By John Filar Atwood
Two amicus briefs—one filed jointly by former SEC Chair Jay Clayton and former SEC Commissioner Joseph Grundfest, and one filed by the Cato Institute—support Slack Technologies’ view that the Ninth Circuit erred in ruling that a purchaser of shares may sue for misleading disclosure in a registration statement even if the purchased shares could not be traced to that registration statement. In their view, the decision conflicts with more than 50 years of precedent and inappropriately extends Section 11 liability far beyond the distribution of securities in and around Slack’s direct listing of shares (Slack Technologies, LLC (f/k/a Slack Technologies, Inc.) v. Pirani, (Clayton amicus brief), (Cato Institute amicus brief), February 2023).
The case arose in the wake of Slack’s 2019 direct listing of shares on the NYSE, which included both registered shares and shares that were exempt from registration. Respondent Fiyyaz Pirani bought 250,000 Slack shares which dropped in value after his purchase. Pirani sued under 1933 Act Sections 11, 12(a)(2), and 15, claiming that Slack’s registration statement was misleading. Slack argued that Pirani lacked standing because his shares could not be traced to the registration statement.
The district court ruled in Pirani’s favor finding that the phrase "any person acquiring such security" gave wide latitude in determining who may sue over a misleading registration statement under Section 11. The district court read the phrase broadly as meaning “acquiring a security of the same nature as that issued pursuant to the registration statement.” The court applied the same reasoning to Pirani’s claims under Section 12(a)(2), which also contains the phrase “such security.”
On appeal, the Ninth Circuit affirmed the lower court’s ruling, concluding that Pirani had standing because his shares could not be purchased without the issuance of Slack’s registration statement. The panel acknowledged that the Ninth Circuit had historically interpreted “such securities” to mean securities offered via a specified registration statement, but found that the nature of Slack’s offering could fit within the language of Section 11. Slack contested the ruling in a petition to the Supreme Court.
Clayton/Grundfest brief. In their amicus brief, Clayton and Grundfest side with Slack, arguing that the Ninth Circuit’s decision invents a new definition of Section 11 standing that conflicts with all precedent on the matter. In their view, the ruling proposes a definition that extends liability far beyond the distribution of securities in and around Slack’s direct listing.
If applied literally, the Pirani definition of standing would significantly expand Section 11 liability and substitute a judicially implied remedy for the judgment of Congress, regulators, and sophisticated market participants, they said.
Clayton and Grundfest also believe that the decision conflicts with the text of the statute. In their view, the ruling cannot be reconciled with the statute’s damages formula, its exemptive provisions, or with governing SEC regulations. Further, they claim that Pirani fails to consider 60 other occurrences of the phrase “such security” in the statute and proposes a definition that is inconsistent with the term’s meaning in those 60 instances.
In arguing for Pirani’s reversal, Clayton and Grundfest point out that the Ninth Circuit’s rationale conflicts with norms of statutory construction urged by the Supreme Court. They believe that if tracing—limiting standing to sue to those shareholders whose purchases can be traced back to the registration statement—creates a challenge that requires correction through government action, then the SEC can take a variety of administrative actions to address the tracing challenge in direct listings, and in all other forms of Section 11 litigation. A rewrite of Section 11 has no support at law and is even more inappropriate when the matter could be addressed by market practice, administrative action, or legislation, they said.
Cato Institute brief. The Cato Institute also decries Pirani’s expansion of the group of plaintiffs with Section 11 standing to include those who purchased shares sold pursuant to exemptions from registration. The Institute notes the Ninth Circuit’s concern that “interpreting Section 11 to apply only to registered shares in a direct listing context would essentially eliminate Section 11 liability,” but counters that federal courts have repeatedly rejected the policy concerns behind the decision holding instead that it is up to lawmakers and regulators to expand Section 11 should they find it necessary.
According to the Institute, the decision ignores the policy benefits of alternative public offering methods. Direct listings such as the one used by Slack offer unique benefits to companies and their shareholders by allowing existing shareholders to sell their shares on a public exchange without the delay and overhead associated with a traditional IPO, it said.
The Ninth Circuit’s ruling could deter companies from going public by means of alternative offering methods, the Institute argues, due to the costs associated with increased Section 11 litigation. Under the Pirani approach, any savings from avoiding underwriters and other IPO expenses could be replaced by the litigation costs of extending Section 11 standing to all post-offering purchasers, it said.
The Institute notes that the 1933 Act was designed to navigate the delicate balance between making issuers responsible for inaccurate disclosure and incentivizing companies to go public without excessive litigation burdens. Limiting those who can sue for mistakes in a registration statement to those who purchased shares that were issued under the registration statement containing the alleged misstatement or omission was crucial to Congress’s decision to relax liability requirements for a Section 11 claim, it points out.
The Institute believes that compared to Congress and the SEC, courts are ill-equipped to determine the proper interplay between regulations and economic incentives in the context of Section 11. If a change to the 1933 Act’s liability scheme is warranted then Congress alone should make that determination, it said.
The case is No. 22-200.