The Leidos Mixup and the Misunderstood Duty to Disclose in Securities Law

Washington and Lee Law Review, Nov 2018

This Article concerns the recent Supreme Court case, Leidos,Inc. v. Indiana Public Retirement System (Leidos), and examines the broader issues that it raised for securities law. The consensus among scholars and practitioners is that Leidos presented a direct conflict among the circuit courts over a core question of securities law—when a failure to comply with the SEC’s disclosure requirements can constitute fraud under Rule 10b-5. This Article provides a much different interpretation of the case. It begins by demonstrating that the circuit split which is presumed to have brought Leidos to the Supreme Court does not in fact exist. It then shows that, rather than being riddled with disagreement, the leading judicial analysis in this area of the law instead reflects a shared set of misconceptions about how the securities regulation architecture works. By unraveling the underlying sources of the Leidos mix-up, this Article makes three contributions. First, it identifies overlooked aspects of the disclosure rules at issue in Leidos, and provides a novel analysis of how the case should have been decided. Second, it explains how errors in leading interpretations of the legal authorities implicated in Leidos carry over to other prominent portions of the regulatory framework, namely Sections 11 and 12 of the 1933 Securities Act. Third, it demonstrates that a central yet ill-defined securities doctrine—the duty to disclose—functions primarily to obscure rather than clarify the legal questions at issue in disclosure fraud claims. Taken together, these points suggest that Leidos was a more unusual case than has been appreciated, and stands at a remarkable confluence of legal and scholarly confusions, many of which implicate fundamental principles of securities law.

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The Leidos Mixup and the Misunderstood Duty to Disclose in Securities Law

The Leidos Mixup and the Misunderstood Duty to Disclose in Securities Law Matthew C. Turk Indiana University 0 1 2 Karen E. Woody 0 1 2 0 Indiana University , USA 1 This Article is brought to you for free and open access by the Washington and Lee Law Review at Washington & Lee University School of Law Scholarly Commons. It has been accepted for inclusion in Washington and Lee Law Review by an authorized editor of Washington & Lee University School of Law Scholarly Commons. For more information , please contact , USA 2 Matthew C. Turk and Karen E. Woody, Th e Leidos Mixup and the Misunderstood Duty to Disclose in Securities Law, 75 Wash. & Lee L. Rev. 957 (2018), https://scholarlycommons.law.wlu.edu/wlulr/ vol75/iss2/7 - The Leidos Mixup and the Misunderstood Duty to Disclose in Securities Law Matthew C. Turk & Karen E. Woody* This Article concerns the recent Supreme Court case, Leidos, Inc. v. Indiana Public Retirement System (Leidos), and examines the broader issues that it raised for securities law. The consensus among scholars and practitioners is that Leidos presented a direct conflict among the circuit courts over a core question of securities law?when a failure to comply with the SEC?s disclosure requirements can constitute fraud under Rule 10b-5. This Article provides a much different interpretation of the case. It begins by demonstrating that the circuit split which is presumed to have brought Leidos to the Supreme Court does not in fact exist. It then shows that, rather than being riddled with disagreement, the leading judicial analysis in this area of the law instead reflects a shared set of misconceptions about how the securities regulation architecture works. By unraveling the underlying sources of the Leidos mix-up, this Article makes three contributions. First, it identifies overlooked aspects of the disclosure rules at issue in Leidos, and provides a novel analysis of how the case should have been decided. Second, it explains how errors in leading interpretations of the legal authorities implicated in Leidos carry over to other prominent portions of the regulatory framework, namely Sections 11 and 12 of the 1933 Securities Act. Third, it demonstrates that a central yet * Matthew C. Turk and Karen E. Woody are both Assistant Professors of Business Law at Indiana University?s Kelley School of Business. For comments on earlier drafts, we would like to thank Donald Langevoort, Adam C. Pritchard, Brian Broughman, Todd Haugh, Margaret Sachs, and Donna Nagy, as well as participants at the 2017 Annual Conference for the Association of Legal Studies in Business and the Indiana University Maurer School of Law faculty workshop. For valuable research assistance, we would like to thank Jarod Zimmerman. ill-defined securities doctrine?the duty to disclose?functions primarily to obscure rather than clarify the legal questions at issue in disclosure fraud claims. Taken together, these points suggest that Leidos was a more unusual case than has been appreciated, and stands at a remarkable confluence of legal and scholarly confusions, many of which implicate fundamental principles of securities law. VI. Conclusion ...................................................................... 1033 I. Introduction For its October 2017 term, the U.S. Supreme Court granted certiorari in the case of Leidos, Inc. v. Indiana Public Retirement System1 (Leidos), and thereby put itself on a course to address some of the most complex yet fundamental issues in securities regulation.2 In securities law jargon, the specific question presented in Leidos was whether a regulation issued by the Securities and Exchange Commission (SEC), Item 303 of Regulation S-K (Item 303), creates a duty to disclose that is actionable under the prohibition against securities fraud set forth in Section 10(b) of the Securities Exchange Act of 1934 (the 1934 Exchange Act) and the related Rule 10b-5.3 Stated more simply, the Court was asked to decide whether failure to comply with a disclosure mandate that is expressly stated in the SEC?s rules can constitute fraud.4 This is no small matter, given that corporate disclosures to investors have been the cornerstone of modern securities regulation since they were established in the 1930s,5 and Item 303 in particular concerns one of the more important categories of information that public companies are called upon to produce: an overview of uncertainties facing a company?s financial future, known as ?Management?s Discussion and Analysis? (MD&A).6 The controversies raised by Leidos will not be resolved through any statement by the Court, however, and remain open indefinitely as a doctrinal matter, due to a settlement of the case that was announced by the parties on the eve of oral argument.7 of the Third and Ninth Circuits?that Item 303 of SEC Regulation S-K creates a duty to disclose that is actionable under Section 10(b) . . . and SEC Rule 10b-5.?). 5. See JOEL SELIGMAN, THE TRANSFORMATION OF WALL STREET 39?40 (3d ed. 2003) (noting the need for disclosure of data by firms involved in the securities markets following the stock market crash of the Great Depression). See generally James M. Landis, The Legislative History of the Securities Act of 1933, 28 GEO. WASH. L. REV. 29 (1959) (discussing the origins and legislative history of the Securities Act of 1933) ; Cynthia A. Williams, The Securities and Exchange Commission and Corporate Social Transparency, 112 HARV. L. REV. 1197 (1999) (discussing the SEC and the need for expanded social disclosure requirements for public reporting companies in order to further social and financial transparency). 6. See generally Denise Voigt Crawford & Dean Galaro, A Rule 10b-5 Private Right of Action for MD&A Violations?, 43 SEC. REG. L.J. 1 (2015) (discussing ?the use of Item 303 violations as a basis for a private cause of action under Rule 10b-5?); Mark S. Croft, MD&A: The Tightrope of Disclosure, 45 S.C. L. REV. 477 (1994) (considering MD&A disclosure requirements and various issues that have arisen in the requirements? application); Eric R. Harper, Unveiling Management?s Crystal Ball, 77 LA. L. REV. 879 (2017) (discussing the history and various applications of the Exchange Act, Rule 10b-5, and Item 303); Lauren M. Mastronardi, Note, Shining the Light a Little Brighter: Should Item 303 Serve as a Basis for Liability Under Rule 10b-5?, 85 FORDHAM L. REV. 335 (2016) (discussing the split between the Second and Ninth Circuits concerning the disclosure requirement of Item 303 and liability under Section 10(b) and Rule 10b-5); Brian Neach, Note, Item 303?s Role in Private Causes of Action Under the Federal Securities Laws, 76 NOTRE DAME L. REV. 741 (2001) (noting the uncertainty concerning the application of Item 303 violations in private causes of actions and presenting a standard of review for such allegations in securities cases); Suzanne J. Romajas, The Duty to Disclose Forward-Looking Information: A Look at the Future of MD&A, 61 FORDHAM L. REV. S245 (1993) (discussing the differing approaches that the SEC and courts have taken concerning the disclosure of forward-looking information). 7. See generally Leidos, Inc. v. Ind. Pub. Ret. Sys., No. 16-581, 2017 WL 4622142 (U.S. Oct. 17, 2017) (stating that the proceedings are held ?in abeyance?). If the settlement is not approved by the Southern District of New York, Leidos will be back on the Supreme Court?s docket for the October 2018 term. Leidos arose before the Court due to an intensifying clash between the Second Circuit and Ninth Circuit?the two federal appellate courts that together handle more securities cases than all other circuits combined.8 The conflict first materialized in a 2015 decision, Stratte-McClure v. Morgan Stanley9 (Stratte-McClure), in which the Second Circuit declared that its interpretation of the relationship between Item 303 and Section 10(b) was ?at odds? with a Ninth Circuit case from the prior year, In re NVIDIA Corporate Securities Litigation10 (NVIDIA).11 When the Second Circuit decided Leidos a year later, it closely followed the reasoning set forth in Stratte-McClure.12 Leidos is therefore perceived as escalating a preexisting dispute among the federal appellate courts,13 and, as the Leidos plaintiff?s successful petition for certiorari (Cert. Petition) states, introduced ?a deep split of 8. See Leidos Cert. Pet., supra note 3, at 1?2 (noting that ?[t]he Second and Ninth Circuits, which see more federal securities cases than the rest of the circuits combined, are in open disagreement? concerning this issue); see also Brief for the Sec. Indus. & Fin. Mkts. Ass?n et al. as Amici Curae Supporting Petitioner, Leidos, Inc. v. Indiana Pub. Ret. Sys. at 16?17, No. 16-581 (U.S. June 28, 2017), 2017 WL 2859944 (discussing approaches taken by other circuits); Filings Database, STAN. L. SCH. SEC. CLASS ACTION CLEARINGHOUSE, http://securities.stanford.edu/circuits.html (last visited Jan. 4, 2018) (listing securities class action filings in every circuit) (on file with the Washington and Lee Law Review). 9. 776 F.3d 94 (2d Cir. 2015). 10. 768 F.3d 1046 (9th Cir. 2014). 11. See id. at 103 (noting that the Ninth Circuit held that ?Item 303?s disclosure duty is not actionable under Section 10(b) and Rule 10b-5? (citing NVIDIA, 768 F.3d at 1046)). authority with respect to one of the most important?and frequently invoked?provisions of the federal securities laws.?14 Or so the conventional wisdom holds. In contrast, this Article argues that although Leidos did raise fundamental questions of securities law, they were not the questions that everyone supposes them to be, nor the ones that the Court likely would have addressed. The primary reason is that the circuit split that the Court is presumably seeking to resolve does not in fact exist. On the core legal question at issue in Leidos, the Second Circuit and Ninth Circuit are in full agreement. The relevant cases from both circuits draw on an earlier Third Circuit opinion written by then-Circuit Judge Samuel Alito, Oran v. Stafford15 (Oran), and come to the exact same conclusion: a failure to comply with Item 303 may constitute a violation of Rule 10b-5 under some circumstances, but does not necessarily do so.16 Only two alternatives to this outcome are logically possible: (1) noncompliance with Item 303 could always constitute a per se violation of Rule 10b-5, or (2) Item 303 could provide a safe harbor that can never serve as a basis for fraud claims. Neither of those positions have been adopted by any federal court to have considered the issue. As a predictive matter, then, the Court likely would have summarily affirmed the lower court decision in Leidos, and on the same grounds that were articulated by the Second Circuit.17 While this may not be the first time that the Court has stumbled into agreement with overstated rhetoric in a petition for certiorari, what is remarkable about Leidos is that the Cert. Petition?s narrative of intractable conflict among the circuit courts has been universally embraced by surrounding commentary on the case.18 One example is the defendants? Brief in Opposition to the 14. Leidos Cert. Pet., supra note 3, at 1. 15. 226 F.3d 275 (3d Cir. 2000). 16. See id. at 288 (holding that ?a violation of SK-303?s reporting requirements does not automatically give rise to a material omission under Rule 10b-5?); see also Stratte-McClure, 776 F.3d at 103 (noting that ?Oran actually suggested, without deciding, that in certain instances a violation of Item 303 could give rise to a material 10b-5 omission?); NVIDIA, 768 F.3d at 1054?55 (agreeing with Oran?s reasoning regarding Item 303?s disclosure requirement). 17. See infra Part III.B.2 (discussing the potential impacts of the Leidos settlement). 