2. Defendants

• Section 11 lists the categories of persons and entities who may be liable.
  • The issuer: The company issuing the securities. The issuer has strict liability and cannot use the “due diligence” defense.
  • The underwriters: The investment banks that help the issuer sell the securities.
  • Directors and officers: Individuals who signed the registration statement or were directors or partners at the time of filing.
  • Experts: Professionals, such as accountants or engineers, who consented to be named in the registration statement for preparing or certifying parts of it.
• Hagert v. Glickman, Lurie, Eiger &Co., 520 F. Supp. 1028, 1033 (D. Minn. 1981): The court explained that “liability cannot be extended to those who do not fall into the specific categories of section 11.”
• Dorchester Investors v. PeakInternational, Ltd., 134 F. Supp.2d 569 (S.D.N.Y. 2001): The court explained that if an individual or entity does not fall within one of the listed categories in section 11, they do not incur liability. In this case, a large shareholder did not sign the registration statement. The court held that section 11 was not applicable because the shareholder did not sign the registration statement as required under section 11(a)(1). The court went on to note that liability could attach to the shareholder as a controlling person under section 15 of the 1933 Act. However, section 11 could not be used to attach liability.
• Pompano-Windy City Partners, Ltd.V. Bear Stearns & Co., Inc., 794 F. Supp. 1265 (S.D.N.Y. 1992): describes the scope of signors as defendants. The court noted that for liability to attach, the person must sign the  registration statement in dispute. In this case, the allegedly misleading statement was not incorporated by reference into the registration statement that was signed by the defendant.

3. Elements

• 15 U.S.C. § 77k(a):  Liability attaches when untrue statements of material fact or omissions of material fact are in a registration statement “when such part became effective.”

A. Materiality:

• McMahan & Co. v. Wherehouse Entertainment, Inc., 900 F.2d 576 (2d Cir. 1990), certiorari denied 501 U.S.1249 (1991): Materiality is a question of fact.
• TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976): The Supreme Court described materiality in terms of whether the “reasonable investor” would view the lack of disclosure “as  having significantly altered the ‘total mix’ of information made available.”
• Cooperman v. Individual, Inc., 171 F.3d 43 (1st Cir. 1999): An omission is actionable only if the 1933 Securities Act required
  the information to be disclosed.
• In re Sterling Foster & Co., 222 F.Supp.2d 216 (E.D.N.Y. 2002): The misstatements or omissions must be based on the written
  information within the registration statement. Section 11 does not apply when subsequent events make a registration statement
  misleading.
• Cautionary Statements Rendering Misstatement Immaterial: Sufficient cautionary language will render the “alleged omission or misrepresentation immaterial.” In re Donald J. Trump Casino, 7 F.3d 357, 371 (3d Cir. 1993). In In re Worlds of Wonder, 35 F.3d 1407 (9th Cir. 1994), the court applied the Bespeaks Caution Doctrine to section 11 actions. In EP Medsystems, Inc.
  v. EchoCath, Inc., 235 F.3d 865 (3d Cir. 2000), the court noted that cautionary language only applies to forward looking  statements and not historical facts. The cautionary language must sufficiently disclose necessary facts to help the investor not rely on the predictions.

B. Reliance

• 15 U.S.C. § 77k(a): Reliance is presumed prior to one year after the effective date. If  the plaintiff has acquired shares twelve months after the effective date and the issuer has issued an earnings statement.
• Barnes v. Osofsky, 373 F.2d 269 (2d Cir. 1967): The court held that a presumption of reliance exists for any person purchasing securities prior to the twelve-month cut off  date. See also Feit v. Leasco Data Processing Equipment Corp., 332 F. Supp. 544 (E.D.N.Y. 1971).

