APA Excelsior III L.P. v. Premiere Technologies, Inc.

[PUBLISH]

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT FILED
________________________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
No. 05-15936 FEBRUARY 2, 2007
________________________ THOMAS K. KAHN
CLERK
D. C. Docket No. 99-01377-CV-JOF-1

APA EXCELSIOR III L.P.,
APA EXCELSIOR III OFFSHORE L.P, et al.,

Plaintiffs-Appellants,

versus

PREMIERE TECHNOLOGIES, INC.,
BOLAND T. JONES, et al.,

Defendants-Appellees.

________________________

Appeal from the United States District Court
for the Northern District of Georgia
_________________________

(February 2, 2007)

Before ANDERSON and DUBINA, Circuit Judges, and VINSON,* District Judge.

VINSON, District Judge:

*
Honorable C. Roger Vinson, United States District Judge for the Northern District of
Florida, sitting by designation.
 The lawsuit underlying this appeal was filed in 1998. It arose from a stock-

for-stock merger and acquisition between Xpedite Systems, Inc., and Premiere

Technologies, Inc. The case is before us for a second time. As will be discussed in

Part I infra, the claims and issues have been winnowed over the years and we are

now faced with what is tantamount to a single question: Are sophisticated

investors involved in an arms-length merger transaction entitled to recover under

Section 11 of the Securities Act of 1933 if they make a legally binding investment

commitment months before the issuance of a defective registration statement?

I. BACKGROUND

Plaintiffs are investment funds and individuals who are former shareholders

of Xpedite Systems, Inc. (“Xpedite”). Xpedite, a Delaware corporation, was

formed in 1988 to provide enhanced facsimile and messaging delivery services.

Plaintiffs APA Excelsior III L.P., APA Excelsior III Offshore L.P., APA/Fostin

Pennsylvania Venture Capital Fund, and CIN Venture Nominees Limited

(collectively, “the Plaintiff Funds”) are investment funds managed by Alan

Patricof Associates (“APA”). Plaintiffs Stuart and David Epstein are brothers who

invested in Xpedite as individual investors. Together, Plaintiffs held

approximately 30 percent of the stock of Xpedite. Due to the Plaintiff Funds’

substantial holdings in Xpedite, a representative from APA, Robert Chefitz, served

2
as a member of Xpedite’s board of directors (“the board”). Similarly, due to the

Epsteins’ holdings in Xpedite, David Epstein sat on the board.

In 1997, Xpedite began to consider strategic alternatives to provide an exit

strategy for Xpedite’s early investors, which included Plaintiffs. In February 1997,

the board appointed a special committee to evaluate Xpedite’s alternatives and to

engage advisors. Members of the special committee included Chefitz (who

testified at deposition that he may have actually been chair of the committee) and

David Epstein, among others.

During this process, contact was made with Defendant Premiere

Technologies, Inc. (“Premiere”), which expressed an interest in acquiring Xpedite.

Premiere, now known as PTEK Holdings, Inc. or Premiere Global Services, Inc.,

is in the business of providing telecommunication services, including conference

calling, voice messaging, and telephone calling card-related services. Premiere

proposed a stock-for-stock merger and acquisition, which Xpedite felt was an

attractive proposal. On October 31, 1997, Xpedite — through its senior officers,

investment banker (Merrill Lynch), accountants (Ernst & Young), and legal

counsel (Paul, Hastings, Janofsky & Walker LLP) — began its due diligence

investigation of Premiere. The special committee on which Chefitz and David

Epstein sat had oversight responsibility for this investigation.

3
 As we noted in our prior opinion, and as recognized by the district court on

remand (which has not been seriously challenged in this appeal), Plaintiffs were

sophisticated investors with due diligence rights, but they failed to exercise them

in any meaningful way. For example, Chefitz testified that he did not direct

anyone to examine Premiere’s key telephone calling card customers, he did not

negotiate for specific warranties regarding the calling card business, and he did

not direct anyone to perform due diligence as to the technical capacity of the

calling card business’s software platform. Roy Anderson, Xpedite’s former CEO,

told Chefitz that Premiere’s contract and business dealings with a particular

telephone calling card customer, DigiTEC 2000, Inc. (“DigiTEC”), were important

to Premiere’s revenues. However, Chefitz did not recall performing any

examination of the DigiTEC account, other than reviewing some of the company’s

public materials, nor did he recall directing anyone to make contact with that

company as part of the due diligence efforts. Further, although Chefitz believed

Xpedite’s due diligence team had access to Premiere’s accounts receivable for the

telephone calling card business, Chefitz did not review them personally or direct

anyone else to do so.

Despite this apparently superficial due diligence, on November 13, 1997,

the board entered into a merger agreement with Premiere (agreeing to the stock-

4
for-stock transaction) and unanimously voted to recommend the merger to

Xpedite’s shareholders. As a condition of entering into the merger agreement, and

in order to have some assurance of a favorable merger vote by the shareholders,

Premiere required all Plaintiffs and some of the other shareholders to execute

stockholder agreements. Under these stockholder agreements, Plaintiffs granted

irrevocable proxies to Premiere to vote their Xpedite stock in favor of the merger:

SECTION 1.01 VOTING AGREEMENT. The
Stockholder hereby agrees that . . . the Stockholder shall
vote (or cause to be voted) the Shares and the Other
Securities [in Xpedite] in favor of the Merger [with
Premiere]. . . .

***

SECTION 1.02 IRREVOCABLE PROXY. The
Stockholder hereby irrevocably appoints [Premiere] and
each of its officers . . . to vote and otherwise act (by
written consent or otherwise) with respect to the Shares
and Other Securities, which the Stockholder is entitled to
vote at any meeting of stockholders of the Company. . . .

The stockholder agreements were terminable/voidable only upon the termination

of the merger agreement or at the effective time of the merger itself, whichever

occurred first. Premiere also required Plaintiffs (except Stuart Epstein) and others

to execute affiliate letters, setting forth potential limitations on the transferability

of the Premiere securities they would receive upon consummation of the merger.

