Last week, Judge Crotty of the Southern District of New York heard oral arguments in Richman v. Goldman Sachs Group, Inc., a case in which the plaintiffs, attempting to recover losses on their investments in Goldman stock, articulated a novel theory of liability: that Goldman violated the securities laws by failing to disclose its receipt of a Wells Notice relating to its Abacus 2007-ACI collateralized debt obligation (CDO).

According to the plaintiffs, the Wells Notice, which noted that the SEC staff recommended bringing a civil action against Goldman and invited Goldman to provide information as to why the enforcement action should not be brought, was material to the investors and should have been disclosed. Indeed, according to plaintiffs, it was Goldman’s conduct relating to the Abacus CDO that eventually resulted in a $550 million settlement with the SEC.

The plaintiffs’ theory was straightforward: In January of 2009, Goldman disclosed in its SEC filings that regulators were investigating its CDOs, including Abacus. This, according to the plaintiffs, confirmed Goldman’s belief that the investigation was material to a reasonable investor. If it was not material, the plaintiffs asked, then why would Goldman disclose it in the first place? When the SEC staff issued a Wells Notice to Goldman relating to Abacus in July 2009, Goldman never made a separate disclosure—a material omission that, according to the complaint, kept plaintiffs in the dark about the status of the SEC’s investigation.

The plaintiffs argued that investors would never know about the more immediate threat of a lawsuit, and would instead assume that Goldman was continuing to cooperate with the ongoing regulatory investigation with no imminent threat of an enforcement action. According to the plaintiffs, once Goldman disclosed the existence of the SEC investigation, it had an ongoing duty to disclose all material information relating to that investigation.

Not surprisingly, Goldman moved to dismiss, arguing that the complaint suffered from numerous pleading deficiencies and that, most fundamentally, there is no duty to disclose the receipt of a Wells Notice. First, a Wells Notice is no guarantee that the SEC will commence an enforcement action. Second, no court, statute or regulation has ever required disclosure of a Wells Notice, and the SEC has never brought an action for a failure to make the disclosure. And third, to require disclosure places the company in a difficult position of disclosing the possibility that an enforcement action might be filed. All a company can do, Goldman argued, is give its best guess about what the SEC will decide, and requiring disclosure of a Wells Notice interjects unnecessary speculation into the market about what the SEC may or may not do.

In fact, according to Goldman, disclosing the fact of the investigation, and the fact of the Wells Notice, is effectively the same thing—the latter can flow from the former, and the possibility of an enforcement action is always present when an investigation commences.

After hearing oral arguments, the judge took the motion under advisement, but it would appear that the plaintiffs face an uphill battle. The lack of case law supporting their position may be dispositive, but perhaps just as important is the “slippery slope” problem that plaintiffs’ theory presents. If a Wells Notice is material to a reasonable investor, where should a company draw the line? Does it need to disclose every correspondence from a regulator? Those suggesting that the regulator may be more, or less, likely to pursue claims against the company? Are ongoing status reports about a regulatory investigation material to an investor’s decision to invest?

These are all relevant questions that Judge Crotty will most certainly be considering. Although the safe bet is with Goldman, whatever the outcome, this is certainly a case worth monitoring.