On March 6, 2023, Cohen Milstein’s Laura Posner and Carol V. Gilden; Columbia Law School’s John C. Coffee, Jr. and Joshua Mitts; and Labaton Sucharow’s Ira A. Schochet submitted a brief for amici curiae, distinguished law and business professors in support of respondent, before the Supreme Court.
Amici & Purpose of the Brief
Amici are law and business professors who focus their teaching and scholarship on federal securities law, the financial markets and accounting. They submit this brief to clarify the contours of the modern securities market for the Court’s benefit, and to explain how modern computing power and well established and accepted accounting methodologies make it feasible to trace shares, using the detailed, time-stamped transactional records that broker-dealers, exchanges, and the Financial Industry Regulatory Authority (“FINRA”) are required to maintain and which are obtainable through subpoenas in discovery. Amici also submit to explain how Petitioners’ position would effectively bar investors from tracing their shares, not only in direct listings but in all contexts that Congress intended for Section 11 to apply, thereby resulting in for Section 11 to apply, thereby resulting in a significant loss of investor protection.
Summary of Argument
We submit this amicus brief because we are concerned that this Court may be influenced by a myth: namely, that it is impossible to “trace” shares for purposes of establishing standing under Section 11 of the Securities Act of 1933.
Although many courts and practitioners may have sincerely believed that this barrier was insurmountable, their belief was at best “folk wisdom.” Even if it was reasonable once upon a time, this “impossibility myth” is now demonstrably false, as modern computing power makes it feasible to trace shares, using the detailed, time-stamped transactional records that broker-dealers, exchanges, and the Financial Industry Regulatory Authority (“FINRA”) are required to maintain (and are subject to subpoena in discovery).
Worse yet, the tracing requirement can be (and apparently is being) manipulated by companies, at the advice of skilled practitioners, to deliberately commingle registered and unregistered securities seeking to block tracing and thereby nullify Section 11. This should be unacceptable. If permitted, this tactic could bar Section 11 actions in both the initial public offering and seasoned offering contexts, thereby effectively precluding Section 11 litigation across the board.
Nonetheless, we do not challenge the legitimacy of the tracing requirement and believe that Judge Henry Friendly was correct in Barnes v. Osofsky in holding that Section 11 should apply only to the shares registered under the registration statement. In effect, we agree with Judge Friendly, but believe his approach needs to be updated in light of technological progress that can make tracing feasible and cost-efficient.
Nor do we argue that a statistical estimate of the likelihood that shares sold by plaintiffs were registered is an adequate substitute for proving actual tracing. Rather, we much more modestly assert that, as Petitioner’s own expert acknowledged in parallel litigation, it is possible to use accounting methods like first in-first out (FIFO) or last in-first out (LIFO) to identify in discovery the chain of title by which securities flow from one account to another. The best answer is to enable tracing (not assume its impossibility) through a modern procedure reflective of the technology available today.
Given the attempts by some to expand the tracing requirement so that it can block all Section 11 actions (as discussed below), we particularly fear that any decision in this case that uses the traditional, outdated language of tracing (or assumes its impossibility) will incentivize practices that deliberately seek to “commingle” some modest amount of unregistered securities with a much larger pool of registered securities in order to contaminate that larger pool. This approach, if tolerated, could bar standing across the board and imply the death of Section 11 litigation. Such an outcome would result in a significant loss in investor protection.
Accordingly, if this Court is dissatisfied with the decision of the Ninth Circuit below, it still would be premature and ill-advised to simply overturn that decision and order dismissal. Given the prevailing confusion over the feasibility of tracing, the better and traditional rule would be to remand the case to give plaintiffs an opportunity to demonstrate that they can trace the actual passage of the securities, using existing records, time-dated tracing, and conventional accounting rules.
Such a showing should not only enable respondents to demonstrate their own standing as the holders of registered shares, but also would chart a clear path for securities litigation for the future. Any other outcome will preserve a myth that invites exploitation and will eventually embarrass courts in the future.
Ultimately, if a standing issue can be simply resolved (and not cynically exploited), it benefits all to resolve it efficiently so that the parties can proceed at low cost to the real merits of the case.