5
By executing the affiliate letters, Plaintiffs acknowledged that a restrictive legend

would be placed on the Premiere common stock they were to receive in the

merger. Notably, Plaintiffs warranted in the affiliate letters that they understood

Premiere was “under no obligation to file a registration statement with the

[Securities and Exchange Commission (“SEC”)] covering the disposition of

[their] shares.” (Emphasis in original).

More than two months later, on January 28, 1998, Premiere’s registration

statement for the Xpedite merger became effective. On February 27, 1998, a

majority of both Xpedite’s and Premiere’s shareholders voted to approve the

merger. Upon consummation of the merger, all Xpedite shareholders received

1.165 shares of Premiere common stock for each share of Xpedite stock they

owned. Pursuant to the merger agreement, the exchange ratio was determined by

reference to the average closing price of Premiere stock for a predetermined period

of time.

On June 9 and 10, 1998, Premiere announced that it would have a shortfall

in its revenues, and that it would be taking a charge against its bad debt reserves.

This was a development not mentioned in the registration statement. On June 10,

1998, the price of Premiere stock dropped from $14.4375 per share to $10.375 per

share, a one-day decline of 28 percent and an overall decline of 69 percent from

6
the merger price.1

In November 1998, within months after the Premiere stock price dropped

and before it rebounded, Plaintiffs filed the underlying lawsuit and named

Premiere and certain of its directors and officers as Defendants. In their complaint,

Plaintiffs asserted claims for breach of contract, negligent misrepresentation, and

violations of several different provisions of the Securities Act of 1933 (“the

Securities Act”). As is relevant for the Securities Act claims and this appeal,

Plaintiffs contended that the decline in stock price was the result of numerous

material defects in the registration statement. These allegedly false and misleading

statements or omissions generally concerned Premiere’s financial condition and

expected growth. Specifically, Plaintiffs alleged that Premiere had overstated its

prior acquisitions of and attempts to integrate two voice messaging businesses

(Voice-Tel Enterprises and VoiceCom Holdings, Inc.); it misrepresented the status

and viability of a particular product, “Orchestrate” (a comprehensive suite of

integrated communication services, such as universal messaging with voice mail,

facsimile and email, and conference calling); it failed to disclose that Premiere was

1
This downturn was temporary. Defendants have argued without contradiction that within
one year, Premiere’s stock price had rebounded to more than $20.00 per share — a 100%
increase from the low in June 1998. Notwithstanding the decrease in stock price, Chefitz testified
at deposition that the Plaintiff Funds realized a 500% return on their initial investment in
Xpedite.

7
experiencing dramatic declines in revenue from its business relationship with two

other entities (DigiTEC and Amway Corporation); and it touted that Premiere had

a “strategy” to become “the world’s leading provider of network-based enhanced

personal communication services,” yet Premiere lacked sufficient internal controls

and management capability to manage its growth and integrate its acquisitions, as

well as to properly assess customer credit risk. Plaintiffs alleged that these

misstatements and omissions were material and that they violated Section 11 of

the Securities Act [15 U.S.C. § 77k] (“Section 11”).2

The district court dismissed the contract claim and certain of Plaintiffs’

Securities Act allegations, after which the parties engaged in discovery.

Thereafter, the district court granted summary judgment to Defendants on

Plaintiffs’ remaining Securities Act claims (concluding, inter alia, that Plaintiffs

lacked standing because they acquired the securities through a private offering),

and on Plaintiffs’ negligent misrepresentation claims (concluding that Plaintiffs

could not establish that they reasonably relied on the alleged misrepresentations).

This summary judgment ruling was appealed to this court and set the stage for the

decision reached by the prior panel.

2
Defendants deny that the registration statement contained any misstatement or omission.
We need not resolve this dispute. For purposes of this opinion, we will assume that the
registration statement was defective for the reasons alleged by Plaintiffs.

8
 In the first appeal, we affirmed summary judgment in favor of Defendants as

to Plaintiffs’ negligent misrepresentation claims, but we reversed as to the lack of

standing on the Securities Act claims. See generally APA Excelsior III L.P. v.

Premiere Technologies, Inc. (No. 03-15552, Sept. 23, 2004, 11th Cir.)

(unpublished opinion). As for the negligent misrepresentation claims, we

concluded that Plaintiffs had failed to exercise reasonable due diligence despite

the fact that they knew or should have known of the general problems of which

they complained. Id. at 17-24. We specifically stated that Plaintiffs were on notice

of the problems with Premiere integrating new acquisitions, the possibility of

difficulties in launching the Orchestrate product, and Premiere’s general business

relationships with licensees, yet Plaintiffs failed to adequately investigate these

problem areas. Id. We thus agreed with the district court that Plaintiffs had failed

to present sufficient evidence from which a fact finder could find that Plaintiffs

reasonably relied on the misrepresentations. However, as for the Securities Act

claims, we concluded that Plaintiffs did, in fact, have standing because the

securities had been obtained via an “integrated” (and thus public) offering. Id. at

6-12. We went on to observe, however, that although there was standing under the

Securities Act, “Defendants do not make the related, seemingly more attractive

argument that, due to the time of their investment decision, Plaintiffs could not

9
possibly have relied on the registration statement and therefore should not be

entitled to maintain their claims under Section 11.” Id. at 12. We noted several

times that Plaintiffs made their investment commitment before the issuance of the

registration statement. Id. at 6, 12, 13, 15, 16-17. Therefore, it was “conceivable”

that Plaintiffs should not be permitted to recover under Section 11 since reliance

on the registration statement was impossible. Id. at 13. We stated that this

impossibility of reliance concept might “go to” the actual merits of the Section 11

claim. Id. at 16 n.9. Because Defendants had not directly raised the issue, however

— but rather addressed it only obliquely in a footnote contained in a supplemental

letter brief — we did not decide the point.

The case was then remanded to the district court, where Defendants filed a

renewed motion for summary judgment on the basis of the “seemingly more

attractive argument” alluded to in our prior opinion. The district court interpreted

our discussion of the potential bar to Plaintiffs’ Section 11 claim as a “road map.”

