Ninth Circuit Strengthens Pleading Standard In Section 11 Claims: In Re Century Aluminum Co. Securities Litigation

On January 2, 2013, the Ninth Circuit provided additional support for an increasingly vigorous application of the Twombly/Iqbal pleading standard.1 In In re Century Aluminum Co. Securities Litigation,2 the Ninth Circuit applied the Twombly/Iqbal pleading standard to the tracing element of “aftermarket” purchasers in connection with a claim brought under Section 11 of the Securities Exchange Act of 1933.3 The Ninth Circuit's decision marks the first time a circuit court has applied the Twombly/Iqbal standard to the tracing element, significantly heightening the level of factual specificity required in aftermarket purchasers' claims. The decision indicates an increasing willingness to dismiss claims that require a court to draw unreasonable inferences or accept speculative conclusions from allegations in a complaint.

Under Section 11, any person who buys a security issued under a materially false or misleading registration statement may bring a claim against the issuer of that security. A plaintiff has standing to sue provided he or she either (1) purchased shares in the offering made under the misleading registration statement, or (2) purchased shares in the aftermarket that are traceable back to the relevant offering. Century Aluminum involved the latter scenario.

The Century Aluminum plaintiffs alleged that the company's prospectus supplement, issued in connection with a secondary offering of 24.5 million shares, contained false and misleading information in violation of Section 11. The plaintiffs conceded that they had purchased shares in the aftermarket rather than directly in the secondary offering. The complaint did not set forth specific facts showing the securities were traceable to the allegedly misleading registration statement, but rather relied on a general allegation that plaintiffs had “purchased Century Aluminum common stock directly traceable to the Company's Secondary Offering.”4 The trial court dismissed the complaint, finding that the presence of 49 million shares in the market prior to the secondary offering made the plaintiffs' general allegations insufficient as a matter of law. On appeal, the Ninth Circuit affirmed, finding that the Twombly/Iqbal pleading standard required plaintiffs to make factual allegations “tending to exclude . . . the alternative explanation” that the plaintiffs' purchased shares came from the already existing pool.5

On review, the Ninth Circuit began by noting that when a company has issued...