43 Pages Posted: 2 Oct 2017
Date Written: September 26, 2017
What if the Supreme Court issued an opinion and no one cared? No one cared who won or lost. No one cared how the question presented was resolved. The prevailing party wouldn’t gain a cent from its victory and the losing party wouldn’t suffer one whit from its loss. Leidos, Inc. v. Indiana Public Retirement System, now pending before the Supreme Court, could be just that sort of case.
Leidos asks whether a “pure omission,” an omission that does not render an affirmative statement false or misleading, is actionable under Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. With so much affirmative mandatory and voluntary disclosure in the public domain it is trivially easy for plaintiffs to allege that material omissions create half-truths that are fully actionable under established precedent. Half-truths expose defendants to liability identical to that arising from corresponding pure omission claims, and it makes no meaningful difference whether pure omissions are actionable as omissions or as half-truths. Leidos itself proves the point: there, a single omission causes an affirmative statement to become misleading and is also alleged as a “pure omission.” Leidos will be remanded to resolve the half-truth claim and, on remand, the probability that Leidos will be dismissed, and the amount for which Leidos settles if not dismissed, will not be materially affected by the Supreme Court’s decision.
This is not to suggest that certiorari has been improvidently granted. There is virtue in semantic consistency. A clear opinion describing the scope of liability, if any, for pure omissions will contribute to judicial efficiency by eliminating complex briefing over rhetorical distinctions that don’t move the liability needle.
As for the doctrinal question presented, the better interpretation of the law is that the relevant text, history, and precedent do not support Rule 10b-5 liability for pure omissions. A decision to the contrary would create substantial tension with Supreme Court precedent and generate unnecessary confusion over the application of the most important civil liability provision of the federal securities laws. The article also examines the potential for pure omission liability arising from the Sarbanes-Oxley Section 906 certification and concludes that neither the Commission nor private parties are likely to prevail on such a claim.
Keywords: Leidos, 10(B), 10b-5, 906 Certification, Pure Omissions, Regulation S-K, Item 303, Duty to Disclose, Sarbanes Oxley, 13(A)
JEL Classification: K22, K41, K42
Suggested Citation: Suggested Citation
Grundfest, Joseph, Ask Me No Questions and I Will Tell You No Lies: The Insignificance of Leidos before the United States Supreme Court (September 26, 2017). Rock Center for Corporate Governance at Stanford University Working Paper No. 229. Available at SSRN: https://ssrn.com/abstract=3043990