Securities Regulation -- 2017

Leidos, Inc. v. Indiana Pub. Ret. Sys. v. Indiana Pub. Ret. Sys.   (U.S. Supreme Court)

Liability for securities fraud under Section 10(b)

This case concerns liability for securities fraud under Section 10(b) of the Securities Exchange Act of 1934 based on a failure to disclose adverse “trends” and “uncertainties” in the “Management Discussion & Analysis” section of Item 303. Contrary to earlier Supreme Court decisions, the Second Circuit’s holding in this case subject issuers to securities fraud liability for omitting disclosures, even when the “omitted” information is not necessary to make any affirmative statement not misleading. This represents a dangerous precedent and exposes issuers to ever-increasing litigation. This hindsight problem is exacerbated by the fact that Item 303 concerns disclosures of “soft information” which is often not susceptible to objective verification.

The NAM filed an amicus brief supporting Supreme Court review of the case, arguing that this issue is a slippery slope where manufacturers may be subject to private suits for securities fraud for failing to disclose information that may not be material. Issuers could be exposed to “fraud-by-hindsight” litigation if shrewd plaintiffs allege that an event was known to management as being reasonably likely to occur, including knowledge of “soft information.”

The Court agreed to hear this case, and the NAM filed another amicus brief supporting the merits of the issue. We argued that the Second Circuit's ruling expands the private right-of-action under Rule 10b-5, creating new dangers from having to comply with a vague standard that requires predicting the future. Expanding rights of private parties to sue is unnecessary in light of the other remedies that are available.

Oral arguments scheduled for November 6, 2017 were removed from the Court's calendar because the case settled.

Related Documents:
NAM amicus brief on the merits  (June 28, 2017)
NAM amicus brief supporting review  (November 30, 2016)


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