Can shareholders who purchased stock in a secondary market appeal a decision against the party who made the initial public offering?
FriendFinder Networks, Inc., an internet-based social networking and multimedia entertainment company comprising more than 8,000 websites, made an initial public offering in November of 2011 of 5,000,000 shares of common stock. Greenfield Children’s Partnership, Greenfield Investment Services LLC and David Schwartz purchased FriendFinder common stock during the initial public offering from a secondary market and not directly from the underwriter. Following the IPO, the stock’s price plummeted and continued to decline for several months. A broker told Schwartz that “insiders are selling. At least 700,000 shares were sold immediately upon opening, and…that number may be as high as 2,000,000.”
Once the stock price bottomed out, Greenfield Investment and Schwartz filed suit in federal court and alleged that FriendFinder and its underwriters violated Section 12(a)(2) of the Securities Act of 1933 by selling securities using a prospectus that contained material misstatements. The District Court dismissed the Complaint for failure to state a claim.
Greenfield Children’s Partnership filed for appeal individually and “on behalf of all others similarly-situated.” The 11th Circuit Court of Appeals upheld the dismissal and ruled that Greenfield Children’s Partnership lacked standing to contest the dismissal of the original case under Section 12 since they purchased their shares in a secondary market and not directly from the underwriter. The court made reference to Bochese v. Town of Ponce Inlet, 405 F.3d 964, 974 (11th Cir. 2005) which established that litigants must establish standing in order to appeal judgments, just as they must establish standing in order to initially bring a claim.
The Bottom Line:
Shareholders who purchase stock in a secondary market lack standing under Title 12 of the Securities Act of 1933 to appeal a Complaint against the party who made the initial public offering.
Link for the full text of the Court's unpublished opinion in Greenfield Children's Partnership v. Friendfinder Networks, Inc., et la