The U.S. Court of Appeals for the Second Circuit recently affirmed the dismissal of a securities fraud class action against S&C client Barclays in Knapp v. Barclays PLC. S&C represented Barclays in the appeal. The court resolved two “issues of first impression” in the Second Circuit relating to issuer liability under the Securities Act. First, the court held that routine corporate events involving stock splits or reverse stock splits are not “sales” of securities that trigger liability under the Securities Act. Second, the court reinforced the Supreme Court’s 2023 decision in Slack Technologies, LLC v. Pirani, finding that the plaintiffs were required to trace their securities to the initial registration statement under which the pre-split securities were issued.

Background

In March 2022, Barclays Bank PLC (“Barclays”) announced it had inadvertently issued more than $17 billion of securities in excess of the amount registered on a shelf registration statement. In the wake of that announcement, purchasers of a Barclays exchange-traded note that was involved in the over-issuance asserted claims for (i) rescission under Section 12(a)(1) of the Securities Act, and (ii) misstatements under Section 11 of the Securities Act. The district court (Judge Liman of the S.D.N.Y.) dismissed the plaintiffs’ complaint in full and the plaintiffs appealed.

Section 12(a)(1)’s “sale” requirement. Section 12(a)(1) applies only to purchases of unregistered securities made directly from the defendant. Because the plaintiffs had purchased their notes on the secondary market, which ordinarily would preclude their claims, they sought to assert Section 12(a)(1) claims concerning a subset of notes they purchased on the secondary market on their theory that Barclays’ subsequent 4:1 reverse-split of those notes constituted a sale transaction directly with Barclays. The issue for appeal was whether Barclays’ exercise of a contractual right to condense four notes into one of equal value constituted a statutorily defined “sale.”

Section 11’s tracing requirement. In Slack Technologies, LLC v. Pirani, the Supreme Court held that Section 11 applies only to “registered shares” that are “traceable to the allegedly defective registration statement” (i.e., “the particular registration statement alleged to be false or misleading”).[1] In this case, Barclays had made seven separate offerings of the notes purchased by the plaintiffs. Three of those offerings were prior to the over-issuance, and four of them were affected by the over-issuance. As a result, the plaintiffs could not trace their secondary market purchases to an allegedly defective registration statement. To try to overcome that obstacle, the plaintiffs sought to show that their notes were traceable to a registration statement affected by the over-issuance by again pointing to the reverse-split, arguing that their notes trace back to the registration statement that Barclays issued on the day the reverse-split took effect.

The Second Circuit’s Decision

The Second Circuit affirmed the dismissal of the plaintiffs’ claims.[2]

As to the Section 12(a)(1) claim for rescission, the court held that the 4:1 reverse-split was not a “sale” that can trigger liability under the Securities Act. In resolving this novel issue, the court emphasized that the reverse-split did not constitute a “disposition for value” (which is the statutory definition of “sale”), because the reverse-split did not change the “nature of the investment” and the plaintiffs made no investment decision when Barclays exercised its contractual right to effectuate a reverse-split.[3] As the court stated, the “combination of four notes into one larger note is exactly the kind of non-substantive exchange that will not be treated as a sale.”[4]Because the reverse-split “alter[ed] only the form of the securities,” the exchange did “not require distributees to give any value in exchange.”[5] The court further explained that “[t]his conclusion neatly matches the purposes of the Securities Act”: “The design of [the Securities Act] is to protect investors by promoting full disclosure of information thought necessary to informed investment decisions. But when an issuer announces a mandatory split, as happened here, investors have no choice and make no investment decision.”[6]

As to the Section 11 claim for misstatements, the court followed the strict tracing requirement that the Supreme Court adopted in Slack. Addressing Slack for the first time in the Second Circuit, the court explained that, “[b]ecause section 11 focuses on securities issued under a ‘particular registration statement,’ plaintiffs must first plead that they acquired securities ‘traceable to that allegedly defective statement.’”[7] Although the plaintiffs argued that the notes they received after the reverse-split were traceable to the registration statement that Barclays issued on the same day that the reverse-split took effect, the court rejected that argument based on a careful parsing of the language in that registration statement. The registration statement’s “own terms show that it does not cover those [notes] but rather governs the ‘initial sale of the [post-split] [notes]’ that Barclays still held in its inventory, and which it had thus not distributed via the [reverse] split.”[8] Accordingly, because the plaintiffs failed to meet Slack ’s tracing requirement, the court affirmed the dismissal of the Section 11 claim without addressing whether there were any misrepresentations in the registration statement.

Implication

The plaintiffs’ bar favors bringing Sections 11 and 12 claims against companies and their officers and directors because those claims do not require pleading and proof of scienter (fraudulent intent), reliance, or loss causation, as required for claims under Section 10(b) of the Exchange Act. The Knapp decision serves as an important reminder that there are numerous other important requirements that plaintiffs must meet to unlock those provisions. Accordingly, defendants facing Securities Act claims should carefully evaluate whether the plaintiff satisfies all of the technical statutory criteria.

For public companies and transactional lawyers, the Second Circuit’s decision also provides case-law support for an important point: that a company’s effectuation of a split or reverse-split does not ordinarily constitute a “sale” of a security under the Securities Act. Of course, counsel considering a split or reverse-split must carefully consider the particular facts and circumstances to determine whether registration under the Securities Act is required.

ENDNOTES

[1] 598 U.S. 759, 768, 770 (2023).

[2] Knapp v. Barclays PLC, 171 F.4th 166 (2d Cir. 2026).

[3] Id. at 171-72.

[4] Id. (quotation omitted).

[5] Id. (quotation omitted).

[6] Id. at 171 (quotation omitted).

[7] Id. at 173 (quoting Slack, 598 U.S. at 767, 770) (alterations omitted).

[8] Id.

This post is based on a Sullivan & Cromwell LLP memorandum, “Second Circuit Affirms Dismissal in Major Securities Fraud Case,” dated May 6, 2026, and available here.