Materialized Risks Must Be Disclosed—Second Circuit Vacates Dismissal of Securities Act Claims and Confirms Rule 8 Pleading for Negligence-Based Section 11/12 Claims (Van v. Bright Health Group, Inc.)

Introduction

In Van v. Bright Health Group, Inc., the U.S. Court of Appeals for the Second Circuit vacated the dismissal of Securities Act claims arising from Bright Health Group’s June 2021 initial public offering (IPO). The putative class, led by Winston Van, alleged that Bright Health Group (BHG), its senior executives and directors, and its underwriters issued offering materials that were materially misleading in two ways:

Risk factors framed as potential future risks that had, in fact, already materialized before the IPO (“Risk Factor Misstatements”).
Positive, present-tense statements about BHG’s operational strength that were allegedly false when made (“Affirmative Misstatements”).

The district court dismissed, holding that the complaint failed to plead actionable misstatements or omissions. The Second Circuit disagreed, holding that under the Rule 8 notice-pleading standard applicable to negligence-based Securities Act claims, the complaint plausibly alleged that BHG’s offering documents mischaracterized known, ongoing operational problems—particularly a significant claims backlog and data limitations—as hypothetical risks. The court also emphasized that allegations from multiple former employees (confidential witnesses) and corroborating post-IPO admissions by senior executives, when considered together, made the claims plausible.

Although issued as a non-precedential summary order, the decision reinforces several recurring principles in Securities Act litigation: (1) plaintiffs may plead Section 11/12 claims under Rule 8 when fraud is expressly disclaimed even if Exchange Act fraud claims are also asserted; (2) “may” and “can” risk factors can be actionable when the risk had already materialized and was knowable when disclosed; (3) detailed confidential-witness allegations can support company-wide inferences at the pleading stage; and (4) courts must read both offering documents and complaints holistically.

Summary of the Opinion

The Second Circuit vacated the district court’s dismissal of the Securities Act claims (Sections 11, 12(a)(2), and derivative Section 15 control-person claims) and remanded for further proceedings. Key holdings include:

Pleading standard: Because plaintiffs expressly disclaimed fraud as to the Securities Act claims and alleged negligence, Rule 8—not Rule 9(b)—governs those claims.
Materialized-risk doctrine: Risk disclosures that portray dangers as merely potential cannot insulate a failure to disclose that the risks had already materialized and were virtually certain to continue; such framing may be misleading.
Confidential witnesses: Specific, role-grounded allegations from former employees can plausibly support an inference of company-wide issues and executive knowledge, especially when corroborated by internal communications (e.g., widely distributed emails) and all-hands meetings with senior leadership.
Holistic assessment: Post-IPO statements by executives that align with the former employees’ accounts may corroborate that risks had materialized at the time of the IPO; allegations should be viewed collectively rather than piecemeal.
Section 15 revival: Because Sections 11 and 12(a)(2) claims survive, related Section 15 control-person claims are reinstated.

