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.
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.)
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.”
I blogged earlier this week about proponents taking companies to court over decisions to exclude Rule 14a-8 shareholder proposals from the company proxy statement. Two of the three cases have now settled, with the companies agreeing to include the proposal in the proxy.
The NYC Comptroller announced its settlement yesterday – and emphasized that EEO-1 diversity disclosures are still an initiative:
In 2020, the Comptroller’s Office launched the successful Diversity Disclosure Initiative, encouraging America’s largest companies to voluntarily disclose their Consolidated EEO-1 Reports. The results have been overwhelmingly positive. As of 2025, roughly 80% of S&P 100 companies publicly disclose their Consolidated EEO-1 report, a comprehensive breakdown of the company’s workforce by race, ethnicity, and gender, an increase from about 14 in July 2020. The Comptroller’s Office, on behalf of the Funds, have reached agreements with major companies including the Home Depot, McDonald’s Corporation, Netflix, Nike, and Verizon Inc.
The disclosure of a company’s Consolidated EEO-1 Report is a cost-effective and meaningful way to provide investors with consistent information that allows for comparison of one company to that of its peers. Further, this disclosure imposes few if any additional costs on a company because companies like AT&T are already required to annually submit the report to the Equal Employment Opportunity Commission.
As I noted in my earlier blog, one factor to consider in exclusion decisions is whether the company has previously agreed to do the thing the proposal asks for – that appeared to be a factor in the NYC Comptroller case, even though the macro environment has shifted in the meantime. Another factor, apparently, is whether proponents will litigate – and that risk may be elevated now that there are two settlements on the books.
In other settlement news, Ross Kerber of Reuters reported yesterday that Vanguard had settled antitrust claims with Texas Attorney General Ken Paxton and other state AGs. Here’s more detail (also see this WSJ article):
Vanguard Group will pay $29.5 million and bolster its passive investing approach in order to settle a suit by 13 Republican state attorneys general claiming the fund manager and rivals violated antitrust law through their climate activism.
The suit in U.S. District Court in the Eastern District of Texas has been closely watched as a test of how far Republicans from energy-producing states would push Wall Street firms they accused of overemphasizing environmental matters.
BlackRock and State Street are co-defendants and aren’t part of the settlement. The claims were based on the investors’ membership in investor coalitions focused on climate change commitments, but the investors have already backed away from those. So, the settlement is premised on “passivity commitments.” Vanguard issued this statement – here’s an excerpt:
The terms of the agreement to settle this litigation reaffirm our longstanding practices and standards and the passive nature of our index funds. The settlement also recognizes our innovative Investor Choice program as a tool for empowering investors and bringing new voices into the proxy voting ecosystem. Investor Choice is the largest proxy voting choice program in the world, empowering 20 million index fund investors across more than $3 trillion1 in assets to make their voices heard.
It’s not entirely clear to me what “passivity commitments” means and whether it will affect how Vanguard votes. Maybe it just means the AGs are watching extra close and will swoop in if they see the asset manager support a climate-related shareholder proposal. At any rate, it’s worth noting that institutional investor support (or lack thereof) is another factor to consider in whether to put Rule 14a-8 shareholder proposals in the proxy.
The SEC’s 45th Annual Small Business Forum is coming up on Monday, March 9th from 1:00 to 5:00 pm ET. As Dave shared earlier this month, it’s happening at the SEC’s Headquarters – and there’s also a live webcast if you want to watch virtually. Here’s the registration page – for if you’re attending in person or want to be able to participate virtually.
The agenda includes a session on “Public Company Perspectives: Considerations for IPOs and Small Caps” – at 3:35 pm ET. That’s followed by a 25-minute “open mic” – not for jokes but for an audience opportunity to discuss policy recommendations. Email smallbusiness@sec.gov with your capital-raising policy ideas by noon on March 5th.
Brand new and very timely, this “AI Use by Lawyers” Handbook covers all sorts of terrain – from AI jargon to ethics, use cases, workflows, effective prompting, what to review before sharing AI content with clients – and much more. Brought to you by Meredith and Meaghan, it delivers 25 pages of practical guidance. If you just want to dive into the prompting basics & tips, check out the corresponding checklist.
Yesterday, an online prediction market platform announced that it has been actively investigating potential insider trading activity on its platform. To shed let on how it identifies violations and enforces its rules, it shared details from two cases it recently closed.
With prediction markets taking off, there has been a decent amount of commentary lately on whether there are guardrails to keep things fair. Analytical tools are even popping up to find unusual activity – not unlike how the SEC uses data analytics to flag suspicious trades. And with our members being so on top of things, it was only a matter of time before someone asked about it in our Q&A Forum. Here’s Question #12,966:
I had a question regarding the rise of the predictions market and possible interaction with the federal securities laws. Specifically, I am thinking about a public company’s Insider Trading Policy and whether we should be suggesting any changes to these policies to consider actions by employees/actors in predictions markets.
Of course, we know that SEC Rule 10b-5 requires a trade “in connection with the purchase or sale of any security”. I am pretty sure that participation in a predictions market is not a security.
I am thinking of CFTC’s Rule 180.1 which is modeled directly after Rule 10b-5, and prohibits “any manipulative device, scheme, or artifice to defraud” in connection with any swap or contract of sale of a commodity. Do you think there is reason to believe that prediction market contracts are classified as “commodity interests” rather than securities, that they may technically fall outside the SEC’s reach, and may be within the reach of the CFTC?
