In Kolominsky v. Root, Inc., 2024 WL 1854474 (6th Cir. April 29, 2024), the plaintiffs brought claims under Section 10(b) of the Exchange Act (securities fraud) and Sections 11 and 12(a)(2) of the Securities Act (misstatements in registration statements and offerings) related to alleged misstatements about the company’s purportedly low customer-acquisition cost. The district court dismissed the claims based on the plaintiffs’ failure to adequately plead falsity. On appeal, the Sixth Circuit joined the majority of other circuits on two important issues related to Securities Act claims.
“Sounds in fraud” – Section 11 and 12(a)(2) claims do not have fraud as an element, so generally they are not subject to the heightened pleading standard of Federal Rule of Civil Procedure 9(b). When plaintiffs bring both Section 10(b) and Section 11 and 12(a)(2) claims in the same complaint, however, many courts have found that all of the claims “sound in fraud” and uniformly must be pled with particularity. In Kolominsky, the Sixth Circuit agreed that if the claims are “grounded in one fraudulent course of conduct relying on one set of facts” then Rule 9(b) applies.
“Bespeaks caution doctrine” – The bespeaks caution doctrine addresses situations where optimistic projections are coupled with cautionary language that impacts whether the statements are material or could reasonably have been relied upon by investors. The Private Securities Litigation Reform Act (PSLRA) has a safe harbor for forward-looking statements that applies to Securities Act claims, but there is an exclusion for statements made in connection with initial public offerings. In Kolominsky, the court held that the bespeaks caution doctrine has survived the codification of the PSLRA and joined its “sister circuits that hold when companies such as Root make forward-looking statements contained in a registration statement or in connection with an initial public offering, the Bespeaks Caution doctrine will shield those companies from liability when the forward-looking statements are accompanied by meaningful cautionary language so that a reasonable investor would understand the statements.”
Holding: Motion to dismiss affirmed.
The 10b-5 Daily 