Analysis

Precedents Cited and How They Shaped the Decision

Litwin v. Blackstone Group, L.P., 634 F.3d 706 (2d Cir. 2011) and Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004): Establish the split between Rule 8 and Rule 9(b). When Securities Act claims are premised on negligence and fraud is disclaimed, Rule 8 applies. If they “sound in fraud,” Rule 9(b) applies. The panel held Rule 8 governs here because the complaint disclaimed fraud as to Sections 11/12 and pleaded negligence, even though separate Exchange Act fraud claims were also asserted.
Pappas v. Qutoutiao Inc., No. 23-1233, 2024 WL 4588491 (2d Cir. Oct. 28, 2024) (summary order): Confirms that plaintiffs may plead Exchange Act fraud under Rule 9(b) and Securities Act negligence under Rule 8 in the alternative. The court relied on this to reject the district court’s heightened-pleading approach.
In re Morgan Stanley Information Fund Securities Litigation, 592 F.3d 347 (2d Cir. 2010): States Section 11’s core standard (untrue statement or omission of material fact necessary to make statements not misleading) and emphasizes holistic review of offering materials. The panel applied this holistic approach to both the complaint and the offering documents.
In re ProShares Trust Securities Litigation, 728 F.3d 96 (2d Cir. 2013): Ordinarily, warning of the exact risk that later materializes can defeat Section 11 claims. But this principle does not apply when the “risk” had already occurred at the time of the offering.
Set Capital LLC v. Credit Suisse Group AG, 996 F.3d 64 (2d Cir. 2021) and Rombach again: Cautionary language about future risks cannot insulate the failure to disclose that the risk had already materialized. The court applied this materialized-risk doctrine to hold the “may/can” phrasing plausibly misleading.
New Jersey Carpenters Health Fund v. Royal Bank of Scotland Group, 709 F.3d 109 (2d Cir. 2013): Addresses the use of confidential witnesses. The Second Circuit found that the former employees’ roles supported the probability they possessed the knowledge alleged and that their accounts plausibly suggested company-wide issues, not isolated incidents.
Lynch v. City of New York, 952 F.3d 67 (2d Cir. 2020): Courts must evaluate allegations collectively, not piecemeal, in assessing plausibility. The panel used this to consider the former employees’ allegations together with executives’ post-IPO statements.
In re Synchrony Financial Securities Litigation, 988 F.3d 157 (2d Cir. 2021): Reiterates that Securities Act liability does not require scienter; it is essentially strict as to material misstatements or omissions. This underscores that plaintiffs need not prove intent to deceive to state a Section 11/12 claim.
In re Lehman Brothers Mortgage-Backed Securities Litigation, 650 F.3d 167 (2d Cir. 2011): Section 15 liability requires an underlying Section 11/12 violation and control. Because the panel revived the primary claims, it also revived the derivative control-person claims.

Legal Reasoning

The court’s reasoning proceeds in four linked steps:

Pleading standard. The complaint explicitly disclaimed fraud for the Securities Act counts and alleged that the offering documents were negligently prepared and that underwriters negligently failed to uncover undisclosed operational problems. Given that framing, and despite the presence of separate Exchange Act fraud claims, Rule 8 applied to the Securities Act counts. This follows Litwin and the Second Circuit’s recent Pappas summary order.
Materialized-risk misstatements. The offering documents warned that operational difficulties “may” affect claims-cost estimation and that risk-management problems “can” affect financial performance. The complaint, however, alleged that by the IPO date (June 2021) BHG was already suffering from:
- A major claims-processing backlog (including an internal email around May 2021 noting a >180-day backlog, widely circulated).
- Systemic infrastructure gaps (poor provider directories; legacy systems; manual processing).
- Adverse impacts from rapid growth and COVID-19 on data and risk scoring.
Under Set Capital and Rombach, describing risks as merely potential can be misleading when the problem has already occurred and is likely to recur. The court concluded the complaint plausibly alleged that at least some enumerated risks had already materialized and were knowable to defendants at the time of the IPO.
Confidential witnesses and executive knowledge. The district court discounted the former employees for lacking “company-wide” knowledge and contemporaneity. The Second Circuit found this too restrictive. The complaint described:

FE-1’s role as a Market Executive Director from 2019–2021; his receipt of a widely distributed May 2021 claims-backlog email; participation in “all-hands” meetings from February 2021 with the CEO and CFO discussing the issues; creation of “war rooms” to address the backlog; and first-hand observations of risk-scoring issues since mid-2020.
Two additional managers (in care management and market performance) corroborating increased delinquent-payment complaints and infrastructure deficiencies around the IPO period across markets.

Relying on New Jersey Carpenters v. RBS, the panel held that these descriptions supported the probability that the witnesses possessed the knowledge they claimed and that the problems alleged were plausibly company-wide. The allegations also supported an inference that senior leadership was aware of the issues before the IPO.

Post-IPO statements as corroboration; holistic assessment. The complaint also pointed to March 2022 investor-call admissions by the CEO and CFO: growth “outpaced our operational and system capabilities”; “lack of visibility into lagging medical claims” on “legacy operational systems” that required manual processing; and “2021 [was] the peak of inefficiency.” While post-IPO statements alone do not prove falsity at the time of the IPO, they may corroborate earlier allegations. Viewing all allegations “in combination rather than piecemeal,” the panel held the complaint plausibly alleged the offering documents were misleading when made.

