Lee v. Ernst & Young, LLPLee v. Ernst & Young, LLP
Luis De La Torre, argued amicus curiae, Special Counsel, for Securities Exchange Com‘n, Washington, DC (David M. Becker, General Counsel, Jacob H. Stillman, Solicitor, Eric Summergrad, Deputy Solicitor, Mark Pennington, Asst. General Counsel, SEC, Washington, DC, on the brief), for appellants.
Bruce M. Cormier, argued, Washington, DC (William P. Hammer, Jr., New York City, Stanley J. Parzen, Michele Odorozzi, Chicago, IL, Timothy D. Kelly, Wendy A. Snyder, Minneapolis, MN, on the brief), for appellee.
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
Jurisdiction was proper in the district court based upon
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.
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“),
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 § 11 claim 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
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 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 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.
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; Hertzberg, 191 F.3d at 1080. 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 (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).
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....
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.