The district court first rejected Plaintiffs’ argument that our repeated references to

the timing of Plaintiffs’ investment decision were dicta; instead, the court held that

our conclusion that Plaintiffs made their commitment decision before the

registration statement was new law of the case. In light of the timing of Plaintiffs’

commitment and their sophistication and access to inside information, coupled

10
with their failure to conduct meaningful due diligence, the district court opined

that “[t]rying to fit these investors within the class of individuals intended to be

protected by the Securities Act is like trying to fit a round peg into a square hole.”

Relying primarily on Guenther v. Cooper Life Sciences, Inc., 759 F. Supp. 1437

(N.D. Cal. 1990), which we had also referenced in our opinion, the district court

held that summary judgment was appropriate because reliance under Section 11

was impossible on the facts of the case. Furthermore, even if impossibility of

reliance was not a valid defense, the district court concluded that Plaintiffs could

not establish loss causation and damages.

This second summary judgment ruling is at issue in this appeal. We affirm,

but on a slightly different rationale.3

II. STANDARD OF REVIEW

We review de novo a district court’s grant of summary judgment, applying

the same legal standards as the district court. McCormick v. City of Fort

Lauderdale, 333 F.3d 1234, 1242-43 (11th Cir. 2003).

3
At the time the first appeal was filed, Plaintiffs had three claims under the Securities Act:
Section 11; Section 12(a)(2) [see 15 U.S.C. § 77l(a)(2)]; and Section 15 [see 15 U.S.C. § 77o].
During oral argument in the first appeal, Plaintiffs expressly abandoned their Section 12 claims,
leaving only the Section 11 and Section 15 claims. As noted in our prior opinion, the Section 15
claim is derivative of the Section 11 claim. Consequently, if the Section 11 claim fails, then the
Section 15 claim and this entire litigation — as it has been narrowed over the years — must
necessarily fail.

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 III. DISCUSSION

This case involves application of the so-called “commitment theory” to a

claim brought under Section 11. The commitment theory in securities law appears

to have begun as a means of establishing commencement of the statute of

limitations for Rule 10b-5 claims, promulgated under the Securities Exchange Act

of 1934 [15 U.S.C. § 78j(b)]. See, e.g., Radiation Dynamics, Inc. v. Goldmuntz,

464 F.2d 876, 891 (2d Cir. 1972) (“[T]he time of a ‘purchase or sale’ of securities

within the meaning of Rule 10b-5 is to be determined as the time when the parties

to the transaction are committed to one another.”); see also Kahn v. Kohlberg,

Kravis, Roberts & Co., 970 F.2d 1030, 1040 (2d Cir. 1992) (explaining that the

commitment theory provides that “once plaintiff has committed itself to the

transaction, the claim accrues and thus the statute begins to run”). Other courts

have recognized that the commitment theory is not limited to the Rule 10b-5

statute of limitations context, but rather it may apply to claims brought pursuant to

the Securities Act as well. Westinghouse Elec. Corp. v. “21” Int’l Holdings, Inc.,

821 F. Supp. 212, 215-16 (S.D.N.Y. 1993); see also Pell v. Weinstein, 759 F.

Supp. 1107, 1113-14 (M.D. Pa. 1991) (applying commitment theory to a Section

12(2) claim; holding that because the plaintiffs’ claims were based on

misrepresentations in a prospectus that was filed only after there was commitment

12
to the sale of securities, “the sale could not possibly have been made by means of

[the] prospectus”), aff’d, 961 F.2d 1568 (3d Cir. 1992). In such a circumstance, the

commitment theory is based on the rationale that once the decision is made and the

parties are committed to the transaction, “there is little justification for penalizing

alleged omissions or misstatements which occur thereafter and which have no

effect on the decision.” SEC v. Nat’l Student Mktg. Corp., 457 F. Supp. 682, 703-

04 (D.D.C. 1978).

In deciding this appeal, we recognize that the issue for determination is one

of first impression. As both the prior panel and district court acknowledged, and as

the parties agree, hours of research have not uncovered any case directly on point.

But there is, of course, a governing statute: Section 11. In interpreting this statute,

which counsel for Plaintiffs fittingly described at oral argument as “tough” and

“nasty,” we are guided by the general principle of statutory construction that

“statutory language must be read in the context of the purpose it was intended to

serve.” United States v. Ballinger, 395 F.3d 1218, 1237 (11th Cir.) (en banc), cert.

denied, --- U.S. ---, 126 S. Ct. 368, 163 L. Ed. 2d 77 (2005); see also Chapman v.

Houston Welfare Rights Organization, 441 U.S. 600, 608, 99 S. Ct. 1905, 60 L.

Ed. 2d 508 (1979). Stated differently, the language of a statute should not be

considered in a vacuum and divorced from its underlying purpose. See Ballinger,

13
395 F.3d at 1237. Because the legislature is presumed to act with sensible and

reasonable purpose, a statute should, if at all possible, be read so “‘as to avoid an

unjust or absurd conclusion.’” Id. (quoting In re Chapman, 166 U.S. 661, 667, 17

S. Ct. 677, 41 L. Ed. 1154 (1897)); accord United States v. Mikelberg, 517 F.2d

246, 252 (5th Cir. 1975) (“‘A basic principle of statutory construction enjoins us

from imputing to the Legislature an intent to produce an absurd result.’”) (citations

omitted) (binding precedent under Bonner v. Prichard, 661 F.2d 1206 (11th Cir.

1981) (en banc)). Thus, in applying Section 11 to the facts of this case, we must

always keep before us the underlying purpose of, and legislative intent behind, the

statute.

Plaintiffs suggest in their initial brief that reference to the legislative history

of the Securities Act is improper and “unnecessary” because the statute is

unambiguous on its face. But, as indicated above, it is our responsibility to read

and apply Section 11 in a manner that honors the legislative intent of Congress.

Indeed, as Plaintiffs themselves acknowledge elsewhere in their brief, “[t]his

appeal is fundamentally about the language and legislative intent of Section 11.”

