Hertzberg v. Dignity Partners, Inc.
1999 WL 651947, 191 F.3d 1076 (1999)
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Rule of Law:
Section 11 of the Securities Act of 1933 grants standing to "any person acquiring such security" to sue for material misstatements or omissions in a registration statement, regardless of whether they purchased the stock in the initial public offering or in the aftermarket, provided the shares can be traced to the registered offering.
Facts:
- Dignity Partners, Inc. ("Dignity") was in the business of making "viatical settlements," purchasing rights to life insurance proceeds from individuals with terminal illnesses (primarily AIDS patients) in exchange for lump sums and assuming premium payments.
- By 1995, new drugs and treatments for AIDS allowed patients to live longer than expected, which jeopardized Dignity's business model as it collected life insurance proceeds later and had to pay premiums for longer periods.
- Hertzberg alleged that the owners of Dignity decided to take the company public to liquidate their holdings due to the declining value of the business and filed a registration statement for an initial public offering (IPO) on February 14, 1996.
- Hertzberg and other plaintiffs purchased Dignity stock on the open market more than 25 days after the IPO but before public knowledge of the longer life expectancies or Dignity's large losses became public.
- Hertzberg alleged that Dignity's registration statement contained materially false and misleading statements and omitted facts, including its inability to accurately estimate life expectancies, adverse trends from 1995, and an accrual accounting method that did not comply with GAAP.
- After the facts concerning lengthened life expectancies for AIDS patients became public, Dignity's stock price plummeted, and the company announced significant losses and its abandonment of the viatical settlement business.
Procedural Posture:
- Hertzberg filed a class action lawsuit against Dignity Partners, Inc., alleging violations of federal securities laws, including Section 11 of the Securities Act of 1933.
- The district court dismissed Hertzberg's Section 11 claims, holding that the named plaintiffs lacked standing because they purchased their stock more than 25 days after the initial public offering.
- Unnamed class member Charles Steinberg, who had purchased Dignity stock within eight days of the registration statement's effective date, filed a motion to intervene as a named plaintiff.
- The district court granted Steinberg's motion to intervene.
- Dignity moved to dismiss again, arguing that the statute of limitations barred the entire class's Section 11 claims.
- The district court ruled that the Section 11 claims were time-barred, concluding that the original named plaintiffs' lack of standing meant their suit could not toll the statute of limitations for unnamed class members.
- The district court entered final judgment on the dismissed Section 11 claims under Rule 54(b), finding "no just reason for delay."
- Hertzberg, as the appellant, appealed the district court's decisions to the United States Court of Appeals for the Ninth Circuit.
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Issue:
Does Section 11 of the Securities Act of 1933 grant standing to investors who purchased stock in the aftermarket, rather than solely those who purchased directly in the initial public offering?
Opinions:
Majority - W. Fletcher, Circuit Judge
Yes, Section 11 of the Securities Act of 1933 grants standing to investors who purchased stock in the aftermarket, and not solely those who purchased directly in the initial public offering. The Ninth Circuit reversed the district court's holding that the original named plaintiffs lacked standing. The court based its reasoning primarily on the plain text of Section 11(a), which states that "any person acquiring such security" may bring an action. The court interpreted "any" broadly to mean "all," indicating no restriction to initial purchasers. The court further noted that the damages provision in Section 11(e), which refers to the "price at which the security was offered to the public," would be redundant if only initial offering purchasers had standing, as they would, by definition, have paid that price. The court distinguished the Supreme Court's decision in Gustafson v. Alloyd Co., Inc., explaining that Gustafson interpreted Section 12, not Section 11, and that Section 12 explicitly requires a purchase "from him" (privity), a phrase notably absent from Section 11. This difference in statutory language signifies Congress's intent for different standing requirements in the two sections. The court also found support in the legislative history, citing House Reports from 1933 and 1934 which explicitly stated that Section 11's civil remedies are available to "all purchasers... regardless of whether they bought their securities at the time of the original offer or at some later date." Finally, the court afforded deference to the Securities and Exchange Commission's (SEC) amicus brief, which supported a broad reading of Section 11 standing.
Analysis:
This case significantly broadens the scope of potential plaintiffs in Section 11 actions, ensuring that investors who purchase securities in the aftermarket, but whose shares can be traced to a faulty registration statement, can seek remedies. By affirming a broad interpretation of "any person acquiring such security," the Ninth Circuit reinforced the investor protection goals of the Securities Act of 1933. The decision also clarified the distinction between Section 11 (strict liability for misstatements in registration statements, broad standing) and Section 12 (seller liability, requiring privity), preventing a restrictive interpretation of one from being applied to the other. This ruling makes it harder for companies to limit liability by arguing that only initial purchasers have standing, increasing corporate accountability for public offerings and providing greater recourse for investors in the secondary market.
