Why One Securities Appeal Deserves the Supreme Court’s Attention

Earlier this year, the US Supreme Court disappointed observers and defendants in securities cases by dismissing—without issuing opinions—two securities law appeals it had previously agreed to hear. While it’s not uncommon for the court to take up two securities cases in a single term, it’s unusual to dismiss both without a substantive ruling.

Now, the court has a chance to correct course. Two new certiorari petitions are pending, each addressing important issues under the federal securities laws: BDO USA, LLP v. N.E. Carpenters Guar. Annuity & Pension Funds and Pirani v. Slack Technologies, LLC. were distributed for the court’s Sept. 29 conference and decisions on whether the court will hear these matters are imminent.

Materiality and Why Context Matters. Of the two pending petitions, the BDO petition presents a stronger case for review and would be most beneficial to defendants who wish to argue that no liability exists for statements or silence on matters that are unimportant to investors—i.e., the “materiality” requirement for securities law claims.

BDO contests the US Court of Appeals for the Second Circuit’s conclusion that an auditor’s representation of adherence to professional standards during a public company audit is per se material, given its perceived importance to investor confidence.

No type of statement should be automatically material under Supreme Court precedent. The court has previously emphasized, and may accept this petition to reiterate, that the materiality inquiry is necessarily contextual, requiring consideration of the “total mix of information” available to shareholders. BDO contends that its compliance statement didn’t alter the total mix of information available to investors since the subsequent completion of additional audit requirements didn’t change its audit opinion.

Any erosion of the materiality standard would be an unwelcome development for defendants and should be foreclosed by prior Supreme Court precedent. Therefore, the court may grant the appeal to reaffirm established standards and deter shareholders from advancing similar claims against defendants who assert compliance with applicable rules and regulations.

The Second Circuit’s heavy caseload of securities matters also weighs in favor of granting the petition in that a nonconforming view could lead to forum shopping.

Additionally, the Supreme Court’s directive that plaintiffs file a response brief, notwithstanding their initial decision to forgo doing so, underscores its potential interest in granting review.

Tracing Trouble: A Second Slack Cert Petition. In 2023, the Supreme Court ruled in the first Slack appeal that “tracing” was required for claims brought under Section 11 of the Securities Act of 1933 based on an allegedly false and misleading registration statement. Tracing requires a shareholder to show that shares bought are registered under the specific registration statement being challenged. The Supreme Court refused to create an exemption from the tracing requirement for Section 11 claims when companies go public using a “direct listing,” which allows for the simultaneous trading of registered and unregistered shares.

The Supreme Court, however, remanded to the US Court of Appeals for the Ninth Circuit the question of whether the text of Section 12(a)(2) of the 1933 Act similarly required tracing. The Ninth Circuit had previously assumed the result reached under Section 11 would necessarily apply to Section 12(a)(2). The Ninth Circuit on remand performed the requested textual analysis and concluded that tracing was required for Section 12(a)(2) and that the plaintiff in Slack had previously conceded he couldn’t trace his shares. Accordingly, it dismissed the plaintiff’s claims with prejudice.

The court is unlikely to accept a second appeal from the Slack case, and this is no loss for defendants. While the court was interested in these issues initially, they’re unlikely to accept a second appeal where the Ninth Circuit executed on the court’s instructions and reached a conclusion on tracing with which the court may agree.

Having already affirmed the tracing requirement for Section 11, the Supreme Court is unlikely to grant certiorari in a second appeal to reverse course on Section 12. Moreover, the plaintiff can’t point to any present disagreement among the circuits on the issue of tracing, further weakening the case for continued review.

Although the fate of these petitions is still unknown, the court is most likely to accept just one, with BDO’s facts positioning it as the stronger contender.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Susan Hurd is partner in the securities litigation practice group at Alston & Bird.

Charlotte Bohn is a senior associate in Alston & Bird’s securities litigation group.

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