Krim v. pcOrder.com, Inc.

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
March 1, 2005
FOR THE FIFTH CIRCUIT
Charles R. Fulbruge III
Clerk
No. 03-50737
JERRY KRIM; ET AL
Plaintiffs,
DAVID PETRICK, Lead Plaintiff;
BRET BEEBE, Lead Plaintiff;
GENE BURKE, Lead Plaintiff,
Plaintiffs-Appellants
DAWN RUSING-BELL; KISHORE MEHTA;
DIERDRE HUMPHREY,
Appellants,
versus
PCORDER.COM, INC; ROSS A. COOLEY;
TRILOGY SOFTWARE, INC;
PETER J. BARRIS; JOSEPH A. LIEMANDT;
ROBERT W. STEARNS; LINWOOD A. LACY, JR.,
Defendants-Appellees.
**************************************************************
JEAN SCHWARTZ BURKE, On Behalf of Herself
and All Others Similarly Situated;
Plaintiff-Appellant,
DAWN RUSING-BELL; KISHORE MEHTA;
DIERDRE HUMPHREY,
Appellants,
versus
PCORDER.COM, INC; ROSS A. COOLEY;
CRISTINA C. JONES; JAMES J. LUTTENBACHER;
JOSEPH A. LIEMANDT; PETER J. BARRIS;
LINWOOD A. LACY, JR.; ROBERT W. STEARNS;
TRILOGY SOFTWARE, INC.;
GOLDMAN, SACHS & CO;
CREDIT SUISSE FIRST BOSTON; SG COWEN & CO.,
Defendants-Appellees.
**************************************************************
BARRY J. PINKOWITZ, On Behalf of Himself
and All Others Similarly Situated;
Plaintiff,
DAWN RUSING-BELL; KISHORE MEHTA;
DIERDRE HUMPHREY,
Appellants,
versus
PCORDER.COM, INC.; ROSS A. COOLEY;
CRISTINA C. JONES; JAMES J. LUTTENBACHER;
JOSEPH A. LIEMANDT; PETER J. BARRIS;
LINWOOD A. LACY, JR.; ROBERT W. STEARNS;
TRILOGY SOFTWARE, INC.;
GOLDMAN, SACHS & CO;
CREDIT SUISSE FIRST BOSTON; SG COWEN & CO.,
Defendants-Appellees.
Appeal from the United States District Court
For the Western District of Texas
Before HIGGINBOTHAM, DAVIS, and GARZA, Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
Investors who purchased stock in pcOrder.com brought this
consolidated securities action under Sections 11 and 15 of the
Securities Act of 1933 against defendants pcOrder.com, its
directors, its controlling shareholder Trilogy Software, and its
2
investment bankers (collectively “PCOrder”), alleging that the
registration statements filed with the Securities and Exchange
Commission were false and misleading. The district court concluded
that, with one exception, the investors lacked Section 11 standing
because they could not trace their stock to the registration
statements in question. Finding the remaining investor’s claims
moot, the court dismissed all of the claims and denied a third-
party motion to intervene. We affirm.
I
PCOrder conducted an initial public offering of pcOrder.com
stock on February 26, 1999, and a secondary public offering on
December 7, 1999. In connection with each offering PCOrder filed
a registration statement with the SEC.
Several holders of pcOrder.com stock filed multiple lawsuits
against PCOrder under Section 11 of the Securities Act of 1933,
which provides a right of action to “any person acquiring” shares
issued pursuant to an untrue registration statement.1 The
plaintiffs alleged that the registration statements were false and
misleading by indicating that pcOrder.com had a viable business
plan, had an ability to generate and report accurate operating and
financial information, and was not competing with Trilogy Software
for revenue. The district court consolidated the actions and
1
15 U.S.C. §77k(a).
3
appointed Lead Plaintiffs.2 The Lead Plaintiffs sought to have a
class action certified and have themselves designated as class
representatives.
In its October 21, 2002, order denying class certification,3
the district court first found that none of the Lead Plaintiffs
purchased their stock during the public offerings--that is, they
were “aftermarket” purchasers.4 However, it held that Section 11
is available not only to those who purchased their stock during the
relevant public offerings, but also to aftermarket purchasers as
long as the stock is “traceable” back to the relevant public
offering.5
The district court then considered whether Lead Plaintiffs
Beebe, Dr. Burke, and Petrick could trace their stock back to
either of the two public offerings. The district court found that
the approximately 2.5 million shares issued in the pcOrder.com IPO
were registered in a stock certificate in the name of Cede & Co.,
the nominee of the Depository Trust Company. The court found that,
on April 19, 1999, when Beebe purchased 1000 of these “street name”
shares, the pool of street name stock still contained only the IPO
2
Bret Beebe, Dr. Gene Burke, and David Petrick were appointed Lead
Plaintiffs, along with two other individuals who subsequently dropped out of the
suit and are not part of this appeal.
3
Krim v. pcOrder.com, Inc., 210 F.R.D. 581 (W.D. Tex. 2002).
4
The “aftermarket,” also termed the “secondary market,” is the “securities
market in which previously issued securities are traded among investors.” BLACK’S
LAW DICTIONARY 990 (8th ed. 2004).
5
Krim, 210 F.R.D. at 585. We have since adopted the traceability test and
allowed such aftermarket purchasers to establish standing in Section 11 cases.
See Rosenzweig v. Azurix Corp., 332 F.3d 854, 873 (5th Cir. 2003).
4
stock. Therefore, because all of his stock was necessarily IPO
stock, Beebe was able to satisfy the traceability requirement and
establish standing.