18. See Matthew Ady, Living in a Material World: Does a Violation of Item Cert. Petition, which concedes that there is a circuit split on the question presented in Leidos but attempts to downplay its significance.19 Other amicus briefs that were filed with the Court are even more emphatic about the presence of a split and stress the need for it to be resolved as soon as possible.20 Law firms that specialize in securities litigation have released a number of publications aimed at updating their defense-side clients about Leidos, and such ?client alerts? are also in accord with this consensus interpretation.21 The same can be said for scholarly analyses: the Cert. Petition?s theory of the case has been embraced by a leading securities law casebook,22 every law journal article on 303 of Regulation S-K Satisfy the Materiality Element in a Rule 10b-5 Cause of Action?, 17 WAKE FOREST J. BUS. & INTELL. PROP. L. 401, 439 (2017) (?Despite its 30-year pedigree, Item 303 still generates considerable confusion among courts regarding its relationship with Rule 10b-5.?); Brian Currie, Note, Much Ado About Nothing: The Limits of Liability for Item 303 Omissions and the Circuit Split That Never Was, 8 WM. & MARY BUS. L. REV. 379, 383 (2017) (?Despite all of the commotion, the Supreme Court chose not to address the issue when given the opportunity.?); Harper, supra note 6, at 880 (noting the pressing need for Supreme Court review on this issue in order to resolve confusion among the lower courts). 19. See Brief in Opposition to Petition for a Writ of Certiorari at 18, Leidos, Inc. v. Ind. Pub. Ret. Sys., No. 16-581 (U.S. Feb. 8, 2017), 2017 WL 8292356 [hereinafter Brief in Oppo to Pet. for Cert.] (admitting that there is a ?nascent circuit split? while arguing that the question should be allowed to ?percolate? in the lower courts because the specific procedural posture of Leidos makes it unripe for the Court to review); Reply Brief for Petitioner at 1, 7, Leidos, No. 16-581 (pointing out that the opposition ?concedes? and ?acknowledges? that there is a circuit split). 20. See Brief for the Sec. Indus. & Fin. Mkts. Ass?n et al. as Amici Curiae Supporting Petitioner, supra note 8, at 2?3, 15 (?The split that the Second Circuit has created should be resolved as speedily as possible.?); Brief of Amicus Curiae Nat?l Ass?n of Mfrs. in Support of Petitioners at 2, Leidos, No. 16-581 (?The ruling of the Second Circuit below confirmed a conflict between the Second and the Third and Ninth Circuits on the relationship [between Item 303 and Rule 10b-5].?); Reply Brief for Petitioner, supra note 19, at 5?7 (discussing the split of authorities in detail). 21. See, e.g., U.S. SUPREME COURT GRANTS CERTIORARI TO DECIDE ISSUE THAT MIGHT HAVE SIGNIFICANT IMPACT ON REGISTRANTS? EXPOSURE FOR NON-DISCLOSURE OF ?KNOWN TRENDS OR UNCERTAINTIES? IN SEC FILINGS 3?4 (2017), https://www.sullcrom.com/siteFiles/Publications/SC_Publication _Securities_ Litigation_3_27_17.pdf (discussing the implications of the Court?s upcoming decision for clients); GIBSON, DUNN & CRUTCHER LLP, supra note 13 (discussing the ?clear circuit split? created by Stratte-McClure and NVIDIA). 22. See JAMES D. COX, ROBERT W. HILLMAN & DONALD C. LANGEVOORT, SECURITIES REGULATION: CASES & MATERIALS 611 (8th ed. 2017) (describing an alleged split between the Third Circuit in Oran and the Second Circuit in point,23 and several academic legal blogs that cover current developments in corporate law and securities regulation.24 This Article argues that the startling uniformity of (mistaken) interpretations in Leidos reflects more than an unhappy coincidence. Rather, it is symptomatic of fundamental misconceptions about how the securities regulation architecture works. Accordingly, the Article seeks not only to examine the legal questions directly at issue in Leidos, but also explore how and why it has come to be enveloped in such widespread misunderstanding. In doing so, the Article identifies two underlying sources of confusion and draws out the broader implications that those disputes carry for understanding securities regulation. One cause of the Leidos mix-up stems from a parallel line of case law, which addresses the intersection of MD&A disclosures with investor suits premised on Sections 11 and 12 of the 1933 Securities Act (the 33 Stratte-McClure). 23. See, e.g., Harper, supra note 6, at 880, 900?08 (arguing that the Court must resolve the conflict among circuits relating to Item 303 and Rule 10b-5 fraud claims); Mastronardi, supra note 6, at 337, 350?60 (?A recent split between the Second Circuit and the Ninth Circuit provides a vivid example of the implications of a court?s decision in the securities realm.?); Voigt, Crawford & Galaro, supra note 6 (?[R]ecent disagreement between the Ninth and Second Circuits makes the discussion [of how Item 303 relates to Rule 10b-5] newly ripe.?). 24. See, e.g., David M. J. Rein & Hao Tschang, Supreme Court Certiorari on Non-Disclosure of ?Known Trends or Uncertainties? in SEC Filings, HARV. L. SCH. F. ON CORP. GOVERNANCE & FIN. REG. (Apr. 8, 2017), https://corpgov.law.harvard.edu/2017/04/08/supreme-court-certiorari-on-nondisclosure-of-known-trends-or-uncertainties-in-sec-filings/ (last visited Jan. 11, 2018) (?The U.S. Supreme Court will address a split between the Second Circuit . . . and the Third and Ninth Circuits . . . [and its decision] may have a significant impact on [public companies?] potential exposure to securities fraud claims.?) (on file with the Washington and Lee Law Review); Audra Soloway et al., Paul Weiss Discusses Securities Fraud Liability Based Solely on Omissions, COLUM. L. SCH. BLUE SKY BLOG ON CORPS. & CAP. MKTS. (April 6, 2017), http://clsbluesky.law.columbia.edu/2017/04/06/paul-weiss-discusses-securitiesfraud-liability-based-solely-on-omissions/ (last visited Jan. 11, 2018) On March 27, 2017, the Supreme Court granted certiorari in a potentially significant securities case . . . [and] will resolve a split between the Second and Ninth circuits caused by the Second Circuit?s holding that issuers may be liable for federal securities fraud by omitting information required to be disclosed by SEC regulations. (on file with the Washington and Lee Law Review). Securities Act).25 These cases have been caught in the crossfire among the Second and Ninth Circuits precedents in Leidos, and are at times cited as a basis of disagreement between the courts.26 Although the relationship between Item 30327 and claims under the 33 Securities Act have received minimal scholarly attention, this Article takes a closer look at that question and finds that several surprising conclusions follow.28 First, while the caselaw appears to involve a dispute over whether holdings from 33 Securities Act decisions on Item 303 may be imported into fraud actions under Rule 10b-5, none of the relevant opinions actually take such a step.29 Instead, the consistent pattern is for courts to draw a strict divide between the 33 Securities Act provisions and Section 10(b).30 Second, none of the rationales that the caselaw uses to distinguish the statutory authorities in this area can be justified.31 As outlined below, the same analysis of Section 10(b) that should have driven the outcome in Leidos must necessarily apply with equal force to Sections 11 and 12.32 The ironic result is 25. See 15 U.S.C. ? 77k(a) (2012) (codifying who may bring an action for claims of false registration statements and who is liable); id. ? 77l(a)(2) (setting forth who is liable for claims related to prospectuses and communications). 26. See Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 104 (2d Cir. 2015) (arguing that the Ninth Circuit incorrectly interpreted the relationship between Rule 10b-5 and Section 12(a)(2) (citing Litwin v. Blackstone Grp., L.P., 634 F.3d 706 (2d Cir. 2011))); see also Panther Partners Inc. v. Ikanos Comm?ns, Inc., 681 F.3d 114, 120 (2d Cir. 2012) (finding that in the Item 303 context, the surrounding uncertainty concerning the flow of information is key to disclosure obligations). See generally Steckman v. Hart Brewing Inc., 143 F.3d 1293 (9th Cir. 1998). 27. See 17 C.F.R. ? 229.303 (2017) (?Management?s discussion and analysis of financial condition and results of operations.?). 28. Infra Part IV. 29. Infra Part IV.B. 30. Infra Part IV.B. Roughly speaking, the 33 Securities Act decisions stand for the proposition that Item 303 violations automatically give rise to actionable claims under Section 11 or Section 12 as a matter of law in every case. 31. See Stratte-McClure, 776 F.3d at 104 (?But Section 12(a)(2)?s prohibition on omissions is textually identical to that of Rule 10b?5: both make unlawful omission of ?material fact[s] . . . necessary in order to make . . . statements, in light of the circumstances under which they were made, not misleading.?? (quoting 15 U.S.C. ? 77l (2012))). 32. Infra Part IV.C. The reason is that the Second, Third, and Ninth Circuit decisions all turn on the materiality element in Section 10(b) claims, and the materiality standard for the 33 Securities Act and the 34 Exchange Act are identical. that the Court had taken up the wrong case: the legal question presented by Section 10(b) in Leidos did not cry out for review and likely would have been affirmed as a matter of course; at the same time, however, any Leidos decision would have indirectly rendered a wide swath of Section 11 and Section 12 cases incorrect.33 Third, it will be argued that this outcome, while unlikely at first glance, is representative of some wider pathologies in judicial decision-making and the legal scholarship in securities law.34 The other source of the Leidos mixup involves a controversy over a foundational doctrine in securities law known as the ?duty to disclose.?35 The origins of this debate can be found in an influential scholarly critique of the way that federal courts have handled the duty to disclose in securities fraud cases relating to MD&A,36 including then-Circuit Judge Alito?s opinion for the Third Circuit in Oran.37 Through an interesting twist, the theoretical 33. Infra Part IV.D. 34. Infra Part IV.D. Namely, there is tendency to shortcut the analysis by adopting an overly narrow perspective on the relevant statutory authorities. That strategy often yields incoherent results, however, because it fails to take account of the integrated architecture of securities regulation. See Stephen M. Bainbridge & G. Mitu Gulati, How Do Judges Maximize? (The Same Way Everybody Else Does?Boundedly): Rules of Thumb in Securities Fraud Opinions, 51 EMORY L.J. 83, 118 (2002) (?The key point with the shortcuts is that they serve to avoid complexity.?). 35. The starting point of the confusion is dicta from an insider trading case, Chiarella v. United States, which has come to be cited as hornbook law for the proposition that silence, absent a duty to disclose, is not misleading under Rule 10b-5. See 445 U.S. 222, 230 (1980) [A]dministrative and judicial interpretations have established that silence in connection with the purchase or sale of securities may operate as a fraud actionable under ? 10(b) despite the absence of statutory language or legislative history specifically addressing the legality of nondisclosure. But such liability is premised upon a duty to disclose arising from a relationship of trust and confidence between parties to a transaction. Application of a duty to disclose prior to trading guarantees that corporate insiders, who have an obligation to place the shareholder?s welfare before their own, will not benefit personally through fraudulent use of material, nonpublic information. 36. See Donald C. Langevoort & G. Mitu Gulati, The Muddled Duty to Disclose Under Rule 10b-5, 57 VAND. L. REV. 1639, 1650?51 (2004) (citing Oran as a leading example of how courts? analysis of securities fraud claims go astray when they conflate the duty question with the materiality element of Rule 10b-5 actions). 37. See generally Oran v. Stafford, 226 F.3d 275 (3d Cir. 2000). framework proposed in the academic literature38 makes its way into the key precedents in Leidos, where it is directly referenced in Judge Livingston?s Stratte-McClure opinion as the basis for finding the Second Circuit ?at odds? with Ninth Circuit?s interpretation of Item 303.39 As this Article will demonstrate, however, the courts? putative disagreement over the duty to disclose falls away once two pervasive misconceptions regarding the doctrine are dispelled.40 First, contrary to the controlling view, the duty to disclose does not establish a set of conditions that may ?trigger? a connection between alleged nondisclosures of MD&A information under Item 303 and fraud actions under Rule 10b-5.41 Properly understood, the legal relationship between the two regulations is much more limited, and does not extend beyond the fact that they contain similarly worded provisions. Second, and more fundamentally, the duty issue is of limited relevance in Leidos because it does not play a meaningful role in the disposition of any securities law case (outside of the insider trading context).42 For claims brought in connection with disclosure requirements, the duty question is entirely circular?it represents a legal conclusion rather than an intermediate step in the analysis. The takeaway for securities regulation is that theoretical debates over the meaning of the duty doctrine function primarily to obscure rather than clarify, and are best left behind by legal scholars and federal courts when dealing with disclosure cases. In summary, this Article makes three contributions. First, it identifies overlooked aspects of a significant securities law case pending before the Court, and provides a novel analysis of how the case should have been decided. Second, this Article extends that 38. See Langevoort & Gulati, supra note 36, at 1643?44 (?Conceptually though, in order to provide a meaningful discussion about the duty question, we have to separate it carefully from the materiality question.?). 