You might recall that in the Macquarie case last year, SCOTUS said 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. This was a big win for companies. But as John cautioned when the case came down, plaintiffs could potentially get creative with casting disclosures as “misleading half-truths” to get around the Macquarie limitation.

As a non-litigator, I had not fully appreciated how this plays out procedurally. At the class certification stage, plaintiffs still want to show a case involves omissions, because in omissions-based class certifications, the plaintiffs don’t have to prove reliance and resulting damages. So, according to this Sullivan & Cromwell memo, it is more good news for companies that the 6th Circuit Court of Appeals recently narrowed the path to class certification for “mixed” cases that allege both omissions and misrepresentation.

In In re: FirstEnergy Corp Securities Litigation, the court held that plaintiffs have to show that the case “primarily” involved omissions in order to get the benefit of the easier certification standard. The court also articulated a narrow 4-part test to determine whether statements are “omissions” and whether the standard is met. Among other things, it also said that when a company doesn’t disclose misconduct but makes generic and aspirational statements about its ethics and governance, that’ll be considered a misrepresentation – which makes it harder for the class to be certified. The S&C memo explains what the case as a whole means for companies:

Defendants in securities fraud actions should carefully scrutinize whether a complaint truly alleges omissions under the factors the Sixth Circuit identified. Indeed, in light of the Supreme Court’s holding in Macquarie Infrastructure Corp. v. Moab Partners, L.P. that “pure omissions” are not cognizable under Section 10(b) of the Exchange Act and that plaintiffs instead must identify a statement that is false or misleading,[16] it is not clear how, if at all, the Affiliated Ute presumption could ever apply.

The decision also provides a critical defense in so-called event-driven securities litigation. In such cases, plaintiffs often try to transform any negative company event (such as a data breach) into securities fraud by pointing to generic statements touching on the subject of that negative event (such as committing to protect client data). Following the Supreme Court’s 2021 decision for S&C client Goldman Sachs in Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System,[17] which clarified that the “generic nature of a misrepresentation” is “important evidence of a lack of price impact” under the Basic presumption,[18] plaintiffs have tried to seek shelter under the Affiliated Ute presumption in event-driven cases. The Sixth Circuit’s decision cuts off that path.

The plaintiffs in this case will get another bite at the apple to move forward under the “misrepresentation” class certification standard – but the S&C memo points out that in several recent cases, defendants have succeeded in rebutting the Basic presumption by showing an absence of price impact. In other words, they’ve showed that the alleged misrepresentations did not actually impact the market price of the stock.

All that said, you do still need to think about “known trends” and potential “omissions” allegations when you’re drafting disclosure. As John blogged last year, the Macquarie decision didn’t affect the SEC’s ability to bring an enforcement action, and the class certification piece obviously doesn’t apply in that context either.

– Liz Dunshee