Determining whether and when to disclose an
InNoto v. 22nd
TheNotodecision also provides helpful guidance relating to the contours of liability for statements made by others promoting a stock. The court affirmed dismissal of claims where the plaintiffs failed to allege that the defendants had ultimate authority over content published by those who were paid to promote the stock and had no independent duty to disclose such payments themselves.
Key Takeaways
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Issuers should takeNotointo account when evaluating whether they have a duty to disclose a pending
- Companies paying for media coverage of interest to investors should continue to be careful to avoid unintentionally taking steps that would convert the company into a "maker" of media statements-and where companies do exercise ultimate control over suchcontent-theyshould maintain proper procedures to ensure such statements are truthful.Notounderscored that "only an article's maker, not its benefactor, has a duty to disclose that it was paid for."
Background
The Second Circuit inNotopartially reversed dismissal of securities fraud claims by a class of investors against 22nd
Starting in 2016, 22nd
Plaintiffs also alleged that Defendants paid authors to write flattering articles about 22nd
The Second Circuit reversed dismissal of the investigation-related disclosure claims, but affirmed dismissal of claims relating to statements made by third-party stock promoters and undisclosed payments therefor.
Analysis
The Duty to Disclose an SEC Investigation When Speaking About Subjects Under Investigation
BeforeNoto, the ground rules governing whether a company must disclose the existence of an
While companies sometimes find business reasons to disclose the existence of investigations by the
Notoarguably takes a more expansive view of what triggers a duty to disclose an
The duty to disclose inNoto, according to the court, was triggered by defendants' statements in quarterly
TheNotocourt also inferred that defendants' denial of the
An Issuer Is Not Liable Statements in Stock Promotion Materials, Even If It Benefits from Them
TheNotocourt also offered useful guidance on when public companies and their executives can face potential direct liability for stock-promotion efforts by others under the federal securities laws. TheNotocourt adhered to the
For purposes of direct liability under Rule 10b-5(b), plaintiffs were required-but failed-to allege that defendants were the "makers" of any allegedly false or misleading statements. A "maker of a statement is the person or entity with ultimate authority over the statement," and defendants here were not the makers of the statements in the allegedly paid-for articles. In affirming the dismissal of plaintiffs' stock promotion-related claims, the Court explained defendants did not have the requisite control over the articles' statements required underJanusto be directly liable for their contents, and plaintiffs could point to no independent duty defendants had to disclose their payments.
Plaintiffs also failed to adequately allege a claim based on any of defendants' own statements in the Company's annual filings. In contrast to the court's analysis of defendants' omission of any reference to the
Finally, the Court considered whether plaintiffs' stock promotion allegations were sufficient to support liability for stock manipulation under Rules 10b-5(a) and (c), but agreed with the district court that plaintiffs had not identified "a manipulative act or market activity sufficient to state a claim under those rules." And the Court would not permit plaintiffs to use Rule 10b-5(a) and (c) as alternate liability hooks for conventional misrepresentation claims, explaining that any alleged failure to disclose payments to promoters (even if material) would be insufficient to support liability, as market manipulation claims cannot be based solely on misrepresentations or omissions.
Conclusion
Notocould be a simple case of bad facts making bad law, where defendants' allegedly affirmative false denials of the existence of any investigation colored the Court's view of previous omissions. Moreover, defendants' statements about having "solved the issue" might have played an outsized role in triggering a duty to disclose an investigation into that issue. The Second Circuit's decision is not clear about whether disclosures of material weaknesses alone would have supported the Court's holding. At the very least, in the wake ofNoto, companies considering whether to disclose an
Footnotes
1.Richman v.
2.Noto v. 22nd
3.Janus
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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