39. Id.; see also Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 102 (2d Cir. 2015) (citing Langevoort and Gulati?s article). The primary argument which the Second Circuit borrows from the scholarship in this area is that courts will fail to analyze securities fraud cases correctly unless they carefully separate the question of a legal duty to disclose from other elements of the claim, such as the requirement that misstatements or omissions must be material. 40. Infra Part V.A. 41. Infra Part V.B. 42. Infra Part V.B.2. analysis by showing that the same misunderstandings which have accompanied the disclosure rules and securities fraud claims in the Rule 10b-5 fraud context also carry over to other areas of the securities law framework, namely Sections 11 and 12 of the 33 Securities Act. Third, it uses Leidos as a case study to demonstrate that a central securities law doctrine, the duty to disclose, serves little practical purpose and should play a reduced role in securities regulation. Taken together, these points suggest that Leidos was a much more unusual case than has been appreciated, and stands at striking confluence of legal and scholarly confusions, many of which concern fundamental principles of securities regulation. The discussion below proceeds as follows. Part II provides regulatory and statutory background.43 Part III introduces the Leidos case history and lower court opinions, explains why the circuit split at issue is illusory, and explains how that should have driven the Court?s disposition of the case if it were not precluded by settlement between the parties on the eve of oral argument.44 Part IV identifies the implications that Leidos carries for claims under Sections 11 and 12 of the 33 Securities Act.45 Part V provides a revisionist interpretation of the meaning of the duty to disclose doctrine in Leidos, and in the securities law more generally.46 Part VI briefly concludes.47 II. The Statutory & Regulatory Framework in Securities Law A. The 1933 Securities Act & 1934 Exchange Act Securities law pursues the twin goals of protecting investors and facilitating capital formation.48 The main tool used to reach those ends is the mandatory disclosure regime.49 The Securities Act of 193350 (33 Securities Act) and Securities Exchange Act of 193451 (34 Exchange Act), along with the attendant rules and regulations issued by the SEC, establish an elaborate regulatory framework based on this premise.52 The 33 Securities Act takes a transaction-based approach that requires companies to make initial disclosures when issuing securities to the public.53 The 33 Securities Act consists of registration provisions and liability provisions.54 In the liability 49. See, e.g., SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 186 (1963) (stating that the purpose common to the securities laws was to ?substitute a philosophy of full disclosure for the philosophy of caveat emptor?); Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 477 (1977) (explaining that the fundamental purpose of securities laws is replacing caveat emptor with full disclosure); Jordan v. Duff & Phelps, Inc., 815 F.2d 429, 435 (7th Cir. 1987) (?The ?duty? in question is the fiduciary duty of corporate law. Close corporations buying their own stock, like knowledgeable insiders of closely held firms buying from outsiders, have a fiduciary duty to disclose material facts.?). The standard rationale for such a framework is that disclosure rules can achieve the benefits of efficient capital markets by reducing the information asymmetry between firms and investors, while avoiding the costs associated with more heavy-handed forms of intervention. See Williams, supra note 5, at 1199?200 (?The capital markets in the United States are celebrated for their financial transparency. This financial transparency derives primarily from the specific information about operating results, presented using rigorous accounting principles, that federal securities laws require public companies to report on a quarterly and annual basis.?); Robert B. Thompson & Hillary A. Sale, Securities Fraud as Corporate Governance: Reflections Upon Federalism, 56 VAND. L. REV. 859, 885?86 (2003) (explaining that increased federal securities regulation ?increases the role of shareholders by permitting them (rather than the directors) to hold officers accountable?). 50. Pub. L. No. 73-22, 48 Stat. 74 (codified as amended at 15 U.S.C. ?? 77a? 77bbbb (2012)). 51. Pub. L. No. 73-291, 48 Stat. 881 (codified as amended at 15 U.S.C. ?? 78a?78qq (2012)). 52. Congressman Sam Rayburn, who spearheaded the drafting of the 33 Securities and 34 Exchange Acts, relied heavily on Adolf A. Berle and Gardiner C. Means? book, The Modern Corporation and Private Property, which argued that corporate management should be held more accountable to shareholders through additional disclosure requirements. 77 CONG. REC. 2917 (1933) (statement of Rep. Rayburn). Of course, Rayburn and his contemporaries were also influenced by the writings of Louis Brandeis, who is responsible for the oft-quoted statement justifying the disclosure regime: ?Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.? LOUIS D. BRANDEIS, OTHER PEOPLE?S MONEY AND HOW THE BANKERS USE IT 92 (1914). 53. 15 U.S.C. ? 77a (2012). 54. Id. provisions, Section 11 applies to registration statements,55 while Section 12 applies to a distinct but related offering document, known as a prospectus.56 Section 11 of the 33 Securities Act establishes liability for an untrue statement of material fact, or omission of a material fact, made in the registration statement.57 Likewise, Section 12(a)(2) prohibits untrue statements of material fact, or omissions thereof, in any communication made in connection with a general distribution of securities through interstate commerce.58 Sections 11 and 12 of the 33 Securities Act are prominent examples of the securities laws? joint private-public enforcement structure; these provisions create opportunities for both private suits by investors, as well as enforcement by the SEC.59 The 34 Exchange Act, on the other hand, reflects a periodic approach to disclosure, and contains requirements that are in effect after the securities offering has taken place.60 This means Forms 10-K, 10-Q, and 8-K must be filed with the SEC by all companies with publicly traded securities.61 The key liability provision in the 34 Exchange Act is the anti-fraud prohibition found in Section 10(b), and its counterpart, Rule 10b-5.62 Rule 55. Id. ? 77k. 56. Id. ? 77l(a)(2). 57. Id. ? 77k(a). 58. Id. ? 77l(a)(2). 59. See In re WorldCom, Inc. Sec. Litig., 294 F. Supp. 2d 392, 407 (S.D.N.Y. 2003) (explaining that a cause of action for private suits exists under Section 11); see also Pinter v. Dahl, 486 U.S. 622, 642 (1988) (determining that a cause of action for private suits exists under Section 12). 60. See generally 15 U.S.C. ?? 78a?78nn (2012). 61. The 34 Exchange Act also created the SEC and empowered it with broad regulatory authority over the securities industry. In addition to periodic disclosures such at 10-Ks and 10-Qs, the 34 Exchange Act also requires disclosure of board elections at annual shareholder meetings, as well as information related to any major corporate event such as a merger or sale. See generally 15 U.S.C. ?? 78a?78nn. 62. See id. ? 78j(b) (?It shall be unlawful for any person, . . . [t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securitiesbased swap agreement any manipulative or deceptive device . . . .?); see also 17 C.F.R. ? 240.10b-5 (2017) (?It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, to employ any device, scheme, or artifice to defraud.?). The SEC finalized Rule 10b-5 in 1942. 10b-5, in pertinent part, states that it shall be unlawful ?to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading.?63 Liability under Section 10(b) differs from that under the 33 Securities Act?s Sections 11 and 12 in a number of ways. The most important distinction is that, to bring a successful 10b-5 claim, a plaintiff must establish that he relied upon the misleading or omitted material information, and that the defendant acted with scienter.64 In contrast, for both Section 11 and Section 12(a)(2) claims, the plaintiff is not required to plead scienter.65 Further, unlike Sections 11 and 12, the language of Section 10(b) does not authorize lawsuits by investors, yet an implied private right of action has uniformly been read into the statute by courts.66 In fact, Rule 10b-5 has been called the ?biggest stick? in the securities laws?in part because it can be enforced not only by the SEC and private litigants, but also by the Department of Justice, which can 63. 17 C.F.R. ? 240.10b-5. Courts have distilled this rule into six elements: (1) material misrepresentation or omission; (2) scienter; (3) connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misstatement or omission; (5) economic loss; and (6) loss causation. See Stoneridge Inv. Partners v. Scientific-Atlanta, Inc., 552 U.S. 148, 157 (2008). 64. See generally Tellabs, Inc. v. Makor Issues & Rights, 551 U.S. 308 (2007) (holding that the inference of scienter must be as cogent as any opposing inference of non-fraudulent intent, regardless of whether the claim is brought by a private plaintiff or the government). The scienter requirement is also accompanied by a higher pleading standard, provided by Rule 9(b) of Federal Rules of Civil Procedure (FRCP) and the 1995 Private Securities Litigation Reform Act (PSLRA). See FED. R. CIV. P. 9(b) (?In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.?); 15 U.S.C. ? 78u-4(b)(1)?(2) (?[T]he complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.?). 65. See PAUL VIZCARRONDO, JR., LIABILITIES UNDER THE FEDERAL SECURITIES LAWS 28 (2014), www.wlrk.com/docs/OutlineofSecuritiesLawLiabilities2014.pdf (outlining the elements for liability under the relevant sections of the 33 Securities Act and the 34 Exchange Act). impose criminal penalties for violations of the statute.67 The similarities and distinctions between the 33 Securities Act Sections 11 and 12 claims and that of the 34 Exchange Act Section 10(b) prove critical in the analysis of Leidos and other cases, as discussed below. B. Reg. S-K: Item 303 MD&A Rules For decades, critics pointed out that the disclosure requirements under the 33 Securities Act and the 34 Exchange Act produced ?pointless duplication.?68 As a result, the SEC eventually adopted integrated disclosure regulations in 1980, set forth in Regulation S-K (Reg. S-K).69 Critical to the analysis provided herein are the disclosure requirements relating to MD&A found in Reg. S-K. The historical roots of the MD&A reach back to SEC guidelines issued in 1968, which dictated that companies must include in their registration statements a discussion of ?unusual conditions that affected the appropriateness of the earnings 67. See 17 C.F.R. ? 240.10b-5 (including deceit through means of interstate commerce); see also Blue Chip Stamps, 421 U.S. at 737 (stating that Rule 10b-5 is ?a judicial oak which has grown from little more than a legislative acorn?). 68. See John C. Coffee, Jr., Re-Engineering Corporate Disclosure: The Coming Debate over Company Registration, 52 WASH. & LEE L. REV. 1143, 1145 (1995) (?Logically, a corporate issuer seeking to sell securities under a continuous disclosure system [of the 34 Exchange Act] would only be required to disclose any additional material information that it had not previously disclosed pursuant to the continuous disclosure system.?). See generally Milton H. Cohen, ?Truth in Securities? Revisited, 79 HARV. L. REV. 1340 (1966) (arguing that the 33 Securities Act and the 34 Exchange Act disclosure requirements should have been integrated into a single statute); STAFF OF THE U.S. SEC. & EXCH. COMM?N, REPORT ON REVIEW OF DISCLOSURE REQUIREMENTS IN REGULATION S-K 8 (2013) (summarizing the background of disclosure rules and the purpose of Regulation S-K as streamlining disclosures). 69. Reg. S-K demands a formidable amount of disclosure regarding corporate operations, governance structures, financial information, pending legal proceedings, corporate officers and board members, among numerous other topics. 17 C.F.R. ?? 229.10?1208 (2017); Amendments to Annual Report Form, Related Forms, Rules, Regulations, and Guides, SEC Release No. 33-6231, 45 Fed. Reg. 63630 (Sept. 25, 1980); Adoption of Integrated Disclosure System, Securities Act Release No. 33-6383, 47 Fed. Reg. 11380 (Mar. 3, 1982). Also adopted pursuant to the Integrated Disclosure System was Regulation S-X, which sets forth requirements for accounting statements. 17 C.F.R. ?? 210.1-01? 