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From Securities Regulation Daily, May 26, 2015

Petition arguing inadequate Reg. S-K disclosure forms basis for fraud liability denied

By Amy Leisinger, J.D.

The U.S. Supreme Court has denied an investor’s petition to resolve a question as to whether Item 303 of Regulation S-K can serve as the basis of a duty to disclose material information for the purposes of liability under Exchange Act Section 10(b) and Rule 10b-5. The petitioner argued that the Ninth Circuit’s holding affirming dismissal of his fraud action conflicts with other circuits’ decisions finding that a regulation can give rise to a duty to disclose material information under the Exchange Act. The Court, however, declined to consider whether the Ninth Circuit’s determination would nullify existing federal regulations (Cohen v. NVDIA Corp., May 26, 2015).

Background. In 2008, NVDIA Corp., a publicly traded semiconductor company, disclosed information to investors about defects in two of its products and later stated that it would take a $150-$200 million charge to cover costs. NVIDIA’s share price thereafter dropped 31 percent. Between November 2007 and May 2008, NVIDIA filed several forms with the SEC routinely including a statement explaining that “[its] products may contain defects or flaws,” and warning investors that “[it] may be required to reimburse customers for costs to repair or replace the affected products.”

The investor alleged that NVIDIA knew of and should have informed investors of product defects earlier and that, absent such a disclosure, the company’s intervening statements were misleading. A Ninth Circuit panel affirmed a district court’s dismissal of the action, noting in its opinion (covered in the Securities Regulation Daily Wrap-Up for October 2, 2014) that the plaintiffs failed adequately to allege facts giving rise to a strong inference of scienter. The panel rejected the plaintiffs’ argument that the district court erred by failing to consider their allegations of scienter in the context of Item 303 of Regulation S-K, which requires disclosure of information concerning known trends or uncertainties reasonably expected to have an impact on financial performance, finding that Item 303 does not create a duty to disclose for purposes of Section 10(b) and Rule 10b-5.

Petition for certiorari. In a petition for certiorari (covered in the Securities Regulation Daily Wrap-Up for February 13, 2015), the investor contended that failure to make adequate disclosures under Item 303 can provide the basis for a material omission for a fraud claim. The Ninth Circuit’s conclusion that Item 303 does not create a duty to disclose for Section 10(b) purposes conflicts with the determinations of other circuits, the petitioner explained, noting that both the Second and Third Circuits have found that an Item 303 violation can establish an actionable omission under Section 10(b) if the information is material and other elements of a fraud claim are present. These courts recognize an affirmative duty to disclose when a statute or regulation requires disclosure, according the petitioner, and the precedent cited by the Ninth Circuit only says that an Item 303 violation does not “automatically give rise to a material omission.” The petitioner also argued that the Ninth Circuit’s decision undermines the SEC’s rulemaking authority by hindering enforcement and protecting those committing disclosure failures from liability under federal regulations.

Without further comment, the Court declined to address any of these contentions.

The case is No. 14-975.

Attorneys: Kim E. Miller (Kahn Swick & Foti, LLC) for Roberto Cohen. James N. Kramer (Orrick, Herrington & Sutcliffe LLP) for NVIDIA Corp.

Companies: NVIDIA Corp.

MainStory: TopStory FraudManipulation PublicCompanyReportingDisclosure SupremeCtNews

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