Jerry Krim, David Petrick, Lead Bret Beebe, Lead Gene Burke, Lead Dawn Rusing-Bell Kishore Mehta Dierdre Humphrey v. pcorder.com, Inc. Ross A. Cooley Trilogy Software, Inc. Peter J. Barris Joseph A. Liemandt Robert W. Stearns Linwood A. Lacy, Jr., Jean Schwartz Burke, on Behalf of Herself and All Others Similarly Situated Dawn Rusing-Bell Kishore Mehta Dierdre Humphrey v. pcorder.com, Inc. Ross A. Cooley Cristina C. Jones James J. Luttenbacher Joseph A. Liemandt Peter J. Barris Linwood A. Lacy, Jr. Robert W. Stearns Trilogy Software, Inc. Goldman, Sachs & Co. Credit Suisse First Boston Sg Cowen & Co., Barry J. Pinkowitz, on Behalf of Himself and All Others Similarly Situated, Dawn Rusing-Bell Kishore Mehta Dierdre Humphrey v. pcorder.com, Inc. Ross A. Cooley Cristina C. Jones James J. Luttenbacher Joseph A. Liemandt Peter J. Barris Linwood A. Lacy, Jr. Robert W. Stearns Trilogy Software, Inc. Goldman, Sachs & Co. Credit Suisse First Boston Sg Cowen & Co.
Docket: 03-50737
Court: Court of Appeals for the First Circuit; February 28, 2005; Federal Appellate Court
Investors in pcOrder.com initiated a consolidated securities action against pcOrder.com, its directors, and investment bankers under Sections 11 and 15 of the Securities Act of 1933, claiming that the registration statements filed with the SEC were false and misleading. The district court ruled that, except for one investor, the plaintiffs lacked standing because they could not trace their shares to the registration statements. The court found the remaining claims moot and dismissed all. The case originated after pcOrder.com's initial public offering on February 26, 1999, and a secondary offering on December 7, 1999. Plaintiffs argued that the registration statements misrepresented the company's business viability and competitive status. The district court consolidated the lawsuits and appointed Lead Plaintiffs. In a subsequent order denying class certification, the court determined that none of the Lead Plaintiffs purchased shares during the public offerings but acknowledged that aftermarket purchasers could have standing if their shares were traceable to the offerings.
The district court evaluated the standing of Lead Plaintiffs Beebe, Dr. Burke, and Petrick to trace their stock to two public offerings. Beebe was found to have standing because he purchased 1,000 shares from a pool that exclusively contained IPO stock at the time of his acquisition. Conversely, Dr. Burke and Petrick were denied standing due to the intermingling of IPO and non-IPO shares by the time of their purchases, making it impossible to trace their shares to the public offerings. Although expert testimony indicated a high probability that they owned IPO stock, the court required definitive traceability under Section 11, ruling that mere likelihood was insufficient. Consequently, the court held that Dr. Burke and Petrick could not serve as class representatives, leading to a denial of class certification. On May 5, 2003, the court granted PCOrder's motion to dismiss for lack of subject matter jurisdiction, confirming Beebe's standing while concluding that the other plaintiffs also lacked standing. Beebe's claim was dismissed as moot following a settlement offer from PCOrder. The court denied a motion to intervene by three individuals and entered final judgment in favor of PCOrder, while the challenges to the standing rulings and the motion to intervene were raised by the appellants, with the denial of class certification not being part of the appeal.
Review of dismissals for lack of subject matter jurisdiction under Rule 12(b)(1) is conducted de novo, focusing on whether the court possesses the statutory or constitutional authority to hear the case. The district court may evaluate evidence and resolve factual disputes concerning its jurisdiction, with findings of fact reviewed for clear error. The denial of a motion to intervene as of right is also reviewed de novo, while the denial of a permissive motion to intervene is assessed for abuse of discretion.
Appellants contend that Dr. Burke, Mrs. Burke, and Petrick can establish Section 11 standing through statistical evidence indicating a high probability that some shares were issued under the questioned registration statement. This interpretation is rejected. The Securities Act of 1933 governs the initial distribution of securities, and Section 11 allows any individual acquiring such securities to sue, but limits standing to those who purchased securities directly related to the registration statement.
The case of Rosenzweig v. Azurix Corp. clarifies that aftermarket purchasers may have standing, as the statute's language does not exclude them, provided they can trace their shares back to the faulty registration. A plaintiff must meet higher procedural standards to benefit from the lower burden of proof under Section 11, particularly the requirement to trace the security to the specific registration statement. The Rosenzweig ruling suggests that traceability is logically satisfied if the stock entered the market through a single offering, although alternative methods for aftermarket purchasers to demonstrate traceability were not explored.
Appellants argue that they can show standing by providing statistical evidence of a high probability that they possess shares traceable to the relevant public offerings, claiming that their determinations exceed 50%, thus indicating it is "more likely than not" that their shares are connected to the disputed registrations.
