Ninth Circuit Follows Frutarom

Previously, I blogged about Mivtachem Insurance v. Furtarom, 54 F.4th 82 (2d Cir. 2022), where the Second Circuit held that false statements about a target company - most of which were included in the acquiring company's S-4 - were not made "in connection with" sales of the acquirer's securities, and therefore, purchasers of the acquirer's stock did not have standing to bring Section 10(b) claims against target company officers.

Inevitably, the same thing came up in a pair of cases about SPACs, where purchasers in the publicly-traded SPAC entity wanted to bring claims based on pre-merger false statements about the target company.  A New York district court, following Frutarom, denied the claims; a California district court rejected the Second Circuit's reasoning (and dismissed the claims on other grounds, namely, that at the time of the false statements it wasn't clear that the target company really was going to be a target company).

Anyway, the California case, which involved the Lucid de-SPAC, was just appealed to the Ninth Circuit and the Ninth Circuit ... followed the Second Circuit's rule.  In Max Royal LLC v. Atieva, it held:

As noted above, Blue Chip limits standing to “purchasers or sellers of the stock in question.” 421 U.S. at 742.  Plaintiffs contend that the “stock in question” is “the security about which Plaintiffs allege injury,” and not necessarily a security of the company that made the alleged misrepresentations. Plaintiffs further contend that the “Blue Chip rule merely checks whether plaintiffs allege injury from the purchase or sale of a security” and that standing is determined based on “whether the security plaintiff purchased is sufficiently connected to the misstatement.” For several reasons, we conclude that Plaintiffs’ construction of standing is inconsistent with Blue Chip. …

Plaintiffs ignore the plain language of Blue Chip and assert that Section 10(b) standing extends to any stockowner who claims that the misstatements of another person or company negatively affected the value of the owner’s stock. Under Plaintiffs’ desired formulation of the standard, hypothetical plaintiffs would need only to have purchased a security—any security—to satisfy the purchaser-seller requirement. But Plaintiffs’ interpretation of the securities laws would vastly expand the boundaries of Section 10(b) standing and contradict the express limiting purpose of the Birnbaum Rule. The Supreme Court has cautioned that Section 10(b) does not “provide a cause of action to the world at large,” and “should not be interpreted to provide a private cause of action against the entire marketplace in which the issuing company operates.” Stoneridge, 552 U.S. at 162 (cleaned up) (quoting Blue Chip, 421 U.S. at 733 n.5)….

We agree with the Second Circuit’s reasoning in Menora and likewise reject Plaintiffs’ “sufficiently connected” test. The Supreme Court adopted a bright-line rule for standing—even at the risk of it being “arbitrary” in some cases—to avoid the type of “endless case-by-case” analysis contemplated by Plaintiffs....

It is undisputed that the securities about which Defendants allegedly made misrepresentations were those of Lucid. Under the Birnbaum Rule, Plaintiffs would need to have purchased or sold Lucid stock to have standing to bring this action under Section 10(b). Here, Plaintiffs did not purchase or sell Lucid stock, as Lucid was a privately held company during the relevant period. Plaintiffs purchased CCIV stock, but their complaint does not allege that anyone made misrepresentations about CCIV stock. Because Plaintiffs did not purchase or sell the securities about which the alleged misrepresentations were made, Plaintiffs lack standing under Section 10(b).

That CCIV later acquired Lucid does not change our analysis.

One interesting point about the Ninth Circuit's reasoning is that the court added, "If Congress wants to treat SPAC acquisitions differently than traditional mergers, it has the authority to do so."

Except the SEC, anyway, did do so - inapplicable to this transaction, but applicable to transactions going forward, the SEC adopted new rules requiring target company officers to sign the registration statement issued in connection with the de-SPAC transaction.  And in the adopting release, it said:

Given that the target company therefore is, in substance, an “issuer” of securities in a de-SPAC transaction regardless of transaction structure, the Commission proposed to amend Instruction 1 to the signatures section of both Form S-4 and Form F-4 to require that, when the SPAC would be the issuer filing the registration statement for a de-SPAC transaction, the term “registrant” would mean not only the SPAC but also the target company....

As discussed in more detail below, it is our view that in a de-SPAC transaction the target company is an issuer of securities under section 2(a)(4) of the Securities Act, and, therefore, the target company along with its required officers and directors must sign a registration statement filed by a SPAC or another shell company for the de-SPAC transaction, because both in substance and by operation of new Securities Act Rule 145a, the target company is issuing or proposing to issue securities in a de-SPAC transaction, regardless of the transaction structure....

Now, the SEC was explicitly contemplating Section 11 liability, not 10(b) liability, and it therefore was talking about the S-4 rather than statements made outside the securities filings, but that might be the kind of thing that ... informs ... a court's analysis, no?

I also wonder how this reasoning impacts SEC v. Panuwat, i.e., the "shadow" insider trading case, which I previously blogged about here.  That case also involved information about one company being used to trade in the securities of another company - and after trial, a jury found the trader liable.  I assume Panuwat will cite Max Royal on appeal, though I suppose the Ninth Circuit might limit its holding to private Section 10(b) actions.

Anyway, here's Marc Steinberg and Antonio R. Partida criticizing Frutarom.