Two recent cases, one in the Ninth Circuit, and one in the Second Circuit, questioned whether a failure to include information allegedly required by the Management Discussion and Analysis (MD&A) under Item 303 of Regulation S-K1 of the Securities and Exchange Commission (SEC) can support a fraud action under Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), and came to conflicting conclusions. In these cases the courts agreed that Congress did not intend to create a private cause of action for alleged violations unless the plaintiffs could satisfy the requirements of a Section 10(b) case. Nevertheless, these cases raise several interesting questions. The first is whether line-item disclosure or other regulatory obligations relating to the contents of SEC filings are necessarily material. The second is how and whether Item 303 fits into the doctrine that silence is not actionable under Section 10(b) unless there is a duty to speak.
These are two separate and distinct inquiries, but courts have sometimes conflated them.2 Some of the confusion in the cases seems to result from the SEC’s view that the concept of materiality for purposes of the MD&A is broader than the Supreme Court’s “probability/magnitude” formulation for purposes of Section 10(b) cases. In Basic v. Levinson,3 which was an affirmative misrepresentation case, the court adopted the materiality standard of SEC v. Texas Gulf Sulphur Co.,4 an insider trading case, and held that with regard to a contingent event—a merger—materiality depended upon “the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity.”