210-12.29. presentation and footnotes indicating adverse changes in operating results subsequent to the latest period in the earnings summary.?70 Since that time, the SEC has continued to amend the disclosure requirements pertaining to the MD&A, with an eye toward providing investors with ?a narrative explanation for the financial statements, because a numerical presentation . . . may be insufficient for an investor to judge the quality of earnings and the likelihood that past performance is indicative of future performance.?71 The MD&A section, by definition, includes ?soft information,? which relates to qualitative assessments of operating performance, in addition to ?hard information? contained in quantitative overviews of companies? financial conditions.72 In its current form, Reg. S-K rules for MD&A require discussion of liquidity, capital resources, and results of operations.73 Item 303 requires the identification and description of any ?known trends or uncertainties? that will affect any one of the three areas (liquidity, capital resources, or operations).74 As part of Reg. S-K, the MD&A requirements set out in Item 303 apply to both offering documents subject to the 33 Securities Act rules, and periodic post-offering disclosures that are covered by the 34 Exchange Act.75 Unlike the liability structure for Sections 11 and 12, however, there is no statutory provision that explicitly provides a private right of action for non-compliance with the MD&A disclosure rules set out in Item 303.76 Further, unlike causes of action stemming from Section 10(b), courts have refrained from reading an implicit private right of action into Reg. S-K violations.77 The SEC retains enforcement authority, however, over violations of the disclosure requirements found in Reg. S-K.78 C. The Materiality Requirement An important commonality across all four statutory authorities?Section 10(b), Section 11, Section 12, and Item 303? is the materiality requirement.79 The disclosure requirements mandated by these provisions apply to information that is material. Materiality was first defined in 1976, when the Court held in TSC Industries v. Northway, Inc.80 that a material fact, and therefore one that must be disclosed, is a statement that ?would have been viewed by the reasonable investor as having significantly altered the ?total mix? of information made available.?81 As the Court has explained in TSC Industries and 78. See Harper, supra note 6, at 894?900 (discussing the history of the SEC?s enforcement authority over Reg. S-K disclosure requirements). For offering documents subject to Sections 11 and 12, the SEC reviews disclosures before they become effective. Likewise, for periodic disclosures subject to 10(b), such as 10-K?s, the SEC also can take administrative actions by issuing cease-and-desist orders that seek injunctive relief. See generally C. A. Cassell, L. M. Dreher & L. A. Myers, Reviewing the SEC?s Review Process: 10-K Comment Letters and the Cost of Remediation, 88 ACCT. REV. 1875 (2013) (assessing the effectiveness of the SEC?s feedback on disclosures prior to an SEC administrative action). 79. See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976) (articulating the materiality standard). The SEC codified this standard in its Rule 405. ?The term material, when used to qualify a requirement for the furnishing of information as to any subject, limits the information required to those matters to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to purchase the security registered.? 17 C.F.R. ? 230.405 (2017). Rules 408 and 12b-20 also require any ?such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances in which they are made, not misleading.? 17 C.F.R. ? 230.408 (covering 33 Securities Act disclosures); 17 C.F.R. ? 240.12b-20 (applying to 34 Exchange Act disclosures). 80. 81. 426 U.S. 438 (1976). See id. at 448?49 Some information is of such dubious significance that insistence on its disclosure may accomplish more harm than good. The potential liability for a Rule 14a-9 violation can be great indeed, and if the standard of materiality is unnecessarily low, not only may the corporation and its management be subjected to liability for elsewhere, the purpose of materiality is to introduce a counterweight against the otherwise daunting disclosure requirements contained in both Acts.82 The TSC Industries standard provides relatively clear guidance when considering the materiality of hard facts, such as past financial information, but the parameters for materiality become less precise when considering speculative, forward-looking or ?soft? information.83 In 1988, the Court attempted to clarify that the test for estimating when speculative or forward-looking information rose to the level of ?material? is the ?probability versus magnitude test.?84 In Basic Inc. v. Levinson,85 the Court rejected a bright-line test for materiality and held that, in the context of merger negotiations, materiality will depend on the likelihood of the future transaction taking place, and the significance of the transaction to the issuer.86 In doing so, the Court explained it was insignificant omissions or misstatements, but also management?s fear of exposing itself to substantial liability may cause it simply to bury the shareholders in an avalanche of trivial information[,] a result that is hardly conducive to informed decision-making. Cf. Dale A. Oesterle, The Overused and Under-Defined Notion of ?Material? in Securities Law, 14 U. PA. J. BUS. L. 167 (2011) (suggesting that the formulation for materiality is inherently abstract and often overbroad). 82. See TSC Industries, 426 U.S. at 448 (?That purpose is not merely to ensure by judicial means that the transaction, when judged by its real terms, is fair and otherwise adequate, but to ensure disclosures by corporate management in order to enable the shareholders to make an informed choice.?). 83. ?Forward-looking information? is defined as a statement related to or describing events or activities that will occur, if at all, at some future date. JAMES D. COX ET AL., SECURITIES REGULATION: CASES AND MATERIALS 602?05 (5th ed. 2006) ; 15 U.S.C ? 78u-5 (2012). 84. See Basic Inc. v. Levinson, 485 U.S. 224, 238 (1988) (?[M]ateriality ?will depend at any given time upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity.?? (quoting SEC v. Tex. Gulf Sulphur Co., 401 F.2d. 833, 849 (2d Cir. 1968))); see also Donald C. Langevoort, Basic at Twenty: Rethinking Fraud on the Market, 2009 WIS. L. REV. 151, 152 (?Basic stands for the proposition that materiality is about what is important to investors, nothing more and nothing less, and offers a way (the so-called probability-magnitude test) for estimating when speculative information is sufficiently important or not.?). 85. 485 U.S. 224 (1988). 86. See id. at 250 (?Materiality in the merger context depends on the probability that the transaction will be consummated, and its significance to the issuer of the securities. Materiality depends on the facts and thus is to be determined on a case-by-case basis.?). authorities. A myopic view that begins by taking the disclosure rules in isolation, on the other hand, threatens to miss the forest for the trees, and a fa?ade of judicial conservatism is likely to increase the incidence of legal error. Confirmation of these points is provided by the substantial misdirection of judicial resources that has taken place in Item 303 cases. The blinkered analyses in those decisions have culminated in the granting of Cert. in Leidos, where the Court has sacrificed its scarce docket space in order to resolve a line of precedents that are both legally sound and in full agreement; meanwhile, broad swaths of case law within the circuit courts that address similar issues have avoided scrutiny, despite the incompatible outcomes they produce. The lackluster judicial performance in the Item 303 context conforms to a broader pattern of decisionmaking in securities law, which is documented in an important article by Stephen Bainbridge and Mitu Gulati.265 In their paper, Bainbridge and Gulati provide an extensive catalogue of the rhetorical tools and doctrinal devices that allow federal judges to circumvent the complicated legal questions that often arise in securities litigation.266 As a result, judges often dispose of securities fraud cases on the simplest grounds possible.267 Bainbridge and Gulati argue that, although these judicial strategies are often defended on various grounds, the underlying policy rationales tend to be weak.268 Instead, the doctrinal shortcuts they identify are better explained by a combination of judicial boredom with the technicalities of securities regulation, psychological aversion to complexity, and institutional constraints such as overcrowded dockets.269 Bainbridge and Gulati mainly focus on shortcuts judges use when applying particular substantive legal standards, such as 265. See generally Bainbridge & Gulati, supra note 34. But cf. Donald C. Langevoort, Are Judges Motivated to Create ?Good? Securities Fraud Doctrine?, 51 EMORY L. J. 309, 310 (2002) (arguing that the claims made by Bainbridge and Gulati are overstated in certain respects). 266. See Bainbridge & Gulati, supra note 34, at 91 (discussing the ?doctrinal development? of the ?Herculean model of adjudication,? which ?seeks to demonstrate that the rule is the economically efficient one?). 267. See id. at 90 (arguing that judges often try to ?dispose? of cases on simple threshold issues). 268. See id. (referring to this as a ?systematic failure?). 269. See id. (discussing the reasons for the practice of disposing of cases on the simplest grounds possible). materiality or scienter,270 but the same underlying logic fits the case law on Item 303 as well. The opinions in those cases reflect on an analogous set of analytical moves, which are used to reduce the complexity of legal authorities under consideration, and also tend to yield poorly reasoned results. While it may be inevitable that generalist judges operating within the administrative constraints of federal courts will take a reductive approach to securities law cases, the problem is magnified by the fact that legal scholarship on securities regulation shares some of the same shortcomings. The primary culprit for this overly narrow perspective is a tendency of the literature to fixate on securities fraud claims under Rule 10b-5 to the exclusion of other regulatory policies or statutory provisions.271 As with Bainbridge and Gulati?s analysis of federal judges, there are a number of plausible theories for how the particular institutional incentives facing securities law professors may have skewed this scholarly output.272 But regardless of the explanation, 270. See id. at 87 (stating that the analysis focuses on ?materiality and scienter?). 271. One clear manifestation of this is the crowded field of securities fraud topics in the literature, which often focus on debates concerning each particular element of a Section 10(b) fraud claim. See generally Anne M. Lipton, Reviving Reliance, 86 FORDHAM L. REV. 91 (2017); Donald Langevoort, Reading Stoneridge Carefully: A Duty-Based Approach to Reliance and Third Party Liability Under Rule 10b-5, 158 U. PA. L. REV. 2125 (2010); Jill E. Fisch, Cause for Concern: Causation and the Federal Securities Fraud, 94 IOWA L. REV. 811 (2008). Another generic problem appears in articles that approach topics exclusively from the perspective of Rule 10b-5, despite the applicability of the underlying questions to other areas of the securities law. See generally Bainbridge & Gulati, supra note 34 (arguing that judges avoid the technical details of securities fraud cases, but limiting its review of judicial decision-making to the relatively well understood doctrine relating to securities fraud cases); Langevoort & Gulati, supra note 36 (analyzing Item 303 cases with respect to 10b-5 but not Section 11 or Section 12). 272. Perhaps the most plausible explanation is that Rule 10b-5 securities fraud claims are the one area that may be familiar or of interest to outside audiences, who may regard the remainder of the field as tedious arcana. Bainbridge & Gulati, supra note 34, at 107 (??High profile? and ?controversial? are almost never words used to describe securities class action cases.?). A related reason is that the legal academy pays inordinate attention to the Supreme Court relative to its decisions? practical impact on the law, and Section 10(b) is the only section of the securities law that gets addressed by the Court with any regularity. See Donald C. Langevoort, Words From on High About Rule 10b-5: Chiarella?s History, Central Bank?s Future, 20 DEL. J. CORP. L. 865, 865 (1995) (?A securities law decision by the United States Supreme Court is an extraordinary event, especially when it deals with the centerpiece antifraud requirement, Rule the practical result is that, in securities litigation cases presenting complex issues that strain the institutional capacity of federal courts, judges often cannot fall back on a body of scholarship that systematically clarifies how the dispute fits within the broader structure of securities regulation. Leidos once again provides a compelling illustration of this point, as the case has been widely misunderstood in academic commentary, which tends to dig no deeper than culling loose bits of language that the Cert. Petition pulls from decisions such as Stratte-McClure. V. The Duty to Disclose While the alleged dispute over Sections 11 and 12 precedents raises a number of puzzles of its own and carries significant implications that are not widely appreciated, the duty to disclose issue has received greater exposure in early commentary on Leidos, and has been the subject of greater scholarly attention in general. This section analyzes the duty to disclose as the second source of the Leidos mix-up. Part A begins by identifying how the duty to disclose issue has become a point of controversy in the relevant caselaw and scholarly commentary. Part B walks through the most prominent theory of how the duty to disclose doctrine should be interpreted in securities fraud cases relating to Item 303. It then explains why applying that analysis does not provide a useful framework for understanding the legal questions that are presented to the Court in Leidos. Part C closes by arguing that the confusion which the duty to disclose has generated in Leidos is typical of more general problems with the role that the doctrine plays in securities regulation. 10b-5.?). A final factor may be that the continuous ebb-and-flow in the scope of securities fraud class actions provides a convenient platform for simplistic normative battles over whether securities law should be more ?pro-defendant? or ?pro-investor.? See, e.g., Franklin A. Gevurtz, Law Upside Down: A Critical Essay on Stoneridge Investment Partners, LLC, 103 NW. U. L. REV. COLLOQUY 448, 448? 