# In the Supreme Court of the United States

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

No. 16-581

In the Supreme Court of the United States
LEIDOS, INC., FKA SAIC, INC., PETITIONER
v.
INDIANA PUBLIC RETIREMENT SYSTEM, ET AL.
ON WRIT OF CERTIORARI TO
THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT

BRIEF FOR THE UNITED STATES
AS AMICUS CURIAE SUPPORTING RESPONDENTS

ROBERT B. STEBBINS
General Counsel
MICHAEL A. CONLEY
Solicitor
JEFFREY A. BERGER
Senior Litigation Counsel
RACHEL M. MCKENZIE
Attorney
Securities and Exchange
Commission
Washington, D.C. 20549

JEFFREY B. WALL
Acting Solicitor General
Counsel of Record
MALCOLM L. STEWART
Deputy Solicitor General
ZACHARY D. TRIPP
Assistant to the Solicitor
General
Department of Justice
Washington, D.C. 20530-0001
SupremeCtBriefs@usdoj.gov
(202) 514-2217

QUESTION PRESENTED

Whether an issuer’s submission of a Form 10-K that
discloses some but not all of the trends, events, or uncertainties it was required to disclose under Item 303 of
SEC Regulation S-K, 17 C.F.R. 229.303, is categorically
exempt from liability under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and SEC
Rule 10b-5, 17 C.F.R. 240.10b-5.

(I)

TABLE OF CONTENTS

Page
Interest of the United States....................................................... 1
Statement ...................................................................................... 1
Summary of argument ................................................................. 6
Argument:
I. An MD&A that omits information that Item 303
requires to be disclosed can be the predicate for a
Section 10(b) violation ..................................................... 8
A. An MD&A that omits information that Item 303
requires to be disclosed is a misleading halftruth ............................................................................ 8
B. Even if an incomplete MD&A were viewed as
“silence,” it could still serve as the predicate for
a claim under Section 10(b) .................................... 15
C. The SEC’s longstanding position supports the
potential imposition of Section 10(b) liability for
misleading omissions like the one alleged in this
case ........................................................................... 22
II. Petitioner’s arguments lack merit ............................... 24
A. The court of appeals did not create a private
right of action to enforce Regulation S-K or
Item 303.................................................................... 24
B. The court of appeals’ decision is consistent with
the PSLRA and with Section 11 ............................ 27
C. Petitioner’s policy arguments provide no sound
basis for exempting this form of securities fraud
from Section 10(b) ................................................... 29
Conclusion ................................................................................... 33

(III)

IV
TABLE OF AUTHORITIES

Cases:

Page

Abazari v. Rosalind Franklin Univ. of Med. & Sci.,
40 N.E.3d 264 (Ill. App. Ct. 2015), cert. denied,
136 S. Ct. 1526 (2016) ......................................................... 19
Basic Inc. v. Levinson, 485 U.S. 224 (1988) ............... passim
Blockburger v. United States, 284 U.S. 299 (1932) ............ 26
Binette v. Dyer Library Ass’n, 688 A.2d 898
(Me. 1996) ............................................................................ 19
Brown v. K & V Auto., Inc., 946 So. 2d 458
(Ala. Civ. App. 2006) ........................................................... 19
Burlington Coat Factory Sec. Litig., In re,
114 F.3d 1410 (3d Cir. 1997) .............................................. 10
Chiarella v. United States, 445 U.S. 222 (1980) ....... 2, 16, 20
Chroniak v. Golden Inv. Corp., 983 F.2d 1140
(1st Cir. 1993) ...................................................................... 19
Ciro Inc., In re, Exchange Act Release No. 34,767,
57 SEC Docket 1893 (Sept. 30, 1994) .......................... 11, 23
Cypress Bioscience Inc., In re, Exchange Act
Release No. 37,701, 62 SEC Docket 2286
(Sept. 19, 1996) .................................................................... 22
Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005) ........ 2, 25
Favors v. Matzke, 770 P.2d 686 (Wash. Ct. App.
1989) ..................................................................................... 19
Fischman v. Raytheon Mfg. Co., 188 F.2d 783
(2d Cir. 1951) ................................................................... 7, 17
Fitzpatrick, In re, Exchange Act Release No. 34,865,
57 SEC Docket 2178 (Oct. 20, 1994)............................ 22, 24
France v. Chaprell Jeep-Eagle Dodge, Inc.,
968 P.2d 844 (Okla. Civ. App. 1998) .................................. 19
Gallagher v. Abbott Labs., 269 F.3d 806
(7th Cir. 2001) ...................................................................... 17

