NEW GUIDANCE FROM THE SECOND CIRCUIT ON THE MEANING OF MATERIAL MISREPRESENTATIONS AND OMISSIONS?
By Brett Sherman; The Sherman Law Firm
A new opinion from the United States Court of Appeals for the Second Circuit included an interesting and potentially important quote about the materiality element of federal securities fraud litigation claims under 10b-5.
For an alleged misrepresentation or omission to rise to the level of fraud under the federal securities laws, the misrepresented or omitted fact(s) must be material.
The core definition of material information is the well recognized “total mix of information” test. Under the total mix test, courts ask whether there is a substantial likelihood that a reasonable investor would have viewed the misrepresented information, or disclosure of omitted fact(s), as having significantly altered the “total mix” of information available to the investor.
A more concrete version of the total mix test is this: A fact is material (i.e., it alters the total mix of information) if a reasonable person would consider that fact important when deciding whether to buy or sell shares of stock.
When the opportunity arises, federal courts frequently attempt to add to or clarify the meaning of materiality under the total mix of information test with respect to the underlying facts of a particular case.
Occasionally, a court opinion will yield a quote or two that may help clarify the meaning of materiality beyond the unique circumstances of the case before the court. A new opinion from the Second Circuit struck us as being one of those cases that discusses materiality in such a way that the holding may be an important contribution to the concept of the meaning of material information in securities fraud cases.
In Operating Local 649 Annuity Trust Fund v. Smith Barney Fund Management LLC, No. 07-5125-cv, 2010 WL 520896 (2d Cir. Feb. 16, 2010), the United States Court of Appeals for the Second Circuit applied the total mix of information standard and observed:
[A] reasonable investor would be reluctant to deal with a fiduciary who allegedly “lined their pockets at the expense of investors whose interests they were obligated to protect.”
In the opinion (no pun intended) of those of us at Wall Street Law Blog, the same rationale sounds meaningful for financial crisis litigation claims in which investors contend that senior officers of financial institutions placed their own interests in obtaining windfall bonuses above the interests of the shareholders corporate management was obligated to protect.