(Emphasis added). To the extent these materials will assist in that regard, we may

refer to the legislative history. Train v. Colorado Public Interest Research Group,

Inc., 426 U.S. 1, 96 S. Ct. 1938, 48 L. Ed. 2d 434 (1976) (expressly holding that

14
legislative history may be considered to determine congressional intent even if a

statute is unambiguous on its face); see also United States v. Elgersma, 971 F.2d

690, 693 n.7 (11th Cir. 1992). In other words, and to be clear, we do not reference

the legislative materials to contravene the clear and unambiguous will of

Congress; instead, we use these materials as an additional resource to determine if

Congress intended Section 11 to apply to a factual scenario like this case. Cf.

Ernst & Ernst v. Hochfelder, 425 U.S. 185, 201, 96 S. Ct. 1375, 47 L. Ed. 2d 668

(1976) (looking to legislative history to support an interpretation of Section 10(b)

of the Securities Exchange Act even though the statute was unambiguous).

Relatedly, to the extent that we believe it would lead to an unreasonable result for

Plaintiffs to obtain refuge under Section 11 on the facts as presented in this case,

we may consider the legislative materials to ascertain statutory intent. See United

States v. American Trucking Ass’ns, 310 U.S. 534, 543-44, 60 S. Ct. 1059, 84 L.

Ed. 1345 (1940) (courts may look beyond the plain meaning of an unambiguous

statute when that meaning will lead to “absurd or futile results,” or an

“unreasonable one” inconsistent with the policy of the legislation as a whole;

further, when legislative materials are available and assist in determining statutory

intent and meaning, “there certainly can be no ‘rule of law’ which forbids its use,

however clear the words may appear . . .”) (footnotes omitted); see also Alabama

15
Power Co. v. F.E.R.C., 685 F.2d 1311, 1316 (11th Cir. 1982) (“[W]here the plain

meaning [of a statute] leads to results that are absurd or at variance with the policy

of the enactment, a reviewing court may seek guidance wherever available.”).

A. Timing of Plaintiffs’ Investment Decision and Commitment

Early in this case, Defendants advanced a commitment theory argument by

way of a motion to dismiss. The district court noted that under the terms of the

merger agreement, “the obligations of each party to effect the merger were subject

to the prior satisfaction of certain conditions.” The district court thus held that the

commitment theory was inapplicable because Plaintiffs “did not irrevocably

commit themselves to the acquisition of Premiere stock by executing the

Stockholder Agreements.” In reaching this conclusion, the district court relied on

three cases standing for the general proposition that, in order for the commitment

theory to apply, the investment decision and commitment must be irrevocable. See

Westinghouse Elec. Corp. v. “21” Int’l Holdings, Inc., 821 F. Supp. 212, 215-16

(S.D.N.Y. 1993) (commitment theory applies once the investment decision is

made and the parties are irrevocably committed to the transaction); Pell v.

Weinstein, 759 F. Supp. 1107, 1114 (M.D. Pa. 1991) (applying commitment theory

specifically because “plaintiffs lacked the power or authority to back out of the

merger”), aff’d, 961 F.2d 1568 (3d Cir. 1992); SEC v. Nat’l Student Mktg. Corp.,

16
457 F. Supp. 682, 703-04 (D.D.C. 1978) (commitment theory inapplicable where

merger agreement stated that obligations to proceed with merger were subject to

performance of certain conditions and the parties “had no expectation or duty to

proceed with the sales if the merger was aborted”). On summary judgment,

Defendants asked that the district court reconsider its prior ruling on this issue.

The district court denied Defendants’ request, reiterating in its first summary

judgment order that Plaintiffs were not “irrevocably committed” to acquiring the

Premiere stock before the merger.

But, we stated several times in our prior decision that Plaintiffs had made

their investment commitment before the filing of the registration statement and,

therefore, reliance on the registration statement would have been impossible. The

district court held on remand that these statements were not dicta; instead, the

court ruled that our comments called its prior holding “into question” and were

new law of the case. In light of this reading of our decision, the district court

expressly held that “Plaintiffs made their investment decision prior to the issuance

of the Registration Statement” and they “committed to purchase their shares prior

to the issuance of the Registration Statement.”

In this appeal, Plaintiffs did not challenge the above holding anywhere in

their initial brief (nor did they do so directly in their reply brief). Rather, they

17
argued repeatedly throughout both briefs that the timing of their commitment was

“irrelevant” for Section 11 purposes and that impossibility of reliance is no bar to

their claim. While Plaintiffs’ counsel took a different approach at oral argument,

and suggested that Plaintiffs were not fully committed to the merger before the

registration statement because their commitment was revocable, we do not

consider claims not raised in a party’s initial brief and made for the first time at

oral argument. See, e.g., United States v. Nealy, 232 F.3d 825, 830 (11th Cir.

2000); Softball Country Club-Atlanta v. Decatur Federal Sav. & Loan Ass’n, 121

F.3d 649, 654 n.9 (11th Cir. 1997); Bigby v. United States Immigration and

Naturalization Serv., 21 F.3d 1059, 1063 n.6 (11th Cir. 1994). Accordingly, it is

not necessary for us to decide if the district court was correct in holding that the

timing of Plaintiffs’ investment commitment was law of the case. Rather, Plaintiffs

waived the issue by not challenging that clear and express holding.

Perhaps anticipating this result, and recognizing that it may have a bearing

on their case, Plaintiffs’ counsel stated at oral argument his belief that Plaintiffs

did, in fact, argue in their initial brief that the commitment decision was revocable.

Counsel for Plaintiffs suggested that resolution of this issue boils down to

“interpreting the words of the brief.” Turning to the language in the initial brief

does not help Plaintiffs, however. Plaintiffs did not raise this issue anywhere in

18
their statement of the issues. Instead, they described the pertinent issues as

whether the district court erred in holding that reliance is an element of a Section

11 claim and whether impossibility of reliance is a valid defense thereto.

Consistent with this framing of the issues, Plaintiffs argued several times in their

initial brief that the timing of their investment decision and commitment is

irrelevant. As reflected in their answer brief, Defendants understood this argument

to mean that Plaintiffs were no longer claiming that their commitment was

revocable. Defendants thus stated in their answer brief that “Plaintiffs now

concede that they made their investment decision prior to the effective date of the

Registration Statement,” and, furthermore, “their commitment was binding.”