V
Cases—Continued:

Page

Glazer v. Dress Barn, Inc., 873 A.2d 929 (Conn. 2005)...... 19
Glazer v. Formica Corp., 964 F.2d 149
(2d Cir. 1992) ....................................................................... 17
Halliburton Co. v. Erica P. John Fund, Inc.,
134 S. Ct. 2398 (2014) ................................................... 29, 32
Herman & MacLean v. Huddleston, 459 U.S. 375
(1983) .................................................................................... 29
Herpich v. Wallace, 430 F.2d 792 (5th Cir. 1970) ............... 28
Janus Capital Grp., Inc. v. First Derivative Traders,
564 U.S. 135 (2011)................................................................ 9
Junius Constr. Co. v. Cohen, 178 N.E. 672
(N.Y. 1931) ........................................................................... 14
Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27
(2011) .............................................................................. 19, 20
NVIDIA Corp. Sec. Litig., In re, 768 F.3d 1046
(9th Cir. 2014), cert. denied, 135 S. Ct. 2349 (2015)......... 30
Omnicare, Inc. v. Laborers Dist. Council Constr.
Indus. Pension Fund, 135 S. Ct. 1318
(2015) .................................................................7, 9, 10, 12, 29
Oran v. Stafford, 226 F.3d 275 (3d Cir. 2000) ..... 4, 17, 18, 25
Rivermont Inn, Inc. v. Bass Hotels & Resorts, Inc.,
113 S.W.3d 636 (Ky. Ct. App. 2003) .................................. 19
SCC Acquisitions Inc. v. Central Pac. Bank,
143 Cal. Reptr. 3d 711 (Cal. Ct. App. 2012)...................... 19
SEC v. CVS Caremark Corp., No. 14-cv-177
(D.R.I. Apr. 8, 2014) ........................................................... 23
SEC v. Capital Gains Research Bureau, 375 U.S. 180
(1963) .................................................................................... 28
SEC v. Conaway, 698 F. Supp. 2d 771 (E.D. Mich.
2010) ..................................................................................... 23
SEC v. Zandford, 535 U.S. 813 (2002) ........................... 18, 22
Scholastic Corp. Sec. Litig., In re, 252 F.3d 63
(2d Cir.), cert. denied, 534 U.S. 1071 (2001) ..................... 30

VI
Cases—Continued:

Page

Shaw v. Digital Equip. Corp., 82 F.3d 1194
(1st Cir. 1996), abrogated in part on other grounds
by 15 U.S.C. 78u-4(b)(2) ..................................................... 17
Steckman v. Hart Brewing, Inc., 143 F.3d 1293
(9th Cir. 1998) ........................................................................ 4
Stoneridge Inv. Partners, LLC v. Scientific-Atlantic,
Inc., 552 U.S. 148 (2008) ........................................... 2, 27, 28
Stratte-McClure v. Morgan Stanley, 776 F.3d 94
(2d Cir. 2015) ............................................................. 5, 17, 21
Universal Health Servs., Inc. v. United States,
136 S. Ct. 1989 (2016) ....................................9, 13, 14, 15, 27
Valley Sys, Inc., In re, Exchange Act Release No.
36,227, 60 SEC Docket 541 (Sept. 14, 1995) ..................... 22
Westwood One, Inc., In re, Exchange Act Release
No. 33,489, 55 SEC Docket 2350 (Jan. 19, 1994) ............. 22
Williams v. East Coast Sale, Inc. 298 S.E.2d 80
(N.C. App. 1982).................................................................. 19
Statutes and regulations:
False Claims Act, 31 U.S.C. 3729 et seq. ............................. 14
Private Securities Litigation Reform Act of 1995,
Pub. L. No. 104-67, 109 Stat. 737 ...................................... 26
Securities Act of 1933, 15 U.S.C. 77a et seq.:
15 U.S.C. 77k(a) (§ 11(a)) ................................................ 28
Securities Exchange Act of 1934,
15 U.S.C. 78a et seq.:
15 U.S.C. 78j(b) (§ 10(b)) ....................................... passim
15 U.S.C. 78l(a) (§ 12(a)) ................................................... 4
15 U.S.C. 78l(b) (§ 12(b)) .................................................. 3
15 U.S.C. 78m(a) (§ 13(a)) ..........................1, 2, 3, 4, 10, 15
15 U.S.C. 78u(d)(2) .......................................................... 32
15 U.S.C. 78u-2 .................................................................. 3