In contrast, the court concluded that standing was lacking for
Dr. Burke and Petrick. By the end of June 1999 when Dr. Burke
purchased 3000 shares, the court found that non-IPO shares--
specifically, insider shares--had entered the street name
certificate and intermingled with the IPO shares, but that IPO
shares still comprised 99.85% of the pool. Subsequent to the
December 7, 1999, secondary public offering, Dr. Burke made
additional purchases and Petrick also purchased a number of shares
at a time when IPO and SPO shares (collectively “PO stock”)
constituted 91% of the market. Appellants’ expert acknowledged
that there is no way to track individual shares within a pool once
it becomes contaminated with outside shares.
In light of the intermingling of PO and non-PO stock in the
market at the time of their purchases--even though PO stock was the
overwhelming majority--the district court held that Dr. Burke and
Petrick could not demonstrate that their shares were traceable to
the public offering registration statements. In reaching this
conclusion, the court considered expert testimony indicating that,
given the number of shares owned by each Lead Plaintiff and the
percentage of PO stock in the market, the probability that each
Lead Plaintiff owned at least one share of PO stock was very nearly
5
100%.6 However, the court held that this did not satisfy the
traceability requirement because the “Lead Plaintiffs must
demonstrate all stock for which they claim damages was actually
issued pursuant to a defective statement, not just that it might
have been, probably was, or most likely was, issued pursuant to a
defective statement.”7 The district court noted that,
“[o]therwise, ‘all persons who held stock in street name on and
after the offering date could claim a proportional interest in the
shares.’”8
Having found that Dr. Burke and Petrick lacked Section 11
standing, the court concluded that they could not serve as class
representatives and denied class certification.9 We rejected a
6
Appellants’ expert arrived at the odds of getting at least one PO (or
“tainted”) share using elementary principles of binomial probability. See
generally PAUL G. HOEL, INTRODUCTION TO MATHEMATICAL STATISTICS (4th ed. 1971), cited in
Castaneda v. Partida, 430 U.S. 482, 496 n.17 (1977); see also Vuyanich v.
Republic Nat’l Bank of Dallas, 505 F. Supp. 224, 345-46 (N.D. Tex. 1980),
vacated, 723 F.2d 1195 (5th Cir. 1984).
The expert treated the purchase of shares as a series of independent random
draws from the stock pool (similar to flipping a weighted coin once for each
share), and calculated the probability that at least one of the shares would be
tainted according to the following formula: 1 - (1 - PO%)#shares, where PO% is the
percentage of PO stock in the market and #shares is the number of shares owned.
For example, at the end of June, when Dr. Burke had purchased 3000 shares, PO
shares (specifically IPO shares) constituted 99.85% of the street name
certificate. Therefore, the probability that he owned at least one PO share was
1 - (1 - 0.9985)3000, or very nearly 100%.
7
Krim, 210 F.R.D. at 586.
8
Id. at 587 (quoting Kirkwood v. Taylor, 590 F. Supp. 1375, 1380 (D. Minn.
1984), aff’d 760 F.2d 272 (8th Cir. 1985) (table)).
9
The district court further concluded as an independent ground for not
certifying the class or appointing the representatives that even if each of the
Lead Plaintiffs had standing to sue under Section 11, they were each, including
Beebe, unqualified to be class representatives because they were, for other
reasons, not able to “fairly and adequately protect the interests of the class.”
Id. at 587-89.
6
request for an interlocutory appeal.10
On May 5, 2003, the district court granted PCOrder’s motion to
dismiss for lack of subject matter jurisdiction under Federal Rule
of Civil Procedure 12(b)(1).11 The district court reiterated its
conclusion that Beebe had standing to sue under Section 11, but
that Dr. Burke and Petrick did not. It concluded that the other
plaintiffs, Barry Pinkowitz, Jerry Krim, and Jean Schwartz Burke,
also lacked standing because they too could not trace their stock
back to the public offerings.12 The court dismissed all of these
claims without prejudice. The court then dismissed Beebe’s claim
as moot because PCOrder had offered Beebe a settlement equal to his
full recovery under the statute. Having disposed of the suits, the
district court denied a motion to intervene by three individuals
(“Intervenors”)13 and entered final judgment in favor of PCOrder.
Appellants14 challenge the district court’s rulings regarding
standing and the motion to intervene. The denial of class
certification is not before us.
10
Krim v. pcOrder.com Inc., No. 03-00001 (5th Cir. Mar. 18, 2003) (order
denying petition for leave to appeal under FED. R. CIV. P. 23(f)).
11
Krim v. pcOrder.com, Inc., No. A-00-CA-776-SS, 2003 WL 21076787 (W.D.
Tex. May 5, 2003) (order dismissing for lack of subject matter jurisdiction and
denying intervention).
12
PCOrder’s motion to dismiss for lack of standing was unopposed with
respect to the claims of Pinkowitz and Krim. Id. at *2 n.1. Jean Burke
purchased 200 shares at the end of June 1999 around the same time that her
husband, Dr. Gene Burke, made his initial purchases.
13
The Intervenors were Dawn Rusing-Bell, Kishore Mehta, and Dierdre
Humphrey.
14
Appellants include Beebe, Dr. Burke, Mrs. Burke, Petrick and the
Intervenors. No argument is advanced on appeal on behalf of either Krim or
Pinkowitz.
