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Krim v. pcOrder.com, Inc.

Court of Appeals for the Fifth Circuit
402 F. 3d 489 (2005)
ELI5:

Rule of Law:

To establish standing under Section 11 of the Securities Act of 1933, an aftermarket purchaser must prove their shares are traceable to the specific registration statement alleged to be false. A high statistical probability that the shares came from the public offering in question is insufficient to meet this traceability requirement.


Facts:

  • pcOrder.com conducted an Initial Public Offering (IPO) of its stock on February 26, 1999, filing a registration statement with the SEC.
  • On April 19, 1999, investor Bret Beebe purchased 1,000 shares of pcOrder.com stock at a time when only shares from the IPO were available in the public market.
  • By the end of June 1999, non-IPO shares, such as those held by company insiders, had entered the public market and intermingled with the IPO shares, though IPO shares still constituted 99.85% of the public float.
  • In late June 1999, investors Dr. Gene Burke and Jean Schwartz Burke purchased shares from this commingled pool of stock.
  • pcOrder.com conducted a secondary public offering (SPO) on December 7, 1999, filing another registration statement.
  • After the SPO, Dr. Burke and investor David Petrick purchased additional shares at a time when shares from both the IPO and SPO constituted 91% of the shares in the market.
  • The investors alleged that the registration statements for both the IPO and SPO contained false and misleading information about pcOrder.com's business viability.
  • Due to the fungible nature of shares held in 'street name' by brokerages, it was impossible to distinguish or track individual shares originating from the public offerings once non-offering shares entered the market.

Procedural Posture:

  • Several stockholders filed lawsuits against pcOrder.com and others in the U.S. District Court for the Western District of Texas.
  • The district court consolidated the actions and appointed Bret Beebe, Dr. Gene Burke, and David Petrick as Lead Plaintiffs.
  • The Lead Plaintiffs moved for class certification.
  • On October 21, 2002, the district court denied the motion for class certification, finding that only Beebe could trace his shares and had standing, while the other plaintiffs could not.
  • PCOrder offered Beebe a full settlement for his individual claim, which rendered his claim moot.
  • PCOrder then filed a motion to dismiss all remaining claims for lack of subject matter jurisdiction.
  • The district court granted the motion, dismissing the claims of Dr. Burke, Petrick, and others for lack of standing.
  • The district court also denied a motion by other individuals to intervene in the case and entered final judgment for pcOrder.com.
  • The plaintiffs (Appellants) appealed the district court's dismissal for lack of standing to the U.S. Court of Appeals for the Fifth Circuit.

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Issue:

Does a high statistical probability that an aftermarket purchaser's shares were issued pursuant to a specific public offering satisfy the 'traceability' requirement for standing under Section 11 of the Securities Act of 1933 when those shares have been commingled with other shares in the market?


Opinions:

Majority - Judge Higginbotham

No. A high statistical probability does not satisfy the traceability requirement for standing under Section 11. The statute's language granting a right to sue to 'any person acquiring such security' requires a plaintiff to demonstrate that their specific shares were actually issued pursuant to the defective registration statement, not merely that they probably were. Allowing 'statistical tracing' would impermissibly expand the statute's narrow standing requirement, potentially giving every aftermarket purchaser standing whenever the percentage of offering shares in the market is high. The court reasoned that while modern market practices make tracing difficult, it is Congress's role, not the court's, to amend the statute to account for these realities. The court distinguished this case from the use of DNA evidence, noting that the statistics presented here are general probabilities about any random sample of shares, rather than particularized evidence about the specific shares a plaintiff actually owns.



Analysis:

This decision significantly restricts the ability of aftermarket purchasers to bring claims under Section 11 of the Securities Act, which has a lower burden of proof than other anti-fraud provisions. By rejecting statistical tracing, the court makes it practically impossible for investors who buy shares from a commingled pool to establish standing. This ruling reinforces a strict interpretation of Section 11's standing requirements and places a heavy, often insurmountable, evidentiary burden on plaintiffs in modern securities markets where shares are fungible, potentially shielding issuers from liability to a large class of investors.

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