VII
Statutes and regulations—Continued:

Page

15 U.S.C. 78u-4(b)(2)(A) ................................................. 26
17 C.F.R.:
Section 229.10(a)(2) ........................................................... 3
Section 229.103 .......................................................... 11, 28
Section 229.303 ....................................................... passim
Section 229.303(a) .............................................................. 3
Section 229.303(a)(1) ....................................... 3, 10, 12, 25
Section 229.303(a)(3)(ii)................................... 4, 10, 12, 25
Section 230.405 ................................................................ 32
Section 229.504 (1987) ..................................................... 23
Section 230.262(a)(5) ....................................................... 32
Section 230.506(d)(1)(iv) ................................................. 32
Section 240.10b-5 .................................................... passim
Section 240.10b-5(a) ........................................................ 21
Section 240.10b-5(b) ........................................ 9, 20, 21, 29
Section 240.10b-5(c)......................................................... 21
Section 240.13a-11(c) ....................................................... 24
Section 243.100 ................................................................ 24
Section 243.102 ................................................................ 24
Section 249.310(a) ........................................................ 3, 10
Miscellaneous:
Black’s Law Dictionary (10th ed. 2014) ....................... 17, 18
Business and Financial Disclosure Required by
Regulation S-K, Securities Act Release No. 10,064,
81 Fed. Reg. (Apr. 22, 2016):
p. 23,919 ............................................................................ 32
p. 23,944 .............................................................................. 4

VIII
Miscellaneous—Continued:

Page

Commission Guidance Regarding Management’s
Discussion and Analysis of Financial Condition
and Results of Operation, Securities Act Release
No. 8350, 68 Fed. Reg. (Dec. 29, 2003):
p. 75,059 ............................................................................ 32
p. 75,061 .............................................................................. 4
Frank F. Coulom, Jr., Note, Rule 10b-5 and the Duty
to Disclose Market Information: It Takes a Thief,
55 St. John’s L. Rev. 93 (1980) .......................................... 20
Div. of Corp. Fin., Sec. & Exch. Comm’n,
Filing Review Process (Jan. 19, 2017),
https://www.sec.gov/divisions/corpfin/
cffilingreview.htm ............................................................... 31
7 Fed. Reg. 3804 (May 22, 1942) .......................................... 27
47 Fed. Reg. 11,474 (Mar. 16, 1982) ....................................... 3
53 Fed. Reg. 29,227 (Aug. 3, 1988) ....................................... 28
2 Thomas Lee Hazen, Treatise on the Law of
Securities Regulation (7th ed. 2016) ................................ 12
W. Page Keeton et al., Prosser and Keeton on the
Law of Torts (5th ed. 1984) ................................................ 13
Donald C. Langevoort & G. Mitu Gulati,
The Muddled Duty to Disclose Under Rule 10b-5,
57 Vand. L. Rev. 1639 (2004) ....................................... 12, 26
Management’s Discussion and Analysis of
Financial Condition and Results of Operations;
Certain Investment Company Disclosures,
Securities Act Release No. 6835, 54 Fed. Reg.
(May 24, 1989):
p. 22,428 .............................................................................. 4
p. 22,429 .............................................................................. 4
4 Oxford English Dictionary (2d ed. 1989) .......................... 17

IX
Miscellaneous—Continued:

Page

Proposed Comprehensive Revision to System for
Registration of Securities Offerings, Securities
Act Release No. 6235, 45 Fed. Reg. 63,694
(Sept. 25, 1980) ...................................................................... 3
Restatement (Second) of Torts (1977) ........................... 13, 20
Sec. & Exch. Comm’n, Form 10-K (expires Sept. 30,
2017), https://www.sec.gov/files/form10-k.pdf ....... 3, 10, 33
Selective Disclosure and Insider Trading,
Securities Act Release No. 7881, 65 Fed. Reg.
51,726 (Aug. 24, 2000) ......................................................... 24
Webster’s Third New International Dictionary
(2002) ...................................................................................... 9

In the Supreme Court of the United States
No. 16-581
LEIDOS, INC., FKA SAIC, INC., PETITIONER
v.
INDIANA PUBLIC RETIREMENT SYSTEM, ET AL.
ON WRIT OF CERTIORARI TO
THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT

BRIEF FOR THE UNITED STATES
AS AMICUS CURIAE SUPPORTING RESPONDENTS

INTEREST OF THE UNITED STATES

The United States, through the Department of Justice and the Securities and Exchange Commission (SEC
or Commission), administers and enforces the federal
securities laws, including the laws at issue in this case.
The question presented here arises in both private civil
actions and government enforcement suits.
STATEMENT

1. This case presents a question about Sections 10(b)
and 13(a) of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. 78j(b), 78m(a).
a. Section 10(b) makes it unlawful for any person
“[t]o use or employ, in connection with the purchase or
sale of any security * * * any manipulative or deceptive
device or contrivance in contravention of ” SEC rules.
15 U.S.C. 78j(b). SEC Rule 10b-5 implements Section
(1)

2
10(b) and makes it unlawful for any person, in connection with the purchase or sale of a security, (a) to “employ any device, scheme, or artifice to defraud”; (b) 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 the light of the circumstances under
which they were made, not misleading”; or (c) to “engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any
person.” 17 C.F.R. 240.10b-5. “Section 10(b) is aptly
described as a catchall” anti-fraud provision. Chiarella
v. United States, 445 U.S. 222, 234-235 (1980). And
“Rule 10b-5 is coextensive with the coverage of § 10(b).”
SEC v. Zandford, 535 U.S. 813, 816 n.1 (2002).
Section 10(b) and Rule 10b-5 may be enforced by the
SEC. Suits to enforce those provisions may also be
brought by aggrieved private parties, under an implied
private right of action that Congress has “ratified.”
Stoneridge Inv. Partners, LLC v. Scientific-Atlanta,
Inc., 552 U.S. 148, 165 (2008). The SEC or a private
plaintiff must show (1) a material misrepresentation or
omission; (2) made with scienter; (3) in connection with
the purchase or sale of a security. Dura Pharm., Inc.
v. Broudo, 544 U.S. 336, 341 (2005). A private plaintiff
must in addition prove (4) reliance; (5) economic loss;
and (6) loss causation. Id. at 341-342.
b. Section 13(a) of the Exchange Act, 15 U.S.C.
78m(a), provides that issuers of registered securities
“shall file with the Commission” annual and other periodic reports that contain “such information * * * as the
Commission shall require,” regarding, inter alia, “the
organization, financial structure and nature of the busi-

3
ness.” 15 U.S.C. 78l(b), 78m(a). The SEC enforces Section 13(a), see 15 U.S.C. 78u-2, but there is no private
right of action for its violation.
SEC regulations state that issuers “shall” use Form
10-K for annual reports. 17 C.F.R. 249.310(a). Form
10-K identifies items that issuers must disclose, corresponding to different categories of information. See
SEC, Form 10-K. 1 Centrally relevant here is Item 7,
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” (MD&A), where
the company must “[f ]urnish the information required
by Item 303 of Regulation S-K.” Ibid.; see 47 Fed. Reg.
11,474 (Mar. 16, 1982) (adopting this requirement).
Regulation S-K provides consolidated instructions
for disclosures in the non-financial statement portions
of Form 10-K and other reports. See 17 C.F.R.
229.10(a)(2). Regulation S-K is intended to ensure “that
investors and the marketplace are provided meaningful,
nonduplicative information periodically and when securities are sold to the public, while the costs of compliance for public companies are decreased.” 45 Fed. Reg.
63,694 (Sept. 25, 1980).
Item 303 states that the issuer “shall provide” certain information. 17 C.F.R. 229.303(a). As relevant here,
the issuer must “[i]dentify any known trends or any
known demands, commitments, events or uncertainties
that will result in or that are reasonably likely to result
in the registrant’s liquidity increasing or decreasing in
any material way,” 17 C.F.R. 229.303(a)(1), and “[d]escribe any known trends or uncertainties that have had
or that the registrant reasonably expects will have a
material favorable or unfavorable impact on net sales
1

https://www.sec.gov/files/form10-k.pdf.

