When can a company’s silence support a Rule 10b-5 claim? The U.S. Supreme Court will consider that question next term in Leidos Inc. v. Indiana Public Retirement System. The case is generating buzz because it could expand the universe of omissions actionable under the judicially created private right of action for securities fraud.
The Supreme Court has long held that “[s]ilence, absent a duty to disclose, is not misleading under Rule 10b-5.” And such a duty to disclose only arises where necessary to make a statement already made not misleading, thus allowing companies to “control what they have to disclose … by controlling what they say to the market.” On March 27, 2017, in Leidos, Inc. v. Indiana Public Retirement System, the court granted certiorari to determine whether, in the absence of any need to correct a prior statement, there exists a separate disclosure duty under Item 303 of SEC Regulation S-K that is actionable under Section 10(b) of the Securities Exchange Act and Rule 10b-5. In Leidos, the U.S. Court of Appeals for the Second Circuit held, contrary to two other circuits, that Item 303, which pertains to disclosure of so-called “soft” information like trends or uncertainties, does create such a disclosure duty.
If you are a public company, or audit one, three recent SEC auditor independence cases deserve your attention. Auditor independence cases typically arise from financial, employment or business ties between an auditor and a client or their personnel. The recent cases, however, arose from what the SEC called "inappropriate close personal relationships."
Stephen J. Crimmins, James K. Goldfarb and Sharon A. O'Shaughnessy write: Public company audit committee members might be forgiven for sweating potential SEC scrutiny of late. We examine the SEC's focus on audit committee members as gatekeepers, review three recent enforcement actions to highlight conduct that attracts the staff's attention, and suggest certain safeguards that might help mitigate the chance of an SEC investigation or charge.
In 2013, with financial crisis enforcement cases winding down, the U.S. Securities and Exchange Commission announced a renewed focus on audit, accounting and financial reporting misconduct. (Subscription required.)
"This is a case first impression and one of signal importance in our administration of the Federal securities acts." With those words just over fifty years ago in Cady, Roberts, a Securities and Exchange Commission ("SEC") adminitrative proceeding, Chariman William L. Cary began the first insider trading decision ever issued under the federal securities laws.