In late January in Newtyn Partners, LP v. Alliance Data Sys. Corp., (6th Cir.; 1/26), the Sixth Circuit clarified when omitted facts may cause public statements to constitute “half-truths” and affirmed the dismissal of a putative securities class action against a financial services company. The Court held that a statement cannot be a misleading half-truth when the disclosure and the omitted information operate on different “levels of generality.”
“Half-truths,” as this Katten blog explains, were defined by SCOTUS in Macquarie as “representations that state the truth only so far as it goes, while omitting critical qualifying information.” One of the issues debated but not addressed by SCOTUS in Macquarie was whether a statement could be misleading for failure to disclose a fact on the “same subject” (broadly defined) or if the omitted fact must be “like in kind in both subject matter and specificity.” The Katten blog asserts that no court had actually addressed this specific question about half-truths until Newtyn Partners.
This A&O Shearman alert describes the facts at issue in Newtyn Partners.
Plaintiff alleged that Defendants made misleading statements during the spinoff regarding the Loyalty Program’s client base despite the risk of allegedly significant client departures. The crux of Plaintiff’s claim was that Defendants’ statements about the Loyalty Program’s “stable client base” and “deep, long-standing relationships” were “half-truths” because they omitted key context about clients who were considering terminating partnerships.
The Court did not agree that Defendants’ statements were misleading half-truths, noting that a statement cannot be a misleading half-truth when “the words spoken and the facts omitted operate on different levels of generality” and “that the omitted facts must have a reasonably close fit to what defendants disclosed.” Here, Defendants made generic statements about a stable client base which the Court described as loosely optimistic, high-level remarks that would not have created inferences regarding specific contractual relationships for reasonable investors. These general optimistic statements did not require Defendants to disclose the specific contractual terms with clients who were at risk of terminating their partnerships and, therefore, the upbeat statements were not misleading half-truths.
– Meredith Ervine
Gibson Dunn is out with its annual update sharing observations and trends from Form 10-K disclosures so far based on annual reports they’ve reviewed for clients and other filings. It’s full of helpful discussions of trending risk factor and MD&A disclosures, common topics for comment letters, enforcement focus areas and other reminders. One suggestion that I found interesting and practical (plus universally applicable) is to tweak your typical risk factors intro. Here’s why and how (links added):
Recent securities litigation has highlighted the importance of properly characterizing the purpose of risk factor disclosures and clearly communicating the limitations of those disclosures to investors. Securities lawsuits increasingly include claims that risk factors are misleading when they describe potential risks as hypothetical when such risks have already materialized. Last year, the Supreme Court’s decision to dismiss the appeal in Facebook Inc. v. Amalgamated Bank left unanswered how securities fraud claims challenging risk factor disclosures should be analyzed, and, as a result, companies face even greater uncertainty in drafting risk factors.
To address this risk, we recommend companies update the introductory paragraph to the Risk Factors section to clarify that the risk factor disclosures reflect management’s beliefs and opinions about potential future risks and do not contain factual assertions about past events [. . .] The following is an example of language that could be included in the introductory paragraph of the Risk Factors section:
“These disclosures reflect the Company’s beliefs and opinions as to factors that could materially and adversely affect the Company and its securities in the future. References to past events are provided by way of example only and are not intended to be a complete listing or a representation as to whether or not such factors have occurred in the past or their likelihood of occurring in the future.”
Including such clarification communicates that Item 105 disclosures are inherently speculative and exclusively forward-looking. We encourage companies preparing their 2025 Form 10-Ks to incorporate similar language to strengthen their litigation protection while maintaining clarity.
Even the Newtyn Partners case that I shared in the prior blog included a claim that a risk factor that the loss of any of the company’s top ten clients would have a significant impact on revenue was misleading because it failed to add that some clients were considering terminating. The Sixth Circuit’s decision was consistent with the suggested language above — that risk disclosures are inherently prospective and should not “cause a reasonable investor to infer anything about the present.”
I fully support including this language and agree with John that alleged “hypothetical risk factors” aren’t likely to be a high priority for the SEC in the current environment. But it still behooves companies to be careful about hypothetical risk factor language since it’ll continue to be a popular topic for private securities litigation and may preclude companies from relying on the PSLRA safe harbor for forward-looking statements. (And, after Saturday, that may now mean updating risk factors concerning geopolitical risks and conflict in the Middle East to address surging oil prices and other business impacts of war against Iran.)
– Meredith Ervine
Last week on LinkedIn, John Reed Stark shared his perspective on the SEC Enforcement Division’s latest updates to its Enforcement Manual. I think it’s safe to say that he’s a fan. And his post is a helpful explanation for corporate attorneys who may be wondering what the changes really mean in practice. He specifically highlights Section 2.3.
[Section 2.3] directs staff, subject to confidentiality constraints, to inform Wells notice recipients of ‘salient, probative evidence’ that the staff ‘should have reason to believe may not be known to the recipient.’
Staff are further instructed to be ‘forthcoming’ about the contents of the investigative file and, on a case-by-case basis, to ‘make reasonable efforts’ to allow recipients to review relevant portions.”
He notes that the SEC Staff was operating without a formalized policy or uniform practice of sharing relevant evidence with counsel before recommending a civil action to the Commissioners. He calls this a “foundational shift.”
– Meredith Ervine
