Krim v. Pcorder.Com, Inc.
| Decision Date | 01 March 2005 |
| Docket Number | No. 03-50737.,03-50737. |
| Citation | 402 F.3d 489 |
| Parties | 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, v. 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, v. 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, v. 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. |
| Court | U.S. Court of Appeals — Fifth Circuit |
James D. Baskin, III (argued), The Baskin Law Firm, Austin, TX, Joe R. Whatley, Jr., Whatley Drake, Birmingham, AL, for Plaintiffs-Appellants and Appellants.
James Edward Maloney, Baker Botts, Houston, TX, for pcOrder.com, Inc., Ross A. Cooley, Christina C. Jones and James J. Luttenbacher.
Noel M.B. Hensley (argued), P. Nicholas Even, Richard Thaddeus Behrens, Haynes & Boone, Dallas, TX, for Trilogy Software, Inc., Peter J. Barris and Joseph A. Liemandt.
Robert W. Brownlie, Gray, Cary, Ware & Freidenrich, San Diego, CA, Alan D. Albright, Geoffrey Robert Unger, Gray, Cary, Ware & Freidenrich, Austin, TX, for Robert W. Stearns and Linwood A. Lacy, Jr.
Harry M. Reasoner, Karl S. Stern, Gary Ewell, Vinson & Elkins, Houston, TX, for Goldman Sachs & Co., Credit Suisse First Boston and SG Cowen & Co.
Appeal from the United States District Court for the Western District of Texas.
Before HIGGINBOTHAM, DAVIS and GARZA, Circuit Judges.
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 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.
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 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 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 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 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.
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 intervene as of right is reviewed de novo.19 The denial of a permissive motion to intervene is reviewed for abuse of discretion.20
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
We turn first to the language of the statute.22 In general, the Securities Act of 1933 ("Securities Act")23 "is concerned with 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...
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