IV. THE SECTION 11 TRACING REQUIREMENT
Having addressed Morrison's implications for the placement of initially distributed shares, and having established that non-domestic purchasers in the initial distribution cannot bring a section 11 claim, the next question is whether and how Morrison implicates the section 11 rights of shares traded in the aftermarket on a U.S. exchange, subsequent to completion of the initial distribution. This deceptively simple question requires a complex analysis because section 11 is unique among all the liability provisions of federal securities law in that it requires proof of "tracing" as a pre-condition to any aftermarket purchaser's ability to assert a section 11 claim. It is the definition of the tracing requirement that raises the possibility that no aftermarket purchasers can assert a valid section 11 claim--even if they transacted on a U.S. exchange--as long as a single share of the initial distribution was sold in a non-domestic transaction and then re-sold in the opening cross.
More precisely, the law of section 11 tracing has evolved in a manner that creates a significant ambiguity with regard to the analysis of the implications of the Court's decision in Morrison, because pre-Morrison precedent fails to distinguish between a requirement that plaintiffs (1) trace to shares simply issued pursuant to a defective registration statement, as opposed to a requirement that they (2) trace to shares that were initially acquired in a domestic distribution that Congress intended to protect with section 11 rights. The absence of this distinction in the literature is entirely unsurprising because, in a pre-Morrison world, the two conditions were synonymous. Under the now-rejected conduct and effects tests, shares issued pursuant to a defective registration statement and listed for trading on a U.S. exchange typically gave rise to a valid section 11 claim in the hands of the original purchaser, without regard to the locus of the transaction. Identically, every initial purchaser with a valid section 11 claim acquired shares issued pursuant to a defective registration statement. Again, the purchaser would achieve this status without regard to the locus of the transaction. The courts therefore had no cause to analyze a circumstance in which an initial purchaser acquires securities issued pursuant to a defective registration statement but has no valid section 11 claim because, pre-Morrison, such situations did not exist.
Morrison, however, disrupts this status quo and, for the first time, creates situations in which purchasers in the initial distribution of registered securities do not have valid section 11 claims even if the shares they purchased were issued pursuant to the allegedly defective registration statement because the transaction was offshore. What then does section 11's tracing requirement mandate? Is it sufficient to demonstrate that the shares purchased in the aftermarket were issued pursuant to the allegedly defective registration statement, even if the original purchaser has no section 11 rights because they purchased in a non-domestic transaction that Congress never intended section 11 liability to reach? Or, must the plaintiff demonstrate that the shares purchased in the aftermarket were both issued pursuant to the allegedly defective registration statement and that the initial holder acquired the shares in a transaction subject to section 11's territorial reach?
To address this question of first impression, this Part IV begins with a summary of section 11 liability and a description of the evolution and logic of the section 11 tracing requirement. The analysis then describes the practical challenges to satisfying the section 11 tracing requirement, as the law existed prior to Morrison. This analysis is a prologue to the more complex consideration of Morrison's implication for the ability of aftermarket purchasers to assert section 11 claims, which is presented in Part V. …