Krim v. pcOrder.com, Inc.Krim v. pcOrder.com, Inc.
Investors who purchased stock in pcOrder.com brought this consolidated securities action under Sections 11 and 15 of the Securities Act of 1933 against defendants pcOrder.com, its directors, its controlling shareholder Trilogy Software, and its investment bankers (collectively “PCOrder“), alleging that the registration statements filed with the Securities and Exchange Commission were false and misleading. The district court concluded that, with one exception, the investors lacked Section 11 standing because they could not trace their stock to the registration statements in question. Finding the remaining investor‘s claims moot, the court dismissed all of the claims and denied a third-party motion to intervene. We affirm.
I
PCOrder conducted an initial public offering of pcOrder.com stock on February 26, 1999, and a secondary public offering on December 7, 1999. In connection with each offering PCOrder filed a registration statement with the SEC.
Several holders of pcOrder.com stock filed multiple lawsuits against PCOrder under Section 11 of the Securities Act of 1933, which provides a right of action to “any person acquiring” shares issued pursuant to an untrue registration statement.1 The plaintiffs alleged that the registration statements were false and misleading by indicating that pcOrder.com had a viable business plan, had an ability to generate and report accurate operating and finan
In its October 21, 2002, order denying class certification,3 the district court first found that none of the Lead Plaintiffs purchased their stock during the public offerings—that is, they were “aftermarket” purchasers.4 However, it held that Section 11 is available not only to those who purchased their stock during the relevant public offerings, but also to aftermarket purchasers as long as the stock is “traceable” back to the relevant public offering.5
The district court then considered whether Lead Plaintiffs Beebe, Dr. Burke, and Petrick could trace their stock back to either of the two public offerings. The district court found that the approximately 2.5 million shares issued in the pcOrder.com IPO were registered in a stock certificate in the name of Cede & Co., the nominee of the Depository Trust Company. The court found that, on April 19, 1999, when Beebe purchased 1000 of these “street name” shares, the pool of street name stock still contained only the IPO stock. Therefore, because all of his stock was necessarily IPO stock, Beebe was able to satisfy the traceability requirement and establish standing.
In contrast, the court concluded that standing was lacking for Dr. Burke and Petrick. By the end of June 1999 when Dr. Burke purchased 3000 shares, the court found that non-IPO shares—specifically, insider shares—had entered the street name certificate and intermingled with the IPO shares, but that IPO shares still comprised 99.85% of the pool. Subsequent to the December 7, 1999, secondary public offering, Dr. Burke made additional purchases and Petrick also purchased a number of shares at a time when IPO and SPO shares (collectively “PO stock“) constituted 91% of the market. Appellants’ expert acknowledged that there is no way to track individual shares within a pool once it becomes contaminated with outside shares.
In light of the intermingling of PO and non-PO stock in the market at the time of their purchases—even though PO stock was the overwhelming majority—the district court held that Dr. Burke and Petrick could not demonstrate that their shares were traceable to the public offering registration statements. In reaching this conclusion, the court considered expert testimony indicating that, given the number of shares owned by each Lead Plaintiff and the percentage of PO stock in the market, the probability that each Lead Plaintiff owned at least one share of PO stock was very nearly 100%.6 However, the court held that this did not satisfy the traceabili
Having found that Dr. Burke and Petrick lacked Section 11 standing, the court concluded that they could not serve as class representatives and denied class certification.9 We rejected a request for an interlocutory appeal.10
On May 5, 2003, the district court granted PCOrder‘s motion to dismiss for lack of subject matter jurisdiction under
II
In general, we review a dismissal for lack of subject matter jurisdiction pursuant to
III
A
