Howard Hertzberg John Derosa Jeffrey Feinman, on Behalf of Themselves and Others Similarly Situated v. Dignity Partners, Inc. Bradley N. Rotter Alan B. Perper John Ward Rotter Stephen T. Bow Paul A. Volberding
Docket: 98-16394
Court: Court of Appeals for the Ninth Circuit; August 27, 1999; Federal Appellate Court
The case involves Howard Hertzberg, John Derosa, and Jeffrey Feinman, who filed a class action against Dignity Partners, Inc. and several individuals associated with it, following alleged misstatements and omissions in Dignity's registration statement for an initial public offering (IPO) of stock. Dignity specialized in purchasing life insurance proceeds from people with AIDS, and after the IPO, it suffered significant losses due to unexpected increases in the life expectancy of insured individuals, attributed to advances in AIDS treatments.
The plaintiffs, who bought Dignity stock after the IPO but before the public disclosure of the longer life expectancies and resulting losses, argued that Dignity had failed to disclose this critical information in its registration statement, violating Section 11 of the Securities Act of 1933. The district court dismissed their claims on the basis that they lacked standing since they did not purchase shares within 25 days of the IPO.
The Ninth Circuit Court of Appeals reversed the district court's decision regarding the plaintiffs' standing, thereby allowing their claims under Section 11 to proceed. The court did not address the statute of limitations issue raised by the district court, as the reversal of the standing decision rendered it unnecessary to consider. Hertzberg's claim emphasizes that Dignity was aware of the longer life expectancy but did not disclose it, which is central to the allegations of misleading statements in the registration statement.
In 1995, advancements in AIDS treatments led to longer-than-expected survival rates for individuals associated with Dignity, negatively impacting its business model. Hertzberg claims that this situation endangered Dignity's ability to collect life insurance proceeds promptly, increased premium payments, and hindered accurate life expectancy estimates. In response to these pressures, Dignity's owners opted to take the company public, but Hertzberg alleges that the financial statements in the registration statement were misleading regarding the company's value. He contends that Dignity adopted an accrual accounting method, recognizing income from purchased policies prematurely, obscuring delays in collections and inaccurate mortality estimates. Hertzberg asserts that Dignity violated Section 11 by failing to disclose these critical issues.
After the market learned of the extended life expectancies, Dignity's stock price plummeted from $12 to around $2 following announcements of significant losses and the decision to exit the viatical settlement business. Dignity sought to dismiss Hertzberg's Section 11 claims on the basis that the named plaintiffs did not purchase shares within the required timeframe of the registered offering, leading the district court to dismiss those claims. Subsequently, class member Charles Steinberg sought to intervene as a named plaintiff, having purchased shares within the valid period, and was granted permission by the district court. Dignity then argued that the class's claims were barred by the statute of limitations, a position the district court upheld, stating that the original plaintiffs' lack of standing did not toll the limitations period for other class members. The district court invited further briefs on the Section 11 scope, and on June 29, 1998, entered final judgment on those claims. The case was appealed under jurisdiction granted by 28 U.S.C. § 1291, resulting in a reversal of the district court's decision.
The district court's interpretation of Section 11 was reviewed de novo, focusing on the statute's text. Section 11(a) allows "any person acquiring such security" to sue for losses due to misstatements or omissions in a registration statement. The district court incorrectly limited this phrase to those who acquired securities during the initial public offering or within a subsequent twenty-five-day period, imposing a restriction not present in the statute. The term "any person" is interpreted broadly, meaning all individuals, as supported by dictionary definitions and prior case law.
The only limitation is that the person must have purchased securities issued under the relevant registration statement. In this case, since all Dignity stock was sold under the allegedly misleading statement, any purchaser, regardless of timing, qualifies as "any person purchasing such security." Additionally, Section 11(e) specifies damages based on the amount paid for the security, further indicating that recovery is not limited to initial purchasers.
Dignity's argument that its interpretation is validated by the Supreme Court's decision in Gustafson is unfounded, as that case pertained to Section 12, not Section 11, and drew no parallels regarding the restrictions on who may sue under Section 11. While Sections 11 and 12 are related, their wording and provisions differ significantly; Section 11 allows for claims from any person acquiring securities, whereas Section 12 restricts claims to individuals who purchased securities directly from the issuer.
Congress's use of "from him" in Section 12 and its omission in Section 11 indicates an intentional difference in meaning between the two sections, as established in Russello v. United States. This principle suggests that the express privity requirement of Section 12 should not be read into Section 11. Other circuits support this interpretation, allowing aftermarket purchasers to recover under Section 11, which imposes liability on ancillary parties to registration statements. No circuit has revisited or disagreed with this position since Gustafson. Although some district courts have interpreted Gustafson differently, the prevailing view maintains they misread both Gustafson and Section 11. The clarity of the statute's text suggests no further inquiry is needed; however, legislative history, including the House Report on the Securities Act of 1933, reinforces that Section 11 provides remedies for all purchasers, including those buying in the aftermarket, as long as claims are filed within the statute of limitations. The 1934 amendment further clarifies that purchasers after an earnings statement also fall under Section 11’s cause of action.
Dignity's arguments do not effectively challenge the legislative history relevant to Section 11, primarily relying on comments about an unpassed bill (S. 875) rather than official committee reports, which are the standard for interpreting legislative history in this circuit. Dignity acknowledges that the focus of Section 11 pertains to new securities offerings, but the case at hand only involves a single offering by Dignity, eliminating complexities in tracing stock to specific offerings. The Securities and Exchange Commission (SEC) supports Hertzberg's interpretation of Section 11 in an amicus brief, warranting judicial deference due to the SEC's considered judgment. Hertzberg's standing to pursue action under Section 11 negates the need to evaluate the statute of limitations for Steinberg, the alternative class representative. The district court's 25-day period for claims appears incorrectly sourced from regulations pertaining to Section 12 violations instead of Section 11. Additionally, should a mix of pre-registration and misleadingly registered stock exist, plaintiffs must either prove they purchased in the initial offering or trace later purchases back to it. The statute of limitations mandates claims be filed within one year of discovering misstatements or three years from registration, whichever is earlier. Dignity's suggestion that initial offering purchasers could pay more due to broker fraud is deemed implausible, as it implies Congress intended to deny such victims recovery. Finally, a Supreme Court ruling clarified that a private sales agreement 20 years post-issuance was not classified as a prospectus. The decision is reversed and remanded.
