Ninth Circuit Applies Heightened 'Twombly/Iqbal' Pleading Standard To Allegations Of Tracing In A Section 11 Claim

In In re Century Aluminum Co. Securities Litigation, No. 11-15599, 2013 U.S. App. LEXIS 24 (9th Cir. Jan. 2, 2013), the United States Court of Appeals for the Ninth Circuit affirmed the dismissal of a claim for violations of Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k, on the ground that plaintiffs' "tracing" allegations did not meet the pleading standard set forth in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009) (the "Twombly/Iqbal standard"). The Court held that plaintiffs who purchased their shares in the aftermarket must plead facts with "sufficient specificity" to allow the court to draw a "reasonable inference" that their shares can be traced back to those that were issued under the allegedly false and misleading offering materials. This decision marks the first time the Ninth Circuit has applied the heightened Twombly/Iqbal standard to tracing allegations in a Section 11 case.

Plaintiffs' allegations centered on their January 2009 purchase of shares of common stock of Century Aluminum Company ("Century Aluminum"). Prior to January 2009, more than 49 million shares of Century Aluminum common stock were outstanding and trading in the public markets. On January 28, 2009, Century Aluminum issued a prospectus supplement in connection with its secondary offering of another 24.5 million shares of common stock.

Two months later, Century Aluminum restated its cash flows from operating activities. Investors in Century Aluminum shares sued, alleging that the prospectus supplement was "materially false and misleading" in violation of Section 11. Although plaintiffs acknowledged that they purchased their shares in the secondary or "aftermarket," they alleged summarily that the shares they purchased were issued as part of — and thus could be "traced" to — the secondary offering.

The United States District Court for the Northern District of California dismissed plaintiffs' Section 11 claim with prejudice, holding that their "naked allegations" that the shares they purchased were issued in the secondary offering were not sufficient to give them standing to assert a Section 11 claim. In re Century Aluminum Co. Sec. Litig., 2011 U.S. Dist. LEXIS 21406 (N.D. Cal. Mar. 3, 2011). Plaintiffs appealed.

The Ninth Circuit affirmed. The Court observed that, as a matter of settled law, plaintiffs alleging the sale of securities under a materially false or misleading registration statement in...