C. Tracing Securities to the Registration Statement

• Slack Technologies, LLC v. Pirani, No. 22-200 (June 1, 2023): On June 1, 2023, the United States Supreme Court held in a unanimous decision that, under Section 11 of the Securities Act of 1933 (the “Securities Act”), plaintiffs must plead and prove that they purchased securities that were traceable to the registration statement that plaintiffs claim contained a material misstatement or omission.
• Courts have read section 11 to require a tracing requirement on the plaintiff. For an example, see In re Elscint Ltd., 674 F. Supp. 374, 380 (D. Mass. 1987).
• In re American Bank NoteHolographics, 93 F. Supp.2d 424 (S.D.N.Y. 2000). The court held that the tracing requirements could be satisfied if the stock was purchased in the aftermarket. However, the court explained that a purchaser still must trace the purchased shares to the offering covered by the registration statement. See also Lee v. Ernst & Young, LLP, 294 F.3d 969 (8th Cir. 2002)
  (holding same position that after market purchasers could trace securities back to the registration statement).
• Krim v. pcOrder.com, Inc., 210 F.R.D. 581, 587 (W.D. Tex. 2002). The court strictly construed the tracing requirement doctrine. In that case, the plaintiff argued that 91% of the publicly traded shared could be traced to the public offering. The court explained that a high percentage is irrelevant because the plaintiff must actually trace the shares to the public offering. The  court noted that an averment that the security “might have been, probably was, or most likely was, issued pursuant to a defective statement” was not enough.
• Harden v. Raffensperger, Hughes &Co., 933 F. Supp. 763 (S.D. Ind. 1996): The court explained that plaintiffs must show that the purchased securities are the “direct subject” of the registration statement.

D. Fraud and Scienter is Irrelevant

• 15 U.S.C. § 77k(a): Statute only requires “an untrue statement of a material fact or omitted to state a material fact required to be stated therein.”
• Escott v. BarChris Construction Co.,283 F. Supp. 643 (S.D.N.Y. 1968): The court explained that the “statute imposes liability for untrue statements regardless of whether they are intentionally untrue.”
• Haft v. Eastland Financial Corp., 755 F. Supp. 1123 (D.R.I. 1991): The court noted that scienter is not required under a section 11
  cause of action. The Supreme Court has defined scienter as “a mental state embracing intent to deceive, manipulate, or
  defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976).
• Pleading with Particularity: Even though fraud is not required, courts vary on requiring the plaintiff to plead with particularity as required under Fed. R. Civ. Proc. 9(b). In re NationsMart Corp., 130 F.3d 309 (8th Cir. 1997) (not requiring particularity in pleading). But see Haft v. Eastland Financial Corp., 755 F. Supp. 1123 (D.R.I. 1991) (requiring particularity in pleading).

4. Defenses

A. Issuers are Strictly Liable

• In re NationsMart Corp., 130 F.3d 309 (8th Cir. 1997). The court explained that issuers are strictly liable for any misstatements in the registration statement. Section 11 liability is “virtually absolute” for issuers.
• Issuer Defenses: Only defenses for issuers are statutory defenses, which are: (1) the purchaser knew of the inaccuracies, (2) the inaccuracies are immaterial, (3) the depreciation of value is not from inaccuracies, or (4) the statute of limitations has run.

B. Misstatement Had No Adverse Impact on Price

• Akerman v. Oryx Communications, Inc., 810 F.2d 336 (2d Cir. 1987): The court explained that a “defendant may, under section 11, reduce his liability by proving that the depreciation in value resulted from factors other than the material misstatement in the registration statement.” In that case the court held that “the misstatement was barely material and that the public failed to
  react adversely to its disclosure.”

C. Purchaser Knew of the Inaccuracies/Omissions

• 15 U.S.C. § 77k(a): The statute provides that any person that has properly acquired a security may sue “unless it is proved that at the time of such acquisition he knew of such untruth or omission.”

