17 December 2017

US Corporate Law News: Supreme Court will not resolve circuit court split on liability for material omissions in an MD & A

The U.S. Supreme Court recently removed from its oral argument calendar a pending securities fraud case, due to a tentative pending settlement by the litigants. The case was being closely watched, as it offered an opportunity to resolve a split between the Second Circuit, on the one hand (including the New York City region), and the Ninth Circuit (covering parts of California and the northwest) and Third Circuit (covering Delaware, Pennsylvania and New Jersey), on the other hand, relating to liability under SEC Rule 10b-5 for material omissions in MD&A sections of SEC filings. SEC Regulation S-K Item 303 requires public disclosure in the “Management's Discussion and Analysis” (MD&A) section as to trends, uncertainties or events that may have a material impact on the company's future financial condition, results or liquidity. Under existing Third and Ninth Circuit decisions, failure to include that disclosure does not by itself give rise to violation; rather, the omission must make some other statement materially misleading. In contrast, the Second Circuit in its Leidos v. Indiana Public Retirement System, et. al. case (in which Leidos had failed to disclose a criminal investigation resulting in restitution and fines of approximately $500 million) took a more expansive approach, finding that a disclosure failure by itself gave rise to a violation. For more information, see https://www.bloomberg.com/news/articles/2017-10-17/supreme-court-drops-securities-fraud-argument-with-accord-near.