Appellate Roundup

The Second Circuit and Seventh Circuit have issued recent notable decisions.

(1) Item 303(a) of Regulation S-K requires issuers to disclose known trends or uncertainties “reasonably likely” to have a material effect on operations, capital, and liquidity. While it has been referred to as the “sleeping tiger” of securities litigation, it may soon be the star of the circus. In Panther Partners Inc. v. Ikanos Communications, Inc., 2012 WL 1889622 (2nd Cir. May 25, 2012), the Second Circuit added to its Item 303(a) jurisprudence, finding that the plaintiffs had plausibly alleged that the company, at the time of its securities offering, “was aware of the ‘uncertainty’ that it might have to accept returns of a substantial volume, if not all, of the chips it had delivered to its major customers.”

Holding: Denial of leave to file an amended complaint (based on futility) reversed.

(2) He’s back and so soon! Following up on last month’s decision, Judge Easterbrook of the Seventh Circuit has authored another securities litigation opinion. In Plumbers and Pipefitters Local Union 719 Pension Fund v. Zimmer Holdings, Inc., 2012 WL 1813700 (7th Cir. May 21, 2012) (Easterbrook, J.), the court addressed whether the plaintiffs had adequately plead scienter (i.e., fraudulent intent) in a case alleging that the company downplayed the significance of product problems. Among other things, the plaintiffs pointed to the CEO’s failure, in response to a question posed during an analyst call, to reveal that the company had received verbal notice from an FDA inspector of “significant objectionable conditions” at one of its plants. The court concluded that the CEO’s answer was technically accurate and the “worst one could say about [the] answer is that it was evasive, which is short of fraudulent.”

Holding: Dismissal affirmed.

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