Publications

(Article from Securities Law Alert, September/October 2018) 

For more information, please visit the Securities Law Alert Resource Center

On September 26, 2018, the Northern District of Indiana held that plaintiffs adequately alleged securities fraud claims against a medical device company, but dismissed plaintiffs’ Section 12(a)(2) and insider trading claims against the company’s former private equity investors (the “Private Equity Defendants”).[1] Shah v. Zimmer Biomet Holdings, 2018 WL 4637247 (N.D. Ind. 2018) (Simon, J.). The court held plaintiffs did not allege that the Private Equity Defendants were “statutory sellers of any of the securities in question,” as required for liability under Section 12(a)(2) of the Securities Act of 1933. The court also found plaintiffs did not allege that the Private Equity Defendants “actually possessed material non-public information” at the time they made the alleged insider trades.

The court explained that “Section 12 liability attaches only to a person who ‘offers or sells’ a security, and that person is liable only to those persons ‘purchasing such security from him.’” Shah, 2018 WL 4637247 (quoting 15 U.S.C. § 77l(a)(2)). The court further noted that in Pinter v. Dahl, 486 U.S. 622 (1988), the Supreme Court “made the categorically narrow nature of Section 12 liability clear and limited it only to ‘the buyer’s immediate seller.’” Shah, 2018 WL 4637247 (quoting Pinter, 486 U.S. 622).

In Shah, plaintiffs alleged that the Private Equity Defendants sold their shares in the medical device company, but failed to plead that plaintiffs purchased those shares from the Private Equity Defendants. The court found that the offering documents made clear that the Private Equity Defendants “agreed to sell to the underwriters.” Id. (emphasis added). The court held that as a result, “plaintiffs did not purchase their stock directly from the Private Equity Defendants but instead from the underwriters and thus the Private Equity Defendants cannot be held liable under Section 12.” The court also found plaintiffs could not ground their Section 12 claims on the solicitation of sales, because plaintiffs did not allege that any of the Private Equity Defendants “directly communicated with any plaintiff, encouraging them to purchase any [company] stock.”

The court found plaintiffs’ insider trading claims against the private equity defendants equally insufficient because plaintiffs did not allege that the private equity investors “actually possessed material non-public information.” Although plaintiffs alleged that two of the issuer’s directors were “controlled by” certain of the private equity defendants, plaintiffs did not allege that “any information relating to [the] problems” at issue was “in fact shared with the Private Equity Defendants.” The court determined that plaintiffs “alleged nothing more than that the Private Equity Defendants had potential access to insider information.” The court explained that “access to information is not the same as actually possessing the specific information and knowing it.”