Can Section 11 Be Saved?: "Tracing" a Path to Its Survival

Last term, a unanimous Supreme Court held in Slack Techs. v Pirani that purchasers of securities must “trace” their shares to the registration statement that contains the alleged misstatement or omission in order to be able to assert a claim under Section 11 of the Securities Act of 1933. Lawyers and law firms on both sides of the case agreed (with differing emotions) that the decision eclipsed Section 11, which had been the federal securities laws’ strongest litigation remedy for investors. We disagree with this conclusion that Section 11 is doomed, but we recognize the danger. Both in an amicus brief we filed with the Court and now in this article, we show how tracing can be performed and thus Section 11 preserved. Despite the views of many that it is impossible to trace the chain of title for commingled securities in order to establish standing under Section 11, we argue that this is a misguided, out-of-date assumption because enhanced data-reporting requirements and modern computing power can realistically solve this problem. With an accessible body of transaction records, it is possible to trace the chain of title for securities, using standard accounting methods like first in-first out (FIFO) or last in-first out (LIFO). This allows us to distinguish those investors who purchased only registered IPO shares from those who purchased both registered and unregistered shares. Of course, that a problem can be solved does not mean that both sides will want to solve it. Thus, we examine some of the objections that will likely be raised. Finally, that a technological solution is possible to the problem of tracing that protects both sides suggests that similar solutions should be pursued across a broader context.