Image of Can an incomplete Section 303 MD&A disclosure give rise to Section 10(b) securities fraud liability?

Can an incomplete Section 303 MD&A disclosure give rise to Section 10(b) securities fraud liability?

Yes.  “Item 303 provides a critical backstop to prevent unscrupulous issuers from exploiting the trust that reasonable investors place in submissions made in purported compliance with SEC disclosure requirements. Indeed, a partial disclosure is particularly likely to create a false impression of completeness when it is offered in an MD&A, which reasonable investors understand must disclose the information that Item 303 requires.”  Solicitor’s brief in Leidos, Inc. v. Indiana Public Retirement System.

Item 303 or Regulation S-K requires issuers to disclose all known trends, events, or uncertainties that are reasonably likely to affect the issuer’s financial condition and prospects.  Where an issuer files an incomplete or partial MD&A disclosure, it is likely to create a false impression of completeness because investors expect that the MD&A disclosure will be complete.  In other words, a reasonable investor would understand the MD&A disclosure as implicitly representing that the issuer had disclosed all the information Item 303 requires.

To establish Section 10(b) liability for an incomplete MD&A disclosure, there is a required showing that:

  1. the omission was material; and
  2. the issuer acted with scienter.

 

Jason Zuckerman, Principal of Zuckerman Law, litigates whistleblower retaliation, qui tam, wrongful discharge, and other employment-related claims. He is rated 10 out of 10 by Avvo, was recognized by Washingtonian magazine as a “Top Whistleblower Lawyer” in 2015 and selected by his peers to be included in The Best Lawyers in America® and in SuperLawyers.