Orrick Secures Precedent-Setting Ninth Circuit Victory for Credit Suisse and Morgan Stanley


Orrick’s Securities Litigation Team secured a victory in the Ninth Circuit for clients Credit Suisse and Morgan Stanley in a precedent setting case that has significantly raised the pleading bar in Section 11 cases under the 1933 Securities Act. On January 2, 2013, the Ninth Circuit affirmed the dismissal of a putative class action in which plaintiffs alleged that Century Aluminum, and its underwriters Credit Suisse and Morgan Stanley, issued false and misleading statements in connection with a secondary offering. Century also restated its financial statements in a manner the company claimed was not material because of a lack of any impact on the company’s bottom line. The crux of the court’s decision, however, did not concern the merits but instead dramatically raised the bar for pleading the tracing element in Section 11 cases alleging aftermarket purchases. This decision will likely set in motion a sea change in the Ninth Circuit that will make it virtually impossible in most instances for a plaintiff alleging Section 11 violations based solely on aftermarket purchases to survive beyond the pleading stage.

Specifically, the Ninth Circuit held that the effect of the pleading requirements set forth in the Supreme Court’s Twombly and Iqbal decisions made it no longer sufficient for a plaintiff to make bare-bones allegations that aftermarket shares could be "traced" back to a secondary offering. Instead, the Ninth Circuit held that a plaintiff must plead facts demonstrating that his or her tracing allegations are "plausible on its face."

The Ninth Circuit stated that in order to satisfy the plausibility requirement it is not enough for a plaintiff to plead facts showing that the shares could have come from the secondary offering. Rather, a plaintiff must plead facts that tend to exclude the possibility that the shares came from any offering prior to the secondary offering – which in most instances is a Herculean task. Significantly, the court stated that given these tough new pleading requirements "aftermarket purchasers usually will not be able to trace their shares back to a particular offering."

Defendants in Section 11 cases in the Ninth Circuit will now have a powerful new weapon that will enable most cases alleging only aftermarket purchases to be dismissed at the pleading stage.

The Orrick team was led by San Francisco securities litigation partner Robert Varian and included San Francisco of counsel Stephen Knaster and San Francisco managing associate Lily Becker.