Metropolitan News-Enterprise


Thursday, January 3, 2013


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Ninth Circuit Panel Upholds Dismissal of Complaint for Securities Fraud by Purchasers of Aftermarket Shares


By a MetNews Staff Writer


Plaintiffs who could not prove that aftermarket shares of stock they purchased were issued under an allegedly false or misleading registration statement rather than a registration statement for a different offering of the same stock, lacked standing to sue for a decline in such shares’ value, the Ninth U.S. Circuit Court of Appeals held yesterday.

The burden was on the plaintiffs to allege specific facts which would prove that their shares came from the allegedly offending offering, rather than a previous offering that would not result in liability, Judge Paul J. Watford wrote for a unanimous panel.

Plaintiffs purchased shares in Century Aluminum Company at the end of January 2009, following Century Aluminum’s issuance of a prospectus supplement in connection with an offering of 24.5 million shares of the company’s common stock. Two months later the company restated its cash flows from operating activities, and the shares declined in value.

Plaintiffs sued under Sec. 11 of the Securities Act of 1933, which provides a cause of action to any person who buys a security issued under a materially false or misleading registration statement. The section covers not only plaintiffs who purchase shares in the offering made under the misleading registration statement, but those who purchase such shares in the aftermarket, provided they can trace their shares back to the relevant offering.

The plaintiffs claimed they purchased shares issued under the January prospectus supplement which, they alleged, was materially false and misleading.

But at the time of the January stock offering, more than 49 million shares of Century Aluminum common stock were already on the market. To prevail, therefore, the plaintiffs needed to prove that the shares they purchased came from the pool of shares issued in the secondary offering, rather than from the pool of previously issued shares.

Since the plaintiffs had not purchased their shares directly in the secondary offering itself, this meant that they had to trace the chain-of-title for their shares back to the secondary offering, starting with their own purchases and ending with someone who bought directly in the secondary offering.

U.S. District Judge Susan Illston of the Northern District of California dismissed, holding that the plaintiffs inadequately alleged that the aftermarket shares were purchased on the basis of the secondary offering, and that they therefore lacked standing under Sec. 11.

The panel, relying on Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009), the plaintiffs failed to allege facts showing a plausible chance of success.

Watford said that when a company has issued shares in multiple offerings under more than one registration statement, a court must be able “to reasonably infer that shares purchased in the aftermarket were traceable to a particular offering.” Since “experience and common sense” suggests that in most cases aftermarket purchasers will not be able to do so, the complaint must allege facts showing that their situation is different.

In the instant case, while the plaintiffs’ shares could have come from the secondary offering, they might also have come from the pool of previously issued shares. When faced with two possible explanations, only one of which can be true and only one of which results in liability, shareholders must allege facts tending to exclude the alternative explanation. The plaintiffs had not done so, Watford said.

The panel did agree with the plaintiffs, however, that Illston erred by considering extrinsic evidence. Watford said it appeared that Illston had improperly based her dismissal on Federal Rule of Civil Procedure 12(b)(1) rather than Rule 12(b)(6), and that plaintiffs’ failure to plead the traceability of their shares meant only that they failed to state a claim on which relief could be granted under Sec. 11, not there was an absence of subject matter jurisdiction.

Plaintiffs had, he said, pled sufficient facts to support standing under Article III, because they alleged that they suffered an injury-in-fact whether their shares came from the secondary offering or the pool of previously issued shares, since false or misleading statements in the prospectus supplement would likely “affect the price of shares already issued to almost the same extent as those of the same class about to be issued.” Since such an injury would be redressed by the award of money damages the plaintiffs sought, the plaintiffs had standing under Article III.

Notwithstanding Illston’s error, however, Illston properly took judicial notice of the January prospectus supplement, which plaintiffs incorporated into the complaint by reference, the appellate jurist said. Although the fact that more than 49 million shares of Century Aluminum common stock were already in the market at the time of the secondary offering was not alleged in plaintiffs’ complaint, it was a fact “not subject to reasonable dispute” and was included in the prospectus supplement.

Accordingly, dismissal was proper under Rule 12(b)(6), Watford said.

Judge Consuelo M. Callahan and Senior District Judge James K. Singleton, sitting by designation, concurred in the opinion.

The case is In Re Century Aluminum Company Securities Litigation, 11-15599.


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