44 Cal.App.5th 618
Cal. Ct. App.2020Background
- Plaintiffs bought BlackRock iShares ETFs and suffered losses when market/stop‑loss orders executed during the August 24, 2015 “flash crash,” producing prices far below NAV.
- Plaintiffs alleged offering documents (registration statements/prospectuses and amendments, 2012–2015) failed to disclose known ETF/stop‑loss/flash‑crash risks, and sued under the Securities Act of 1933 §§ 11, 12(a)(2), and 15.
- Defendants are iShares Trust (an ICA‑registered open‑end investment company), BlackRock Fund Advisors, BlackRock, Inc., and related entities; ETFs are continuously offered via creation units and trade on exchanges in fungible book‑entry form.
- Trial was bifurcated on standing/tracing. Plaintiffs argued ICA §24(e) makes the latest posteffective amendment the operative registration date “with respect to securities sold after” that amendment, so secondary‑market purchasers need not trace shares to a particular initial offering.
- The trial court held plaintiffs lacked standing: §24(e) does not eliminate §11 tracing or expand §12(a)(2) privity; judgment for defendants. Plaintiffs appealed; the court of appeal affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether ICA §24(e) eliminates the §11 tracing requirement for secondary‑market ETF purchasers | §24(e) deems the latest amendment effective “with respect to securities sold after” the amendment, so any purchaser after the amendment (including aftermarket buyers) can sue under §11 without tracing | §24(e) merely ensures posteffective amendments can form the basis for §11 liability for shares sold by the issuer; it does not alter the 1933 Act’s focus on primary‑market offerings or eliminate tracing | Court rejects plaintiffs: §24(e) does not expand §11 standing; tracing to the offering tied to the challenged registration/amendment remains required |
| Whether secondary‑market purchasers can bring §12(a)(2) claims against issuer/distributors | Secondary purchasers should have §12(a)(2) relief because ETFs target secondary‑market investors, SEC guidance contemplates disclosures for secondary investors, and prospectus delivery regimes reach aftermarket trading | §12(a)(2) is limited to purchasers who bought "from" the seller (immediate seller/privity); Pinter requires direct sale or active solicitation by the defendant to the particular purchaser | Court holds plaintiffs lack §12(a)(2) standing: secondary purchases do not satisfy the statute’s "purchased from" / immediate‑seller requirement absent direct solicitation |
| Whether fungibility and modern ETF mechanics obviate tracing or compel judicial change | Fungible book‑entry holdings and continuous offerings make tracing impossible; §24(e) was enacted to address continuous offerings and should allow broader standing | Tracing difficulties predate ETFs and do not justify judicially rewriting statutory standing rules; market‑structure changes are a matter for Congress | Court declines to modify tracing rule; practical tracing problems do not eliminate statutory standing requirements |
Key Cases Cited
- Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (explains 1933 Act focuses on initial distributions and 1934 Act on post‑distribution trading)
- Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (distinguishes 1933 and 1934 Acts' regulatory focuses)
- Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (clarifies scope of Exchange Act/1934 Act jurisdictional issues)
- In re Century Aluminum Co. Securities Litigation, 729 F.3d 1104 (discusses §11 standing and tracing in aftermarket purchases)
- Hertzberg v. Dignity Partners, Inc., 191 F.3d 1076 (tracing requirement for §11 standing explained)
- In re Daou Systems, Inc., 411 F.3d 1006 (§11 liability standards; scienter not required)
- In re Stac Elecs. Sec. Litig., 89 F.3d 1399 (§11 materiality/reliance discussion)
- Gustafson v. Alloyd Co., Inc., 513 U.S. 561 (prospectus is a public‑offering term; informs limits on §12(a)(2) reach)
- Pinter v. Dahl, 486 U.S. 622 (defines "seller" under §12 and limits liability to immediate sellers or those who directly solicit purchases)
- Krim v. pcOrder.com, Inc., 402 F.3d 489 (acknowledges tracing may be impracticable but holds statutory change is for Congress)
- Barnes v. Osofsky, 373 F.2d 269 (early recognition of tracing difficulties in fungible‑share markets)