Plaintiffs responded directly to this claim in their reply brief, but they still did not

argue that their commitment was revocable. To the contrary, they merely stated in

response that “Plaintiffs’ position is, and always has been, that the timing of their

investment decision is irrelevant to their Section 11 claims. . . . Irrespective of

when Plaintiffs decided to invest, the District Court was incorrect as a matter of

law when it granted summary judgment based upon its ruling that that [sic]

reliance was impossible.” (Emphasis in original).

This “irrelevance” argument is to be contrasted with the argument that

Plaintiffs made in opposition to Defendants’ renewed summary judgment motion

19
in the district court. At that time, quoting from the district court’s prior order,

Plaintiffs argued that they “‘had not irrevocably committed themselves to the

acquisition of Premiere stock by executing the Stockholder Agreements.’” They

were not irrevocably committed, Plaintiffs argued in the district court, because

they could have invalidated the merger agreement and terminated the merger by a

number of different means. By not clearly raising this or a similarly-phrased

argument in their initial brief before this court (and making only passing, cryptic

reference in their reply brief), we must conclude that Plaintiffs abandoned the

argument. See, e.g., Marek v. Singletary, 62 F.3d 1295, 1298 n.2 (11th Cir. 1995)

(“Issues not clearly raised in the briefs are considered abandoned.”).4

In summary, we accept the prior panel’s conclusion (and the district court’s

express holding on remand) that Plaintiffs made a binding investment commitment

prior to the registration statement. We now proceed to consider the effect that

holding has on the disposition of this appeal.

B. Impossibility of Reliance Under Section 11

We begin here, as we must, with the language of the statute. In relevant part,

4
Although Plaintiffs did not directly argue in their reply brief that their commitment was
revocable, they did impliedly suggest that position while attempting to distinguish Pell v.
Weinstein, 759 F. Supp. 1107 (M.D. Pa. 1991). They argued in passing that unlike the pre-
registration statement commitment in Pell, Plaintiffs here could have terminated the merger “in a
variety of ways,” suggesting revocability. But, as noted above, we do not consider claims not
clearly raised in a party’s initial brief.

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Section 11 provides:

In case any part of the registration statement, when such
part became effective, contained an untrue statement of a
material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements
therein not misleading, any person acquiring such
security (unless it is proved that at the time of such
acquisition he knew of such untruth or omission) may,
either at law or in equity, in any court of competent
jurisdiction, sue [five categories of persons therein
named].

15 U.S.C. § 77k(a). The statute creates a presumption that “any person acquiring

such security” was legally harmed by the defective registration statement. See,

e.g., Kirkwood v. Taylor, 590 F. Supp. 1375, 1378 (D. Minn. 1984) (“[Section 11]

in effect presumes that those who purchased stock in the public offering relied

upon the allegedly misleading documents.”), aff’d, 760 F.2d 272 (8th Cir. 1985).

But, that presumption ends after an earnings statement which covers a period of at

least twelve months after the effective date of the registration statement has

become available. The statute then sets out the post-twelve months earnings period

requirements:

If such person acquired the security after the issuer has
made generally available to its security holders an
earning statement covering a period of at least twelve
months beginning after the effective date of the
registration statement, then the right of recovery under
this subsection shall be conditioned on proof that such

21
 person acquired the security relying upon such untrue
statement in the registration statement or relying upon
the registration statement and not knowing of such
omission, but such reliance may be established without
proof of the reading of the registration statement by such
person.

15 U.S.C. § 77k(a). Intentional or willful conduct is not required under Section 11

and liability will attach even for “innocent misstatements.” Herman & MacLean v.

Huddleston, 459 U.S. 375, 382, 103 S. Ct. 683, 74 L. Ed. 2d 548 (1983); see also

Barker v. Henderson, Franklin, Starnes & Holt, 797 F.2d 490, 495 (7th Cir. 1986)

(noting that Section 11 imposes “liability without fault”). To recover under the

statute, a plaintiff need only show a material misstatement and/or omission in the

registration statement and be able to “trace” the security he acquired to that

defective statement. Huddleston, 459 U.S. at 382; Barnes v. Osofsky, 373 F.2d

269, 271-73 (2d Cir. 1967). That is, he must show that the security was issued

under, and was the direct subject of, the prospectus and registration statement

being challenged. Barnes, 373 F.2d at 273. However, as noted, a Section 11

plaintiff does not need to show that he actually relied on the registration statement

unless he acquired the security “after the issuer has made generally available to its

security holders an earning statement covering a period of at least twelve months

beginning after the effective date of the registration statement.” See 15 U.S.C. §

22
77k(a). To put it another way, “there is a conclusive presumption of reliance for

any person purchasing the security prior to the expiration of twelve months.” 1

Thomas Lee Hazen, The Law of Securities Regulation § 7.3[4], at 587 (4th ed.

2002); accord Barnes, 373 F.2d at 272; see also Unicorn Field, Inc. v. Cannon

Group, Inc., 60 F.R.D. 217, 227 (S.D.N.Y. 1973). Plaintiffs here did not acquire

their Premiere stock after the issuance of a twelve-months earning statement.

Therefore, if the Section 11 presumption applies, that would mean reliance is

“conclusively presumed.”

Before considering whether the Section 11 presumption applies, we must

address Plaintiffs’ threshold argument. Plaintiffs argue primarily that reliance is

not an element of a Section 11 claim and, consequently, reliance is irrelevant to,

and plays no role in, this case. That is only partly true. Plaintiffs are correct to the

extent that reliance does not need to be proven (except post-earnings statement).

Reliance is ordinarily presumed. See, e.g., Barnes, 373 F.2d at 272. The statute’s

intended purpose as it concerns the presumption of reliance is well-documented.

