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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: March 29, 2020

Securities Act Claims Based on Negligence Do Not Have to be Plead in Detail Under CPLR 3106

On March 9, 2020, Justice Borrok of the New York County Commercial Division issued a decision in Matter of Uxin Ltd. Sec. Litig. v. XXX, 2020 NY Slip Op. 50336(U), holding that Securities Act claims based on negligence do not have to be plead in detail under CPLR 3106, explaining:

The defendants argue that the plaintiffs’ claims are subject to the heightened pleading requirements of CPLR 3016(b) because they are based upon alleged misrepresentations. CPLR 3016(b) states:

Where a cause of action or defense is based upon misrepresentations, fraud, mistake, willful default, breach of trust or undue influence, the circumstances constituting the wrong shall be stated in detail

This however misses the point. Simply put, the claims here are based on an alleged breach of duty imposed under the 1933 Act. As this court has previously discussed, Congress enacted the 1933 Act and the Securities and Exchange Act of 1934 (the 1934 Act) to promote honest business practices in the securities market. The 1933 Act created private rights of action in connection with the initial public offering of securities and the 1934 Act regulates subsequent trading activity, the Second Circuit explained that:

Fraud is not an element or a requisite to a claim under Section 11 and Section 12(a)(2). [A] plaintiff need allege no more than negligence to proceed under Section 11 and Section 12(a)(2).

In other words, at their heart, Sections 11 and 12(a)(2) claims are negligence-based claims. And, a heightened pleading standard need not be satisfied because the defendant’s state of mind is not relevant because scienter is not an element under Sections 11 and 12(a)(2) (i.e., as opposed to a claim based on fraud or otherwise under the 1934 Act). Based on the seminal case of Ultramares Corp. v Touche, 255 NY 170 (1931) and as distinguished from Glanzer v Shepard, 233 NY 236 (1922), generally, where the plaintiff alleges negligent misrepresentation, the plaintiffs must plead a special relationship approaching privity to establish a duty. But, where a plaintiff’s claims arise under the 1933 Act, the statute (i.e., the 1933 Act) imposes the duty and that duty is to act truthfully in the offering of public securities. Put another way, the 1933 Act imposes a statutory duty which plaintiffs allege was breached by Uxin making materially misleading statements in connection with the offering of securities registered under the 1933 Act. The Complaint does not allege any claim for fraud or misrepresentation and only alleges claims based on negligence. Therefore, and as the Litwin court observed, this is an ordinary notice pleading case, and, accordingly, the plaintiffs’ claims brought in this court are not subject to a heightened pleading requirement that they would not be subject to in federal court.

(Internal quotations and citations omitted).

We have substantial experience in litigation regarding securities, both in state and federal court. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client need help regarding a claim related to stocks, bonds or other financial instruments.

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Posted in Commercial, Securities
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