49 (2009) (?Given the current leaning of the Supreme Court, victory for the defendants in Stoneridge was probably predictable. Nevertheless, the decision is worth academic discussion because it illustrates how utterly irrational the law governing private securities fraud actions has become.?). A. Origins of the Leidos Mixup over the Duty to Disclose The putative conflict in Leidos concerning the duty to disclose is raised at the outset of the Cert. Petition, which frames the question presented to the Court as the need to resolve a ?direct conflict? among the circuit courts over the issue of ?[w]hether . . . Item 303 of SEC Regulation S-K creates a duty to disclose that is actionable under Section 10(b)? of the 34 Exchange Act.273 The Cert. Petition?s primary basis for that claim is Judge Livingston?s opinion in Stratte-McClure, which declares that it is ?at odds? with the Ninth Circuit (NVIDIA) over the question of whether an Item 303 disclosure duty is actionable under Section 10(b).274 The result is that commentary on Leidos is dominated by a working assumption that the Court must intervene in a judicial disagreement over the circumstances in which Item 303?s requirements ?trigger? a duty to disclose that gives rise to a Rule 10b-5 claim in securities fraud cases.275 The underlying source of that perspective can be traced, in part, to a seminal article on disclosure by Donald Langevoort and Mitu Gulati (L&G) entitled The Muddled Duty to Disclose Under Rule 10b-5.276 The L&G article not only sets forth an influential interpretation of the specific legal question at issue in Leidos,277 but has also had a relatively direct impact on the development of that case. In Stratte-McClure, the Livingston Opinion cites to L&G immediately before declaring a conflict between the Second and Ninth Circuits over the duty issue.278 The certiorari briefing to the 273. Leidos Cert. Pet., supra note 3, at i (emphasis added). 274. Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 103 (2d Cir. 2015); see also Leidos Cert. Pet., supra note 3, at 2 (quoting the same passage from Stratte-McClure). 275. See supra note 20 (referencing sources that defend this proposition). 276. See Langevoort & Gulati, supra note 36, at 1640 (discussing the controversy surrounding the duty to disclose). 277. See id. at 1648 (discussing how the MD&A disclosures and Section 10(b) fraud claims interact). The L&G article is principally concerned with the interplay between the MD&A disclosures and a fraud claims under Section 10(b)). Id. 278. See Stratte-McClure, 776 F.3d at 102 (?It follows that Item 303 imposes the type of duty to speak that can, in appropriate cases, give rise to liability under Section 10(b).? (citing Langevoort & Gulati, supra note 36, at 1640)). Court refers to arguments contained in the L&G article, as well.279 Thus, through a somewhat circuitous route, the origins of the alleged circuit split lies within L&G?s theory of the duty to disclose. As its title suggests, the main thrust of the L&G article is that there is a pervasive incoherence in judicial decisions that grapple with securities claims under Section 10(b) that are based on allegedly fraudulent omissions.280 The L&G thesis proceeds from the premise that the ?two central and required elements in any securities fraud case are materiality and a duty to disclose.?281 The source of the analytical muddle in securities fraud caselaw, they suggest, is a failure to maintain a clear conceptual distinction between those two elements.282 In support of this argument, L&G point to the Third Circuit?s decision in Oran, where then-Judge Alito?s opinion is said to represent a leading ?illustration of courts confusing duty and materiality.?283 The line of reasoning that is filtered down from L&G and into Leidos is itself somewhat of a muddle in need of clarification. One issue is that, despite L&G?s critique of Oran, Justice Alito?s analysis in that case appears sound, and has been followed by other circuit courts that have considered the same issue.284 Another wrinkle involves the Second Circuit?s Stratte-McClure decision, which relies on both the Langevoort and Gulati article and the holding in Oran when announcing that its duty analysis is in conflict with that of the Ninth Circuit.285 Because L&G argue that Oran was wrongly decided, however, the strange result is that the Livingston Opinion in Stratte-McClure wields a pair authorities against the Ninth Circuit that appear to contradict one 279. Brief in Opposition to Petition for a Writ of Certiorari, supra note 19, at 20?21. 280. See Langevoort & Gulati, supra note 36, at 1647 (pointing out the disagreement regarding fraudulent omissions). 281. Id. at 1643. 282. See id. at 1650?51 (?In court opinions on the fraud question, it is often hard to determine whether the judge is basing her decision on materiality or duty.?). 283. Id. at 1651. 284. See supra Part III.B.1 (discussing Justice Alito?s opinion). 285. See Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 102 (2d Cir. 2015) (?It follows that Item 303 imposes the type of duty to speak that can, in appropriate cases, give rise to liability under Section 10(b).?). another.286 A final oddity is that, while the Second Circuit?s decision in Leidos purports to follow Stratte-McClure, Judge Lohier?s opinion in that case does not include more than a limited discussion of the duty issue and fails to note any tension with the Ninth Circuit?s view of the doctrine.287 Taken together, then, the caselaw and scholarship surrounding Leidos reflect a baffling crisscross of agreements and disagreements over the duty issue that calls for further explanation. B. Clarifying the Duty to Disclose Under Item 303 and Rule 10b-5 In order to resolve the confusion over the duty to disclose that enters Leidos through Judge Livingston?s reading of the L&G article, it is helpful to take a close look at the latter?s argument, which begins with their definition of ?duty.?288 On a first pass, L&G state that ?duty . . . refers to whether there is an obligation to disclose a certain category of information.?289 ?Materiality,? by contrast, ?refers to the matter of whether a piece of information would likely be important to the reasonable investor.?290 According to L&G, this conceptual distinction is critical, because determining whether a securities fraud defendant was subject to a duty to disclose is a freestanding part of the judicial inquiry in Section 10(b) claims, and one that necessarily precedes the question of materiality.291 When applying this framework, L&G conclude that Justice Alito?s Oran opinion erred by not sequencing its reasoning into two 286. Compare id. (citing both Oran, and Langevoort and Gulati favorably), with Langevoort & Gulati, supra note 36, at 1651 (referring to Oran as problematic). 287. Supra Part III.A.2. 288. See Langevoort & Gulati, supra note 36, at 1644 (?Duty, by contrast, refers to whether there is an obligation to disclose a certain category of information.?). 289. Id. (citing COX ET AL., SECURITIES REGULATION ? 10.4 (4th ed. 2004)). 290. Id. 291. See id. at 1643?44 (?Conceptually though, in order to provide a meaningful discussion about the duty question, we have to separate it carefully from the materiality question.?); see also id. at 1644?45 (?[I]t is important to keep the two concepts separate . . . . Any suggestion that materiality and duty are the same would disturb [] foundational elements [of the securities regulation] architecture.?). separate steps. First, the analysis must begin by asking the ?duty question,? which ?is simply whether violations of this particular category of disclosure requirements [here, Item 303] have the potential to mislead.?292 Second, if courts answer that initial question in the affirmative, they may ?then go on to the question of whether the particular violation was material.?293 The L&G reading of Oran puts some meat on the bones of their otherwise vague articulation of how the duty to disclose doctrine applies in securities fraud cases. The two key moves are to equate the duty concept with a legal obligation to avoid statements that are misleading, and to anchor the source of those statements in the specific line item disclosures that the SEC requires firms to include in their public filings.294 1. Issues with the Conventional Analysis of Disclosure Duties for Rule 10b-5 Structuring the duty to disclose analysis as L&G suggest is problematic, however, because it obscures an important aspect of the legal obligation imposed by Rule 10b-5. Namely, a misleading line-item disclosure is neither sufficient nor necessary for a statement to be actionable under Section 10(b). As a consequence, the ?category of information? which L&G argue is covered by the duty to disclose in the context of securities fraud claims is both under-inclusive and over-inclusive. On one hand, focusing the duty question on violations of particular line-items such as Item 303 is too narrow, given that Rule 10b-5 forbids fraudulent statements in many contexts that do not involve the SEC?s specific disclosure categories.295 The presence of a line-item requirement is not a necessary precondition 292. Id. at 1651. 293. Id. 294. A ?line-item? is any content that is specifically required to be included in a firm?s public filings under the SEC?s disclosure rules. In addition to MD&A under Item 303, other examples include quantitative financial data under Reg. S-X, as well as qualitative information presented in narrative form on subjects such as ?risk factors? facing a firm or summaries of any ongoing ?legal proceedings.? 295. See 17 C.F.R. ? 240.10b-5 (2017) (providing a broad prohibition against fraud). for a Section 10(b) claim for two reasons. First, securities fraud actions may be premised on deceptive statements that are made to investors in any form.296 It is common for courts to recognize claims based on informal press releases or interviews by management that are published in the business press.297 Second, even in the context of disclosures filed with the SEC, a Rule 10b-5 claim can be supported by the omission of information that does not correspond to any particular line-item requirement. One notable illustration of this point is a recent series of class actions against companies such as Target, Inc., which turned on the alleged failure to disclose internal cybersecurity protocols.298 The same conclusion also follows from a widely recognized purpose of Rule 10b-5, which is for Section 10(b) to serve as a ?catch-all? provision that covers interstitial categories of information that have not been explicitly designated by the SEC.299 On the other hand, defining the duty inquiry as a question of whether a line-item disclosure (or any other statement) is 296. See, e.g., Beaver Cnty. Emps.? Ret. Fund v. Tile Shop Holdings, Inc., 94 F. Supp. 3d 1035, 424, 426 (D. Minn. 2015) (reasoning that press releases and other public statements [such as WSJ interviews] actionable under 10b if materially misleading (citing Shaw and other 1st Circuit cases)); see also Karmel, supra note 261, at 786 (?The line-item disclosures of Regulation S-K are mandated and do not depend on an independent judgment by registrants as to their materiality.?). In fact, there does not even need to be a statement. As the Court has recently held, actions taken by management can be deceptive under Rule 10b-5 as well. See Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 158 (2008) (finding no need even for a statement: ?If this conclusion were read to suggest there must be a specific oral or written statement before there could be liability under ? 10(b) or Rule 10b?5, it would be erroneous. Conduct itself can be deceptive, as respondents concede?). 297. In other words, although the SEC does not provide line item categories of information that a CEO must disclose during an interview with the Wall Street Journal, investors may nonetheless sue under Section 10(b) if her responses to the reporter are deceptive due to the fact that they leave out certain pieces of relevant information. 298. The nondisclosure of cyber-security threats that were the basis for fraud actions against Target and other companies took place before the SEC had issued any guidance as to whether or where those topics must be included in a firm?s periodic filings See Karmel, supra note 261, at 812 (discussing the Target ?debacle? and ?other high-profile cybersecurity breaches?). 299. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 202, 206 (1976) (?The section was described rightly as a ?catchall? clause.?). If this were not the case, there would effectively be immunity for any nondisclosure, no matter how deceptive, so long as it does not violate a specific requirement in the securities regulations. ?misleading? creates a legal obligation that is too broad. This is because many line-item rules deal with technicalities that can be stated in a misleading manner yet still not provide any plausible basis for fraud claims, due to their lack of materiality.300 For example, Item 102 of Reg. S-K requires that companies list the address of all physical properties owned by the parent entity or its subsidiaries; Item 502, meanwhile, mandates that a table of contents follow after the cover page of any prospectus document.301 As these rules suggest, certain SEC line item rules and other corners of the securities regulation regime compel the production of trivial bits of information. Rule 10b-5, by contrast, does not do so, and leaves firms free to remain silent with regard to immaterial facts which, if disclosed, would remedy inaccuracies in representations that are only of marginal importance.302 While the foregoing examples highlight the potential blind spots in L&G?s conception of the duty to disclose at a relatively granular level, the same general oversights are also evident in light of the plain language of Rule 10b-5. In relevant part, the rule provides that it is ?unlawful? to make ?any untrue statement of material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances 300. See Langevoort & Gulati, supra note 36, at 1645 n.18 (?Although the rationale for the construction of the various disclosure obligations of companies? such as their periodic filing obligations in Forms 10-Q and 10-K?is that the information is likely to be important to investors, not every piece of information required is going to be important in every instance.?). 