For example, various House and Senate bills relating to the Securities Act explain

that when there is a defect in a registration statement, “the public shall be

presumed to rely” on the defect. See H.R. 5480, 73d Cong., 1st Sess. § 9 (1933);

see also S. 875, 73d Cong., 1st Sess. § 9 (1933); accord S. Rep. No. 47, 73d

23
Cong., 1st Sess. 4 (1933) (“S. Rep. No. 47”) (stating that if there is a defective

registration statement, “the buyer presumably relies” on the statement).

The concept of reliance was obviously important to Congress in drafting

Section 11. The House Report accompanying the version of the bill that ultimately

became the Securities Act explains that responsibility under Section 11 is enforced

against “those who purport to issue statements for the public’s reliance.” See H.R.

Rep. No. 85, 73d Cong., 1st Sess. 9 (1933) (“H.R. Rep. No. 85”). In fact, Congress

made clear that the no-fault nature of Section 11 is specifically based on the legal

principle that if one of two innocent persons must bear a loss, “he should bear it

who has the opportunity to learn the truth and has allowed untruths to be published

and relied upon. Moreover, he should suffer the loss who occupies a position of

trust in the issuing corporation toward the stockholders, rather than the buyer of a

stock who must rely upon what he is told.” S. Rep. No. 47 at 5 (emphasis added).

If reliance were irrelevant to the analysis, as Plaintiffs suggest, then no

presumption would be required at all. To say that reliance is “presumed” is simply

not the same thing as saying that reliance is “irrelevant.” Cf. Lewis v. McGraw,

619 F.2d 192, 195 (2d Cir. 1980) (observing that shareholder cases which presume

reliance on material misrepresentations and omissions under Section 14(e) of the

Williams Act “did not abolish it as an element of the cause of action. Rather, they

24
held that in cases in which reliance is possible, and even likely, but is unduly

burdensome to prove, the resulting doubt would be resolved in favor of the class

the statute was designed to protect.”).

The above discussion recognizes that the presumption of reliance was an

important and relevant concern for Congress in drafting and promulgating Section

11. That much is clear. What must be decided in this case is whether Congress

intended this presumption to apply (or whether a purchaser of security falls

outside the reach and scope of the statute) when reliance is rendered impossible by

virtue of a pre-registration commitment.5

Plaintiffs argue that Section 11 is the equivalent of a strict liability statute.

Because their Premiere stock was eventually issued under a defective registration

statement — and was not previously-issued stock already in the open market —

Plaintiffs contend that they have established a prima facie case under Section 11.

Although the Supreme Court of the United States has not gone so far as to hold

that Section 11 imposes strict liability, the Court has made clear that the statute

5
Plaintiffs point out that the district court in Westinghouse Elec. Corp. v. “21” Int’l
Holdings, Inc., 821 F. Supp. 212 (S.D.N.Y. 1993) rejected the commitment theory under Section
11 because the statute does not contain “any reference to a . . . presumption that the plaintiff
might have relied on the registration statement” and, therefore, “impossibility of reliance can be
no bar to a § 11 claim.” Id. at 218. While it is true that the statute itself does not specifically
reference the presumption of reliance, it is well-documented that reliance factored heavily in the
promulgation of Section 11. For this reason, and for the reasons to be further discussed infra, we
respectfully disagree with the conclusion reached by the district court in Westinghouse Electric.

25
imposes a “stringent standard of liability” that is “virtually absolute.” Huddleston,

459 U.S. at 381-82 (footnotes omitted). Plaintiffs interpret this language to mean

that summary judgment was wrongly granted as to Defendants because the Section

11 presumption is strict and irrebuttable. However, Plaintiffs’ argument

presupposes that the Section 11 presumption applies in the first place. It does not.

First, as a matter of common sense, Plaintiffs are not entitled to the

presumption in light of the timing of their investment decision and commitment.

To hold otherwise would mean that an impossible fact will be presumed in

Plaintiffs’ favor. As to this issue, Lewis v. McGraw, 619 F.2d 192 (2d Cir. 1980),

is analogous and instructive. That case involved a shareholder suit under Section

14(e) of the Williams Act [15 U.S.C. § 78n(e)]. The plaintiff shareholders alleged

that the defendant board of directors made false and improper comments regarding

a “friendly business combination” proposal by American Express. These

comments allegedly frustrated a merger that would have resulted in a stock price

increase of $15.00 per share. Although the plaintiffs conceded that no tender offer

ever took place and that no shareholder was ever in the position to offer his shares

to American Express at the stated price, they nonetheless contended that if they

had been provided accurate and truthful information, the merger would have been

consummated. The district court dismissed the complaint, holding that although

26
the plaintiffs alleged deception on the part of the defendants, they were unable to

establish that anyone actually relied to their detriment on the deception.

On appeal, the plaintiffs in Lewis admitted that they could not establish

reliance — which is a required element under Section 14(e) — because they were

never given the opportunity to tender their shares; however, they rested upon cases

holding that reliance may be presumed from a “showing of materiality.” Id. at 195.

The Second Circuit disagreed, concluding that while reliance may be presumed in

Section 14(e) cases, that is only where it is “logical” to do so. Id. Thus, “where no

reliance was possible under any imaginable set of facts, such a presumption would

be illogical in the extreme.” Id.; see also Chris-Craft Indus., Inc. v. Piper Aircraft

Corp., 480 F.2d 341, 375 (2d Cir. 1973) (a presumption of reliance is proper

“where it is logical to presume that reliance in fact existed”). Here, as in Lewis, it

would be illogical to cloak Plaintiffs with a presumption of reliance. Plaintiffs

made their investment decision and were legally committed to the transaction (and

thus could not possibly have relied on the registration statement) months before

the registration statement was in existence.

Furthermore, and more significantly, our review of the legislative history of

Section 11 strongly suggests that Congress did not intend for the presumption to

apply in a situation such as the one presented here. This is because when there is a

27
binding pre-registration commitment, the entire purpose of, and justification for,

the presumption in the first place is non-existent.

In drafting Section 11, it appears that Congress assumed that only those who

acquired their stock after the effective date of the registration statement would be

affected by material defects, and it simply eliminated the requirement that they

must prove that they had read and relied upon the defective registration statement.

