## Facts

- Aileen, Inc. had over one million shares outstanding; some were already registered and publicly traded, while a large block was held by insiders.
- A registration statement became effective on September 10, 1963 for an offering of 200,000 additional shares at about the then-market price, consisting of newly issued shares and insider-sold shares.
- The prospectus described substantial historical sales growth through the first half of 1963.
- In early October 1963, Aileen publicly disclosed weaker third-quarter performance and lower-than-expected orders for an important spring line.
- Aileen’s stock price declined significantly in the months after the offering.
- Purchasers filed three consolidated class actions in the Southern District of New York under Securities Act § 11, alleging material misstatements and omissions in the registration statement and prospectus, including failure to disclose negative information known before effectiveness.
- A proposed settlement limited recovery to purchasers who could show that the specific shares for which they sought compensation were issued under the 1963 registration statement.
- Two objecting purchasers appealed, arguing the alleged misstatements affected the price of all Aileen shares trading in the market and that tracing specific shares to the offering was impracticable.

## Issues

1. Whether Securities Act § 11 permits recovery by any purchaser whose market price was affected by a misleading registration statement, or only by a purchaser who can show the purchased shares were issued pursuant to that registration statement.
2. Whether the district court properly approved a settlement limiting recovery to purchasers able to trace their shares to the challenged registered offering.

## Decision

- The Second Circuit affirmed the district court’s approval of the settlement.
- The court held that § 11 provides a cause of action only to a person who acquired securities traceable to the specific registration statement alleged to be misleading.
- The court rejected the objectants’ argument that § 11 should extend to all purchasers of the issuer’s stock during the relevant period because the market price of all shares may have been affected.
- The court held that practical tracing difficulties did not justify expanding § 11 beyond its statutory scope.

## Legal Principles

- Under Securities Act § 11, standing is limited to “any person acquiring such security,” meaning securities issued pursuant to the particular registration statement that allegedly contained a material misstatement or omission.
- § 11 does not grant a remedy to purchasers of the issuer’s other, previously outstanding shares merely because the registration statement may have influenced the overall market price.
- Courts may not rewrite § 11 into a general market-based misrepresentation remedy; broader fraud theories must arise, if at all, under different provisions.
- A settlement in a § 11 class action may properly limit recovery to claimants who can demonstrate traceability to the challenged registered offering when that limitation matches the statute’s reach.

## Conclusion

The court held that § 11 liability and recovery are confined to purchasers who can trace their shares to the specific registered offering challenged as misleading, and it therefore upheld a settlement requiring such traceability even though some market purchasers could not meet that requirement.


Barnes v. Osofsky, 373 F.2d 269 (2d Cir. 1967)