Section 11 claims are on the rise
2013 was a big year for IPO’s, and 2014 looks to be even busier. From an initial boost for smaller companies from the JOBS Act to the more recent boom in tech, e-commerce and telecom company filings, IPO activity in the U.S. has reached its highest since 2013. But as more companies go public, the courts are not far behind. Along with the increase in IPO’s has come a similar rise in securities class action suits alleging misrepresentation in IPO companies’ offering documents. More notably, cases filed under Section 11 allegations have become an attractive option for plaintiffs looking to obtain class certification without being dependent on the “fraud on the market” theory.
Section 11 holds Issuers of securities liable for registration statements containing false statements of a material fact or those that omit a material fact. According to the rule, a purchaser of a security may bring suit against a company under Section 11 even if they bought shares on the secondary market, as long as the purchase can be traced back to the initial public offering. Most importantly, plaintiffs do not need to prove causation or reliance on the misstatements or omissions of material facts. Damages are limited to the difference between the initial offering price and the current value of the securities.
Three recent examples Section 11 filings include:
- A plaintiffs’ claim against the directors and officers of a video-advertising group alleging that the company’s offering documents failed to disclose important facts about the online advertising market. The plaintiffs’ alleged that the company omitted information related to a loss in sales to competitors due to a market shift away from desktop toward mobile browsing.
- The second involves a plaintiff filing of a securities class action against Coty, Inc., alleging certain of its directors and officers and its offering underwriters relating to the company’s initial public offering documentation purposefully contained misleading statements about the consumption of the company’s products in the quarter leading up to the IPO, as well as the fact that during the same period the company’s U.S. and European retailers were returning products to the Company. The complaint further alleges that in the months preceding the offering, sales of certain key company products were declining.
- Lastly, plaintiffs’ have filed an action in the Central District of California relating to the February 5, 2014 securities offering of CytRx. The complaint alleges that “defendants CytRx, its CEO, and two stock promotion firms made false and/or misleading statements and/or failed to disclose that numerous articles issued by the stock promotion firms were paid stock promotions. According to the suit, when the market began to learn of the true facts through partial disclosures, the value of CytRx stock dropped damaging investors.”
In 2013, nearly 10% of securities class action filings contained Section 11 allegations, well-below Rule 10-5b claims but still significant in light of the impending Haliburton case decision. If the Supreme Court throws out the fraud on the market theory, plaintiff’s will face a greater challenge to obtain class certification in 10-5b cases, since each individual class member will have to prove misrepresentation in their investments. As a result, Section 11 cases will become even more appealing for plaintiffs seeking damages in IPO-related securities claims.
About the Author
James Gaudette is a Vice President and ExecutiveRisk Counsel at William Gallagher Associates. He advises clients on issues of coverage and advocates on their behalf to maximize coverage on all claims submitted to the insurers that comprise their Executive Risk portfolio. His professional liability expertise includes Directors and Officers Liability, Employment Practices Liability, Errors’ & Omissions’ Liability, Fiduciary Liability and Legal Malpractice.