According to the Committee Report in 73d Congress, 1st Session H.R. No. 85 on

H.R. 5480, at 10 (May 4, 1933), the presumption of reliance in Section 11 is

specifically justified because, even though the purchaser may not read and rely on

the registration statement, the misstatements and omissions contained therein are

reasonably assumed to affect the market price and impel the purchase:

Liability is imposed upon [defendants under Section 11]
as a condition of the acquisition of the privilege to do
business through the channels of interstate or foreign
commerce. The statements for which they are
responsible, although they may never actually have been
seen by the prospective purchaser, because of their wide
dissemination, determine the market price of the
security, which in the last analysis reflects those
manifold causes that are the impelling motive of the
particular purchase. The connection between the
statements made and the purchase of the security is clear,
and, for this reason, it is the essence of fairness to insist
upon the assumption of responsibility for the making of
these statements.

28
(Emphasis added); see also id. at 9 (“The Committee emphasizes that [liability

under Section 11 attaches] only when there has been an untrue statement of

material fact or an omission to state a material fact in the registration statement or

the prospectus — the basis information by which the public is solicited.”)

(emphasis added). Thus, as a matter of common sense reasoning, the presumption

should only apply to those who purchase securities at the time of or after the

registration statement. Id. at 22 (“Inasmuch as the value of a security may be

affected by the information given in the registration statement, . . . the civil

remedies accorded by this subsection against those responsible for a false or

misleading statement filed with the Federal Trade Commission are given to all

purchasers . . . regardless of whether they bought their securities at the time of the

original offer or at some later date.”) (emphasis added); cf. In re WorldCom, Inc.

Sec. Litig., 219 F.R.D. 267, 288 (S.D.N.Y. 2003) (“Those who purchase within

twelve months after the registration statement becomes effective, and at any time

until there is an earning statement ‘covering a period of at least twelve months

beginning after the effective date of the registration statement’ need not prove

reliance in order to recover.”) (emphasis added); Louis Loss & Joel Seligman,

Fundamentals of Securities Regulation 1234 (5th ed. 2004) (materiality under

Section 11 is presumed “no matter whether the plaintiff purchased a day or a year

29
after the effective date of the particular part of the registration statement

complained of”) (emphasis added).

Courts and commentators have, therefore, recognized that the Section 11

presumption exists because of the relationship between the registration statement

and the subsequent market price for the security. See, e.g., In re WorldCom, Inc.

Sec. Litig., 219 F.R.D. at 294 (commenting that when the Section 11 plaintiffs

there purchased their stock they were presumed to have relied “on all public

information about WorldCom’s financial condition insofar as it was reflected in

the market price of the WorldCom securities”); Krista L. Turnquist, Note,

Pleading Under Section 11 of the Securities Act of 1933, 98 Mich. L. Rev. 2395,

2413 (2000) (“Section 11 does not require proof of reliance because the Securities

Act presumes causation between a material misstatement or omission and the

market price, so section 11 plaintiffs do not have to specifically plead that they

read the registration statement.”); Julie A. Herzog, Fraud Created the Market: An

Unwise and Unwarranted Extension of Section 10(B) and Rule 10B-5, 63 Geo.

Wash. L. Rev. 359, 401 (1995) (stating that while it may seem “incongruous” that

Section 11 does not require proof of reliance, the reason for the presumption is

apparent when one considers “the efficient market theory;” that is, if an efficient

market exists, “enough investors will study the information and, through trading in

30
the securities, transfer the information to the market price”).

William O. Douglas (later Justice Douglas), who wrote extensively on the

Securities Act as a law professor and served as an early chairman of the SEC,

explained the justification for the Section 11 presumption of reliance as follows:

[T]he protection given to investors by Section 11 fills a
long felt need in so far as it shifts the burden of proof.
This is particularly desirable during the early life of the
security. At that time the registration statement will be an
important conditioner of the market. Plaintiff may be
wholly ignorant of anything in the statement. But if he
buys in the open market at the time he may be as much
affected by the concealed untruths or the omissions as if
he had read and understood the registration statement. So
it seems wholly desirable to create a presumption in
favor of the investor in this regard. If carried out
logically, however, some time limitation might be placed
upon this presumption, for in most cases after a year or
so the statements made in the registration would have
become outmoded and wholly discounted by a host of
other factors. In other words, the present provision for
reliance [which at that time did not contain the post-
earnings statement exception] provides an excellent rule
of thumb during the early life of the security. It has less
justification the longer the security is outstanding.

William O. Douglas & George E. Bates, The Federal Securities Act of 1933, 43

Yale L.J. 171, 176 (1933). While there is, as Douglas opines, little justification for

the Section 11 presumption at a certain point in time after the security is issued

pursuant to a defective registration statement, there is even less justification for it

31
before the fact. Beforehand the investment decision and market price could not

possibly have been affected, nor could the purchase have been “impelled,” by a

registration statement that was not yet in existence.

Further support for this conclusion can be found in the post-earnings

statement exception to the presumption, discussed supra. This exception, which

was added during the 1934 amendment to the Securities Act, places the burden on

the purchaser to show that he actually relied on the defective registration statement

if an intervening earnings statement has been issued. Congress explained that this

provision was specifically based on the fact “‘that in all likelihood the purchase

and price of the security purchased after publication of such an earning statement

will be predicated upon that statement rather than upon the information disclosed

upon registration.’” Hertzberg v. Dignity Partners, Inc., 191 F.3d 1076, 1081-82

(9th Cir. 1999) (quoting H.R. Rep. No. 1838, 73d Cong., 2d Sess. 41 (1934));

Rudnick v. Franchard Corp., 237 F. Supp. 871, 873 n.1 (S.D.N.Y. 1965) (same).

In other words, Congress made an exception to the Section 11 presumption when

“in all likelihood” the purchase decision was based on factors other than the

registration statement.

