Don’t Tout

A number of years ago, the U. S. Court of Appeals for the Fourth Circuit addressed whether a company’s false statement about its CEO’s educational background was material.  The court found that the statement was immaterial as a matter of law, even though the company’s stock price dropped significantly once the truth about the CEO’s lack of an undergraduate economics degree was revealed to the market.  But is that true of any false statement in a corporate biography?

In Kelsey v. Textura Corp., 2016 WL 825236 (N.D. Illinois March 2, 2016), the court confronted a similar situation.  As part of Textura’s initial public offering, the company issued a prospectus and registration statement containing its CEO’s biography.  The biography provided a number of details about the CEO’s prior work history, but failed to disclose that the CEO previously had been the CEO of another company and, in that position, had been accused by an auditor of providing the auditor with false information.  Indeed, the auditor later announced that it could no longer rely upon the CEO’s representations.

Textura argued that under the applicable SEC regulation, it was only required to provide investors with the last five years of the CEO’s business experience.  During that period of time, the CEO had worked at Textura.  The court found, however, that once Textura chose to speak about the CEO’s prior work history, it “had a duty to do so in a manner that was not misleading.”  Indeed, the court concluded that the CEO’s prior work history clearly was material because Textura chose to include it even though it was not required to do so.  The court therefore denied the defendants’ motion to dismiss as to the alleged omission in the CEO’s biography.

Holding: Denying in part and granting in part the motion to dismiss.

Quote of note: “The court rejects defendants’ argument that they did not ‘tout’ [the CEO’s] prior experience.  Having convincingly argued that it was not required to include any of [the CEO’s] prior experience, there could be no other reason from them deciding to do so.”