301. See Item 102, 17 C.F.R. ? 229.102 (2017) (?State briefly the location and general character of the . . . physical properties of the registrant and its subsidiaries.?); Item 502, 17 C.F.R. ? 229.502 (?You must include the table of contents immediately following the cover page in any prospectus you deliver electronically?; also including front and back page formatting requirements.?). 302. A table of contents can be designed in a way that flouts the formatting strictures of Item 502 while also giving a false impression of the contents in a prospectus, but nonetheless fail to defraud investors. Cf. Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 38 (2011) (?We were ?careful not to set too low a standard of materiality,? for fear that management would ?bury the shareholders in an avalanche of trivial information.?? (quoting Basic, Inc. v. Levinson, 485 U.S. 224 (1988); TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976)); Greenhouse v. MCG Capital Corp., 392 F.3d 650, 656 (4th Cir. 2004) (stating that Section 10(b) and Rule 10b-5 ?decidedly do not prohibit any misrepresentation? no matter how willful, objectionable, or flatly false?of immaterial fact, even if it induces reactions from investors that, in hindsight or otherwise, might make the misrepresentations appear material?). under which they were made, not misleading.?303 Two features characterize the information that Section 10(b) creates a legal obligation to disclose. First, the omitted information can relate to ?any statement.?304 This is consistent with preceding observation that, depending on the particular statements at issue in a case, an omission may be actionable even if it is unrelated to a line item category of information.305 Second, the omitted information must render a statement materially misleading in order to be actionable as a Section 10(b) claim.306 The key implication here, which also confirms the intuition suggested above, is that Rule 10b-5 can only be violated by the joint presence of both conditions in the same statement (an omission that is misleading as well as material).307 Therefore, any definition of duty that walls off the question of materiality is incomplete.308 Once the universe of information covered by Rule 10b-5 is reframed along these lines, the alleged circuit splits and accusations of legal error that swirl around Leidos dissolve away. This includes the L&G critique of the Third Circuit?s duty analysis in Oran which, upon reexamination, falls short for a number of reasons.309 First, once L&G?s insistence on the strict separation 303. 17 C.F.R. ? 240.10b-5(b). 304. See id. (stating that it is illegal to make ?any untrue statement of a material fact?). 305. See Langevoort & Gulati, supra note 36, at 1647 (discussing the treatment of fraudulent omissions). See id. at 1644 (discussing the materiality requirement). 307. In other words, investors have no securities fraud claim against firms that issue statements that withhold material information so long as they are not deceptive; neither can they sue firms that issue statements that are misleading if they are immaterial. See David Monsma & Timothy Olson, Muddling Through Counterfactual Materiality and Divergent Disclosure, 26 STAN. ENVTL. L.J. 137, 168?72 (2007) (providing an argument to the same effect); Victor Brudney, A Note on Materiality and Soft Information Under the Federal Securities Laws, 75 VA. L. REV. 723, 726 n.10 (1989) (same); Edmund W. Kitch, The Theory and Practice of Securities Disclosure, 61 BROOK. L. REV. 763, 816?25 (1995) (same). 308. Reframing the duty to disclose in this manner does not entail a conflation of misleading omissions with material omissions, as one reading of L&G might suggest. Identifying the conjunction of two sets does not eliminate the distinct conceptual properties that define each set. 309. Recall, the criticism was that then-Judge Alito?s opinion improperly skipped over the duty issue, because it found that the omissions alleged by the Oran plaintiffs were immaterial but did not first determine whether they were misleading. See supra notes 291?292 and accompanying text (stating that between misleading and material omissions is dropped, it is not obvious that Justice Alito?s opinion actually passed over the duty question. Instead, a more plausible reading of Oran is that such a determination was implicit in the materiality analysis.310 Second, because Rule 10b-5 can be violated only by statements that are misleading in a material way, a finding that either condition is absent will be sufficient to dispose of a claim under Section 10(b).311 Therefore, even if the Oran opinion skipped over L&G?s narrow version of the duty question, the court was not logically required to resolve that question in the first place. Third, there is no merit to an objection on sequencing grounds.312 In Section 10(b) claims, materiality is considered a mixed question of law and fact, which means that it can properly be reached at the motion to dismiss stage in order to sustain a finding that the pleadings are insufficient as a matter of law.313 In short, the argument that Justice Alito?s opinion fumbled the duty issue does not hold up; and by extension, neither does the stronger claim that Oran illustrates a broader analytical disarray in the caselaw relating to Item 303 and Section 10(b). Likewise, the purported split between the Second and Ninth Circuits only gains traction when a convoluted theory of the duty issue is applied. Here, the decisive passage comes from the Second Circuit decision in Stratte-McClure, wherein the court notes that materiality analyzes whether the particular piece of information would be important to the reasonable investor). 310. ?Materiality? is a concept that deals with magnitudes?it concerns how misleading a statement or omission is. A close analysis of something?s magnitude often presupposes that it exists. See Langevoort & Gulati, supra note 36, at 1644 (?Materiality refers to the matter of whether a piece of information would likely be important to the reasonable investor.?). 311. See id. at 1644 (describing materiality as a ?central and required? element). 312. In other words, the idea that although the materiality element may be dispositive on an ultimate finding of liability may not precede the duty question when a court is asking whether a claim has been stated. 313. This was precisely what was done by the district court decision that was upheld in Oran. In fact, courts often bypass both the misleading or material addressing the question of scienter, which is expressly authorized under terms of the PSLRA. See, e.g., Thompson v. RelationServe Media, Inc., 610 F.3d 628, 633 n.11 (11th Cir. 2010) (upholding dismissal of 10b-5 claim based on failure to plead scienter under PSLRA, without reaching other elements of the claim); In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046, 1056 (9th Cir. 2014) (dismissing Rule 10b-5 claim on scienter grounds). noncompliance with Item 303 may involve a misleading statement that is relevant for purposes of a Section 10(b) claim.314 There are two potential interpretations of this language. From one perspective, it is an accurate yet entirely innocuous proposition. As has been explained, ?any statement? can be misleading for purposes of Rule 10b-5, and Item 303 do not represent a special exception from the general rule that gives MD&A disclosures some sort of safe harbor immunity against the prohibition on securities fraud.315 In other words, the Second Circuit is restating a truism. Under the L&G framework, by contrast, the same passage in Stratte-McClure represents the court?s resolution of the duty issue. It therefore addresses a mandatory threshold question, and directs the decision in that case down a path that will differ from others which do not perform a similar analysis. Because the Livingston Opinion self-consciously adopts the L&G approach, it misconstrues the opinion in NVIDIA and sets the Second Circuit ?at odds? with a conclusion that no court, including the Ninth Circuit, has ever asserted.316 314. See Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 102 (2d Cir. 2015) (?It follows that Item 303 imposes the type of duty to speak that can, in appropriate cases, give rise to liability under Section 10(b).?); see also Langevoort & Gulati, supra note 36, at 1645 n.19 (discussing the when omission of certain facts may or may not be misleading). 315. Materially misleading omissions will often involve noncompliance with a line-item requirement, even though the latter is not necessarily required. For one, the SEC presumably formulates most disclosure rules in order to cover information that is likely to be of interest to investors. See Shaw v. Dig. Equip. Corp., 82 F.3d 1194, 1202 (1st Cir. 1996) (?The obligations that attend the preparation of [a registration statement and prospectus] embody nothing if not an affirmative duty to disclose a broad range of material information.?); see also Langevoort & Gulati, supra note 36, at 1645 n.18 (explaining that, although the purpose of disclosure obligations is to inform investors, not all disclosed information will always be important). In addition, the fact that the SEC requires certain information in a line-item may also lead to self-fulfilling expectations on part of investors that such information will be produced. See Oesterle, supra note 258, at 146 (referring to the ?self-enforcing? nature of judicial interpretations of SEC line items rules). 316. See supra Part III.B.1 (discussing the Leidos case?s cert. petition argument regarding a circuit split on the issue presented by Leidos). 2. Reframing the Relationship Between Item 303 and Section 10(b) The duty to disclose rhetoric that appears in Leidos does more than encourage some questionable interpretations of the relevant precedents. It also distorts the bigger picture perspective on securities fraud claims that involve MD&A disclosures. The prevailing view seems to be that violation of Item 303 effectively serves as a predicate act, which courts must identify in order to determine whether a viable Section 10(b) claim has been pled.317 In reality, there is no particular legal relationship between Rule 10b-5 and Item 303 beyond the fact that both regulations happen to obligate disclosures that look similar in many respects but are not identical. A notable example, of course, is the rules? respective materiality standards.318 But close parallels appear along a number of other dimensions as well: Section 10(b) and Item 303 have roughly comparable knowledge requirements;319 both attempt to draw a distinction between disclosure of verifiable historical facts, as opposed to expressions of opinion or forward-looking projections;320 and, they may both apply to the 317. See supra Part III.B.2 (discussing the relationship between a violation of Item 303 and a Section 10(b) claim through discussion of the Leidos case). 318. See supra Part II.C (discussing materiality in the context of disclosure requirements). 319. The scienter standard in Item 303 turns on language that requires the disclosure of ?known facts.? See 17 C.F.R. ? 229.303 (2017) (providing Item 303 rules which includes language requiring identification or descriptions of ?any known trends?). Meanwhile, the scienter standard for fraud claims is generally understood to be recklessness rather than actual knowledge. See Tellabs, Inc. v. Makor Issues & Rights, 551 U.S. 308, 319 n.3 (2007) (discussing the court of appeals? decisions allowing the scienter requirement to be met by showing recklessness on the part of the defendant). 320. See In re Verifone Sec. Litig., 11 F.3d 865, 870?71 (9th Cir. 1993) (stating that there is no rule 10b-5 liability for purely forward-looking statements); Eisenstadt v. Centel Corp., 113 F.3d 738, 745?46 (7th Cir. 1997) (explaining that Rule 10b-5 does not apply to statements of opinion that amount to mere puffery); DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990) (explaining that Rule 10b-5 does not apply to speculative statements that are only false when viewed in hindsight). Compare SEC Rule 175, 17 CFR ? 230.175 (providing Rule 10b-5 safe harbor for forward-looking statements), with SEC 1989 Release, supra note 73 (providing analogous rule for purposes of Item 303). same underlying disclosure documents.321 In any particular case, courts may compare these categories side-by-side, and where they find the overlap to be complete, declare that Item 303 has ?triggered? a Rule 10b-5 cause of action. But no such procedure is required?the elements of Section 10(b) stand by themselves, and a motion to dismiss must be denied whenever a claim has been properly stated under the terms of the Private Securities Litigation Reform Act.322 For this reason, the underlying complaints in Leidos span hundreds of pages, but only mention Item 303 in a few stray paragraphs, if at all.323 Indeed, as one practitioner has explained, the inclusion of Item 303 allegations in a securities fraud complaint is often considered a minor drafting point or throwaway formality.324 The misunderstood legal relationship between Item 303 and Rule 10b-5 has led commentators to overstate the effect that particular interpretive decisions in the federal courts may have on actual outcomes in securities litigation.325 Even if the caselaw draws subtle technical distinctions between the relevant standards of Item 303 and Rule 10b-5 (regarding materiality, scienter, and so on), it is hard to envision a real-life fact pattern that would occupy 321. This is because Rule 10b-5 claims can be premised on statements made in SEC filings in which Item 303 disclosures must appear. See Shaw, 82 F.3d at 1222 (discussing that Rule 10b-5 claim can proceed based on statements made in prospectuses and registration statements, in addition to periodic financial statements made on a quarterly and annual basis). 