D. The Inaccuracies/Omissions are Immaterial

• 15 U.S.C. § 77k(a):

E. Whistle Blowing

• 15 U.S.C. § 77k(b)(1):

F. Due Diligence

• 15 U.S.C. § 77k(b)(3) and 15 U.S.C. § 77k(c)
• Rule 176 (17 C.F.R. § 230.176): See also SEC Regulations. Escott v. BarChris Construction Co.,283 F. Supp. 643 (S.D.N.Y. 1968)
  The court evaluated what constituted a “reasonable investigation.” This case is the fountainhead for the due diligence
  defense in section 11 cases. The court gave a sliding scale on  the level of investigation required depending on the category of
  the defendant. The categories discussed by the court included (1)  Officers and Directors, (2) Outside Directors, (3) Underwriters,
  and (4) Accountants. The highest standard of care applied to insiders who signed the registration statement. The level of
  expertise of insiders will also factor into the level of investigation required. Insiders with an expertise in law or accounting have
  higher investigation requirements to satisfy a reasonable investigation than those without such expertise. The court also
  explained that non-expert defendants may rely on the expert’s portion of the registration statement. A researcher should use
  shepard’s® or Keycite® on this case to find recent cases that might be more on point with the researcher’s fact pattern.
  Anytime a due diligence defense is used, a court will likely cite to the BarChris case.

G. Class Action Limitations

• 15 U.S.C. § 77p(b)-(c):
  (b) Class action limitations
  • No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging—

    (1) an untrue statement or omission of a material fact in connection with the purchase or sale of a covered security; or

    (2) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.

    (c)Removal of covered class actions

    Any covered class action brought in any State court involving a covered security, as set forth in subsection (b), shall be removable to the Federal district court for the district in which the action is pending, and shall be subject to subsection (b).

H. Statute of Limitations

• 15 U.S.C. § 77m: No action shall be maintained to enforce any liability created under section 77k or 77l(a)(2) of this title unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence, or, if the action is to enforce a liability created under section 77l(a)(1) of this title, unless brought within one year after the violation upon which it is based. In no event shall any such action be brought to enforce a liability created under section 77k or 77l(a)(1) of this title more than three years after the security was bona fide offered to the public, or under section 77l(a)(2) of this title more than three years after the sale.

SEC RELEASES:

1. Exchange Act Release No. 6335, 1981 WL 31062 (Aug 06, 1981).

This SEC release discussed what constitutes reasonable investigation and reasonable grounds for belief under Section 11. Some of this information can also be found at 46 Federal Register 42015 (Aug 18, 1981).

2. Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002,
68 Federal Register 5110-5132 (Jan 31, 2003).

This SEC final rule explains the background of the Sarbanes-Oxley Act as it relates to disclosure obligations. The SEC discussed the audit committee’s role in a Section 11 action. The SEC explained that “a person who is determined to be an audit committee financial expert will not be deemed an “expert” for any purpose, including without limitation for purposes of Section 11 of the Securities Act, as a result of being designated or identified as an audit committee financial expert pursuant to the new disclosure item.” Id. at 5116 –5117. The SEC went on to note, “Our new rule provides that whether a person is, or is not, an audit committee financial expert does not alter his or her duties, obligations or liabilities.” Id. at 5117.
This SEC action is useful to a researcher trying to understand how the Sarbanes-Oxley Act affects Section 11.

Conclusion

Section 11 of the Securities Act of 1933 is a pivotal piece of legislation that plays a crucial role in protecting investors in public offerings. By providing investors with the right to sue for damages if they have been misled by false or misleading statements in a registration statement, Section 11 ensures a level of transparency and accountability in the securities market.

Standing as one of the most significant provisions, it empowers investors with the legal standing to hold issuers, directors, and underwriters accountable for any inaccuracies that could potentially harm their investments. Public offerings, which involve the sale of securities to the general public, must adhere strictly to the disclosures required under Section 11.

This section mandates that all material information be accurately presented to prevent any form of fraud or misrepresentation. The comprehensive nature of this section underscores its importance in maintaining investor confidence and promoting fair practices within the financial markets. By ensuring that all parties involved in public offerings are bound by stringent disclosure requirements, Section 11 serves as a critical safeguard against the dissemination of false information.

In conclusion, Section 11 of the Securities Act of 1933 stands as an indispensable guide for investors navigating public offerings. It not only provides a mechanism for redress in cases of misinformation but also fosters a culture of integrity and transparency in the securities market.

As we look ahead to 2025, it remains essential for investors to be well-versed in the protections afforded by Section 11. Understanding this provision is crucial for making informed investment decisions and ensuring that market participants are held to the highest standards of honesty and accountability.