## Facts

- Summit Medical Systems, Inc. conducted an IPO in August 1995 and filed a registration statement incorporating audited financial statements.
- Ernst & Young LLP served as Summit’s independent auditor and was identified as an expert in the registration statement.
- After trading in the public market, Summit’s stock price later declined below the IPO price.
- In 1997, Summit admitted it had improperly recognized revenue and filed revised financial statements for 1994, 1995, and part of 1996 showing a cumulative revenue shortfall.
- Shareholders who bought Summit stock in the aftermarket (not in the IPO) sued Summit-related defendants and Ernst & Young, alleging material misstatements and omissions in the registration statement and audit opinions in violation of § 11 of the Securities Act of 1933.
- The district court dismissed the § 11 claim against Ernst & Young on the ground that only IPO purchasers had standing, and the aftermarket purchasers appealed.

## Issues

1. Whether aftermarket purchasers have standing to sue under § 11 of the Securities Act of 1933 if they can trace their shares to a registration statement alleged to contain material misstatements or omissions.
2. Whether the district court erred in refusing to appoint a lead plaintiff after the statutory period (raised but not dispositive to the standing ruling).

## Decision

- The Eighth Circuit reversed the dismissal of the § 11 claim against Ernst & Young and remanded.
- The court held that aftermarket purchasers have § 11 standing if they can trace their securities to the allegedly defective registration statement.
- The court did not treat the lead-plaintiff issue as controlling for the disposition of the appeal.

## Legal Principles

- Section 11 authorizes suit by “any person acquiring such security” when a registration statement contains a material misstatement or omission.
- “Such security” refers to securities issued pursuant to the challenged registration statement; standing is not limited to purchasers in the initial distribution.
- Unlike § 12(2), § 11 contains no privity-like purchaser-from-seller limitation, supporting broader standing consistent with the statutory text.
- The tracing requirement limits § 11 claims by requiring a purchaser to show the acquired shares are traceable to the registration statement at issue.
- Section 11’s damages provisions, which reference public offering price and market-price changes, are consistent with claims by purchasers in the secondary market so long as tracing is satisfied.

## Conclusion

The Eighth Circuit held that § 11 standing extends to aftermarket purchasers who can trace their shares to the registration statement alleged to be materially false or misleading, reversing the dismissal of the auditor-focused § 11 claim and remanding for further proceedings.


Lee v. Ernst & Young LLP, 294 F.3d 969 (8th Cir. 2002)