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
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
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
VI. Conclusion ...................................................................... 1033
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
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,
(last visited Jan. 4, 2018)
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
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
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
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
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
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),
(last visited Jan. 11,
(?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),
(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
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
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
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
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?
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).
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
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).
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.
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
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,
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
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
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?
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).
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
; 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
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
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
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)).
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
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
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
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
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
289. Id. (citing COX ET AL., SECURITIES REGULATION ? 10.4 (4th ed. 2004)).
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]
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.
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
295. See 17 C.F.R. ? 240.10b-5 (2017) (providing a broad prohibition against
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
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
?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
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?
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
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
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
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
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/
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
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
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
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),
s/SSRN-id261277.pdf (reviewing the origins of the federal prohibition on insider
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.
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
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
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
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
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.
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
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