Appellants argue that Dr. Burke, Mrs. Burke, and Petrick can establish Section 11 standing by proffering nothing more than statistics indicating a high mathematical probability, based on the number of shares purchased by each individual and the number of PO shares in the market, that at least some of their shares were issued pursuant to the challenged registration statement. We disagree.21
We turn first to the language of the statute.22 In general, the Securities Act of 1933 (“Securities Act“)23 “is concerned with the initial distribution of securities.”24 Section 11 of the Securities Act, imposing civil liability for public offering of securities pursuant to a false registration statement, permits “any person acquiring such security” to sue.25 While Section 11‘s liability provisions are expansive—creating “virtually absolute” liability for corporate issuers for even innocent material misstatements26—its standing provisions limit putative plaintiffs to the “narrow class of persons” consisting of “those who purchase securities that are the direct subject of the prospectus and registration statement.”27 In Rosenzweig v. Azurix Corp., we recently held that aftermarket purchasers do not inevitably lack standing.28 The district court here foreshadowed this in holding that Section 11‘s “language suggests a much broader class of potential plaintiffs than those who literally purchased their shares in the challenged offering.”29 Indeed, the plain language of the statute confers standing on “any person acquiring such security,”30 and there is no reason to categorically exclude aftermarket purchasers, “‘so long as the security was indeed issued under that registration statement and not another.‘”31 As such, aftermarket purchasers seeking standing must demonstrate the ability to “trace” their
[T]o be able to take advantage of the lower burden of proof and almost strict liability available under § 11, a plaintiff must meet higher procedural standards. The most significant of the procedural standards is the requirement that a plaintiff be able to trace the security for which damages are claimed to the specific registration statement at issue.33
In Rosenzweig, we further held that this traceability requirement is satisfied, as a matter of logic, when stock has only entered the market via a single offering.34 We did not speculate on what other methods might be available to satisfy the traceability requirement for aftermarket purchases, but we were careful to note the Supreme Court‘s concern “that the Securities Act remain anchored to its original purpose of regulating only public offerings.”35
Appellants, as aftermarket purchasers, assert that they can also demonstrate standing by showing a very high probability that they each have at least one PO share. Appellants argue that their statistical determinations, being over 50%, demonstrate by a preponderance of the evidence, that it is “more likely than not,” that their shares are traceable to the public offerings in question.
We are persuaded that accepting such “statistical tracing” would impermissibly expand the statute‘s standing requirement. Because any share of pcOrder.com stock chosen at random in the aftermarket has at least a 90% chance of being tainted, its holder, according to Appellants’ view, would have Section 11 standing.36 In other words, every aftermarket purchaser would have standing for every share, de
The fallacy of Appellants position is demonstrated with the following analogy. Taking a United States resident at random, there is a 99.83% chance that she will be from somewhere other than Wyoming.39 Does this high statistical likelihood alone, assuming for whatever reason there is no other information available, mean that she can avail herself of diversity jurisdiction in a suit against a Wyoming resident? Surely not.40
In limiting those who can sue to “any person acquiring such security,” Congress specifically conferred standing on a subset of security owners (unless of course, as in Rosenzweig, all shares in the market are PO shares). To allow Appellants to satisfy the tracing requirement for aftermarket standing in this case with the proffered statistical methodology would contravene the language and intent of Section 11.
Appellants urge this Court to not hew the statutory line, contending that to do so, in light of current market conditions, effectively precludes recovery under Section 11; that there is no reason to “express a preference for” the interests of defendants over plaintiffs. Appellants point out that, given the fungible nature of stocks within a street name certificate, it is virtually impossible to differentiate PO shares from non-PO shares.