The logic underlying the post-earnings statement exception applies with

equal, if not more, force to the situation at hand. It is not merely likely that

32
Plaintiffs’ acquisition of the Premiere stock was based on factors other than the

contents of the registration statement. Rather, because the registration statement

did not exist at the time of the commitment, it is beyond dispute. It would be

absurd to conclude that Congress intended to limit the Section 11 presumption

when “in all likelihood” the stock purchase was motivated by other factors, and

yet allow the presumption when it is an absolute certainty.

An analogy to the tracing requirement in Section 11 merely reinforces our

conclusion. In order to have standing and prevail on a claim under Section 11 a

plaintiff must be able to trace his stock to the defective registration statement. It is

undisputed that if stock is purchased in a prior offering, and before a defective

registration statement is issued, then no relief may be had as the pre-registration

purchaser falls outside the scope of Section 11. See, e.g., Barnes, 373 F.2d at 273.

In Turner v. First Wisconsin Mortgage Trust, 454 F. Supp. 899 (E.D. Wis. 1978),

for example, the plaintiff purchased her stock in August 1972, and the defective

registration statement was filed six months thereafter, in February 1973. The

district court dismissed the Section 11 claim, concluding that “[i]n order to have a

claim under that section, the plaintiff must prove that she purchased a security

which was issued in connection with such registration statement, which Turner

obviously cannot do, having purchased prior to 1973.” Id. at 911. Plaintiffs here,

33
by virtue of their binding commitment decision, effectively “purchased” their

Premiere stock months before the registration statement was filed. It follows

therefrom that they cannot have purchased pursuant to the registration statement,

particularly since, under the affiliate letters, no registration statement was even

required as to their shares.6

Such reasoning was also embraced by the court in Guenther v. Cooper Life

Sciences, Inc., 759 F. Supp. 1437 (N.D. Cal. 1990), which was cited by both the

district court and the prior panel. In that case, a registration statement was filed on

June 14, 1985, and was later amended on February 19, 1986. The plaintiffs there

purported to represent a class of investors who purchased stock between June 17,

6
It is true that Plaintiffs in one sense “acquired” their stock only after consummation of
the merger and after the registration statement was filed. Regardless of when they may have
physically acquired the stock, however, Plaintiffs made their investment decision, and were
committed thereto, months before that time. See, e.g., Radiation Dynamics, Inc. v. Goldmuntz,
464 F.2d 876, 891 (2d Cir. 1972) (the date of purchase or sale is to be determined “as the time
when the parties to the transaction are committed to one another;” further noting that
“commitment” in this context “marks the point at which the parties obligated themselves to
perform what they had agreed to perform even if the formal performance of their agreement is to
be after a lapse of time”); Helman v. Murry’s Steaks, Inc., 742 F. Supp. 860, 869-71 (D. Del.
1990) (“[O]nce the parties make the investment decision and enter into a binding commitment to
perform the transaction, the purchase and sale is complete;” accordingly, “the purchase and sale
in the present case took place . . . when the parties signed the Definitive Agreement and
committed to the transaction, not when the securities were transferred for money.”). This
conclusion is not inconsistent with our prior opinion, wherein we held that “Plaintiffs did acquire
their shares of Premiere pursuant to a public offering.” That holding arose in the context of
determining whether Plaintiffs had standing to pursue the Section 11 claims (that is, whether the
stock was issued pursuant to a private or public offering). The standing holding did not fix the
actual point in time that Plaintiffs were legally committed to the merger transaction, which the
prior panel concluded was before the filing of the registration statement.

34
1985, and January 28, 1988. The defendants argued that the plaintiffs who

purchased their stock between the filing of the initial registration statement and the

filing of the misleading amendment could not trace their securities to a defective

statement. Id. at 1440. The district court accepted this argument and, in so doing,

noted that to rule in the plaintiffs’ favor “would enable investors . . . to bring a

section 11 action even though at the time they purchased their shares they could

not possibly have relied on misleading registration statements, since none had

been filed. Such a result would clearly contravene the purpose of section 11.” Id.

And lastly, although it is not essential to our holding, it should not be

forgotten that Plaintiffs were investors with access to inside information. As we

held in the prior appeal, Plaintiffs had access to a wide range of information and

knew of the stock issuance months before the registration statement was filed.

They had the opportunity to learn (and, in fact, were on notice) of the potential

problems with certain of Premiere’s business relationships, its telephone calling

card business, and the Orchestrate product of which they now complain. Congress

has noted that liability under Section 11 is imposed and justified because members

of the public are presumed to be “innocent” and, as compared with the issuers of

stock, do not have the “opportunity to learn the truth;” instead, they are merely

reliant upon what they are told. See S. Rep. No. 47 at 5. Plaintiffs do not appear to

35
fit that characterization. Cf. Feit v. Leasco Data Processing Equipment Corp., 332

F. Supp. 544, 575 (E.D.N.Y. 1971) (intimating that a plaintiff may not recover

under Section 11 if it “knew [of] or had available” information that would have

revealed the untruth or omission contained in the registration statement) (emphasis

added).7

In sum, we hold that the Section 11 presumption of reliance does not apply

in the limited and narrow situation where sophisticated investors participating in

an arms-length corporate merger make a legally binding investment commitment

months before the filing of a defective registration statement.8

IV. CONCLUSION

For the reasons noted above, we hold that the district court properly granted

summary judgment in favor of Defendants.

AFFIRMED.

7
Plaintiffs argue that our prior holding as it concerns their failure to conduct due diligence
is immaterial because they “allege a myriad of adverse material developments concerning
Premiere that occurred during the two-and-one-half month period between the execution of the
Stockholder Agreements and the dissemination of the Registration Statement.” In other words,
Plaintiffs claim it is of no moment that they did not conduct adequate due diligence because
“Defendants never disclosed numerous such material facts that came into their possession after
November 13, 1997 (i.e., the date Plaintiffs signed the Stockholder Agreements and the end of
the due diligence period).” (Emphasis in original). But, as we held in the prior appeal, these
“myriad” issues were at least generally known to Plaintiffs during the due diligence period.
8
Our rationale encompasses the lack of causation analysis the district court employed and,
therefore, we do not find it necessary to separately address the district court’s alternative holding
that Plaintiffs could not establish loss causation and damages.

36