Articles

Companies That Withhold Bad News Face New Rules Penned by SCOTUS

Bloomberg Law

January 18, 2024

What You Should Know:

  • Circuit split on omissions calls for guidance, attorneys say
  • Even a narrow holding on disclosure could offer clarity

Companies, attorneys, and courts are expected to receive useful guidance on liability for failing to disclose troublesome trends from even a limited ruling by the US Supreme Court after oral argument on the theme this week, attorneys said.

Such a ruling “would give direction” to the lower courts in the context of a circuit split on the securities fraud issue, said Laura Posner of Cohen Milstein Sellers & Toll PLLC in New York. The split has led companies like Nvidia Corp. and Morgan Stanley to follow conflicting federal appeals court rulings.

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But Posner, an attorney for investors, said that most of the time, plaintiffs are identifying specific statements in their complaints—and that the investor suing Macquarie, Moab Partners LP, did so in this case. Posner, who’s also president of the Institute for Law and Economic Policy in Jenkintown, Pa., co-authored an amicus brief on behalf of former SEC officials in Macquarie.

There may be an unusual case where a company lists no known trends in its Item 303 filing of the SEC’s Regulation S-K, she said. “What do you do when there’s no specific statement?” she said.

Assuming a false and misleading “management discussion and analysis” statement in an Item 303 filing can give rise to liability, a Supreme Court ruling that an investor would need to plead a statement would provide guidance to the Ninth Circuit, which has held that nothing in the MD&A can support liability, she said. A narrow ruling by the top court would be “agnostic as to the Second Circuit,” she said.

“Where the rubber will meet the road is whether a statement is specific enough to be actionable,” she said.

Read Companies That Withhold Bad News Face New Rules Penned by SCOTUS.