322. See Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, 109 Stat. 737 (codified as amended at scattered sections of 15 U.S.C.) (providing for dismissal if the pleadings in an action under the statute do not meet all requirements set out under the statute). 323. See generally Compl., supra note 117 (failing to mention Item 303). See Am. Compl., supra note 107, ?? 49?50 (referencing Item 303 in 2 out of 165 paragraphs). Likely in response to the Second Circuit and SDNY?s unexpected focus on the Item 303 issue, there is a slight uptick in its use in the Second Amended Complaint. See Second Am. Compl., supra note 138, ?? 5, 13, 403, 444, 445, 475, 492 (referencing Item 303 in seven of 527 paragraphs). 324. See Douglas W. Greene, Why Item 303 Just Doesn?t Matter In Securities Litigation, LAW360 (Oct. 13, 2015, 12:49 PM), https://www.law360.com/ articles/711040/why-item-303-just-doesn-t-matter-in-securities-litigation (last visited Jan. 17, 2018) (arguing that Item 303 lacks value as a practical matter) (on file with the Washington and Lee Law Review). 325. See supra Part II (discussing the commentary surrounding the Item 303 and Section 10(b) relationship and the several cases, specifically Leidos, that have dealt with this relationship). the interstitial gap between the two sets of requirements. In other words, as a practical matter, an omitted fact that violates Item 303 will almost always render a statement materially misleading for purposes of a fraud claim as well.326 This reality belies claims made by the Cert. Petition that recent circuit court opinions, such as NVIDIA and Stratte-McClure, have spurred rampant forum shopping by plaintiff?s attorneys in securities class actions.327 It also means that, for securities plaintiffs who would prefer that noncompliance with Item 303 automatically translate into a Section 10(b) claim in some mechanical per se fashion, not much will be at stake in how the Court decides Leidos. A final irony of the duty to disclose debate in Leidos, lost on most of the briefing to the Court and academic commentary, is that the presence of a legal obligation to disclose information relating to MD&A is quite literally not at issue in the case. It is uncontested that such a requirement is imposed by the SEC through Item 303 of Reg. S-K. In the rare (but hypothetically possible) case where factual allegations that support a violation of Item 303 do not also give rise to a fraud claim under Rule 10b-5, the only upshot is that a private enforcement mechanism for that requirement is unavailable.328 The SEC can still police noncompliance with its MD&A rules through cease-and-desist orders and other forms of regulatory supervision.329 Thus, from a policy perspective that focuses on the flow of information to capital markets, the kinds of disclosures that the securities regulations compel firms to make to investors will remain unchanged. 326. No decision in the caselaw surrounding Leidos finds material noncompliance with Item 303 in a way that did not also support a fraud claim, on the grounds that the underlying facts were immaterial as matter of law under Basic. 327. See Leidos Cert. Pet., supra note 3, at 17 (arguing that securities plaintiffs have rushed from the Ninth Circuit to the Second Circuit in recent years). 328. Cf. Amanda M. Rose, The Multienforcer Approach to Securities Fraud Deterrence: A Critical Analysis, 158 U. PA. L. REV. 2173, 2208 (2010) (arguing that overlapping public and private enforcement is an inefficient way to prevent securities fraud). 329. See supra Part II.B (discussing the SEC?s power to exercise enforcement authority over disclosure requirements violations). C. The Role of the Duty to Disclose in Securities Regulation Debate over the precise meaning of the duty to disclose doctrine permeates the securities regulation caselaw and has inspired a voluminous body of legal scholarship.330 These disputes first gained momentum in the seminal insider trading case of 1980, Chiarella v. United States,331 where the Court stated that ?when an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to speak.?332 Although the law of insider trading generally concerns a set of conduct and legal theories that is foreign to securities fraud suits based on misleading corporate disclosures,333 the duty language from Chiarella migrated over to the conventional fraud context with the Court?s 1988 opinion in Basic, where it held that ?[s]ilence, absent a duty to disclose, is not 330. See generally Oesterle, supra note 258 (discussing the meaning of the term ?material? in securities law); Monsma & Olson, supra note 307, at 168?72 (arguing that firms cannot be sued for issuing statements that are misleading if they are immaterial); Kitch, supra note 307, at 816?25 (same); Jeffrey D. Bauman, Rule 10b-5 and the Corporation?s Affirmative Duty to Disclose, 67 GEO. L.J. 935, 936 (1979) (?The extent to which rule 10b-5 imposes a duty to disclose in the absence of trading or prior inaccurate disclosure, however, remains relatively undefined.?); Alan L. Talesnick, Corporate Silence and Rule 10b-5: Does a Publicly Held Corporation Have an Affirmative Obligation to Disclose?, 49 DENV. U. L.J. 369, 370 (1972) (discussing ?material information? and asking under what circumstances a corporation has an obligation to disclose such information). 331. 445 U.S. 222 (1980); see Langevoort & Gulati, supra note 36, at 1641 (?Ever since [the decision in Chiarella], the lower courts have struggled to make sense of what the Court meant [in that case regarding the duty to disclose].?); cf. Hugh T. Wilkinson, The Affirmative Duty to Disclose After Chiarella and Dirks, 10 J. CORP. L. 581, 598 (1984) (arguing that the decisions issued after Chiarella indicate that ?the affirmative duty to disclose retains vitality, and indeed, it remains a rather expansive doctrine?). Chiarella, 445 U.S. at 230. 333. While insider trading cases are premised on Section 10(b), the federal courts did not recognize such claims until more than two decades after Rule 10b-5 was promulgated. See In re Cady, Roberts & Co., Exchange Act Release No. 8-3925, 49 SEC Docket 907, at *3?5 (Nov. 8, 1961) (recognizing federal insider trading claims through SEC administrative action); SEC v. Tex. Gulf Sulphur Co., 401 F.2d 833, 848?49 (2d Cir. 1968) (adopting the SEC position), cert. denied, 394 U.S. 976 (1969); see also STEPHEN M. BAINBRIDGE, THE LAW AND ECONOMICS OF INSIDER TRADING: A COMPREHENSIVE PRIMER 9?12 (2001), http://pages.stern.nyu.edu/~jhasbrou/Teaching/POST%202015%20Fall/Material s/SSRN-id261277.pdf (reviewing the origins of the federal prohibition on insider trading). misleading.?334 The way that the duty to disclose has been conceived in Leidos is typical of a broader theoretical approach to the issue, and is therefore revealing of some of the more dysfunctional aspects that apply to those debates in general. The L&G analysis is a useful starting point in this respect, as it once again provides the clearest articulation of the duty analysis that is adopted in much of the relevant caselaw and broader commentary on the case. L&G define the parameters of any proper theory of the duty to disclose by explaining that it must be consistent with the ?two foundation stones in the securities disclosure architecture.?335 Those are that: ?First, not all material information has to be disclosed [and] [s]econd, immaterial information is often required to be disclosed (although not under Rule 10b-5).?336 The otherwise subtle parenthetical regarding Rule 10b-5 holds the key to this argument?why should a definition of the legal obligation to disclose information under Rule 10b-5 turn on requirements that are nowhere provided in that regulation but instead belong to other areas of the securities law? The unstated assumption here is that the ?duty to disclose? is a unified principle that must be derived from a comprehensive view of the securities law ?architecture? as a whole. This is a fairly representative view. A hallmark of the judicial and scholarly response to Chiarella and Basic is to take the Court?s language at face value by seeking to define a duty to disclose in the abstract, and then resolve particular legal questions in a way that fits with the underlying logic of the more general concept.337 A broader lesson of this article?s analysis is that the leading approach to the duty question runs into serious theoretical and practical difficulties. The most obvious problem is that it produces poor results. As employed in Leidos, the relevant conceptual categories do not map well onto the interaction between Item 303 and Section 10(b), do not provide persuasive critiques of the 334. See Basic, Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988) (discussing the requirement that a statement be misleading to be actionable). 335. Langevoort & Gulati, supra note 36, at 1644?45. 336. Id. 337. See Bauman, supra note 330, at 949 (discussing that there are ways to inform corporations how to act while providing courts with information to determine good faith efforts to comply with the duty to disclose given uncertainties in duty to disclose requirements). relevant caselaw, and often draw attention to sources of disagreement that are nonexistent or merely superficial. In other words, Leidos illustrates the hazards of tackling the duty question based on principles by showing how such an analysis can quickly make an easy case seem very hard. An alternative to the abstract conception of the duty to disclose has been provided in the analysis of Section 10(b) and Item 303 that is presented directly above.338 The basic procedure is to determine the timing and content of any given disclosure duty by grounding the question in the specific legal authorities at issue? whether they be statutory provisions, regulatory rules, statements in the legislative history, or interpretive guidance released by the SEC. This framework differs from that of L&G and the Second Circuit?s Livingston Opinion in that it treats duty as a localized concept that varies across different portions of the securities regulation architecture, rather than as a metaphysical object which hovers above it.339 The advantage of a more particularized approach to duty is that it can reduce apparently complicated legal or policy questions into much simpler terms, and highlights the fact that ?[t]o focus on a duty to disclose in the abstract . . . would be to miss the obvious in favor of the obscure.?340 The deeper theoretical weakness of an abstract approach to the duty to disclose question relates to an equivocation over the term ?duty? as it is used in securities law. In the insider trading context, the duty to ?speak? mainly reflected a prohibition on certain kinds of securities transactions, and had little to do with 338. See supra Part V.B.2 (comparing the standards, rules, and requirements of Item 303 and Section 10(b) violations and claims under each cause of action). 339. See Neach, supra note 6, at 757 (?A detailed look at the various liability provision that a novel concept?reading the statutes and rules themselves?can help to clear at least some of the confusion [relating to Item 303].?); see also Gallagher v. Abbott Laboratories, 269 F.3d 806, 807?11 (7th Cir. 2001) (detailing the universe of regulatory mandates for disclosure). But cf. Donald C. Langevoort, Half-Truths: Protecting Mistaken Inferences by Investors and Others, 52 STAN. L. REV. 87, 125 (1999) (questioning whether securities regulation framework provides sufficient guidance regarding when disclosures must be made on a continuous rather than periodic basis). 340. See Shaw v. Dig. Equip. Corp., 82 F.3d 1194, 1202 (1st Cir. 1996) (explaining that the main issue in the case is not whether there was an abstract duty to disclose but whether there was a specific obligation to disclose the relevant information). financial disclosures per se.341 Instead, when Chiarella and related insider trading precedents invoked the duty concept, those courts were referring to the state law of fiduciary duties that applied to corporate officers and certain other employees as agents of a corporation, and grafting those fiduciary obligations onto the federal securities law.342 Thus, the ?duty? was employed as a term of art that was borrowed from the common law of agency, tort, or contract.343 As such, the term mapped onto the common law idea that heightened legal duties could arise from the presence of certain special relationships.344 341. See BAINBRIDGE, supra note 333, at 43 (arguing that it is the act of insider trading rather than nondisclosure which provides the basis for imposing liability); Charles C. Cox & Kevin S. Fogarty, Bases of Insider Trading Law, 49 OHIO ST. L.J. 353, 353 (1988) (discussing the abstention versus disclosure view of insider trading). 342. See RESTATEMENT (SECOND) OF AGENCY ? 395 (AM. LAW INST. 1958) (discussing the duty of confidentiality for corporate agents); see also BAINBRIDGE, supra note 333, at 39?40 (discussing state law?s influence on federal law in fiduciary duty and insider trading questions); Langevoort & Gulati, supra note 36, at 1654?55 (discussing the Supreme Court?s intrusion into state fiduciary law in Chiarella); Theresa A. Gabaldon, State Answers to Federal Questions: The Common Law of Federal Securities Regulation, 20 J. CORP. L. 155, 157 (1994) (discussing the Supreme Court?s use of state law to decide federal cases). 