However, as we have explained, Section 11 is available for anyone who purchased directly in the offering and any aftermarket purchasers who can demonstrate that their shares are traceable to the registration statement in question—e.g. when, as with Beebe, there had only been one offering at the time of purchase.41 When Congress enacted the Securities Act of 1933 it was not confronted with the widespread practice of holding stock in street name that Appellants describe as an impediment, absent our acceptance of statistical tracing, to invoking Section 11.42 That present market realities, given the fungibility of stock held in street name, may render Section 11 ineffective as a practical matter in some aftermarket scenarios is an issue properly addressed by Congress. It is not within our purview to rewrite the statute to take account of changed conditions. In the words of one court, Appellants’ arguments may “have the sound ring of economic reality but unfortunately they merely point up the problems involved in the present scheme of statutory regulation.”43
It is, therefore, perhaps not surprising that we failed to locate any court, nor did Appellants point to any, that found Section 11 standing based solely on the statistical tracing theory espoused today. Given that the statute has been in existence for over 70 years and such elementary statistical calculations have been around for centuries, it is difficult to conclude that this is a coincidence. We note that a handful of lower courts have rebuffed similar attempts by plaintiffs.44 In one case, Kirkwood v. Taylor, the district court—later
In Barnes v. Osofsky,47 the Second Circuit confronted an intermingled stock pool not unlike the one we face today. In that case, two individuals challenged the settlement of a class action alleging Section 11 violations in a secondary public offering. The challengers, who purchased stock after the SPO, were unable to trace a portion of their shares to the SPO as opposed to the preexisting shares on the market. They objected to a provision of the settlement “limiting the benefits of the settlement to persons who could establish that they purchased securities issued” in the SPO.48 The court was not deterred by the reality that this “eliminated those who purchased after the issuance of the allegedly incomplete prospectus but could not so trace their purchases,” because Section 11 “extends only to purchases of the newly registered shares.”49 While not addressing the question before us today, Barnes is nonetheless instructive. Plaintiffs in that case urged a broad reading of Section 11 to cover anyone purchasing stock after the SPO—whether or not it was traceable to the SPO. Not unlike the concerns expressed by Appellants in the instant case, the plaintiffs in Barnes argued as follows:
[O]nce it is agreed that § 11 is not limited to the original purchasers, to read that section as applying only to purchasers who can trace the lineage of their shares to the new offering makes the result turn on mere accident since most trading is done through brokers who neither know nor care whether they are getting [tainted] or [clean] shares.... [I]t is often impossible to determine whether previously traded shares are [clean] or [tainted], and that tracing is further complicated when stock is held in margin accounts in street names since many brokerage houses do not identify specific shares with particular accounts but instead treat the account as having an undivided interest in the house‘s position.50
The court rejected these arguments and rejected the plaintiffs’ broad reading of Section 11‘s standing requirement as “inconsistent with the over-all statutory scheme” and “contrary to the legislative history.”51 The same is true of Appellants’ view today.
Appellants’ reliance upon the Fourth Circuit‘s opinion in Friends of the Earth v. Gaston52 is misplaced. Rather, this case offers support to PCOrder. In Gaston, the Clean Water Act53 specifically provided standing for persons “having an interest which is or may be adversely affected.”54 This language, chosen by Congress, “confers standing on a ‘broad category of potential plaintiffs’ who ‘can claim some sort of injury,’ be it actual or threatened, economic or noneconomic.”55 In fact, “Congress has indicated that this provision confers standing to enforce the Clean Water Act to the full extent allowed by the Constitution.”56 As such, Gaston illustrates Congress‘s ability to provide for standing based on risk, confined only by the strictures of Article III: While Article III sets the minimum requirements for standing, Congress is entitled to impose more exacting standing requirements for the vindication of federal statutory rights if it wishes. Here the legislature chose to go to the full extent of Article III in conferring standing on any person with “an interest which is or may be adversely affected.”57
Here, by contrast, Congress conferred standing on those who actually purchased the tainted stock, not on the whole class of those who possibly purchased tainted shares—or, to put it another way, are at risk of having purchased tainted shares. Unlike the standing conferred by Congress in the Clean Water Act, Appellants here cannot meet the statutory standing requirement of Section 11 merely by showing that they jumped into a potentially polluted “pool” of stock.58
4
Appellants are surely correct in pointing out that, at some level, all evidence is “probabilistic.”59 As we have explained,
Unquestionably, principles of probability are powerful tools, when deployed in appropriate tasks. Unquestionably, the statistics in this case indicate a high probability that a person purchasing a given number of shares will obtain at least one tainted share. However, these general statistics say nothing about the shares that a specific person actually owns and have no ability to separate those shares upon which standing can be based from those for which standing is improper. The task before the district court was to determine, by a preponderance of the evidence, whether and in what amount a plaintiff‘s shares are tainted, not whether the same number of shares drawn at ran
5
In sum, aftermarket purchasers seeking Section 11 standing must demonstrate that their shares are traceable to the challenged registration statement. We are not persuaded that the statistical tracing method advanced today is sufficient to satisfy this traceability requirement.
B
Appellants argue that the district court erred in denying the motion to intervene. We disagree.
