Supreme Court Confirms the Scope of Section 11's Tracing Requirement

On June 1, 2023, a unanimous Supreme Court held that plaintiffs suing under Section 11 of the Securities Act of 1933 (the Securities Act) must "trace" their shares to the specific registration statement that they allege was false or misleading, even when they acquired those shares in a direct listing.1 The decision, Slack Technologies, LLC v. Pirani, settles a recent circuit split on tracing that developed from a Ninth Circuit's ruling. The majority reasoned that because NYSE rules permit direct listings only if an effective registration statement is in place, any unregistered shares that were purchased on the NYSE still qualified as "such securities]" within the scope of Section ll.13 Supreme Court Limits Section 11 Liability to Shares That Are Registered under the Challenged Registration Statement The Supreme Court granted certiorari to resolve the circuit split created by the Ninth Circuit,14 and in a unanimous decision authored by Justice Gorsuch, vacated the Ninth Circuit's ruling. The Court explained that Section 11 itself uses the phrase "the registration statement" and ties damages to the value of the registered shares offered to the public, features that would be difficult to reconcile with an interpretation of Section 11 that allowed a plaintiff to sue on unregistered shares.16 More broadly, the Court reasoned that the Securities Act generally "uses the word 'such to narrow the law's focus," and that other provisions of the Act closely tie the scope of the registration requirement to the specific securities that are being sold and that are mentioned in the registration statement.17 Bycontrast, the Court found that Mr. Pirani's alternative reading of the statute-that "such security" under Section 11 includes "other securities that bear some sort of minimal relationship to a defective registration statement"-was difficult to square with the statutory text and would yield uncertainties and indeterminate results.18 The Court specifically rejected Mr. Pirani's policy argument that his interpretation, with its broader scope of liability, would better accomplish the Securities Act's remedial purpose, finding that it was equally possible that Congress had intended to keep the class of claims covered by Section 11 narrow, given the relatively few elements required for such claims.19 Taking this context together, the Court held that the "better reading" of Section 11 "requires a plaintiff to plead and prove that he purchased shares traceable to the alleged