Litigating Section 11's Tracing Requirement: A Practitioner's View of a Powerful Defense
To recover under Section 11 of the Securities Act of 1933, a plaintiff must be able to “trace” his or her shares to an allegedly false or misleading registration statement. When the Securities Act was enacted in 1933, satisfying this requirement was straightforward: an investor who purchased a security in a particular offering would receive an individualized paper certificate showing that the security was traceable to that offering and its registration statement.
But today, most issuers do not use individualized paper certificates; instead, they issue shares in electronic book-entry form, and securities are held in the name of third-party custodians—not in the names of the beneficial owners. These changes have made the tracing requirement much harder to satisfy in many situations, and courts are now grappling with this issue with increasing frequency.
In this article, we discuss how this issue arises at the motion-to-dismiss stage, class certification, summary judgment, and trial, and we summarize how courts have resolved tracing-based defense arguments. We also offer some observations about the best ways to present this issue to a generalist judge and some tips about discovery considerations in a case where a defendant has a potential tracing-based defense. Although tracing is highly technical, it can provide a powerful defense in many situations and should not be overlooked when faced with a Section 11 claim.