7
II
In general, we review a dismissal for lack of subject matter
jurisdiction pursuant to Rule 12(b)(1) de novo.15 “A case is
properly dismissed for lack of subject matter jurisdiction when the
court lacks the statutory or constitutional power to adjudicate the
case.”16 In considering a challenge to subject matter jurisdiction,
the district court is “free to weigh the evidence and resolve
factual disputes in order to satisfy itself that it has the power
to hear the case.”17 We review the district court’s jurisdictional
findings of fact for clear error.18 The denial of a motion to
15
John Corp. v. City of Houston, 214 F.3d 573, 576 (5th Cir. 2000);
Robinson v. TCI/US W. Communications Inc., 117 F.3d 900, 904 (5th Cir. 1997).
We note that the motion before the district court was styled as a “Motion
to Dismiss for Lack of Subject Matter Jurisdiction, or Alternatively, for Summary
Judgment,” but the district court chose to dispose of it as the former. Neither
party has objected on appeal to that choice. In Montez v. Department of Navy we
noted:
[W]here issues of fact are central both to subject
matter jurisdiction and the claim on the merits, we have
held that the trial court must assume jurisdiction and
proceed to the merits. In circumstances where ‘the
defendant’s challenge to the court’s jurisdiction is
also a challenge to the existence of a federal cause of
action, the proper course of action for the district
court . . . is to find that jurisdiction exists and deal
with the objection as a direct attack on the merits of
the plaintiff’s case’ under either Rule 12(b)(6) or Rule
56.
392 F.3d 147, 150 (5th Cir. 2004) (quoting Williamson v. Tucker, 645 F.2d 404,
415 (5th Cir. 1981)).
16
Home Builders Ass’n of Miss., Inc. v. City of Madison, 143 F.3d 1006,
1010 (5th Cir. 1998) (quoting Nowak v. Ironworkers Local 6 Pension Fund, 81 F.3d
1182, 1187 (2d Cir. 1996)) (internal quotation marks omitted).
17
Montez, 392 F.3d at 149 (citing Land v. Dollar, 330 U.S. 731, 735 & n.4
(1947)); see Robinson, 117 F.3d at 904 (“A court may base its disposition of a
motion to dismiss for lack of subject matter jurisdiction on (1) the complaint
alone; (2) the complaint supplemented by undisputed facts; or (3) the complaint
supplemented by undisputed facts plus the court’s resolution of disputed
facts.”).
18
Robinson, 117 F.3d at 904; see also Kelly v. Syria Shell Petroleum Dev.
B.V., 213 F.3d 841, 845 (5th Cir. 2000).
8
intervene as of right is reviewed de novo.19 The denial of a
permissive motion to intervene is reviewed for abuse of
discretion.20
III
A
Appellants argue that Dr. Burke, Mrs. Burke, and Petrick can
establish Section 11 standing by proffering nothing more than
statistics indicating a high mathematical probability, based on the
number of shares purchased by each individual and the number of PO
shares in the market, that at least some of their shares were
issued pursuant to the challenged registration statement. We
disagree.21
1
We turn first to the language of the statute.22 In general,
the Securities Act of 1933 (“Securities Act”)23 “is concerned with
19
Doe v. Duncanville Indep. Sch. Dist., 994 F.2d 160, 167 (5th Cir. 1993).
20
Bush v. Viterna, 740 F.2d 350, 359 (5th Cir. 1984).
21
Appellants’ related argument that the district court applied an
inappropriately high burden of proof to the standing issue misses the mark.
Appellants correctly point out that the correct burden of proof is a
preponderance of the evidence. See Lujan v. Defenders of Wildlife, 504 U.S. 555,
560-61 (1992) (plaintiff’s burden of proof on standing issue is same as for other
elements of the claim); Herman & MacLean v. Huddleston, 459 U.S. 375, 390 (1983)
(burden of proof in securities cases, in absence of contrary congressional
expression, is preponderance of the evidence). While the district court did not
make explicit the standard that it was applying, it is clear that it found
Appellants could not, based solely on general mathematical probabilities, and in
light of admissions about the nature of securities markets, demonstrate the
ability to satisfy the tracing requirement under any of the proffered standards.
22
See, e.g., Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 756
(1975) (Powell, J., concurring).
23
15 U.S.C. § 77a et seq.
9
the initial distribution of securities.”24 Section 11 of the
Securities Act, imposing civil liability for public offering of
securities pursuant to a false registration statement, permits “any
person acquiring such security” to sue.25 While Section 11’s
liability provisions are expansive--creating “virtually absolute”
liability for corporate issuers for even innocent material
misstatements26--its standing provisions limit putative plaintiffs
to the “narrow class of persons” consisting of “those who purchase
securities that are the direct subject of the prospectus and
registration statement.”27
In Rosenzweig v. Azurix Corp., we recently held that
aftermarket purchasers do not inevitably lack standing.28 The
24
Rosenzweig, 332 F.3d at 861.
25
15 U.S.C. § 77k(a). Section 11 provides, in relevant part:
In case any part of the registration statement, when
such part became effective, contained an untrue
statement of a material fact or omitted to state a
material fact required to be stated therein or necessary
to make the statements therein not misleading, any
person acquiring such security (unless it is proved that
at the time of such acquisition he knew of such untruth
or omission) may, either at law or in equity, in any
court of competent jurisdiction, sue [various
individuals].
Id. (emphasis added).
26
Herman & MacLean, 459 U.S. at 382 (“If a plaintiff purchased a security
issued pursuant to a registration statement, he need only show a material
misstatement or omission to establish his prima facie case. Liability against
the issuer of a security is virtually absolute, even for innocent misstatements.”
(footnote omitted)); Lone Star Ladies Inv. Club v. Schlotzsky’s Inc., 238 F.3d
363, 369 (5th Cir. 2001).
