Disappearing Without a Trace: Sections 11 and 12(a)(2) of the 1933 Securities Act

The judicially created tracing requirement thwarts the remedial sections of the 1933 Securities Act (the "Securities Act") by requiring shareholders to prove the impossible—that their securities were actually issued in the questioned offering. Since 1967, courts addressing this issue have, without question, adopted a requirement for section 11 that plaintiff-shareholders trace their shares to the offering. Recently, courts have expanded it to apply to section 12(a)(2) as well. For any but the first purchases of a share of stock, this requirement has always been virtually impossible to meet.

Courts have also used the 1995 opinion in Gustafson v. Alloyd Co. to eliminate even the possibility of tracing, thereby further eroding shareholders' access to sections 11 and 12(a)(2). Now, many securityholders cannot sue under either section. This Article examines sections 11 and 12(a)(2) and the cases interpreting them. The analysis shows that tracing is almost impossible whenever a company has made more than one offering of securities of a particular type, and as a result, few, if any, shareholders can successfully sue under sections 11 and 12(a)(2) even though the Securities Act arguably provides them with a remedy.

This development of the tracing requirement has the potential to defeat the statute's purpose of promoting full and accurate disclosures in public-offering documents through strong deterrence measures. To resolve the problem, the Article argues that the courts should apply the relaxed rules of causation now employed in the toxic-tort context for indeterminate plaintiffs. Increasingly, courts have allowed these indeterminate plaintiffs to use group-derived statistical evidence to meet their buden ofproof. In the securities context, instead of requiring shareholders to prove the impossible, courts should allow them to sustain their burden by employing the best available evidence and proving that it is more likely than not that their securities were issued in the questioned offering.

In doing so, courts can both limit the statute's reach and fulfill Congress's purpose in adopting it.