Securities Litigation Advisory | Court Watch: Certiorari Petitions Raise Questions on Materiality and Tracing

Two possible appeals currently pending before the U.S. Supreme Court raise important questions under the federal securities laws. In BDO USA, LLP v. N.E. Carpenters Guar. Annuity & Pension Funds, the Court is being asked to address the materiality standard for securities fraud claims brought under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.¹

In a separate petition, Pirani v. Slack Technologies, LLC, the Court is being asked to consider whether, for purposes of liability under Section 12(a)(2) of the Securities Act of 1933, plaintiffs must plead and prove that their shares were issued pursuant to the specific registration statement alleged to be false and misleading—a requirement commonly referred to as “tracing.”² If the Court accepts the Slack appeal, this will be the second time the Court has considered issues arising from that case.³

Although the Supreme Court is currently in recess, decisions on whether to grant review in these cases are expected later this year. If granted, these appeals could have meaningful implications for defendants who face claims for alleged violations of the federal securities laws.

BDO Certiorari Petition: Per Se Materiality vs. Contextual Inquiry

In a recently filed petition, the accounting firm BDO USA seeks review of a Second Circuit decision that held an auditor’s allegedly false statement of compliance with professional standards is per se material for purposes of pleading claims under Section 10(b)/Rule 10b-5.⁴ The Second Circuit ruled that the shareholders suing BDO for violations of the federal securities laws were not required to allege a link between the supposedly false compliance statement by the auditor and any specific errors in the financial statements of the company being audited.⁵ The requested appeal raises questions about the contours of potential liability for professionals whose certifications and assurances are relied upon by investors.

The underlying dispute stems from BDO’s 2013 audit report in which it stated that its audit of a publicly traded company had been conducted in accordance with Public Company Accounting Oversight Board (PCAOB) standards. Investors alleged that BDO had not completed certain required audit procedures before issuing the report, which they contend rendered the compliance statement false as a technical matter. The plaintiffs nevertheless conceded that the supposedly omitted procedures were promptly completed within weeks of the report’s issuance and did not cause BDO to change its audit opinion. In other words, the plaintiffs do not claim that the omitted procedures, once completed, had any impact on the company’s financial statements.

The district court dismissed the securities fraud claims against BDO, holding that the alleged misstatement was not material.⁶ The court reasoned that the omitted procedures had no effect on the audit’s conclusions or the financial statements themselves. The Second Circuit also initially affirmed dismissal, agreeing that the plaintiffs had failed to allege any link between BDO’s compliance statement and any misstatements or errors in the audited company’s financial statements.⁷ However, on rehearing—and following an amicus brief filed by the SEC—the Second Circuit reversed itself.
It held that an auditor's allegedly false statement of compliance with PCAOB standards is inherently material, regardless of whether the noncompliance affected the audit’s substance. The court reasoned that such certifications are critical to investor confidence and, thus, always significant.⁸

BDO argues in its certiorari petition that the Second Circuit erred in concluding in effect that compliance statements are always material. Courts have historically emphasized that materiality must be assessed in context—based on whether a reasonable investor would view the disclosure of the allegedly omitted fact as having altered the “total mix” of information. BDO explains that its earlier compliance statement, when considered in the proper, fact-specific context was immaterial because it swiftly completed the omitted procedures as permitted by auditing standards and determined that the audit report was unaffected by the initial noncompliance. Thus, even if BDO had performed all necessary procedures on a timely basis, investors would have received no different information about the company’s finances. According to BDO, the Second Circuit’s decision wrongly exposes auditors to potential liability when no investor was misled and no financial misstatement occurred.

Should the Supreme Court grant certiorari and ultimately reverse the Second Circuit, it would likely reaffirm the long-standing principle that materiality under Section 10(b)/Rule 10b-5 must be evaluated based on the specific facts and context of each case. The Supreme Court may view the Second Circuit’s decision as a significant departure from established precedent. The Court could be motivated to hear the case out of concern that imposing liability for technical or procedural compliance foot faults—particularly when those issues have no bearing on the accuracy of financial statements—risks expanding the scope of securities fraud beyond its intended reach. The Supreme Court has historically resisted bright-line rules for materiality, favoring a nuanced, fact-driven approach instead.