Because the complaint plausibly alleged material misstatements/omissions under Sections 11 and 12(a)(2), derivative Section 15 claims were also reinstated for further proceedings on control.

Impact

Although non-precedential, the order has practical and persuasive significance in the Second Circuit:

Drafting risk factors in IPOs: Issuers and underwriters should avoid describing known, ongoing operational issues as hypothetical “may/can” risks. If a risk has already materialized, disclosing it as present—and, where feasible, quantifying or contextualizing its impact—reduces Section 11/12 exposure. Mere generic cautionary language, especially in IPOs, will not shield misstatements of present fact.
Use of confidential witnesses: Detailed accounts from former employees—anchored to specific roles, timeframes, and internal communications—can survive Rule 12(b)(6). Courts will not automatically dismiss such allegations for lack of “company-wide” vantage if the pleaded facts support a reasonable inference of breadth (e.g., enterprise-wide emails, cross-market consistency, all-hands meetings with executives).
Pleading standards clarified: Plaintiffs can plead Securities Act negligence claims under Rule 8 even when also asserting Exchange Act fraud claims under Rule 10b-5 with Rule 9(b); the presence of the latter does not elevate the former to Rule 9(b). Plaintiffs should expressly disclaim fraud for Sections 11/12 when pursuing a negligence theory.
Holistic plausibility: Post-IPO admissions can corroborate that risks were known or knowable at the IPO, especially when aligned with internal communications and confidential-witness accounts. Courts must assess the complaint and offering documents holistically.
Remand considerations: On remand, expect litigation over materiality, negative causation (an affirmative defense to damages under Section 11/12), due diligence defenses for underwriters, and proof that statements were misleading when made. The panel’s ruling does not resolve these issues; it merely allows the case to proceed past the pleading stage.

Complex Concepts Simplified

Section 11 (Securities Act of 1933): Imposes liability for material misstatements or omissions in a registration statement. Plaintiffs need not prove intent to defraud; falsity is assessed at the time of the offering.
Section 12(a)(2): Imposes liability for material misstatements or omissions in a prospectus or oral communication during a securities offering.
Section 15: Control-person liability. If a primary violation of Section 11/12 exists, those who controlled the primary violator may be liable.
Rule 8 vs. Rule 9(b): Rule 8 requires a “plausible” claim with sufficient factual matter (notice pleading). Rule 9(b) requires particularity for fraud-based claims. Negligence-based Securities Act claims are typically governed by Rule 8—especially where the complaint disclaims fraud for those counts.
Materialized-risk doctrine: A risk factor is misleading if it frames a danger as hypothetical when the issuer already knows the risk has occurred and is likely to continue. Cautionary language cannot sanitize omissions about present or past problems.
Holistic review: Courts read offering materials “as a whole” and assess complaints collectively, weighing how all allegations interlock rather than isolating each statement.
Confidential witnesses (former employees): Their allegations are credited at pleading if the complaint describes their roles, tenure, and basis of knowledge with enough detail to support the probability that they know what they claim. Multiple such accounts and internal documents can corroborate company-wide inferences.
Non-precedential summary order: The order may be cited subject to FRAP 32.1 and Local Rule 32.1.1, but it does not bind future panels. It remains persuasive, especially to district courts within the Circuit.

Conclusion

Van v. Bright Health Group, Inc. strengthens a familiar, but critical, set of principles in Securities Act cases: issuers and underwriters cannot safely present known, active problems as merely potential risks; plaintiffs may pursue negligence-based Section 11/12 claims under Rule 8 even when also alleging fraud under the Exchange Act; and well-pled confidential-witness accounts, buttressed by internal communications and post-IPO admissions, can clear the plausibility threshold at Rule 12(b)(6).

On remand, the parties will contest materiality, causation, due diligence, and other merits issues. But the Second Circuit’s message is clear: where the complaint plausibly alleges that “may/can” risks had already materialized and were known or knowable to management at the time of the IPO, dismissal at the pleading stage is improper. Even as a summary order, this decision offers practical guidance for IPO disclosure practices and for litigating the boundary between hypothetical risk warnings and omissions about present, material operational realities.