March 27, 2017

The U.S. Supreme Court is poised to resolve a circuit split after agreeing to take up whether certain U.S. Securities and Exchange Commission regulations create a duty to disclose "known trends and uncertainties," and experts said the high court's decision could give investors a powerful weapon against companies keeping silent on investigations and other developments.

The high court accepted Leidos Inc.'s petition for review of a Second Circuit ruling reviving a proposed class action alleging the contractor withheld information that it was being investigated by state authorities for overbilling New York City. The appeal will resolve a split between the Second and Ninth circuits over whether a company can face liability for securities fraud claims from third parties if it doesn't disclose "known trends and uncertainties" as required by Item 303 of the SEC's Regulation S-K.

Experts said that if the high court decides to uphold the Second Circuit, which ruled the SEC regulation can give rise to private investor suits under Section 10(b) of the Exchange Act, it could transform the landscape of securities litigation and give investors a powerful tool.

The Supreme Court has previously held that companies don't have an affirmative duty to disclose all material information, unless a particular omission makes other statements misleading. In 1988, the high court specifically said in Basic v. Levinson that "silence, absent a duty to disclose, is not misleading under Rule 10b-5."

Under the Second Circuit's interpretation, however, Item 303 creates an affirmative duty for issuers to disclose trends or uncertainties that could have a material impact on their finances.

"In the Second Circuit, silence has enforceable meaning under Rule 10b-5," explained Michael Eisenkraft, a partner with Cohen Milstein Sellers & Toll PLLC. Eisenkraft said that a ruling upholding the Second Circuit's opinion would "open up a whole new area to potential liability in other circuits," and would force companies to share more information or be subject to private liability.

Experts said that although upholding the Second Circuit could have a significant impact on securities litigation, the Supreme Court may find enough to hang its hat on.

Eisenkraft noted that the Second Circuit's opinion doesn't expand what's permissible for companies, it just makes violations of particular SEC rules privately enforceable. "It's fair, because companies are required to speak on these issues because it's mandated by the SEC," Eisenkraft said. "But it definitely expands the playing field."

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