{"id":868,"date":"2016-03-31T13:13:39","date_gmt":"2016-03-31T17:13:39","guid":{"rendered":"https:\/\/www2.law.temple.edu\/10q\/?p=868"},"modified":"2016-03-31T13:13:39","modified_gmt":"2016-03-31T17:13:39","slug":"sec-investigations-disclose-not-disclose-question","status":"publish","type":"post","link":"https:\/\/law.temple.edu\/10q\/sec-investigations-disclose-not-disclose-question\/","title":{"rendered":"SEC Investigations: To Disclose or Not to Disclose-That is the Question"},"content":{"rendered":"

Among the many important decisions a company facing a SEC investigation must make is the decision whether to publicly disclose the existence of the investigation. The decision may depend on the stage of the investigation, what is being investigated, and what is the likelihood of a bad outcome. While the weight of authority suggests that SEC investigations need not be disclosed, recent case law illustrates that the decision to disclose or not disclose carries with it certain consequences. Companies under investigation should consider all potential consequences of disclosure or non-disclosure with the help of counsel in determining a strategy.<\/p>\n

In a recent decision<\/a> from the U.S. District Court for the Southern District of New York, Judge John G. Koeltl held that issuers do not have a general duty to disclose the existence of an SEC investigation or a Wells Notice.1.\u00a0The plaintiffs primarily alleged that Lions Gate and the individual defendants were aware of, but failed to disclose, the SEC\u2019s investigation into alleged misrepresentations relating to transactions that were announced two years earlier.\u00a0 Id. <\/i>The defendants moved to dismiss the claims on the basis that plaintiffs failed to plead that any omissions by Lions Gate were material or, alternatively, that defendants had a duty to disclose the SEC investigation and Wells Notices. The court agreed and dismissed the claims, holding that issuers do not have a general duty to disclose as \u201cthe securities laws do not impose an obligation on a company to predict the outcome of investigations.\u201d<\/p>\n

The Lions Gate<\/i> court did, however, illustrate two situations in which non-disclosure of an SEC investigation could serve as the basis of a securities claim: (1) where the defendants had a preexisting duty to disclose; or (2) where the non-disclosed statements were material. The court emphasized that in the case before it, there were no statements that needed to be updated because the plaintiffs failed to point to any statements during the class period about transactions that were the subject of the SEC investigation or statements about the SEC investigation. Additionally, the court observed that the plaintiffs failed to allege that the SEC investigation was material and would \u201csignificantly alter[ed] the total mix of information available to an investor\u201d because the civil penalty was less than one percent of Lion Gate\u2019s 2014 third-quarter revenue.<\/p>\n

Companies under investigation should consider all potential consequences of disclosure or non-disclosure with the help of counsel in determining a strategy.<\/p><\/blockquote>\n

In another recent case, Lloyd v. CVB Fin.<\/i> Corp<\/i>.<\/a>, the Ninth Circuit analyzed the different but related issue of whether disclosure of an SEC investigation can establish one of the elements a plaintiff must prove to prevail in a securities action \u2013 loss causation.\u00a0The court in Lloyd<\/i> held that a plaintiff satisfies the loss causation element of a securities claim when the plaintiff alleges: (1) that the defendants announced an SEC investigation connected to an alleged misrepresentation; and (2) that the defendants later revealed an inaccuracy related to that misrepresentation.<\/p>\n

As part of its securities claim, the plaintiff in Lloyd<\/i> alleged that the defendant reported in its SEC filings that it had no \u201cserious doubts as to the ability of [its] borrowers to comply with their loan repayment terms,\u201d despite the defendant knowing that one of its largest borrowers could not meet its borrowing obligations.\u202fThe defendant subsequently received a subpoena from the SEC, which it disclosed in its Form 10-Q, resulting in a 22% drop in its stock price.\u202f One month later, when the defendant announced that the previously-mentioned borrower was unable to pay its loans, the announcement only had a minimal effect on the defendant\u2019s stock price.\u202fThe court reasoned that the plaintiffs adequately pleaded loss causation because the minimal effect of the defendant\u2019s announcement regarding its largest borrower \u201cconfirm[ed] that investors understood the SEC announcement as at least a partial disclosure of the inaccuracy of the previous \u2018no serious doubts statements.\u2019\u201d\u00a0Lloyd<\/i> suggests that though disclosing an SEC investigation may allow issuers to better prepare and control the response to the disclosure, issuers should also consider how the disclosure may affect potential securities actions against them.<\/p>\n

Importantly, similar questions as to the need for disclosure can arise in the context of investigations by other government agencies.\u00a0See<\/i>, e.g.,<\/i> L<\/i>ubbers v. Flagstar Bancorp, Inc<\/i>.<\/a>\u00a0–\u00a0dismissing lawsuit after finding that general language in SEC filings stating that defendants were involved in \u201congoing investigations\u201d was not misleading and that defendants had no duty to disclose that the Consumer Financial Protection Bureau was specifically investigating them.<\/p>\n

All of these recent decisions reinforce that companies must consider their own specific circumstances while paying close attention to jurisdictional developments regarding whether companies must disclose SEC and other agencies\u2019 investigations. Specific circumstances such as conducting a securities offering may weigh in favor of making disclosures. On the other hand, if the potential consequences of an SEC investigation are not material, or the likelihood of a bad outcome is very small, disclosure could send the wrong message to the public. Consequently, it is important to obtain legal advice as early as possible when faced with the choice to disclose an SEC or other regulatory investigation in order to help companies navigate this complex decision.<\/p>\n

\n

Jay A. Dubow is a partner with Pepper Hamilton LLP in Philadelphia, PA where he is a member of the firm\u2019s White Collar Litigation and Investigations Practice Group and co-chair of the Securities and Financial Services Enforcement Group.\u00a0 Erica H. Dressler is an associate in Pepper Hamilton LLP\u2019s Commercial Litigation Practice Group in Philadelphia, PA and a 2014 Temple Law graduate.\u00a0 The material in this publication should not be construed as legal advice or legal opinions and does not purport to represent the views of our clients or Pepper Hamilton LLP.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Among the many important decisions a company facing a SEC investigation must make is the decision whether to publicly disclose the existence of the investigation. The decision may depend on the stage of the investigation, what is being investigated, and what is the likelihood of a bad outcome. While the weight of authority suggests that<\/p>\n","protected":false},"author":5,"featured_media":561,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[12,13,38],"tags":[],"coauthors":[172,173],"class_list":["post-868","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-alumni-authored","category-business-law-practice","category-regulated-industries","masonry-post","generate-columns","tablet-grid-50","mobile-grid-100","grid-parent","grid-33"],"yoast_head":"\nSEC Investigations: To Disclose or Not to Disclose-That is the Question - The Temple 10-Q<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/law.temple.edu\/10q\/sec-investigations-disclose-not-disclose-question\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"SEC Investigations: To Disclose or Not to Disclose-That is the Question - The Temple 10-Q\" \/>\n<meta property=\"og:description\" content=\"Among the many important decisions a company facing a SEC investigation must make is the decision whether to publicly disclose the existence of the investigation. 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