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UPDATE: When Silence Isn't Golden:
Omissions Liability under Securities Laws
Updated October 17, 2017
UPDATE: On October 17, the Court granted a joint motion of the parties to remove the case from its
argument calendar in light of the parties 'reported agreement in principle to settle the dispute.
The original post from October 3, 2017, appears below.
In its upcoming term, the Supreme Court is scheduled to hear oral arguments in Leidos, Inc. v. Indiana
Public Retirement System, a case involving a circuit split between the Second and Ninth Circuits (which
together see more securities cases than the rest of the federal circuits combined) on a question concerning
the principal anti-fraud provision of the Securities and Exchange Act of 1934 (the Exchange Act). The
case raises the question of whether violations of a Securities and Exchange Commission (SEC) regulation
requiring public companies to disclose known trends or uncertainties that a company reasonably
expects will have a material ... impact on revenues are actionable under Section 1 0(b) of the Exchange
Act, which prohibits fraudulent misstatements and omissions in connection with the purchase and sale of
securities. This Sidebar discusses the legal issues involved in Leidos, the circuit split, and the implications
of the Court's decision for securities law in general.
Section 10(b), Rule 10b-5, and Item 303
The Leidos case involves the interaction of Section 10(b), SEC Rule 1 Ob-5, which implements Section
10(b), and Item 303 of SEC Regulation S-K, which imposes certain disclosure requirements on public
companies.
Section 10(b) of the Exchange Act makes it unlawful [t]o use or employ, in connection with the purchase
or sale of any security ... any manipulative or deceptive device or contrivance prohibited by rules
adopted by the SEC. SEC Rule IOb-5, in turn, makes it unlawful to, in connection with the purchase or
sale of any security, (1) employ any device, scheme, or artifice to defraud; (2) make any untrue
statement of a material fact or ... omit to state a material fact necessary in order to make the statements
made ... not misleading; or (3) engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon any person. To state a claim under these provisions, a plaintiff
must show that a defendant (1) made a material misrepresentation or omission (i.e., that there is a
substantial likelihood that a reasonable investor would view a misrepresented or omitted tact as
significant); (2) with scienter (i.e., that the defendant made the misstatement or omission intentionally or
Congressional Research Service
https://crsreports.congress.gov
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