ARGUMENT ANALYSIS

Justices lean toward split decision for suits challenging misleading securities registration statements

Monday’s arguments in Slack Technologies v. Pirani suggest a court leaning toward a split decision, rejecting liability under only one of the two securities-law statutes at issue in the case. 

Slack Technologies asks the court to apply two provisions of the Securities Act of 1933 to a relatively new method of going public known as a “direct listing.” In a traditional IPO, a company “goes public” by issuing new shares and offering them to the public. In that transaction, the Securities Act obligates the company to file a registration statement, which describes the company and covers the newly issued (registered) shares. In Slack’s direct listing, by contrast, Slack itself sold no shares. Rather, several of its largest shareholders filed a registration statement and registered their existing shares. Then, those shareholders, as well as other smaller shareholders exempt from the registration requirement, sold shares to the public in a direct listing. What that means is that some, but not all, of the shares sold in the direct listing were registered.

The question the case presents is whether it matters under Sections 11 and 12 of the Securities Act that some of the shares sold in the direct listing were unregistered. Specifically, if a plaintiff purchased shares that were not registered, can it sue Slack under Sections 11 and 12? Section 11 applies if the registration statement includes any information that is materially false or misleading, and permits a suit by “any person acquiring such security.” Section 12, in turn, imposes liability on anyone selling a security “by means of a prospectus” that includes a material misstatement, running in favor of “the person purchasing such security from him.”

The lower court ruled that the structure of the transaction was irrelevant, so that purchasers complaining about the accuracy of the registration statement could bring suit under Sections 11 and 12 even if they could not prove that they brought shares covered by the registration statement. The argument suggested a strong likelihood that the court would reject that conclusion as to Section 11, but not as to Section 12.

The justices had relatively little to say about Section 11, and pretty much everything they said revolved around one of two points. The first is agreeing that everybody has thought for decades that Section 11 applied only to shares registered under the allegedly inaccurate statement, and that it would be a major change in the law to apply it to unregistered shares. Justice Brett Kavanaugh, for example, commented to Kevin Russell, representing Fiyyaz Pirani, the plaintiff in the case, that “we would have to depart on Section 11 from a lot of law starting with Judge Friendly, that’s been around for a long time.”

In the same vein, Chief Justice John Roberts and Justice Elena Kagan seemed to read the text of Section 11 as plainly barring the action on the facts of Slack’s listing. Roberts, for example, characterized the reference in the statute to “such security” as a “big hurdle for you to get over,” while Kagan suggested that “you have a hard row to hoe here.”

For that group of justices, it is hard to understand what Congress possibly could have meant when limiting the action for an inaccurate statement to “any person acquiring such security” other than that only people who acquired securities registered under the challenged statement could file a lawsuit. That perspective would lead to a direct reversal of the lower court ruling as to Section 11.

The only other point to get any substantial discussion under Section 11 is what the justices should do if they reverse the lower court’s approval of liability without proof of registration. Russell explained that the complaint alleged that the purchasers had acquired registered shares, and that the allegation made sense because it is overwhelmingly likely, as a statistical matter, that they did purchase registered shares, even if they can’t prove that any particular share was registered. Justice Neil Gorsuch for one was emphatic in his view that such an allegation should be sufficient for the case to proceed. And others seemed to accept the idea that the whole question of tracing should be left for the lower courts, if the justices should happen to reverse the existing judgment under Section 11. Suffice it to say that when a major portion of the argument on the topic is consumed with hypotheticals about what to do if you lose on that statute, you can’t hold out a lot of hope for your chances in the final opinion.

The discussion about Section 12 was quite different. The lower court started from the premise that Sections 11 and 12 should apply identically here, but that perspective had no credence with any of the justices who spoke at the argument. From the earliest questions by Justice Clarence Thomas, almost every justice who spoke challenged the idea that Sections 11 and 12 meant the same thing. Two disparate views were clear.

First, Kavanaugh repeatedly noted his reluctance to address the Section 12 question. He explained early in the argument to Thomas Hungar, representing Slack, that he was “a bit concerned about deciding [the Section 12 issue] without the SEC here, without more law out there, without knowing more about the Section 12 issue … Why not allow the lower courts to sort out the Section 12 issue before we give a definitive ruling on that?” Kavanaugh repeated the sentiment in a discussion later with Russell, agreeing that Russell had made “good arguments” about Section 12, but returning to the point that “[w]e don’t have the SEC. We don’t have a lot of case law.”

Gorsuch seemed to be in the same camp, as he pressed Hungar on whether “the sky [would] fall” if the court were to “answer the Section 11 question in your client’s favor, vacate and remand, without addressing the Section 12 question.”

Kagan seemed to have a different view, as she expressed some pretty well-defined views about the propriety of Section 12 liability here. For her, it seemed easy as a textual matter to say that a sale is made “by means of a prospectus” (the relevant language of Section 12) if the prospectus is in the market when the sale is made. At the end of Hungar’s argument against Section 12 liability, she offered Hungar a chance to “tell me why I might be wrong about the textual differences between the two sections.” She then offered a lengthy passage that sounded like a summary of a draft opinion. She started by noting that she can “count four key differences between the two sections,” and then walked through the differences one after the other, in detail. She concluded by explaining that “what [those differences] sugges[t] to me is that the two provisions are targeting two very different things, that one [Section 11] is targeting dishonesty in creating a registration statement and the other [Section 12] is targeting dishonesty in certain kinds of sales, period.” That analysis would support a complete rejection of Slack’s argument about Section 12.

Although it is not obvious exactly what will happen here, a few things are pretty clear from the argument. It is highly unlikely that the majority will affirm Section 11 liability; no justice who addressed the subject seemed to support that result. At the same time, it is hard to see a majority for rejecting Section 12 liability, as all the justices who spoke were either agnostic or supportive of liability under Section 12. It remains to be seen whether the justices will divide on the answer under Section 12 or can coalesce around a middle ground – avoiding any discussion of Section 12 at all.

Disclosure: Lawyers associated with SCOTUSblog are among the counsel to Fiyyaz Pirani in this case. The author of this article is not affiliated with the firm.