27
Fischman v. Raytheon Mfg. Co., 188 F.2d 783, 786-87 (2d Cir. 1951),
quoted in Barnes v. Osofsky, 373 F.2d 269, 273 (2d Cir. 1967).
28
332 F.3d at 872; accord DeMaria v. Andersen, 318 F.3d 170, 175-78 (2d
Cir. 2003); Lee v. Ernst & Young, LLP, 294 F.3d 969, 974-78 (8th Cir. 2002);
Joseph v. Wiles, 223 F.3d 1155, 1158-61 (10th Cir. 2000); Hertzberg v. Dignity
Partners, Inc., 191 F.3d 1076, 1079-82 (9th Cir. 1999).
10
district court here foreshadowed this in holding that Section 11’s
“language suggests a much broader class of potential plaintiffs
than those who literally purchased their shares in the challenged
offering.”29 Indeed, the plain language of the statute confers
standing on “any person acquiring such security,”30 and there is no
reason to categorically exclude aftermarket purchasers, “‘so long
as the security was indeed issued under that registration statement
and not another.’”31 As such, aftermarket purchasers seeking
standing must demonstrate the ability to “trace” their shares to
the faulty registration.32 As one court explained:
[T]o be able to take advantage of the lower
burden of proof and almost strict liability
available under § 11, a plaintiff must meet
higher procedural standards. The most
significant of the procedural standards is the
requirement that a plaintiff be able to trace
the security for which damages are claimed to
the specific registration statement at issue.33
In Rosenzweig, we further held that this traceability
requirement is satisfied, as a matter of logic, when stock has only
entered the market via a single offering.34 We did not speculate
29
Krim, 210 F.R.D. at 585.
30
15 U.S.C. § 77k(a).
31
DeMaria, 318 F.3d at 176 (quoting Lee, 294 F.3d at 976-77).
32
Rosenzweig, 332 F.3d at 873.
33
Harden v. Raffensperger, Hughes & Co., 933 F. Supp. 763, 766 (S.D. Ind.
1996) (citing Kirkwood, 590 F. Supp. at 1378).
34
Rosenzweig, 332 F.3d at 873 (“[B]ecause there was only one offering of
Azurix stock, all the plaintiffs’ stock is traceable to the challenged
registration statement.”); accord Hertzberg, 191 F.3d at 1080 (finding standing
for aftermarket purchaser because “the only Dignity stock ever sold to the public
was pursuant to the allegedly misleading registration statement at issue in this
11
on what other methods might be available to satisfy the
traceability requirement for aftermarket purchases, but we were
careful to note the Supreme Court’s concern “that the Securities
Act remain anchored to its original purpose of regulating only
public offerings.”35
Appellants, as aftermarket purchasers, assert that they can
also demonstrate standing by showing a very high probability that
they each have at least one PO share. Appellants argue that their
statistical determinations, being over 50%, demonstrate by a
preponderance of the evidence, that it is “more likely than not,”
that their shares are traceable to the public offerings in
question.
We are persuaded that accepting such “statistical tracing”
would impermissibly expand the statute’s standing requirement.
Because any share of pcOrder.com stock chosen at random in the
aftermarket has at least a 90% chance of being tainted, its holder,
according to Appellants’ view, would have Section 11 standing.36
case”); Joseph, 223 F.3d at 1160 (“[B]ecause [the defendant] made only one
debenture offering, the debentures [the plaintiff] purchased are directly
traceable to the May offering and registration statement.”).
In Hertzberg v. Dignity Partners, Inc., the Ninth Circuit noted that “[i]f
there is a mixture of pre-registration stock and stock sold under the misleading
registration statement, a plaintiff must either show that he purchased his stock
in the initial offering or trace his later-purchased stock back to the initial
offering” but that “it might present a problem of proof in a case in which stock
was issued under more than one registration statement.” 191 F.3d at 1080 & n.4.
35
332 F.3d at 873 (citing Gustafson v. Alloyd Co., 513 U.S. 561 (1995)).
36
Indeed, under Appellants’ view, in any case where more than 50% of the
available shares are issued pursuant to an allegedly false registration
statement, all shareholders would have standing. Furthermore, even when the PO%
is less than that, applying the “coin flip” methodology, see supra note 6, it
would take relatively few shares to confer standing. For example, even if only
30% of the available shares are PO, or “tainted,” shares, two shares will suffice
12
In other words, every aftermarket purchaser would have standing for
every share, despite the language of Section 11, limiting suit to
“any person acquiring such security.”37 As the district court
found, it is “likely that any street name shareholder can make a
similar claim with regard to one share.”38 This cannot be squared
with the statutory language--that is, with what Congress intended.
We decline the invitation to reach further than the statute.
The fallacy of Appellants position is demonstrated with the
following analogy. Taking a United States resident at random,
there is a 99.83% chance that she will be from somewhere other than
Wyoming.39 Does this high statistical likelihood alone, assuming
for whatever reason there is no other information available, mean
that she can avail herself of diversity jurisdiction in a suit
against a Wyoming resident? Surely not.40
to confer standing because there would be a 51% chance that at least one of the
two shares is a PO share, i.e. 1 - (1 - 0.30)2 = 51%. (Put another way, the
chance that both shares will be “clean” is (0.70)2, or 49%. Therefore, the
likelihood of this not being the case--i.e. that at least one share is tainted--
is 51%.) When PO shares are 10% of the market, still only 7 shares are needed:
1 - (1 - 0.10)7 = 52%. Even when PO shares are only 2% of the pool, 35 shares
would confer standing: 1 - (1 - 0.02)35 = 51%.