Accepting "statistical tracing" would improperly broaden the standing requirement under Section 11 of the Securities Act, as it would allow every aftermarket purchaser of pcOrder.com stock to claim standing based solely on a high probability that their shares are tainted, contrary to the statutory language which limits standing to specific security owners. The analogy of randomly selecting a U.S. resident illustrates that high statistical likelihood does not confer legal rights, reinforcing that Congress intended to limit standing to those who directly acquired shares, unless all shares are tainted as in specific cases like Rosenzweig. Appellants argue that current market conditions make it difficult to differentiate between tainted and non-tainted shares, suggesting this hinders recovery under Section 11. However, the court emphasizes that Section 11 is available to direct purchasers and those who can trace their shares to a registration statement, and not adapting the statute to current market realities is a legislative responsibility. No court has supported the idea of standing based solely on statistical tracing, with past rulings, such as Kirkwood v. Taylor, rejecting similar theories that would bypass the tracing requirement. This consistent judicial stance indicates a reluctance to deviate from the original statutory framework established by Congress.
In Barnes v. Osofsky, the Second Circuit addressed a settlement in a class action related to Section 11 violations involving a secondary public offering (SPO). Two plaintiffs who bought stock post-SPO challenged the settlement's restriction to those who could trace their purchases directly to the SPO. The court upheld the limitation, emphasizing that Section 11 applies only to purchases of newly registered shares, thereby rejecting the plaintiffs' argument for a broader interpretation that would encompass all post-SPO purchases regardless of traceability. The court noted that determining whether shares were "clean" or "tainted" is often impossible due to the nature of stock trading, complicating the tracing of shares.
The court also criticized the Appellants' reliance on the Fourth Circuit's decision in Friends of the Earth v. Gaston, highlighting that the Clean Water Act explicitly grants standing to a wider range of potential plaintiffs based on adverse effects, unlike Section 11, which restricts standing to actual purchasers of tainted stock. The Appellants failed to meet the statutory requirements because they could not prove they purchased tainted shares, as mere participation in a potentially polluted stock pool was insufficient.
While acknowledging that all evidence involves some degree of probability, the court stated that the Appellants' statistical tracing was incompatible with Section 11's standing requirements. It distinguished this situation from the use of DNA evidence in trials, noting that DNA evidence typically accompanies other forms of evidence and is more specific, whereas the Appellants relied solely on general background statistics without sufficient specificity.
DNA analysis aims to establish a direct match between an individual's DNA and a sample from a crime scene, effectively reducing the number of potential sources. In contrast, the evidence presented by the Appellants indicates only a generalized probability that a person owning a certain number of shares may possess tainted shares, lacking specificity about individual ownership. DNA analysis can definitively exclude a suspect as a source if there is a nonmatch, a capability that the current statistical evidence does not possess.
For aftermarket purchasers to establish Section 11 standing, they must show that their shares can be traced back to the registration statement at issue. The court finds that the statistical tracing method proposed by the Appellants does not meet this traceability requirement.
The Appellants' argument regarding the district court's denial of their motion to intervene is rejected. The intervention was not sought in relation to an appeal against class certification, and since no individual claims were viable at the time of the intervention request, the motion is deemed unsubstantiated.
The district court established that only one individual, Beebe, had standing, and his claims became moot when he received a settlement offer matching the statutory limit on damages. Appellants argue that the settlement was inadequate due to the absence of prejudgment interest, which the statute does not mandate and is at the court’s discretion. The district court's refusal to grant this interest was justified, as the delay was attributed to Beebe's unsuccessful class certification motion. Consequently, without viable individual claims and no challenge to class certification, the appellate court affirms the district court's judgment.
Lead Plaintiffs in this case include Bret Beebe, Dr. Gene Burke, and David Petrick, alongside two individuals who later withdrew from the suit. The aftermarket, or secondary market, refers to the trading of previously issued securities. In prior rulings, particularly in Krim v. pcOrder.com, the traceability test was established, allowing aftermarket purchasers to assert standing in Section 11 cases, as affirmed in Rosenzweig v. Azurix Corp.
Appellants' expert calculated the probability of owning at least one "tainted" share using binomial probability principles, considering the percentage of IPO shares in the market. For instance, by the end of June, Dr. Burke’s purchase of 3,000 shares coincided with 99.85% of the market being PO shares, resulting in a near 100% probability of owning at least one PO share.
The district court denied class certification and the appointment of representative plaintiffs, stating that even if the Lead Plaintiffs had standing, they could not adequately represent the class's interests. PCOrder's motion to dismiss for lack of standing was unopposed regarding claims by certain parties, including Pinkowitz and Krim. The motion before the district court was categorized as a "Motion to Dismiss for Lack of Subject Matter Jurisdiction, or Alternatively, for Summary Judgment," but was resolved solely on jurisdictional grounds, with no objections raised on appeal.