4
or revenues or income from continuing operations,”
17 C.F.R. 229.303(a)(3)(ii). This requirement applies
only to “currently known trends, events, and uncertainties that are reasonably expected to have material effects.” 54 Fed. Reg. 22,429 (May 24, 1989) (citation and
emphasis omitted). The “reasonably expects” standard
“helps distinguish statements of known facts relating to
the future, which are mandatory, from forward-looking
statements, which are not required.” Steckman v. Hart
Brewing, Inc., 143 F.3d 1293, 1297 (9th Cir. 1998). Item
303 sets a “lower threshold than ‘more likely than not,’ ”
81 Fed. Reg. 23,944 (Apr. 22, 2016), and “extend[s] considerably beyond [the materiality standard] required by
Rule 10b-5,” Oran v. Stafford, 226 F.3d 275, 288 (3d Cir.
2000) (Alito, J.).
The SEC has explained that, without Item 303’s required narrative, a company’s numerical financial statements and accompanying footnotes “may be insufficient
for an investor to judge the quality of earnings and the
likelihood that past performance is indicative of future
performance.” 54 Fed. Reg. at 22,428; see ibid. (required narrative “give[s] the investor an opportunity to
look at the company through the eyes of management”).
The required disclosure is “[o]ne of the most important
elements necessary to an understanding of a company’s
performance.” 68 Fed. Reg. 75,061 (Dec. 29, 2003).
2. Petitioner is an issuer subject to Section 13(a)’s
reporting requirements. See 15 U.S.C. 78l(a); J.A. 68.
Respondents are investors in petitioner’s stock and the
lead plaintiffs in a putative securities-fraud class action
against petitioner. Pet. App. 2a-3a.
Respondents’ proposed second amended complaint
is the operative pleading here. See Pet. App. 3a. In it,

5
respondents alleged that petitioner had artificially inflated its stock price by filing a Form 10-K that disclosed some known trends and uncertainties but did not
disclose an additional known uncertainty that Item 303
required to be disclosed: that petitioner had been implicated in a fraudulent overbilling scheme in the “CityTime” project with the City of New York. Id. at 9a, 19a.
Respondents further alleged that petitioner had acted
with scienter in omitting that additional information
from the MD&A, and that the omitted information was
material to investors. Id. at 19a-20a, 72a; J.A. 278-279;
cf. Pet. App. 8a (noting that petitioner’s “stock price fell
from $17.21 to $12.97 per share” after the risk was fully
disclosed). Respondents sought to certify a class of all
persons who had purchased petitioner’s stock between
petitioner’s filing of its Form 10-K on March 25, 2011
and its full disclosure of the omitted information on September 1, 2011. Pet. App. 6a, 8a, 14a.
The district court denied a motion to dismiss with respect to respondents’ initial Section 10(b) claim premised on alleged omissions from petitioner’s March 2011
Form 10-K. Pet. App. 73a-74a. The court later dismissed that claim, however, on the grounds that it did
not adequately plead that petitioner’s MD&A had violated Item 303 or that petitioner had acted with scienter. Id. at 46a-48a. The court denied leave to amend,
concluding that the proposed second amended complaint suffered from the same flaws. Id. at 35a-37a.
The court of appeals reversed. Pet. App. 1a-26a.
Following circuit precedent, the court stated that “Item
303 imposes an ‘affirmative duty to disclose’ ” that “ ‘can
serve as the basis for a securities fraud claim under Section 10(b).’ ” Id. at 16a n.7 (quoting Stratte-McClure v.
Morgan Stanley, 776 F.3d 94, 101 (2d Cir. 2015)). The

6
court then held that respondents’ proposed second
amended complaint had alleged sufficient facts to establish an Item 303 violation and the additional elements
required for Section 10(b) liability, including materiality and scienter. Id. at 16a-23a.
SUMMARY OF ARGUMENT

I. It is undisputed in this Court that respondents
have adequately pleaded that petitioner’s MD&A omitted information required by Item 303; that the omission
was material under Basic Inc. v. Levinson, 485 U.S. 224
(1988); and that petitioner acted with scienter. Petitioner contends, however, that an MD&A can give rise
to liability under Section 10(b) and Rule 10b-5 only if it
contains an affirmative false statement or a misleading
half-truth. Petitioner argues (e.g., Br. 3) that it cannot
be held liable under that standard because, it claims, its
own violation of Item 303 involves “pure omissions.”
Petitioner thus does not dispute that respondents
would have stated a claim under Section 10(b) and Rule
10b-5 if petitioner’s MD&A had opened with the statement, “This section discloses all the information required by Item 303.” The absence of such an express
statement of compliance should not change the result,
however, because a reasonable investor understands
the MD&A section of a Form 10-K to make the same
representation implicitly. This case therefore involves
a half-truth rather than a “pure omission”: Petitioner’s
MD&A appeared to be complete and thus conveyed to a
reasonable investor that it disclosed all of the information Item 303 required. If (as respondents allege)
the MD&A omitted information that Item 303 required
to be disclosed, the MD&A was therefore misleading.
II. Not every misrepresentation made in connection
with a securities transaction gives rise to liability under