In addition, the Court might accept the appeal out of concern for the broader potential implications of the Second Circuit’s reasoning. The plaintiffs could attempt to extend a rule of per se materiality for auditor compliance statements to a broader group of defendants who also make representations about adherence to professional or regulatory standards. Numerous amicus briefs filed in support of BDO’s petition highlight concerns over this potential “bleed over” effect. That risk might prompt the Court to intervene and reaffirm that there is no categorical or automatic rule for materiality, regardless of the type of statement involved.

Will the Supreme Court Accept a Second Appeal from the Slack Case?

By virtue of another recently filed petition, the Supreme Court is once again being asked to weigh in on how the federal securities laws apply to direct listings, a relatively recent alternative to traditional IPOs. The pertinent facts underlying the requested appeal are as follows. Slack Technologies went public through a direct listing on June 20, 2019. Unlike a typical IPO, a direct listing allows companies to sell registered shares to the public while simultaneously permitting insiders and early investors to sell their unregistered shares on the open market. On the Slack offering’s first day, 118 million registered shares and 165 million unregistered shares were available for purchase on the NYSE. Plaintiff Fiyyaz Pirani purchased 30,000 Slack shares that day and purchased an additional 220,000 shares over the next few months.

Following the direct listing, Slack’s stock price declined, and, in response, Pirani filed suit on behalf of himself and a putative class of investors alleging violations of Sections 11 and 12(a)(2) of the Securities Act of 1933 against Slack and other defendants. These provisions impose liability for any “untrue statement of a material fact or [omission of] a material fact" in a "registration statement" or "prospectus," respectively.⁹

The district court denied Slack’s motion to dismiss. The court rejected Slack’s argument that, due to the nature of a direct listing, Pirani was unable to trace his shares to the specific registration statement he challenged—a requirement for claims under Sections 11 and 12(a)(2) in the context of a conventional IPO. Slack appealed to the Ninth Circuit, which held that tracing was not required. The Supreme Court subsequently granted Slack’s certiorari petition and, in a 2023 ruling, held that investors asserting claims under Section 11, regardless of whether the company went public via a direct listing or a traditional IPO, must be able to trace their shares to the particular registration statement alleged to be false and misleading.

In a traditional IPO, investment banks underwrite the offering, usually by buying new registered shares at a negotiated price and then selling them to investors at a higher price. The underwriters often require early investors and employees who own preexisting shares to consent to a “lockup agreement,” which means they will hold their shares for a period of time before selling them in the public market. The existence of these lockup agreements makes tracing theoretically possible in a traditional IPO scenario because the only shares in circulation for a specified period are those registered under the registration statement by which the company went public for the first time.

Because Slack went public via a direct listing, there was no lockup agreement and holders of preexisting unregistered shares were free to sell them to the public right away. One of the arguments Pirani made during this first appeal was that tracing should not be required for 1933 Act claims arising from a direct listing because tracing would be nearly impossible to prove in the direct listing context. Thus, he argued that issuers could avoid liability for false and misleading registration statements simply by choosing a direct listing over a traditional IPO.¹⁰

While the Supreme Court definitively ruled on the traceability requirement for Section 11 claims in the first Slack appeal, it left open the question of whether Section 12 carries the same traceability requirement. In its prior Slack decision, the Ninth Circuit held that Sections 11 and 12 should be interpreted similarly when assessing whether tracing was required.

