191 F.3d 1076 (9th Cir. 1999), 98-16394, Hertzberg v. Dignity Partners

Docket Nº:98-16394
Citation:191 F.3d 1076
Party Name:HOWARD HERTZBERG; JOHN DEROSA; JEFFREY FEINMAN, on behalf of themselves and others similarly situated, Plaintiffs-Appellants, v. DIGNITY PARTNERS, INC.; BRADLEY N. ROTTER; ALAN B. PERPER; JOHN WARD ROTTER; STEPHEN T. BOW; PAUL A. VOLBERDING, Defendants-Appellees.
Case Date:August 27, 1999
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

Page 1076

191 F.3d 1076 (9th Cir. 1999)

HOWARD HERTZBERG; JOHN DEROSA; JEFFREY FEINMAN, on behalf of themselves and others similarly situated, Plaintiffs-Appellants,



No. 98-16394

United States Court of Appeals, Ninth Circuit

August 27, 1999

Argued and Submitted June 18, 1999

Page 1077

Patrick J. Coughlin and Eric A. Issacson, Milberg Weiss Bershad Hynes & Lerach, San Diego, California; Alison M. Tattersall, San Francisco, California; Nadeem Faruqi, Faruqi & Faruqi, New York, New York; Stephen Rodd, Abbey, Gardy & Squitieri, New York, New York, for the plaintiffs appellants.

Gerald W. Palmer, Jones, Day, Reavis & Pogue, Los Angeles, California, for the defendants-appellees. Mark Pennington, Securities & Exchange Commission, Washington, D.C., for the amicus.

Appeal from the United States District Court for the Northern District of California. Charles A. Legge, District Judge, Presiding, D.C. No. CV-96-04558-CAL.

Before: David R. Thompson and William A. Fletcher, Circuit Judges, and Robert S. Lasnik,1 District Judge Opinion by Judge William A. Fletcher

W. FLETCHER, Circuit Judge:

This case arises out of alleged misstatements and omissions contained in Appellee Dignity Partners, Inc.'s ("Dignity's") registration statement filed with the Securities and Exchange Commission for an initial public offering of Dignity common stock. Dignity was in the business of buying the rights to life insurance proceeds from people with AIDS, paying a lump sum up front and taking over the responsibility for paying the premiums. Shortly after the offering, the fact that AIDS patients were living longer than expected because

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of new AIDS treatments became public knowledge. As a result of the longer lives of the insured, Dignity posted huge losses, and the stock plummeted.

Plaintiffs/appellants Hertzberg, Derosa, and Feinman ("Hertzberg") are investors who purchased Dignity stock on the open market more than 25 days after the initial offering but before the news of the longer life expectancy or large losses became public knowledge. They brought a class action for several violations of the securities laws by Dignity, including violation of Section 11 of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. S 77k ("Section 11"). Hertzberg claims that Dignity knew of the longer life expectancy but failed to disclose it in the registration statement. The district court dismissed the Section 11 causes of action on the ground that, because appellants had not bought their stock in the initial public offering, or within 25 days thereof, they did not have standing to bring the claim. The district court later found that a proposed new class representative, who had bought Dignity stock within 25 days of the initial offering, was barred by the statute of limitations.

We reverse the district court's holding that the original named plaintiffs lacked standing under Section 11. Because of that holding, we do not reach the statute of limitations issue.


On February 14, 1996, Dignity filed a registration statement for an initial public offering of approximately 2.7 million shares of common stock. Hertzberg asserts, on behalf of a class of persons who purchased Dignity stock between February 14, 1996, and July 16, 1996, that the registration statement contained materially false and misleading statements and omitted material facts. He seeks damages under Section 11 as well as under other provisions of the federal securities laws.

Dignity was in the business of making "viatical settlements." It purchased the rights to the proceeds of life insurance policies from individuals with terminal illnesses, and in exchange paid lump sums to the individuals and assumed responsibility for payment of premiums. The amounts Dignity paid to the individuals were based on their estimated life expectancies, and the profits Dignity received depended on the accuracy of those estimates. Nearly all of the individuals from whom Dignity purchased its rights had AIDS.

By 1995, new drugs and treatments for AIDS became available, and many of the individuals with whom Dignity had contracted began to live longer than expected. Hertzberg alleges that, as a consequence, the value of Dignity's business was in jeopardy because it could not collect the life insurance proceeds as rapidly as expected, it had to pay premiums for longer periods than expected, and it could no longer estimate with accuracy the life expectancy of the persons with whom it contracted.

Hertzberg alleges that the owners of this privately held company saw the prospect of their entire investment disappearing and decided to liquidate much of their holding by taking the company public. According to Hertzberg, the financial statements in Dignity's registration statement were misleading because they misrepresented the true worth of the business. Hertzberg alleges that shortly before the offering Dignity adopted the accrual method of accounting, under which Dignity counted the potential proceeds from a particular policy as income as soon as it purchased the rights, rather than when...

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