July 8, 2004

Are Companies Required to Disclose

The Wall Street Journal reported last week that the SEC has filed an amicus brief in a Second Circuit Court of Appeals case, arguing that companies and mutual funds are not permitted to omit information not specifically required from disclosure documents and public statements simply because that information is available elsewhere.

In In re Merrill Lynch & Co., Inc. Research Reports Securities Litigation, the plaintiff is a shareholder of Merrill’s Global Technology Fund. Suing under Securities Act Sections 11 and 12(a)(2), the plaintiff contends that Merrill should have disclosed the fact that it performed investment banking services for some of the stocks in the fund and that Merrill’s analysts had written research on certain of the fund’s stocks.

The U.S. District Court for the Southern District of New York dismissed the action in July 2003, holding that Merrill had no obligation to tell investors that its fund owned stocks of companies that had relationships with Merrill because “that information was already public” on the Internet, in the news media and elsewhere.

In its brief, the SEC argued that “[t]he fact that information could be discovered somewhere in the public domain does not mean it can never be materially misleading to omit that information from a disclosure document or other statement.”

Stay tuned for the decision.

Chairman Donaldson Recuses Himself

Last week, a company that Chairman Donaldson had served as a director, EasyLink Services Corporation, disclosed in an 8-K filing that it was being investigated by the SEC Staff. According to the filing, the Staff is “reviewing certain transactions accounting for approximately $3 million of revenue generated by its former advertising network business in 2000, a year in which the Company reported $61.2 million in total revenue.” Chairman Donaldson served on the audit committee in 2000.

The next day, the Commission issued a press release announcing that “Chairman Donaldson has not participated and will not participate in any matter before the Commission involving EasyLink.” Further, the SEC announced that a former Assistant Director of the Division of Enforcement was acting as “Special Advisor” to the four Commissioners.

-Posted by Julie Hoffman