Ahead of Their Time: Measuring Damages Pursuant to Section
11(e)(1) of the Securities Act
ABSTRACT
Through the Securities Act of 1933, Congress protects investors from securities fraud by ensuring that persons who purchased securities directly from the securities issuer had complete and accurate information at the time of purchase. Section 11 of the Securities Act accomplishes this purpose by holding issuers civilly liable for registration statements that contain an untrue statement of material fact and those that omit necessary material facts.
Specifically, Section 11(e) states that in a suit alleging that a registration statement contained an untrue statement of material fact or an omission of a necessary material fact, damages are to be measured by “the difference between the amount paid for the security” on the one hand and “(1) the value thereof as of the time such suit was brought, or (2) the price at which such security shall have been disposed of in the market before suit, or (3) the price at which such security shall have been disposed of after suit but before judgment if such damages shall be less than the damages representing the difference between the amount paid for the security . . . and the value thereof as of the time such suit was brought.” Determining the date for measuring damages pursuant to Subsections 2 and 3 is rather straightforward. Subsection 1’s “time such suit was brought” language is similarly straightforward when a single plaintiff files a complaint with Section 11 claims against a defendant. However, the language of Subsection 1 is less straightforward when being applied to a consolidated securities class action where “such suit” for Section 11 damages “was brought” on more than one date, by more than one plaintiff, in more than one complaint.
Courts have not uniformly measured damages pursuant to Section 11(e)(1) in consolidated securities class actions. For example, some courts have measured the damages from the date of the first-filed complaint; other courts have measured the damages from the date of an individual plaintiff’s own first-filed complaint; and still others have measured the damages from the date of the first-filed complaint which contained facts sufficient to plead a Section 11 violation, even though the particular suit only brought claims pursuant to the Securities Exchange Act of 1934 or state law securities statutes rather than the Securities Act.
The core question this article addresses is whether—in the context of a consolidated securities class action—an amended or subsequently filed complaint should relate back to an earlier-filed complaint for purposes of measuring damages pursuant to Section 11(e)(1). The statute does not provide an answer, and Congress has not passed subsequent legislation to clarify. Case law is thin on the issue, providing no definitive answer, and present legal scholarship on point is also lacking. This article provides an analysis of the key considerations related to measuring damages pursuant to Section 11(e)(1) and proposes a uniform framework for how courts should measure such damages.
* J.D., University of Pennsylvania Law School (2019); B.A., Ramapo College of New Jersey (2016).