Indeed, the prediction market that made yesterday’s announcement about insider trading is regulated by the CFTC and referred the cases to that agency. Bloomberg’s Matt Levine explained it this way:
There is, perhaps, a three-tiered system of insider trading enforcement on prediction markets:
1. Kalshi itself bans insider trading, more strictly than the US stock market does; if you trade with any insider knowledge at all, and they catch you, they can ban you from the site and confiscate some of your money.
2. The CFTC bans insider trading on prediction markets, but less strictly than the stock market; the CFTC will only come after you if you have “misappropriated confidential information in breach of a pre-existing duty of trust and confidence to the source of the information.” But if they do come after you, they can probably do more to you than Kalshi can. (Bigger fines, banning you from exchanges other than Kalshi, etc.)
3. The US Department of Justice has some obvious interest in nontraditional insider trading, and has brought wire fraud cases against insider sports gamblers and insider nonfungible token traders. If the DOJ comes after you, they can put you in prison, which Kalshi can’t. I don’t know exactly what makes prediction-market insider trading a crime, though. In the sports gambling case, the DOJ argued that the insider bettors committed wire fraud by violating online sportsbooks’ terms of service, which seems like a stretch to me. But if that is the rule, then betting $200 on your own political candidacy, in violation of Kalshi’s rules, might also be a crime? It’s possible that the criminal insider trading rules cover more than the CFTC’s rules; it’s possible that the Justice Department would prosecute some trades that the CFTC would allow.
Here’s how John responded to our member’s question (in part):
That’s an interesting question. I’m far from an expert in commodities regulation, but it strikes me that some adjustment to existing insider trading policies may be advisable (or at least worth thinking about) in order to address insider trading in prediction markets. While the CFTC generally has jurisdiction over prediction markets, if they are used to manipulate securities markets, it’s my understanding that the SEC has the authority to get involved.
John also noted that the SEC has pursued “shadow trading” enforcement theories in the recent past, so perhaps there could be some tie-in to securities enforcement there (keep in mind that practice varies in terms of whether to prohibit shadow trading in company policy). At this point, though, it seems like the connection to securities trading is more indirect. So, for most companies, it may just be a matter of corporate policy – i.e., prohibiting employees from misusing confidential information. On the other hand, Bloomberg also recently reported this:
Roundhill Investments has asked the US Securities and Exchange Commission for permission to launch six ETFs that would let investors wager on US election outcomes through standard brokerage accounts — the most ambitious attempt yet to bring prediction markets into mainstream finance.
I’m not sure whether that changes things. This is a complex and evolving area, and I’ll look forward to hearing from someone who’s analyzed it more closely!
Yesterday, the SEC posted notice that it has extended its deadline to act on Nasdaq’s proposal to expand trading hours for listed equities and exchange-traded products to 23 hours a day, five days a week. The SEC says it will act on the proposal by April 13th – an extension from the original date of February 27th.
Nasdaq first revealed its efforts towards extended trading last spring – and submitted the proposal to the SEC in December. John blogged about pushback at that time.
In the meantime, the SEC has approved extended trading on NYSE Arca – to 22 hours per day, 5 days a week. The SEC also approved the “24X exchange” in 2024 – which offers trading 23 hours a day, five days a week.
Yesterday, the SEC’s Enforcement Division announced “significant updates” to its Enforcement Manual, which was last revised in 2017. The Enforcement Manual isn’t binding – but it operates as a guide for the Enforcement Division Staff. So, it’s helpful in the sense that it outlines the process for investigating federal securities law violations. Those processes are important to investigation targets, both to know what may be coming and to determine defense strategies and some disclosure decisions.
In general, the latest changes are aimed at making the investigative process more predictable and transparent. The Division’s announcement summarizes the key updates (also see this Reuters article):
1. Ensuring a uniform Wells process: The updated Enforcement Manual emphasizes the importance of open, informed, and thoughtful dialogue between SEC staff and potential respondents and defendants, with the goal of producing better outcomes and ensuring the fair and timely resolution of investigations and recommendations of possible enforcement actions.
– To encourage this dialogue and facilitate greater consistency in the Wells process, the Enforcement Manual updates provide that recipients of a Wells notice will ordinarily receive four weeks to make Wells submissions. The update also gives guidance on what makes a Wells submission most helpful to the staff and the Commission. The updated Enforcement Manual provides that Wells meetings will be scheduled within four weeks of receipt of a Wells submission and will include a member of senior leadership within the Division.
– The processes and timelines set out in the updated Enforcement Manual are intended to ensure that the Division acts promptly to achieve the Commission’s three-part mission while also allowing parties affected by an enforcement investigation to learn more quickly whether the staff will recommend closure of an investigation or an enforcement action, as well as help ensure efficient use of Commission resources.
2. Facilitating simultaneous consideration of settlement recommendations and waiver requests: The updated Enforcement Manual reflects that the Commission recently restored its prior practice of permitting a settling party to request that the Commission simultaneously consider an offer of settlement and any related request for a Commission waiver from automatic disqualifications and other collateral consequences that result from the underlying enforcement action. By providing potential parties to an SEC action with greater visibility into the collateral effects of a settlement, these updates conserve Commission resources, enhance the transparency of its processes, and protect investors by driving significant efficiencies in the resolution of investigations.
3. Additional Updates to the Enforcement Manual: The updated Enforcement Manual details the Division’s framework for evaluating cooperation, including the impact of cooperation on civil penalties. It also includes: changes intended to encourage more consistent internal collaboration, updates regarding the formal order process, an updated framework for referrals to criminal authorities, and other changes intended to conform the Enforcement Manual to current best practices within the Division.
