During its October term this year, the U.S. Supreme Court will hear argument in Leidos v. Indiana Public Retirement System, No. 16-581, on an important federal securities fraud issue: Whether a publicly held company’s omission of “known trends and uncertainties” in its annual or interim reports, as required by Item 303 of Securities Exchange Commission (SEC) Regulation S-K, can give rise to a private securities fraud claim under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 (Rule 10-5). The court granted Leidos Inc.’s writ of certiorari to resolve a conflict between the U.S. Court of Appeals for the Second Circuit—which held in the securities class action against Leidos that a violation of Item 303 can give rise to Rule 10b-5 liability—and the Ninth and Third circuits—which, in earlier decisions, had held to the contrary.
Applying the holding and reasoning of its 2015 opinion, Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 101 (2d Cir. 2015), the Second Circuit held in Indiana Public Retirement System v. SAIC, 818 F.3d 85, 94 & n.7 (2d Cir. 2016), that the failure of Leidos (formerly known as SAIC Inc.) to disclose under Item 303 its exposure for alleged employee fraud and overbilling in connection with certain government contract work stated a cause of action under Rule 10b-5. The Second Circuit’s decisions in Stratte-McClure and SAIC conflict with the Ninth Circuit’s opinion, In re NVIDIA Securities Litigation, 768 F.3d 1046, 1054-56 (9th Cir. 2014), and the Third Circuit’s opinion, Oran v. Stafford, 226 F.3d 275, 287-88 (3d Cir. 2000), in which the courts held that an Item 303 omission is not actionable under Rule 10b-5.
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