37
15 U.S.C. § 77k(a) (emphasis added).
38
Krim v. PcOrder.com Inc., 212 F.R.D. 329, 332 n.2 (W.D. Tex. 2002)
(order denying motion for reconsideration of refusal to certify class).
39
U.S. CENSUS BUREAU, U.S. DEP’T OF COMMERCE, STATISTICAL ABSTRACT OF THE UNITED STATES:
2004-2005, at 23 tbl.20 (124th ed. 2004), available at
http://www.census.gov/prod/www/statistical-abstract-04.html (last visited Mar.
1, 2005).
40
This is not unlike the well-known blue bus hypothetical to which
Appellants refer in their Reply Brief. One commentator offers the following
account of this hypothetical:
While driving late at night on a dark, two-lane road, a
person confronts an oncoming bus speeding down the
13
In limiting those who can sue to “any person acquiring such
security,” Congress specifically conferred standing on a subset of
security owners (unless of course, as in Rosenzweig, all shares in
the market are PO shares). To allow Appellants to satisfy the
tracing requirement for aftermarket standing in this case with the
proffered statistical methodology would contravene the language and
intent of Section 11.
center line of the road in the opposite direction. In
the glare of the headlights, the person sees that the
vehicle is a bus, but he cannot otherwise identify it.
He swerves to avoid a collision, and his car hits a
tree. The bus speeds past without stopping. The
injured person later sues the Blue Bus Company. He
proves, in addition to the facts stated above, that the
Blue Bus Company owns and operates 80% of the buses that
run on the road where the accident occurred. Can he
win?
In this case and others like it, the plaintiff
will lose; in fact, the case is unlikely even to reach
the jury. Although the defendant probably caused the
plaintiff’s injury . . . [t]he factfinder can only
conclude from the plaintiff’s evidence that there was an
80% chance that he was injured by the Blue Bus Company
and a 20% chance that he was not. . . . [T]he factfinder
cannot, and the public knows it cannot, make anything
other than a bet on the evidence. Because the judicial
system strives to project an acceptable account about
what happened, then, the plaintiff’s evidence is
insufficient, notwithstanding the high probability of
its accuracy.
Charles Nesson, The Evidence or the Event? On Judicial Proof and the
Acceptability of Verdicts, 98 HARV. L. REV. 1357, 1378-79 (1985) (footnotes
omitted); see also Laurence H. Tribe, Trial by Mathematics: Precision and Ritual
in the Legal Process, 84 HARV. L. REV. 1329, 1349 (1971) (“[E]ven assuming a
[preponderance of the evidence] standard of proof . . ., the plaintiff does not
discharge that burden by showing simply that four-fifths, or indeed ninety-nine
percent, of all blue buses belong to the defendant.”).
This hypothetical is based on Smith v. Rapid Transit, Inc., 58 N.E.2d 754
(Mass. 1945) (affirming directed verdict for defendant bus company). In Smith,
the court further noted that “‘the fact that colored automobiles made in the
current year outnumber black ones would not warrant a finding that an undescribed
automobile of the current year is colored and not black, nor would the fact that
only a minority of men die of cancer warrant a finding that a particular man did
not die of cancer.’” Id. at 755 (quoting Sargent v. Mass. Accident Co., 29 N.E.2d
825, 827 (Mass. 1940)); cf. Howard v. Wal-Mart Stores, Inc., 160 F.3d 358, 359-60
(7th Cir. 1998) (Posner, C.J.).
14
2
Appellants urge this Court to not hew the statutory line,
contending that to do so, in light of current market conditions,
effectively precludes recovery under Section 11; that there is no
reason to “express a preference for” the interests of defendants
over plaintiffs. Appellants point out that, given the fungible
nature of stocks within a street name certificate, it is virtually
impossible to differentiate PO shares from non-PO shares.
However, as we have explained, Section 11 is available for
anyone who purchased directly in the offering and any aftermarket
purchasers who can demonstrate that their shares are traceable to
the registration statement in question--e.g. when, as with Beebe,
there had only been one offering at the time of purchase.41 When
Congress enacted the Securities Act of 1933 it was not confronted
with the widespread practice of holding stock in street name that
Appellants describe as an impediment, absent our acceptance of
statistical tracing, to invoking Section 11.42 That present market
41
There might well be other acceptable methods of aftermarket tracing even
where non-PO stock has entered the market. For example, if a putative plaintiff
possesses more shares than the number of non-PO shares on the market, our
reasoning in Rosenzweig suggests that she must have standing for at least some
of the shares. If, for example, there are 100 non-PO shares and 900 PO shares,
a plaintiff with 101 shares would seem to have at least 1 PO share. In any case,
because Appellants have not suggested that these conditions apply here, we need
not resolve this issue. Nor need we consider at this time what effect, if any,
the practice of “short selling” would have in such a situation.
42
See J. Robert Brown, The Shareholder Communication Rules and the
Securities and Exchange Commission: An Exercise in Regulatory Utility or
Futility?, 13 J. CORP. L. 683, 693 (1988) (noting relatively infrequent use of
street name and nominee accounts in 1930s) (citing LOUIS LOSS, SECURITIES REGULATION
42 n.226 (1951)); see also Silber v. Mabon, 957 F.2d 697, 700 (9th Cir. 1992)
(“The widespread practice of holding securities in street names grew out of a
perceived ‘paperwork crisis’ in the securities industry in the 1960s. Using
15
realities, given the fungibility of stock held in street name, may
render Section 11 ineffective as a practical matter in some
aftermarket scenarios is an issue properly addressed by Congress.
