Two federal appellate courts have recently issued conflicting decisions about whether the duty to disclose information under Section 10(b) of the Exchange Act is narrower than the disclosure duty under the SEC's rule requiring the disclosure of certain types of information. The federal appellate court based in California held on 2 October 2014 in In re NVIDIA Corporation Securities Litigation that the duty to disclose under Section 10(b) is narrower than the SEC's disclosure requirement, known as Item 303. But on 12 January 2015, in Fjarde AP-Fonden v. Morgan Stanley, the federal appellate court based in New York held the opposite as to statements made in quarterly Forms 10-Q (which are filed by US issuers).
In In re NVIDIA, the plaintiffs claimed that the defendant semiconductor company improperly delayed disclosure of problems with its computer chips. The court explained the well-known rule set forth by the United States Supreme Court that "silence, absent a duty to disclose, is not misleading" under Section 10(b). Disclosure is required, said the appellate court, only when necessary to make affirmative statements not misleading. The court concluded that Item 303's disclosure requirement is broader than Section 10(b)'s duty to disclose because Item 303 requires the disclosure of forward-looking information (such as the potential impact of problems with the company's products) that might not be considered material under Section 10(b), depending on its level of significance. In addition, the court in In re NVIDIA distinguished cases holding that a failure to comply with Item 303 is a basis for liability under the Securities Act of 1933 because that law imposes more demanding disclosure duties for offering documents, does not contain Section 10(b)'s scienter (i.e., intent) requirement and is subject to a lower pleading standard.
The court in Fjarde AP-Fonden, however, reached the opposite conclusion in a case dealing with alleged omissions concerning Morgan Stanley's financial exposure in 2007 to certain investments related to subprime residential mortgage-backed securities. In this case, the court explained that the "duty to disclose under Section 10(b) can derive from statutes or regulations that oblige a party to speak." Based on this principle, the court held, noting its disagreement with the court in In re NVIDIA, that Item 303 creates a disclosure obligation for Form 10-Qs under Section 10(b) similar to the Securities Act's disclosure obligations for offering documents under Section 12(a)(2) because Form 10-Qs, like offering documents, "are mandatory filings" and Item 303 disclosures are "required elements" of those filings.
While the court in Fjarde AP-Fonden expressly disagreed with the court's holding in In re NVIDIA concerning the scope of the duty to disclose under Section 10(b), it is not clear how much practical impact this difference of opinion will have. The court in Fjarde AP-Fonden went on to acknowledge (as the court in In re NVIDIA explained) that the materiality standard is broader under Item 303 than it is under Section 10(b) and a plaintiff must still plead under Section 10(b) that the omitted information meets this more demanding test for materiality. Moreover, both courts ultimately affirmed the district court's dismissal because the plaintiffs in each case failed to allege that the companies acted with scienter. Lastly, the court's decision in Fjarde AP-Fonden specifically concerned quarterly Form 10-Qs, which the court explained are mandatory filings subject to Item 303's disclosure requirements. The court in Fjarde AP- Fonden did not discuss whether it would agree with the In re NVIDIA court about the scope of the duty to disclose under Section 10(b) when dealing with a non-mandatory disclosure.
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