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Northern District Of Texas Dismisses Putative Securities Class Action For Failure To Establish Standing
11/05/2024On October 24, 2024, Judge Jane J. Boyle of the United States District Court for the Northern District of Texas dismissed a putative securities class action alleging that a bond issuer (the “Company”) and certain of its directors and officers violated Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the “Securities Act”). In re GWG Holdings, Inc. Sec. Litig., No. 3:22-CV-0410-B (N.D. Tex. Oct. 24, 2024). The Court found that lead plaintiff failed to establish it had statutory standing sufficient to assert claims under Sections 11 and 12—and by extension, also Section 15—of the Securities Act. The Court dismissed the case without prejudice with leave to amend.
The Company’s primary business was purchasing life insurance policies in the secondary market. The Company funded its operations and life insurance purchases through issuing bonds (“L Bonds”) over the years. In or around 2018, to diversify its business, the Company invested in another company that offered other types of investments in illiquid alternative assets, and through a series of transactions, in or around 2019, consolidated that company as its operating subsidiary. At issue in the case are L Bonds that the Company issued in June 2020 (the “2020 L Bonds”). Plaintiff alleged that the registration statement pursuant to which the 2020 L Bonds were issued misrepresented the Company’s financials, including how it accounted for fees and financing receivables from its new subsidiary and financial reporting of goodwill attributable to the subsidiary. The Court rejected each of the claims because lead plaintiff failed to establish it had standing to assert claims under the Securities Act.
First, the Court held that lead plaintiff failed to plead facts establishing standing to assert claims under Section 11. Section 11 confers standing “to the ‘narrow class of persons’ consisting of ‘those who purchase securities that are the direct subject of the prospectus and registration statement,’” and, as held by the U.S. Supreme Court in Slack Technologies, LLC v. Pirani, plaintiffs asserting Section 11 claims must plead that they purchased securities “traceable to the allegedly defective registration statement.” Plaintiffs can generally establish statutory standing if they either (i) purchased securities directly from the issuer or underwriter in the initial offering, or (ii) made an aftermarket purchase and “can trace their shares to the faulty registration.” Here, lead plaintiff failed to allege from whom he purchased his L Bonds, alleging only that he acquired some L Bonds on September 1, 2020, and additional bonds on January 1, 2021. Without more specificity from plaintiff, the Court could not draw a reasonable inference that plaintiff purchased L Bonds that were issued pursuant to the allegedly misleading registration statement rather than earlier L Bond registration statements that were not at issue.
Second, the Court held that lead plaintiff also failed to plead facts demonstrating it had standing to pursue Section 12(a)(2) claims against any of the individual defendants. Section 12 creates civil liability “for any seller who sells a security with a prospectus containing a material misstatement or omission,” and the liability is limited to a “statutory seller”—i.e., “the person who passes title to the buyer” or “the person who successfully solicits the purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities owner.” Defendants argued that plaintiff failed to allege adequately that any of them were statutory sellers. Lead plaintiff alleged that he purchased L Bonds through the offering such that the Company passed title to plaintiff, rather than any individual defendant, and also that the L Bond sales were solicited by “a network of independent broker-dealers.” Defendants also argued that the individual defendants’ involvement in preparing and circulating the prospectus was insufficient to constitute “solicitation.” Rather than rebutting these arguments, plaintiff responded by requesting leave to amend the Section 12 claim. The Court held that plaintiff’s insufficient allegations and failure to respond to the substantive arguments warranted dismissal.
Finally, the Court dismissed plaintiff’s Section 15 claim because plaintiff failed to adequately allege primary violations under either Section 11 or Section 12. The Court, however, noted that the deficiencies in the complaint “d[id] not appear to be incurable,” and dismissed the complaint without prejudice.
