The 10b-5 Daily

Last year, the U.S. Supreme Court had the opportunity in the Facebook case to address the extent to which corporate risk disclosures can form the basis for securities fraud liability.  After oral argument, however, the Court decided to dismiss the appeal as improvidently granted.  That has left the door open for a wide range of potential decisions from the lower courts.

In Craig v. Target Corp., 2024 WL 4979234 (M.D. Fla. Dec. 4, 2024), the court considered whether Target’s risk disclosures in its 2021 and 2022 annual reports about ESG and DEI initiatives were false and misleading because they failed to disclose that the company would embark on a Pride Month Campaign in May 2023 that could result in customer boycotts and loss of sales. Target generally had disclosed that negative reputational incidents could adversely affect its results and that it faced varied stakeholder expectations regarding how it addressed environmental, social, and governance matters.  In addition, Target previously had been the subject of a customer boycott as the result of its opposition to North Carolina’s 2016 transgender bathroom law. 

The court found, however, that Target had failed “to mention the specific risk of its upcoming 2023 Pride Month Campaign” and that the company knew or should have known that this particular campaign “posed a risk of backlash and financial repercussions.”

Holding: Motion to dismiss denied.

Quote of note: “Target’s plan to enact a new campaign – i.e., placing controversial merchandise at the center of its stores – could be construed as a change to their ESG/DEI campaigns in prior years.  Upon review of the amended complaint and the parties’ briefing, it is unclear whether this information was publicly available and it is further unclear how much information investors and Plaintiffs knew about the plans for the new campaign.  Thus, Plaintiffs have adequately pleaded that information revealed in the 2021 and 2022 risk disclosures may not have been complete.”

In Macquarie, a recent decision from the U.S. Supreme Court, the Court addressed “half truth” liability for securities fraud.  Among other things, the Court noted that “the difference between an omission and a half-truth is the difference between a child not telling his parents he ate a whole cake and telling them he had dessert.  Rule 10b-5(b) does not proscribe pure omissions. . . . Put differently, it requires disclosure of information necessary to ensure that that statements already made are clear and complete (i.e., that the dessert was, in fact, a whole cake.)”  But how does this analogy work in the context of alleged material omissions in a company’s risk disclosures, which by their nature are talking about a dessert that has yet to be eaten (and may never be eaten)?

In Roofers Local N. 149 Pension Fund v. Amgen, Inc. 2024 WL 4358409 (S.D.N.Y. Sept. 30, 2024), the court considered a case involving Amgen’s risk disclosures surrounding its ongoing dispute with the IRS over back taxes.  The risk disclosures stated that the IRS’s proposed adjustments were “significant,” “substantial,” “may result in payments substantially greater than amounts accrued,” and “could have a material impact” on Amgen’s financial statements.  Amgen also disclosed that it did not agree with the adjustments and was contesting them.  What Amgen did not tell the market, however, was that the IRS had indicated to the company that it was seeking a total of $10.7 billion in back taxes.  When Amgen eventually disclosed the exact amounts that the IRS was seeking after receiving notices of deficiency, its stock price declined.  

As recognized in the Amgen decision, companies frequently decline to quantify the risks they face, instead using words like “significant” until the magnitude of the risks becomes more certain.  Nevertheless, the court found that the failure to disclose the $10.7 billion amount rendered Amgen’s risk disclosures materially misleading because investors were “left in the dark” about the magnitude of the potential liability.  While Amgen was “free to vigorously dispute the legal and factual merits of the IRS’s assessments, and to tell investors that it is doing so; what it cannot do consistent with Section 10(b) and Rule 10b-5, however, is present investors with an incomplete, unclear, and thus plausibly misleading picture of the financial risks posed by that dispute.”  Referring to the “whole cake” analogy used in Macquarie, the court noted that it did “not believe that the analogy would have come out differently had the child described his treat as merely ‘significant’ or ‘substantial’ instead.”

Holding: Motion to dismiss denied.