TheCorporateCounsel.net

Last month, Dave blogged about the SCOTUS’s decision in the Macquarie case, in which the Court held that a company’s “pure omission” to disclose information concerning known trends required by Item 303 of Regulation S-K could not serve as the basis for a private securities fraud claim. The decision may have some companies wondering whether they’re off the hook for known trends disclosures, but a recent Weil memo makes it clear that they aren’t.

The memo points out that the decision doesn’t affect the SEC’s ability to bring an enforcement action for failure to comply with Item 303’s disclosure requirements, and that any protection that it provides against private claims may turn out to be very limited:

As the Court itself stated: “For one thing, private parties remain free to bring claims based on Item 303 violations that create misleading half-truths.” A half-truth by its nature is an affirmative statement that may be literally accurate, but it is nonetheless misleading due to the failure to provide additional qualifying information. “In other words, the difference between a pure omission and a half-truth is the difference between a child not telling his parents he ate a whole cake and telling them he had dessert.”

So following Macquarie, a claim that was once asserted as a pure omission of required SEC disclosure may instead be recast as a claim that other affirmative statements in the disclosure were rendered misleading by such omission. The practical result is that companies may continue to face litigation and liability exposure as a result of such omission.

For instance, consider the SEC’s examples of currently known trends and uncertainties that may require disclosure in the MD&A, such as a reduction in the company’s prices, an erosion in its market share and the likely non-renewal of a material contract. It would seem that a plaintiff in such cases would seek to identify affirmative statements in a company’s public disclosures that were rendered misleading (i.e. “half-truths”) as result of the failure to disclose the known trend or uncertainty. For example, if a company makes statements regarding the impact on revenues of a material contract, knowing that the material contract is not likely to be renewed, a plaintiff might argue that these statements are actionable “half-truths” under Rule 10b-5 if the company omits to disclose the potential non-renewal of that contract.

The memo also notes that while Rule 10b-5 may not be available to private plaintiffs in a pure omissions case, Section 11 of the Securities Act does provide for liability based on material omissions of information required to be included in a Securities Act registration statement.

– John Jenkins