It is not within our purview to rewrite the statute to take account
of changed conditions. In the words of one court, Appellants’
arguments may “have the sound ring of economic reality but
unfortunately they merely point up the problems involved in the
present scheme of statutory regulation.”43
It is, therefore, perhaps not surprising that we failed to
locate any court, nor did Appellants point to any, that found
Section 11 standing based solely on the statistical tracing theory
espoused today. Given that the statute has been in existence for
over 70 years and such elementary statistical calculations have
been around for centuries, it is difficult to conclude that this is
a coincidence. We note that a handful of lower courts have
rebuffed similar attempts by plaintiffs.44 In one case, Kirkwood
v. Taylor, the district court--later summarily affirmed by the
Eighth Circuit--rejected the “fungible mass” method whereby every
purchaser is deemed to own a pro rata portion of PO shares for the
street names facilitated the prompt handling of a huge volume of transactions on
the various exchanges in the buying and selling of securities by investors and
speculators.” (internal quotation marks and citation omitted)).
43
Colonial Realty Corp. v. Brunswick Corp., 257 F. Supp. 875, 881 (S.D.N.Y.
1966), cited approvingly, Barnes, 373 F.2d at 273.
44
See, e.g., In re Elscint, Ltd. Sec. Litig., 674 F. Supp. 374 (D. Mass.
1987); Abbey v. Computer Memories, Inc., 634 F. Supp. 870 (N.D. Cal. 1986);
Kirkwood, 590 F. Supp. at 1378-83 (discussing various tracing techniques and
rejecting all but the “direct trace” method); see also In re Quarterdeck Office
Sys., Inc. Sec. Litig., No. CV 92-3970, 1993 WL 623310 (C.D. Cal. Sept. 30,
1993).
16
purpose of determining Section 11 standing.45 Because “all persons
who held stock in street name on and after the offering date could
claim a proportional interest in the shares,” the court held that
“the logical extension of plaintiffs’ fungible mass theory would
. . . effectively circumvent the tracing requirement.”46 Similar
concerns persuade us to reject today’s attempt at statistical
tracing.
In Barnes v. Osofsky,47 the Second Circuit confronted an
intermingled stock pool not unlike the one we face today. In that
case, two individuals challenged the settlement of a class action
alleging Section 11 violations in a secondary public offering. The
challengers, who purchased stock after the SPO, were unable to
trace a portion of their shares to the SPO as opposed to the
preexisting shares on the market. They objected to a provision of
the settlement “limiting the benefits of the settlement to persons
who could establish that they purchased securities issued” in the
SPO.48 The court was not deterred by the reality that this
“eliminated those who purchased after the issuance of the allegedly
incomplete prospectus but could not so trace their purchases,”
because Section 11 “extends only to purchases of the newly
45
590 F. Supp. 1375, 1381 (D. Minn. 1984), aff’d 760 F.2d 272 (8th Cir.
1985) (table).
46
Id. at 1380-81.
47
373 F.2d 269 (2d Cir. 1967) (Friendly, J.).
48
Id. at 271.
17
registered shares.”49 While not addressing the question before us
today, Barnes is nonetheless instructive. Plaintiffs in that case
urged a broad reading of Section 11 to cover anyone purchasing
stock after the SPO--whether or not it was traceable to the SPO.
Not unlike the concerns expressed by Appellants in the instant
case, the plaintiffs in Barnes argued as follows:
[O]nce it is agreed that § 11 is not limited
to the original purchasers, to read that
section as applying only to purchasers who can
trace the lineage of their shares to the new
offering makes the result turn on mere
accident since most trading is done through
brokers who neither know nor care whether they
are getting [tainted] or [clean] shares. . . .
[I]t is often impossible to determine whether
previously traded shares are [clean] or
[tainted], and that tracing is further
complicated when stock is held in margin
accounts in street names since many brokerage
houses do not identify specific shares with
particular accounts but instead treat the
account as having an undivided interest in the
house’s position.50
The court rejected these arguments and rejected the
plaintiffs’ broad reading of Section 11’s standing requirement as
“inconsistent with the over-all statutory scheme” and “contrary to
the legislative history.”51 The same is true of Appellants’ view
49
Id.
50
Id. at 271-72 (emphasis added) (footnote omitted).
51
Id. at 272. Judge Friendly went on to note:
Without depreciating the force of appellants’ criticisms
that this construction gives § 11 a rather accidental
impact as between one open-market purchaser of a stock
already being traded and another, we are unpersuaded
that, by departing from the more natural meaning of the
words, a court could come up with anything better. What
appellants’ arguments does suggest is that the time may
have come for Congress to reexamine these two remarkable
18
today.
3
Appellants’ reliance upon the Fourth Circuit’s opinion in
Friends of the Earth v. Gaston52 is misplaced. Rather, this case
offers support to PCOrder. In Gaston, the Clean Water Act53
specifically provided standing for persons “having an interest
which is or may be adversely affected.”54 This language, chosen by
Congress, “confers standing on a ‘broad category of potential
plaintiffs’ who ‘can claim some sort of injury,’ be it actual or
threatened, economic or noneconomic.”55 In fact, “Congress has
indicated that this provision confers standing to enforce the Clean
Water Act to the full extent allowed by the Constitution.”56 As
such, Gaston illustrates Congress’s ability to provide for standing
based on risk, confined only by the strictures of Article III:
While Article III sets the minimum
pioneering statutes in the light of thirty years’
experience . . . .
Id. at 273.
