their newly acquired shares on the open market. Id. at 164. Shortly thereafter, defendants issued a press release disclosing the pressure drop. Id. Within months, an analyst publicly disclosed more damaging information about the well and concluded its reserves were not even enough to cover the cost of the well. Id. at 165. 84 The Rubinstein court noted that [s]imply alleging that predictive statements at issue here did not have a reasonable basis — that is, that were negligently made — would hardly suffice to state a claim under Rule 10b-5. Id. at 169. However, the Rubinstein plaintiffs supported the allegations with specific allegations of insider trading in suspicious amounts and at suspicious times. Id. 85 Unlike the present case, the plaintiffs in Rubinstein alleged that defendants issued the sort of verifiable statements that could, and did, inflate the price of the stock, and that the defendants engaged in specific activity (insider trading), from which it could be inferred they intentionally manipulated the market. Plaintiffs are correct that predictive statements can be actionable, but, as explained above, their pleadings fall short of the necessary allegations. 86 C. The district court properly dismissed the claims under the Securities Act of 1933 1. Standard of Review 87 As stated above at section II.B.1, supra, we review de novo a 12(b)(6) dismissal. We must accept the facts alleged in the complaint as true and construe the allegations in the light most favorable to the plaintiff. 88 2. Plaintiffs lack standing to sue under § 12 89 Section 12 of the Securities Act states that [a]ny person who ... sells ... shall be liable ... to the person purchasing such security from him .... 15 U.S.C. § 77 l (a). The Supreme Court interpreted this language in Pinter v. Dahl, 486 U.S. 622, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988), to mean that a § 12(a)(2) seller includes either the person who actually passes title to the buyer, or the person who successfully solicits the purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities owner, e.g., a broker. Id. at 647, 108 S.Ct. 2063. 10 Liability does not extend to the gratuitous solicitor, id. at 655, 108 S.Ct. 2063, or to collateral participants. Id. at 650, 108 S.Ct. 2063. 90 Plaintiffs appear to concede that none of the plaintiffs obtained title to the securities directly from defendants. However, plaintiffs argue that, with respect to the individual defendants, signing the registration statement suffices for solicitation. They assert a complex entanglement with Azurix and Enron, from which it could be inferred that the companies participated in a concerted course of action to market Azurix. In any event, plaintiffs argue that the issue of whether or not defendants actively participated in the solicitation is best left for a later stage in the litigation. We disagree. 91 To count as solicitation, the seller must, at a minimum, directly communicate with the buyer. See Craftmatic Sec. Litigation v. Kraftsow, 890 F.2d 628, 636 (3d Cir.1989) (The purchaser must demonstrate direct and active participation in the solicitation of the immediate sale to hold the issuer liable as a § 12[(a)](2) seller.) (alteration added). As this Court observed in Lone Star Ladies Inv. Club v. Schlotzsky's, Inc., 238 F.3d 363 (5th Cir. 2001): in a firm commitment underwriting, such as this one, the public cannot ordinarily hold the issuers liable under section 12, because the public does not purchase from the issuers. Rather, the public purchases from the underwriters, and suing the issuers is an attempt to `recover against [the] seller's seller.' Id. at 370 (quoting Pinter, 486 U.S. at 625 n. 1, 108 S.Ct. 2063) (alteration in original). The issuer may only be liable under § 12(a)(2) if the plaintiff alleges that an issuer's role was not the usual one; that it went farther and became a vendor's agent. Id. at 370. 11 92 The plaintiffs have failed to allege in their original complaint, their motion to amend, or on appeal that any of the defendants assumed the unusual role of becoming a vendor's agent, id., or otherwise actively solicited the plaintiffs to purchase. The district court correctly concluded that plaintiffs lacked standing to sue these defendants. 93 3. Plaintiffs have standing to sue under § 11 94 Plaintiffs argue that, contrary to the district court's conclusion, they have standing as aftermarket purchasers to sue under § 11. Defendants counter with the Supreme Court's decision in Gustafson v. Alloyd Corp., 513 U.S. 561, 115 S.Ct. 1061, 131 L.Ed.2d 1 (1995), which held § 12 not applicable to private, secondary transactions. Gustafson arguably suggests that § 11 applies only to direct IPO purchasers, not aftermarket purchasers. We agree with plaintiffs that § 11 applies to aftermarket purchasers. 95 In Gustafson, the purchasers of a plastics company, Alloyd, Inc., sought rescission of the deal on the theory that the contract of sale was a prospectus within the meaning of § 12(2) (now § 12(a)(2)) and that it contained materially misleading information. 513 U.S. at 564-66, 115 S.Ct. 1061. The Supreme Court rejected the claim, holding that the term prospectus refers to a document soliciting the public to acquire securities. Id. at 574, 115 S.Ct. 1061. In other words, § 12's right of rescission does not to extend to private, secondary sales. Language from the opinion appears to have implications for the application of § 11: 96 The primary innovation of the 1933 Act was the creation of federal duties — for the most part, registration and disclosure obligations — in connection with public offerings. We are reluctant to conclude that § 12(2) creates vast additional liabilities that are quite independent of the new substantive obligations the Act imposes. It is more reasonable to interpret the liability provisions of the 1933 Act as designed for the primary purpose of providing remedies for violations of the obligations it had created. Indeed, §§ 11 and 12(1) — the statutory neighbors of § 12(2) — afford remedies for violations of those obligations. 