June 9, 2023

MD&A Omissions as Securities Fraud: Petition for SCOTUS Review

The requirement under Reg S-K Item 303 to describe “known trends & uncertainties” is one of the trickier items to navigate in periodic reporting. As our “MD&A Handbook” discusses, that’s especially true if you are trying to evaluate the risk of not discussing a matter that, in management’s view, may not be “reasonably likely” to have a material impact at the time the report is filed.

A cert petition filed last week is asking the Supreme Court to clarify the boundaries of private rights of action in these situations. This blog from “Jim Hamilton’s World of Securities Regulation” explains:

In the cert petition, Macquarie and the other petitioning defendants argue that a Section 10(b) claim cannot rest entirely on a failure to provide a disclosure required under Item 303; there needs to be some affirmative statement rendered misleading by the omission. While the SEC can inquire and bring an enforcement action for a violation of Item 303, the violation should not “open the floodgates to potentially crippling private class action liability.”

The petition argues that the Second Circuit has acknowledged its split from the Ninth Circuit’s 2014 holding in In re NVIDIA Corp. Securities Litigation, which in turn had cited a Third Circuit decision. Subsequently, the Eleventh Circuit wrote that a violation of Item 303 does not ipso facto indicate a violation of Section 10(b), and the Fifth Circuit said in dicta that it has never held that Item 303 creates a duty to disclose under the Exchange Act. Resolving the split is important because it involves the three dominant circuits for securities litigation and because different standards should not apply depending on where a plaintiff files suit, the petition asserts.

It would be nice to get more clarity here, but only if the answer is the one I want…

Liz Dunshee