52
204 F.3d 149 (4th Cir. 2000) (en banc).
53
33 U.S.C. § 1251 et seq.
54
33 U.S.C. § 1365(g) (emphasis added).
55
Gaston, 204 F.3d at 155 (quoting Middlesex County Sewerage Auth. v.
Nat’l Sea Clammers Ass’n, 453 U.S. 1, 16-17 (1981)). In another CWA case, we
held that “the Constitution does not require Sierra Club to produce an affiant
who claims that Cedar Point’s discharge in particular injured him in some way.”
Sierra Club, Lone Star Chapter v. Cedar Point Oil Co., 73 F.3d 546, 558 (5th Cir.
1996) (emphases added). Indeed, “[t]he Supreme Court has expressly held that a
‘threatened injury’ will satisfy the ‘injury in fact’ requirement for
[constitutional] standing.” Id. at 556 (quoting Valley Forge Christian Coll. v.
Ams. United for Separation of Church & State, Inc., 454 U.S. 464, 472 (1982)).
56
Gaston, 204 F.3d at 152.
19
requirements for standing, Congress is
entitled to impose more exacting standing
requirements for the vindication of federal
statutory rights if it wishes. Here the
legislature chose to go to the full extent of
Article III in conferring standing on any
person with “an interest which is or may be
adversely affected.”57
Here, by contrast, Congress conferred standing on those who
actually purchased the tainted stock, not on the whole class of
those who possibly purchased tainted shares--or, to put it another
way, are at risk of having purchased tainted shares. Unlike the
standing conferred by Congress in the Clean Water Act, Appellants
here cannot meet the statutory standing requirement of Section 11
merely by showing that they jumped into a potentially polluted
“pool” of stock.58
4
Appellants are surely correct in pointing out that, at some
level, all evidence is “probabilistic.”59 As we have explained,
however, this does not answer the question before us today. In
concluding that Appellants’ attempt to “statistically trace” is
57
Id. at 162 (quoting 33 U.S.C. § 1365(g)).
58
Cf. In re Ames Dep’t Stores Inc. Stock Litig., 991 F.2d 953, 964 (2d
Cir. 1993) (“[I]t is not a bar to a 10b-5 action that the false and misleading
statements in a Registration Statement are pertaining to an issue of a security
. . . which is not the security purchased.”).
59
See, e.g., Victor v. Nebraska, 511 U.S. 1, 14 (1994) (“The beyond a
reasonable doubt standard is itself probabilistic.”); Riordan v. Kempiners, 831
F.2d 690, 698 (7th Cir. 1987) (Posner, J.) (“All evidence is probabilistic--
statistical evidence merely explicitly so.”); see also Richard A. Posner, An
Economic Approach to the Law of Evidence, 51 STAN. L. REV. 1477, 1508 (1999) (“It
is now generally recognized, even by the judiciary, that since all evidence is
probabilistic--there are no metaphysical certainties--evidence should not be
excluded merely because its accuracy can be expressed in explicitly probabilistic
terms . . . .”).
20
incompatible with the standing requirement of Section 11, we cast
no shadow on the use of statistical evidence in general. We
recognize, for example, the widely accepted use of DNA evidence in
criminal matters--even in capital murder trials--where proof must
be beyond a reasonable doubt.60 While both are rooted in
statistical calculations, at least two distinctions between DNA
evidence and the statistics presented by Appellants come to mind.
First, in most trials, DNA evidence does not stand alone.61 Here,
Appellants have relied exclusively on a presentation of background
statistics. Second, in any case, DNA evidence is more
particularistic than the statistics here. DNA analysis seeks to
establish a match between the DNA of a particular individual (e.g.
a suspect) and a “mystery” sample (e.g. from a crime scene),
essentially by quantifying and narrowing the universe of possible
sources of the DNA.62 In contrast, Appellants’ evidence merely
60
See, e.g., Prible v. State, --- S.W.3d ---, No. AP-74487, 2005 WL 156555
(Tex. Crim. App. Jan. 26, 2005) (affirming conviction in capital murder case,
rejecting argument that evidence was insufficient, where evidence included DNA
and several other factors).
61
See, e.g., People v. Soto, 981 P.2d 958, 965 (Cal. 1999) (“[The]
probability that the suspect was indeed the source of the sample . . . will
usually depend, not on the DNA findings alone, but on a combination of those
findings together with other, non-DNA incriminating evidence.”).
62
See 3 DAVID L. FAIGMAN ET AL., MODERN SCIENTIFIC EVIDENCE: THE LAW AND SCIENCE OF
EXPERT TESTIMONY § 24-9.2 (2d ed. 2002) (“DNA typing is capable of exceedingly high
discrimination, and in favorable circumstances it can be shown that only one
person in several billion could have been the source of the evidence
bloodstain.”); see also Commonwealth v. Gaynor, 820 N.E.2d 233, 240 (Mass. 2005)
(noting that “one in 64 quadrillion (64 x 1015) African-Americans would be
expected to have the same DNA profile as the sperm fraction”); Rayford v. State,
125 S.W.3d 521, 526 (Tex. Crim. App. 2003) (“The DNA expert testified that the
probability of the DNA belonging to someone other than Hall was one in 116
billion.”); cf. Miller v. Albright, 523 U.S. 420, 484-85 (1998) (Breyer, J.,
dissenting) (citing E. Donald Shapiro et al., The DNA Paternity Test: Legislating
the Future Paternity Action, 7 J.L. & HEALTH 1, 29 (1992-1993), for the
21
demonstrates the probability that anyone with x number of shares
will possess some tainted shares. It says nothing about the shares
that one particular individual actually owns. The more
particularized nature of DNA is further evident from the fact that
“a nonmatch between any band of the suspect’s DNA and the
corresponding band of the questioned sample conclusively eliminates
the suspect as the source of that sample.”63 There is no such
analog in the general statistics before us today.