When a defendant's jurisdictional challenge also questions the existence of a federal cause of action, the district court should affirm jurisdiction and address the challenge as a direct attack on the plaintiff's case merits under either Rule 12(b)(6) or Rule 56. A court may evaluate a motion to dismiss for lack of subject matter jurisdiction based on the complaint alone, supplemented by undisputed facts, or by resolving disputed facts. The burden of proof for establishing standing is the preponderance of the evidence, similar to other elements of a claim. The district court found that the appellants failed to demonstrate their ability to satisfy the tracing requirement based solely on mathematical probabilities and admissions regarding securities markets. Under Section 11 of the Securities Act, a plaintiff must show a material misstatement or omission to establish a prima facie case against the issuer, which incurs virtually absolute liability for any misstatements, even if innocent. In this context, all plaintiffs' stock is considered traceable to the single offering of Azurix stock linked to the challenged registration statement.
Standing for aftermarket purchasers in securities cases is established when the stock in question was sold under a misleading registration statement. The Ninth Circuit in Hertzberg v. Dignity Partners clarified that if there is a blend of pre-registration and post-registration stock, a plaintiff must demonstrate that their shares were part of the initial offering or trace them back to it. Problems arise when stock is issued under multiple registration statements. A significant point made is that if over 50% of shares are issued under a misleading statement, all shareholders could claim standing. Even if only a minority of shares are tainted, it may take few shares to establish standing based on probabilities. For instance, with 30% tainted shares, owning two shares provides a greater than 50% chance that at least one is tainted. This principle continues with lower percentages of tainted shares requiring more shares to achieve standing, such as 7 shares for 10% tainted and 35 shares for 2% tainted. The excerpt also references a hypothetical involving an injury caused by a bus, illustrating that high probability alone is insufficient for legal claims if causation cannot be definitively established. The case emphasizes the judicial system's need for clear evidence rather than probabilistic assumptions.
The excerpt addresses the concept of burden of proof in legal proceedings, specifically under the preponderance of evidence standard. It highlights that merely demonstrating a statistical majority (e.g., four-fifths or ninety-nine percent) belonging to the defendant does not suffice to meet this burden, as illustrated by the case of *Smith v. Rapid Transit, Inc.*, which affirmed a directed verdict for the defendant based on the insufficiency of evidence linking an automobile's color to the defendant's inventory. The excerpt further discusses acceptable methods of tracing shares in securities litigation, suggesting that if a plaintiff holds more shares than the known non-PO shares, a presumption of standing for at least some shares exists. However, this point is left unresolved due to the Appellants not raising it. The document also notes the historical context of securities held in street names, which arose from the 1960s' paperwork crisis, facilitating transactions. Additionally, it references various legal decisions and critiques regarding tracing techniques in securities law, emphasizing the need for Congress to reconsider existing statutes based on contemporary experiences.
The excerpt addresses various legal precedents and principles related to constitutional standing, evidentiary standards, and the interpretation of probabilistic evidence in legal contexts. It highlights that the Constitution does not mandate a specific affiant's testimony to establish injury for standing, as established in Sierra Club v. Cedar Point Oil Co. The Supreme Court has affirmed that a "threatened injury" suffices for the "injury in fact" requirement. The discussion includes references to cases that elucidate that misleading statements in a registration statement do not preclude a 10b-5 action if they pertain to different securities.
The text further explores the concept that all evidence is inherently probabilistic, suggesting that evidence should not be excluded for being expressible in probabilistic terms. Specific cases, including Prible v. State and People v. Soto, illustrate the reliance on a combination of DNA evidence and other incriminating factors to establish probabilities of guilt. The excerpt also mentions the high discriminatory power of DNA evidence, citing probabilities as low as one in 64 quadrillion for a match in certain populations. The concluding point emphasizes that courts may have a duty to allow class members an opportunity to intervene in class action settlements to appeal denial of class certification, underscoring the importance of procedural safeguards in class action suits.
In Nichols v. Mobile Bd. of Realtors, Inc., the court permitted putative class members to intervene solely to appeal the district court's decertification of the class action, even after the named plaintiffs' claims were settled. This aligns with precedents, such as United Airlines, Inc. v. McDonald, which established that plaintiffs could appeal a denial of class certification despite receiving a tender for their individual claims. The court reiterated that an action on behalf of a class does not become moot simply because the named plaintiff's claim expires, particularly when class certification has been denied. It was noted that a class action may typically be dismissed for mootness if the named plaintiffs' claims are satisfied and no class has been certified, but this does not prevent an appeal of class certification denial. The court also highlighted that the award of prejudgment interest is generally discretionary unless mandated by statute. Additionally, the argument by appellants that the defendants' actions deprived absent class members of their day in court was deemed without merit since the appellants chose not to appeal the denial of class certification. The district court indicated that the plaintiffs could return if they establish standing and that intervenors could initiate their own lawsuits.
