Securities Law & Developments In Class Action Litigation Under Section 12 Of The Securities Act Of 1933

Co-written by Stacy Aronowitz

Schulte Roth & Zabel recently secured a very favorable decision for its client, Canadian Imperial Bank of Commerce ("CIBC"), in a case that should provide an important precedent for other underwriters confronted with class action claims under Section 12 of the Securities Act of 1933. The decision rules that an underwriter can now successfully challenge a class action complaint alleging Section 12 liability in a case in which the named plaintiffs neither purchased from, nor were solicited by, the underwriter.

In Griffin v. PaineWebber, et. al., Civ. No. 99-2292, a holder of certain stock issued by Livent, Inc. ("Livent") brought a Section 12 claim against CIBC, premised on the allegation that CIBC was an underwriter of the offering in which plaintiff purchased shares. The lawsuit was one of a number of suits that arose from the financial collapse of Livent, a Canadian company that produced live theatrical productions. After Livent disclosed that an internal investigation had uncovered accounting irregularities, the value of plaintiff's shares dropped significantly. The plaintiff alleged that he purchased his shares from PaineWebber, one of the other underwriters participating in the offering; the plaintiff did not allege that he purchased any stock from CIBC.

Section 12 imposes liability for the use of a prospectus that contains "an untrue statement of material fact or omits to state a material fact necessary in order to make the statements, in light of the circumstances under which they were made, not misleading." 15 U.S.C. ß 77l (a)(2). CIBC moved to dismiss plaintiff's Section 12(a)(2) claim against it on the ground that the complaint did not allege the required element that CIBC was a "person who offers or sells a security" under the doctrine set forth by the United States Supreme Court in Pinter v. Dahl, 486 U.S. 622 (1988). The Supreme Court, in analyzing Section 12(a)(1) in Pinter, held that a person is a "seller" if it either (1) transferred title to the securities at issue, or (2) actively solicited the sale for the securities with a motivation to serve its own financial interests or those of the securities owner. The Second Circuit has extended the Pinter holding to Section 12(a)(2).

CIBC argued that the plaintiff did not meet the first prong of Pinter with respect to CIBC because he alleged that he purchased the shares in question from PaineWebber, not CIBC. As to the second prong, CIBC argued that...

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