343. See Ronald C. Wyse, A Framework of Analysis for the Law of Agency, 40 MONT. L. REV. 31, 32?33 (1979) (explaining the distinction between the common law of agency, tort, and contract); Sheldon Gardner & Robert Kuehl, Acquiring an Historical Understanding of Duties to Disclose, Fraud, and Warranties, 104 COM. L.J. 168, 179?88 (1999) (discussing disclosure requirements under the various bodies of common law). 344. The duty question also had unique significance as a procedural matter. In the common law tort of negligence, for example, the duty determination was understood to enjoy lexical priority over other steps in the judicial analysis, because it was considered a pure question of law. Other elements of a negligence claim?such as breach, materiality, and reliance?were usually framed as raising pure questions of fact and therefore not properly resolved at the pleading stage. See John C.P. Goldberg & Benjamin C. Zipursky, The Restatement (Third) and the Place of Duty in Negligence Law, 54 VAND. L. REV. 657, 667?68 n.38 (2001) (discussing the potential procedural differences between two formulations of negligence, one which includes and one which does not include reference to duty); Keith N. Hylton, Duty in Tort Law: An Economic Approach, 75 FORDHAM L. REV. 1501, 1501 (2007) (arguing that an economic analysis can explain the concept of duty and provide a theory of tort law). Securities fraud actions have at times been analogized to common law fraud, a tort historically known as ?deceit.? See Steven A. Fishman, Duty to Disclose Under Rule 10b-5 in Face-to Face Transaction, 12 J. CORP. L. 251, 262 n.79 (1986) (comparing state common law and federal securities law with respect to liability for nondisclosures). However, duty was not an element of those claims at common law, because deceit was an intentional tort, By contrast, when courts refer to duty in the context of private securities class actions alleging wrongful nondisclosures, the term does not carry the same common law implications.345 Instead, ?duty? functions as a synonym for whatever legal ?requirement,? ?mandate,? or ?obligation? is established under the particular statutory or regulatory authority that a plaintiff has invoked as a cause of action in that case. In other words, for determining the applicability of disclosure requirements in the securities laws?the only function of which is to legally obligate the disclosure of information?an invocation of the duty to disclose is a tautological formulation that does not serve an independent role in the legal analysis.346 As illustrated in Leidos, the main stumbling block in like battery, and therefore did not require a plaintiff to plead any particular relationships to the defendant. See RESTATEMENT (SECOND) OF TORTS ? 525 (AM. LAW INST. 1977) (providing the elements required to impose liability for fraudulent misrepresentations); see also Gregory Klass, Meaning, Purpose, and Cause in the Law of Deception, 100 GEO. L.J. 449, 454 (2012) (providing the elements of a claim of deceit which does not include a duty or relationship requirement); Paula J. Dalley, The Law of Deceit, 1790?1860: Continuity Amidst Change, 39 AM. J. LEGAL HIST. 405, 407?08 (1995) (same). For that reason, the ?half-truth doctrine??which provides a cause of action under common law fraud for alleged omissions?does not implicate the ?duty? element which otherwise forms a part of claims in connection with unintentional torts, at least not as it is traditionally understood. 345. See Omnicare v. Laborers Dist. Council Constr. Pension Fund, 135 S. Ct. 1318, 1330 n.9 (2015) (explaining that Section 11 is ?not coextensive with common-law doctrines of fraud?); Stoneridge Inv. Partners v. Scientific-Atlanta, Inc., 552 U.S. 148, 162 (2008) (?Section 10(b) does not incorporate common-law fraud into federal law.?); see also Herman & MacLean v. Huddleston, 459 U. S. 375, 381, 388?89 (1983) (explaining that one of the purposes of federal securities laws was to address and fix issues found in the common law); cf. Edward A. Fallone, Section 10(B) and the Vagaries of Federal Common Law, 1997 ILL. L. REV. 71, 104 (?Although it is difficult to find a consistent pattern in the Court?s approach to definite the elements relevant to a 10b-5 action, one recurring theme has been the occasional judicial relaxation of elements drawn from the common law of fraud.?); Margaret V. Sachs, The Relevance of Tort Law Doctrines to Rule 10b-5: Should Careless Plaintiffs be Denied Recovery?, 71 CORNELL L. REV. 96, 137 (1985) (?The Supreme Court has accorded common law deceit a limited role in interpreting rule 10b-5 . . . . The Court has disregarded common law deceit principles where the statute?s language, history, structure, or policy are dispositive.?). 346. Although this circularity is acknowledged in pockets of the scholarly literature, it is usually noted in passing, and treated as a peculiar yet harmless framing mechanism which courts recite before introducing their substantive analysis. See, e.g., Robert H. Rosenblum, An Issuer?s Duty Under Rule 10b-5 to Correct and Update Materially Misleading Statements, 40 CATHOLIC U. L. REV. 289, 293 (1991) (calling the standard tests for when there is a duty to disclose taking an abstract approach to the duty to disclose is that, by freighting the duty analysis with significance that it does not have, courts and scholars lose sight of the disclosures which are compelled by the legal authorities that are actually on point. VI. Conclusion By taking up Leidos for its October 2017 Term, the Court put itself on course to address a set of statutory and regulatory authorities that are at the heart of the securities law framework. As this article has argued, however, even before its settlement, Leidos did not present the Court with an opportunity for resolving any split among the circuit courts of appeals as to how the relationship between those authorities should be interpreted. The consensus in the caselaw is that a failure to comply with the MD&A disclosure requirements in Item 303 of Reg. S-K may in many circumstances also constitute an actionable claim for securities fraud under Rule 10b-5,347 but it does not automatically do so in every instance. The reason is that the materiality standards in the two regulations differ slightly. Since none of the federal court decisions on point have taken a position to the contrary, the Court would likely have upheld the Second Circuit?s decision in Liedos on those same grounds. This argument carries broader implications because it cuts against essentially all other extant readings of the issues raised by Leidos. In the academic scholarship, there is a uniform impression that Leidos will force the Court to confront an intractable disagreement over how much disclosure firms are required to provide to investors under federal law. Moreover, the relevant judicial opinions have often expressed the same conclusion, despite their underlying substantive agreement. Because the thesis of this article is that such an interpretation is radically incorrect, what is really at stake when considering the issues presented by Leidos is ?circular?); Monsma & Olson, supra note 307, at 167 (same). 347. See supra Part III (discussing whether and when an Item 303 violation can constitute a Section 10(b) violation and ultimately concluding that it can but that a violation of Section 10(b) is not inevitable just because of the presence of an Item 303 violation). a proper understanding of how the securities regulation regime operates at a fundamental, systemic level. The Article?s larger contribution therefore consists of identifying the two sources of confusion that have led the courts and academic literature astray in this area. First, the disclosure obligations imposed under Reg. S-K must be analyzed by approaching the twin pillars of the securities law framework, the 33 Securities Act and 34 Exchange Act, from an integrated perspective that identifies the common elements across those statutes. Although the anti-fraud prohibition under Rule 10b-5 has a number of unique features, the tendency to view Section 10(b) of the 34 Exchange Act in isolation from related provisions in the 33 Securities Act often leads to logically inconsistent interpretations of both statutes. Second, the central role granted to the ?duty to disclose? in securities law is misplaced, because the application of that doctrine in cases involving nondisclosure claims simply begs the question. As a result, theoretical disputes over the precise meaning of the duty to disclose distract from the real legal issues presented, more often than not, and are best left unopened. The overarching claim of this Article is that, once these two misunderstandings are remedied, a more coherent picture of how federal securities regulation works will follow. II. The Statutory & Regulatory Framework in Securities Law.................................................................. 968 A. The 1933 Securities Act & 1934 Exchange Act ........ 968 B. Reg. S-K: Item 303 MD & A Rules.............................. 972 C. The Materiality Requirement ................................... 974 III. Leidos: The Illusory Circuit Split.................................... 978 A. Leidos in the Lower Courts ....................................... 978 1 . Factual Background & Proceedings in SDNY.................................................................... 978 2. The Second Circuit Opinion of Judge Lohier ..... 982 B. Leidos at the Supreme Court .................................... 985 1 . The Cert . Petition & Alleged Circuit Split ......... 986 2. The Leidos Settlement and Supreme Court Opinion It Foreclosed ................................ 995 IV. Nondisclosure Claims & the 33 Securities Act............. 1000 A. Origins of the 33 Securities Act Muddle in Leidos ................................................................... 1000 B. The Parallel Caselaw on Sections 11 & 12 ............. 1003 C. Resolving the Intra-Circuit Split over Item 303 . .................................................................. 1007 D. The Missing Systemic Perspective on Securities Regulation............................................... 1010 V. The Duty to Disclose ...................................................... 1015 A. Origins of the Leidos Mixup over the Duty to Disclose ....................................................... 1016 B. Clarifying the Duty to Disclose Under Item 303 and Rule 10b- 5 ......................................... 1018 1. Issues with the Conventional Analysis of Disclosure Duties for Rule 10b-5 ....................... 1019 2. Reframing the Relationship Between Item 303 and Section 10(b )................................ 1025 C. The Role of the Duty to Disclose in Securities Regulation............................................... 1028 1 . Ind. Pub. Ret. Sys. v. SAIC, Inc., 818 F.3d 85 ( 2d Cir . 2016 ) (Lohier , J.), cert. granted sub nom . Leidos, Inc. v. Ind. Pub. Ret. Sys., 137 S. Ct . 1395 ( 2017 ) (No. 16-581) [hereinafter Lohier Op.]. 2. See id. at 88 ( setting forth the four securities issues addressed by the Second Circuit) . 3. See Petition for Writ of Certiorari at i , Leidos, Inc. v. Ind. Pub. Ret. Sys., No. 16 - 581 (U.S. Oct. 31 , 2016 ) [hereinafter Leidos Cert . Pet.] (posing the question the rulings of the Third and Ninth Circuits); see also 17 C.F.R. ? 229 .303 ( 2017 ) by management and the results of operations); 15 U .S.C. ? 78j ( 2012 ) (codifying Section 10(b )); 17 C.F.R . ? 240 .10b-5 (codifying Rule 10b-5) . 4. See Leidos Cert. Pet., supra note 3 , at i (? The question presented is: Whether the Second Circuit erred in holding-in direct conflict with the decisions 12 . See Lohier Op., 818 F.3d 85 , 94 n. 7 ( 2d Cir . 2016 ) (discussing Stratte-McClure and its applications to the Leidos case ). 13 . See Leidos Cert. Pet., supra note 3 , at 9 (? The clashing approaches among on whether plaintiffs may assert Section 10(b) claims based on omissions that are Uncertainties Under Item 303 of Regulation S-K Creates Liability Under Section 10 ( b ), GIBSON, DUNN & CRUTCHER LLP (Jan. 22 , 2015 ) [hereinafter GIBSON , DUNN uncertainties-under-item-303-of-regulation-s-k-creates-liability-under-section- 10b/ (last visited Jan. 4 , 2018 ) (discussing the circuit split resulting from the Law Review) . 43. Infra Part II. 44. Infra Part III. 45. Infra Part IV. 46 . Infra Part V. 47 . Infra Part VI. 48 . See , e.g., THOMAS LEE HAZEN , THE LAW OF SECURITIES REGULATION 19-22 (6th ed. 2006 ); Stephen J . Choi & Andrew T. Guzman , Portable Reciprocity: Rethinking the International Reach of Securities Regulation , 71 S. CAL . L. REV. 903 , 941 - 45 ( 1998 ) (?One of the most cited and intuitive goals of the securities laws is the protection of investors .?). 66 . See generally Blue Chip Stamps v . Manor Drugs Stores , 421 U.S. 723 ( 1975 ). 70 . Guides for Preparation and Filing of Statements, Securities Act Release No. 33 - 4936 , 33 Fed. Reg. 18617 - 02 ( Dec . 9, 1968 ). 71 . Concept Release on Management's Discussion and Analysis of Financial Condition and Operations, Securities Act Release No. 33 - 6711 , 52 Fed. Reg. 13715- 02 (Apr. 17, 1987 ). 72 . 17 C.F.R. ? 229 . 73. Management 's Discussion and Analysis of Financial Condition and Release No . 33 - 6835 , 54 Fed. Reg. 22427 - 01 (May 18, 1989 ) [ hereinafter 1989 SEC Release] . 74 . 17 C.F.R. ? 229 . 303 . 75. Id . 76 . Id . 77 . See Oran v. Stafford , 226 F.3d 275 , 287 ( 3d Cir . 2000 ) (drawing this


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Matthew C. Turk, Karen E. Woody. The Leidos Mixup and the Misunderstood Duty to Disclose in Securities Law, Washington and Lee Law Review, 2018,