97 Id. at 572, 115 S.Ct. 1061 (internal citations omitted). The Supreme Court quoted with approval the House Report of the Securities Act: `The bill affects only new offerings of securities.... It does not affect the ordinary redistribution of securities unless such redistribution takes on the characteristics of a new offering.' Id. at 590, 115 S.Ct. 1061 (quoting H.R.Rep. No. 85, 73d Cong., 1st Sess., 5 (1933)). In light of the broad liability under § 12 — a plaintiff can recover without showing fraud or reliance — the Supreme Court concluded, It is not plausible to infer that Congress created this extensive liability for every casual communication between buyer and seller in the secondary market. Id. at 578, 115 S.Ct. 1061. 98 Immediately after Gustafson, a number of district courts seized upon its reasoning to conclude that aftermarket purchasers also lacked standing to sue under § 11. See, e.g., Gould v. Harris, 929 F.Supp. 353, 358-59 (C.D.Cal.1996); Gannon v. Continental Ins. Co., 920 F.Supp. 566, 575 (D.N.J.1996); Stack v. Lobo, 903 F.Supp. 1361, 1375 (N.D.Cal.1995). As Gould explained, §§ 11 and 12 share the same legislative history, and § 11 likewise imposes liability without a showing of fraud or reliance. 929 F.Supp. at 358. 99 Nevertheless, all four courts of appeals to address the question have held that, even after Gustafson, aftermarket purchasers have standing to sue under § 11. See Demaria v. Andersen, 318 F.3d 170, 175-78 (2d Cir.2003); Lee v. Ernst & Young, LLP, 294 F.3d 969, 974-78 (8th Cir.2002); Joseph v. Wiles, 223 F.3d 1155, 1158-61 (10th Cir.2000); Hertzberg v. Dignity Partners, Inc., 191 F.3d 1076, 1079-82 (9th Cir.1999); see also Adair v. Bristol Tech. Sys., 179 F.R.D. 126, 129-33 (S.D.N.Y.1998); LOSS & SELIGMAN, supra, at 1150 (stating that under § 11, [s]uit may be brought by any person who has acquired a security registered under the 1933 Act, whether in the process of distribution or in the open market.(footnote omitted)). Their reasoning is persuasive. 100 First, the plain language of § 11 permits any person acquiring such security to sue, 15 U.S.C. § 77k(a), whereas the § 12(a)(2) seller is liable only to the person purchasing such security from him. 15 U.S.C. § 77 l (a)(2). See Demaria, 318 F.3d at 177 ([T]he phrase `any person acquiring such security' is plain on its face.); Lee, 294 F.3d at 976 (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.); Joseph, 223 F.3d at 1159 ([T]he natural reading of `any person acquiring such security' is simply that the buyer must have purchased a security issued under the registration statement at issue, rather than some other registration statement.); Hertzberg, 191 F.3d at 1080. 101 Second, two damages provisions of § 11 appear to contemplate aftermarket plaintiffs. Section 11(e) sets the baseline for measuring damages as the amount paid for the security (not exceeding the price at which the security was offered to the public), 15 U.S.C. § 77k(e), and § 11(g) states, In no case shall the amount recoverable under this section exceed the price at which the security was offered to the public. 15 U.S.C. § 77k(g). This express limitation on the recoverable damages would be redundant if only those who had purchased in the offering ( i.e., at the initial offering price) could recover, because their potential damages would be limited in any event to the price they had paid in the offering. Demaria, 318 F.3d at 177; see also Lee, 294 F.3d at 977; Joseph, 223 F.3d at 1159; Hertzberg, 191 F.3d at 1080. 102 Third, the broad reading of § 11 is consistent with the Supreme Court's concern in Gustafson that the Securities Act remain anchored to its original purpose of regulating only public offerings. See Demaria, 318 F.3d at 177 ([T]he focus of the [§ 11] claim remains on deceptions occurring during the public offering.). Whereas the Gustafson plaintiffs sought to invoke § 12 for a private offering, § 11 only applies to public registered offerings. Moreover, in contrast to § 12(a)(2), a § 11 plaintiff is required to prove reliance on the alleged misstatements or omissions in the registration statement if the issuer has made available an earnings statement covering one year after the issuance. 15 U.S.C. § 77k(a). Thus, the Supreme Court's concern about extensive liability far beyond the initial offering is not implicated. In fact, by giving would-be defendants more incentive for compliance, the broader interpretation of § 11, more so than the limited reading, better effectuates the statutory purpose of regulating public offerings. See id. 103 Finally, this interpretation comports with longstanding pre- Gustafson jurisprudence holding that anyone who can trace his shares to the challenged registration statement ( i.e., not merely the initial purchasers) may sue under § 11. See, e.g., Shapiro v. UJB Fin. Corp., 964 F.2d 272, 286 (3d Cir.1992); Barnes v. Osofsky, 373 F.2d 269 (2d Cir.1967); Cf. Columbia Gen. Inv. Corp. v. SEC, 265 F.2d 559, 562 (5th Cir.1959) (Persons other than those who purchase the new stock under the Registration statement may be affected in point of fact and may, under certain circumstances, have remedies in point of law for misrepresentations in a Registration.). 104 The district court erred in concluding that plaintiffs did not have standing on the mere fact that they were aftermarket purchasers. And, because there was only one offering of Azurix stock, all the plaintiffs' stock is traceable to the challenged registration statement. See Hertzberg, 191 F.3d at 1080. 105 4. The plaintiffs' claims under § 11 fail because none of the challenged representations are material 106 We nevertheless affirm because, as explained in section II.B.4, none of the challenged representations in the prospectus and registration statement are material. Even though the district court did not explicitly consider the materiality issue with respect to § 11, its analysis would be identical. The district court's very thorough discussion of the registration statement, 198 F.Supp.2d at 880-84, concludes that plaintiffs could not have relied on any of the [challenged] statements in the prospectus, in light of Azurix's risk warnings and because the statements were merely expressions of corporate optimism.... Id. at 884 (emphasis added). As explained more fully above, we agree with that conclusion.