The chief executive officer (“CEO”) of MCG Capital Corp. (“MCG”) misled his company into believing that he had an undergraduate degree in economics from Syracuse University. MCG repeated this false statement in its SEC filings. Once the CEO admitted the truth, MCG corrected its public statements and the company’s stock price declined. A securities class action suit filed in the E.D. of Va. soon followed. The district court dismissed the case, finding that the CEO’s educational background was immaterial as a matter of law. Plaintiffs appealed.
In Greenhouse v. MCG Capital Corp., 2004 WL 2940871 (4th Cir. Dec. 21, 2004), the U.S. Court of Appeals for the Fourth Circuit has affirmed the district court’s decision. The court held that an action brought pursuant to Rule 10b-5 must “allege a fact that is both untrue and material.” It follows that Rule 10b-5 “does not prohibit any misrepresentation – no matter how willful, objectionable, or flatly false – of immaterial facts, even if it induces reactions from investors that, in hindsight or otherwise, might make the misrepresentation appear material.” The court went on to find that although the statements made about the CEO’s educational background were clearly false, they were immaterial because there was no credible basis for believing that the CEO’s lack of an undergraduate degree would have altered the “total mix” of information available to investors about the company.
Holding: Affirming dismissal.
Quote of note: “In conclusion, while we acknowledge that [the CEO’s] lie is indefensible, it does not follow invariably that it is illegal. We hold that, viewed properly, it is not substantially likely that reasonable investors would devalue the stock knowing that [the CEO] skipped out on his last year at Syracuse. That is, if one imagines a parallel universe of affairs where the one and only thing different was that MCG’s filings made no mention of [the CEO’s] education (or, instead, said simply that he ‘attended’ Syracuse or ‘studied economics’ there), we find it incredible to believe that MCG’s stock would be worth even a penny more to a reasonable investor.”
The 10b-5 Daily 