In a significant ruling, on June 1, 2023, the United States Supreme Court has settled a long-standing dispute over the interpretation of a provision in the federal securities laws. The case, Pirani v. Slack Technologies, Inc., centered around the meaning of Section 11 of the Securities Act of 1933 (“the 1933 Act”) and its implications for investors seeking to recover losses due to false or misleading registration statements.
Before this decision, the majority of lower federal courts held that liability under Section 11 of the 1933 Act attaches only when buyers could trace their purchases of to a false or misleading registration statement. However, the Ninth Circuit Court of Appeals recently departed from this interpretation, ruling that a plaintiff may sometimes recover under Section 11 even when the shares they purchased were not directly traceable to a misleading registration statement.
The Supreme Court’s task was to determine which approach aligns better with the terms of the statute. The 1933 Act and the Securities Exchange Act of 1934 (“the 1934 Act”) form the foundation of the federal securities laws. While the 1933 Act primarily focuses on the regulation of new offerings, the 1934 Act extends to ongoing disclosures and trading on secondary markets.
Section 11 of the 1933 Act imposes strict liability on issuing companies when their registration statements contain material misstatements or misleading omissions. The critical question before the Supreme Court was whether the term “such security” in Section 11 refers only to a security issued pursuant to the allegedly misleading registration statement or if it can encompass securities not directly linked to that statement.
After carefully examining the language and context of the statute, the Supreme Court disagreed with the Ninth Circuit Court of Appeals and sided with Slack Technologies. They found that the term “such security” in Section 11 refers to a security registered under the specific registration statement alleged to contain false or misleading information. This means that investors seeking to bring a claim under Section 11 must demonstrate that the securities they hold are traceable to the particular registration statement in question.
Writing for a unanimous Court, Justice Gorsuch emphasized that the Court’s interpretation is consistent with prior Supreme Court decisions and the contextual clues provided by the statute itself. He also noted that the broader interpretation suggested by Mr. Pirani, the plaintiff in the case, lacked sufficient clarity and raised concerns about the limits and implications of such an approach.
This ruling has significant implications for investors seeking recourse under Section 11 of the Securities Act. It clarifies that recovery for misstatements or omissions in registration statements is limited to securities traceable to the specific registration statement alleged to be false or misleading. The decision aligns with the longstanding interpretation of the lower courts and provides certainty for issuers and investors alike.
The ruling may impact the recoverability of losses for investors who purchased unregistered shares or shares not directly connected to a defective registration statement. Investors will need to ensure their claims meet the traceability requirement set forth by the Supreme Court to establish liability under Section 11.
Overall, the Supreme Court’s decision in Pirani v. Slack Technologies, Inc. brings clarity to the interpretation of securities laws and sets a precedent for future cases involving claims under Section 11 of the 1933 Act. Investors and issuers will need to carefully consider the implications of this ruling when assessing potential liabilities and evaluating investment decisions.
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