As a preliminary matter, we note that this is not a case where intervention is sought for the purpose of appealing the denial of class certification.64 Indeed, Appellants have chosen in this appeal not to challenge the class certification denial.65 Thus, the “prerequisite of an intervention” that there be “an existing suit within the Court‘s jurisdiction” depends here on the individual claims.66 That none of the individual claims remained viable on February 14, 2003, when the motion to intervene was filed, disposes of the attempt at intervention.
As we have explained, by October 21, 2002, the district court had correctly made clear that only Beebe had standing. Furthermore, the district court held that, as of January 15, 2003, Beebe‘s individual claims were rendered moot because PCOrder offered Beebe a settlement equal to the statutory limit on his damages.67 Appellants do not dispute that a full settlement offer, even if refused, would dispose of Beebe‘s individual claims.68 Instead, Appellants contend that Beebe‘s claims were not fully satisfied because the involuntary settlement imposed by the district court did not include prejudgment interest. The stat
IV
For the foregoing reasons the judgment of the district court is AFFIRMED.
Notes
392 F.3d 147, 150 (5th Cir.2004) (quoting Williamson v. Tucker, 645 F.2d 404, 415 (5th Cir.1981)).[W]here issues of fact are central both to subject matter jurisdiction and the claim on the merits, we have held that the trial court must assume jurisdiction and proceed to the merits. In circumstances where “the defendant‘s challenge to the court‘s jurisdiction is also a challenge to the existence of a federal cause of action, the proper course of action for the district court ... is to find that jurisdiction exists and deal with the objection as a direct attack on the merits of the plaintiff‘s case” under either Rule 12(b)(6) or Rule 56.
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 the 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 [various individuals].
Charles Nesson, The Evidence or the Event? On Judicial Proof and the Acceptability of Verdicts, 98 Harv. L.Rev. 1357, 1378-79 (1985) (footnotes omitted); see also Laurence H. Tribe, Trial by Mathematics: Precision and Ritual in the Legal Process, 84 Harv. L.Rev. 1329, 1349 (1971) (“[E]ven assuming a [preponderance of the evidence] standard of proof ..., the plaintiff does not discharge that burden by showing simply that four-fifths, or indeed ninety-nine percent, of all blue buses belong to the defendant.“). This hypothetical is based on Smith v. Rapid Transit, Inc., 317 Mass. 469, 58 N.E.2d 754 (1945) (affirming directed verdict for defendant bus company). In Smith, the court further noted that “‘the fact that colored automobiles made in the current year outnumber black ones would not warrant a finding that an undescribed automobile of the current year is colored and not black, nor would the fact that only a minority of men die of cancer warrant a finding that a particular man did not die of cancer.‘” Id. at 755 (quoting Sargent v. Mass. Accident Co., 307 Mass. 246, 29 N.E.2d 825, 827 (1940)); cf. Howard v. Wal-Mart Stores, Inc., 160 F.3d 358, 359-60 (7th Cir.1998) (Posner, C.J.).While driving late at night on a dark, two-lane road, a person confronts an oncoming bus speeding down the center line of the road in the opposite direction. In the glare of the headlights, the person sees that the vehicle is a bus, but he cannot otherwise identify it. He swerves to avoid a collision, and his car hits a tree. The bus speeds past without stopping. The injured person later sues the Blue Bus Company. He proves, in addition to the facts stated above, that the Blue Bus Company owns and operates 80% of the buses that run on the road where the accident occurred. Can he win?
In this case and others like it, the plaintiff will lose; in fact, the case is unlikely even to reach the jury. Although the defendant probably caused the plaintiff‘s injury ... [t]he factfinder can only conclude from the plaintiff‘s evidence that there was an 80% chance that he was injured by the Blue Bus Company and a 20% chance that he was not.... [T]he factfinder cannot, and the public knows it cannot, make anything other than a bet on the evidence. Because the judicial system strives to project an acceptable account about what happened, then, the plaintiff‘s evidence is insufficient, notwithstanding the high probability of its accuracy.
Id. at 273.Without depreciating the force of appellants’ criticisms that this construction gives § 11 a rather accidental impact as between one open-market purchaser of a stock already being traded and another, we are unpersuaded that, by departing from the more natural meaning of the words, a court could come up with anything better. What appellants’ arguments does suggest is that the time may have come for Congress to reexamine these two remarkable pioneering statutes in the light of thirty years’ experience ....