On remand, the Supreme Court instructed the Ninth Circuit to engage in careful consideration of the distinct language of Section 12 before coming to rest on the question of tracing, rather than assuming—as it appeared to have done previously—that both statutes should be interpreted the same way.¹¹ In response, the Ninth Circuit considered the specific language of Section 12 and held that Section 12, like Section 11, requires plaintiffs to trace their shares directly to the challenged registration statement.¹²

Importantly, in assessing the likelihood that the Supreme Court will grant review, the Ninth Circuit also concluded that Pirani had previously conceded that he could not trace his shares. The court observed that, in arguing against the tracing requirement, Pirani had taken the position that tracing in a direct listing was "impossible.”¹³ Accordingly, having determined that Section 12—like Section 11—requires traceability, and in light of Pirani’s apparent prior concessions, the Ninth Circuit held that all his 1933 Act claims should be dismissed with prejudice.¹⁴ Pirani had attempted to persuade the court that he could potentially satisfy the traceability requirement on remand through a novel statistical analysis or an unprecedented burden-shifting framework, but the Ninth Circuit rejected those arguments.¹⁵

It remains uncertain whether the Supreme Court will agree to hear a second appeal from the Slack case. On the one hand, its decision to take up the initial appeal suggests a willingness to engage on the issue of how traditional securities law concepts apply to emerging framework of direct listings. On the other hand, the Court may think there is nothing of importance left to be said. 

This is so because, on the issue of traceability, the Ninth Circuit did precisely what the Supreme Court asked: it revisited the case and conducted the textual analysis of the language of Section 12(a)(2) that had been missing in its initial decision. If the Justices think the Ninth Circuit “got it right” on the law, i.e., there is no exception to the tracing requirement for Section 12 claims involving direct listings, the Court may see no reason to intervene.

Moreover, the Court may be concerned by the Ninth Circuit’s conclusion that Mr. Pirani previously made concessions about his ability—or inability—to trace his shares. The Supreme Court may be hesitant to grant review for a second time where the plaintiff’s prior admissions could undermine the suitability of the case to serve as a vehicle for resolving the broader legal questions at issue. 

We will continue to monitor both cases and provide updates as new developments arise. 

Endnotes

1. Petition for a Writ of Certiorari, BDO USA, LLP, v. N.E. Carpenters Guar. Annuity & Pension Funds, et al., No. 24-1151 (filed May 7, 2025).
2. Petition for a Writ of Certiorari, Pirani v. Slack Techs., LLC, et al., No. 25-44 (filed July 10, 2025).
3. 598 U.S. 759 (2023).
4. See N.E. Carpenters Guar. Annuity & Pension Funds, et al. v. DeCarlo, 122 F.4th 28, 53 (2d Cir. 2024).
5. Id.
6. In re Amtrust Fin. Servs., Inc. Sec. Litig., No. 17-cv-1545(LAK), 2019 WL 4257110, at *33-34 (S.D.N.Y. 2019).
7. N.E. Carpenters Guar. Annuity & Pension Funds, et al. v. DeCarlo, 80 F.4th 158, 182 (2d Cir. 2023).
8. N.E. Carpenters Guar., 122 F.4th at 53.
9. 15 U.S.C. §§ 77k(a), 77l(a)(2).
10. The SEC’s Investor Advisory Committee recently recommended several reforms to preserve Section 11 liability in direct listings and similar offerings, including requiring different trading tickers for registered and exempt shares, imposing a brief lockup period during which only registered shares may trade, or exploring technological solutions like distributed ledger systems. Although the recommendation was approved in March 2025, the SEC has not acted on it, and some commissioners, most notably Hester Peirce, have questioned whether the tracing problem is pervasive enough to warrant regulatory intervention, casting doubt the SEC will take action.
11. Section 11 provides a cause of action only to a “person acquiring such security,” 15 U.S.C.§ 77k(a), and Section 12(a)(2) similarly gives a cause of action only “to the person purchasing such security,” 15 U.S.C. § 77l(a).
12. Fiyyaz Pirani v. Slack Techs., Inc., 127 F.4th 1183, 1191 (9th Cir. 2025).
13. Id. at 1189.
14. Id. at 1186.
15. Id. at 1189-90. Pirani, for example, maintained that on remand he could show traceability, not by actually tracing the shares he purchased to those issued under the registration statement, but simply by relying on the statistical inference that, given the number of shares he purchased and the portion of shares on the exchange that were registered, the likelihood that none of his 30,000 shares were registered was small. Alternatively, he proposed that the Court should create a regime of burden-shifting under which Slack would have the burden to prove that Pirani’s shares were not registered. See id. at 1190-91. 

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