In a post earlier this month, I summarized the three securities law cases that the U.S. Supreme Court will hear its current term. Among the three cases on the Court’s docket is Leidos, Inc. v. Indiana Public Retirement System. As discussed in greater detail here, in Leidos, the Court will address the question whether or not the alleged failure to make a disclosure required by Item 303 of Reg. S-K is an actionable omission under Section 10(b) and Rule 10b-5. In an interesting September 26, 2017 article entitled “Ask Me No Questions and I Will Tell You No Lies: The Insignificance of Leidos Before the United States Supreme Court” (here), Stanford Law Professor Joseph Grundfest argues that the Leidos case is “not a big deal” and is a “nothing-burger,” because, he contends, regardless of which way the Court comes out in the case, the outcome will make little practical difference.

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Item 303 of Reg. S-K states in pertinent part that in its periodic reports to the SEC, a company is to “[d]escribe any known trends or uncertainties that have had or that the registrant reasonably expects will have a materially favorable or unfavorable impact” on the company. Guidance provided by the SEC on Item 303 clarifies that disclosure is necessary where a “trend, demand, commitment, event or uncertainty is both presently known to management and reasonably likely to have material effects on the registrant’s financial conditions or results of operations.”

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Grundfest draws a distinction between the language Congress used in creating express liability under Section 11(a) of the Securities Act of 1933, for example, and the language the Commission used when it drafted Rule 10b-5 in 1942. Section 11(a) creates liability not only for material misrepresentation or omissions in a registration statement, but also if the registration statement “omitted to state a material fact required to be stated therein.” In Rule 10b-5(b), by contrast, the Commission only rendered it unlawful to “make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.”

In light of this textual analysis, Grundfest contends that nothing in Section 10(b) or Rule 10b-5 “expressly addresses ‘pure omissions,’ the omission of information that Commission regulations requires to be disclosed in periodic reports but that does not render any affirmative statement false or misleading.” The Rule, Professor Grundfest says, prohibits lies and half-truths (that is, omissions making affirmative statements misleading), but, and by contrast to Section 11(a), does not prohibit pure omissions.