Unquestionably, principles of probability are powerful tools,
when deployed in appropriate tasks. Unquestionably, the statistics
in this case indicate a high probability that a person purchasing
a given number of shares will obtain at least one tainted share.
However, these general statistics say nothing about the shares that
a specific person actually owns and have no ability to separate
those shares upon which standing can be based from those for which
standing is improper. The task before the district court was to
determine, by a preponderance of the evidence, whether and in what
amount a plaintiff’s shares are tainted, not whether the same
number of shares drawn at random would likely include at least one
tainted share. Understood in this light, statistical tracing is
not up to the task at hand.
5
In sum, aftermarket purchasers seeking Section 11 standing
proposition that “current testing methods can determine probability of paternity
to 99.999999% accuracy”).
63
Soto, 981 P.2d at 965.
22
must demonstrate that their shares are traceable to the challenged
registration statement. We are not persuaded that the statistical
tracing method advanced today is sufficient to satisfy this
traceability requirement.
B
Appellants argue that the district court erred in denying the
motion to intervene. We disagree.
As a preliminary matter, we note that this is not a case where
intervention is sought for the purpose of appealing the denial of
class certification.64 Indeed, Appellants have chosen in this
appeal not to challenge the class certification denial.65 Thus, the
“prerequisite of an intervention” that there be “an existing suit
within the Court’s jurisdiction” depends here on the individual
claims.66 That none of the individual claims remained viable on
February 14, 2003, when the motion to intervene was filed, disposes
64
Cf. Deposit Guar. Nat’l Bank v. Roper, 445 U.S. 326, 332 n.5 (1980)
(noting that the district court may have “a responsibility, prior to approval of
a settlement and . . . dismissal of the class action, to provide an opportunity
for intervention by a member of the putative class for the purpose of appealing
the denial of class certification” (emphasis added)); Nichols v. Mobile Bd. of
Realtors, Inc., 675 F.2d 671, 675 (5th Cir. 1982) (permitting putative class
members to intervene “solely for the purpose of appealing the district court’s
decertification of the class action” even after settlement of named plaintiffs’
claims); see also United Airlines, Inc. v. McDonald, 432 U.S. 385, 392 (1977).
65
Cf. Roper, 445 U.S. at 331-40 (1980) (holding that plaintiffs can appeal
denial of class certification despite a tender to named plaintiffs in a class
action of the amounts claimed in their individual capacities, followed by the
entry of judgment in their favor on the basis of that tender, over their
objection); United States Parole Comm’n v. Geraghty, 445 U.S. 388, 404 (1980)
(where denial of class certification is challenged on appeal, “an action brought
on behalf of a class does not become moot upon expiration of the named
plaintiff’s substantive claim, even though class certification has been denied”).
66
Non Commissioned Officers Ass’n of the United States v. Army Times
Publ’g Co., 637 F.2d 372, 373 (5th Cir. 1981).
23
of the attempt at intervention.
As we have explained, by October 21, 2002, the district court
had correctly made clear that only Beebe had standing.
Furthermore, the district court held that, as of January 15, 2003,
Beebe’s individual claims were rendered moot because PCOrder
offered Beebe a settlement equal to the statutory limit on his
damages.67 Appellants do not dispute that a full settlement offer,
even if refused, would dispose of Beebe’s individual claims.68
Instead, Appellants contend that Beebe’s claims were not fully
satisfied because the involuntary settlement imposed by the
district court did not include prejudgment interest. The statute,
however, does not require prejudgment interest, and such an award
of interest is up to the district court’s discretion.69 The
district court concluded that it would deny any request from Beebe
for prejudgment interest because the delay in the payment of his
award was due to his “meritless motion for class certification.”70
We are not persuaded that the district court abused its discretion
in denying prejudgment interest. Therefore, as we are not faced on
67
See Krim, 2003 WL 21076787, at *3 (citing 15 U.S.C. § 77k(e)).
68
See Zeidman v. J. Ray McDermott & Co., 651 F.2d 1030, 1045 (5th Cir.
1981) (“[A] suit brought as a class action must as a general rule be dismissed
for mootness when the personal claims of the named plaintiffs are satisfied and
no class has properly been certified.”). This, as the district court
acknowledged, does not foreclose the right to appeal the denial of class
certification. See Krim, 2003 WL 21076787, at *4 (citing Roper, 445 U.S. at 332-
36).
69
See Whitfield v. Lindemann, 853 F.2d 1298, 1306 (5th Cir. 1988) (“Absent
statutory mandate, the award of prejudgment interest generally is discretionary
with the trial court.”).
70
Krim, 2003 WL 21076787, at *3.
24
appeal with a challenge to the denial of class certification, in
the absence of viable individual claims, we are not persuaded that
the district court erred in denying intervention.71
IV
For the foregoing reasons the judgment of the district court
is AFFIRMED.
71
Appellants’ argument that the defendants’ “maneuver” (i.e. defeating
class certification and then “picking off” the only remaining plaintiff with
standing) deprived absent class members their day in court is without merit. It
was the Appellants who chose not to pursue an appeal of the denial of class
certification. In any case, the district court afforded the plaintiffs the
opportunity to return in the event that they can establish standing and suggested
that Intervenors are free to initiate a suit of their own.
25