7
Section 10(b), however. Both the SEC and private plaintiffs must also prove that the omission was material under Basic and that the defendant acted with scienter.
Private plaintiffs must further establish reliance, loss,
and loss causation. Those additional elements provide
important protection to issuers, and ensure that the
large majority of Item 303 violations do not give rise to
liability for securities fraud.
The court of appeals’ decision here thus does not give
private plaintiffs the practical equivalent of a private
cause of action to enforce Item 303 or Regulation S-K.
Instead, it provides a critical backstop to prevent unscrupulous issuers from exploiting the trust that reasonable investors place in submissions made in purported compliance with SEC disclosure requirements.
Indeed, a partial disclosure is particularly likely to create a false impression of completeness when it is offered
in an MD&A, which reasonable investors understand
must disclose the information that Item 303 requires.
Petitioner’s various policy arguments provide no
sound basis for shielding this form of fraud from liability under Section 10(b). Petitioner’s arguments “overstate[] both the looseness of the inquiry * * * and the
breadth of liability” that the court of appeals’ approach
“threatens.” Omnicare, Inc. v. Laborers Dist. Council
Constr. Indus. Pension Fund, 135 S. Ct. 1318, 1332
(2015). If petitioner’s approach were accepted, however, it would create a significant loophole in Section
10(b) by transforming a disclosure obligation “designed
to protect investors even when there is no fraud” into “a
shelter or sanctuary for those who defraud investors.”
Fischman v. Raytheon Mfg. Co., 188 F.2d 783, 787 (2d
Cir. 1951) (Frank, J.).

8
ARGUMENT
I. An MD&A That Omits Information That Item 303 Requires
To Be Disclosed Can Be The Predicate For A Section 10(b)
Violation

A reasonable investor, reading an MD&A in the applicable legal context, understands it to contain all of
the information required by Item 303. An MD&A that
discloses only some of the information Item 303 requires therefore is misleading. Such a filing may trigger liability under Section 10(b) if, but only if, the plaintiff pleads and proves the additional elements of a Section 10(b) cause of action.
A.

An MD&A That Omits Information That Item 303
Requires To Be Disclosed Is A Misleading Half-Truth

1. Petitioner repeatedly asserts (Br. 3-4, 15-17, 20,
22-24, 26, 31-32, 34, 38, 43-44, 48-49 & n.6), that this case
involves “pure omissions,” relying on this Court’s statement that “[s]ilence, absent a duty to disclose, is not
misleading under Rule 10b-5.” Basic Inc. v. Levinson,
485 U.S. 224, 239 n.17 (1988). Petitioner contends that
it was both silent and under no “duty to disclose.”
That argument would lack merit even if petitioner
had been silent, because (as alleged here) petitioner
breached its disclosure obligations under Item 303. See
pp. 15-21, infra. The more fundamental flaw in petitioner’s argument, however, is that petitioner was not
silent. Rather, petitioner filed a Form 10-K with an
MD&A section that disclosed various known trends and
uncertainties, J.A. 898-942; see J.A. 1037-1045 (incorporated by reference), but that did not disclose petitioner’s implication in the CityTime fraud. See also J.A.
1121-1122 (certification of the chief executive officer
and chief financial officer that, “to the best of [their]

9
knowledge,” the filing “fully complie[d] with the requirements of Section 13(a)”). Petitioner submitted that filing despite Item 303’s requirement that an issuer disclose all known trends, events, or uncertainties that are
reasonably likely to affect the issuer’s financial condition and prospects.
This case therefore involves a half-truth rather than
a “pure omission.” See Universal Health Servs., Inc. v.
United States, 136 S. Ct. 1989, 2000 (2016) (Universal
Health Services) (“[H]alf-truths—representations that
state the truth only so far as it goes, while omitting critical qualifying information—can be actionable misrepresentations.”). Rule 10b-5 encompasses not only affirmative falsehoods, but also half truths: It reaches the
failure “to state a material fact necessary in order to
make the statements made, in the light of the circumstances under which they were made, not misleading.”
17 C.F.R. 240.10b-5(b). Here, petitioner made “statements”: It filed an MD&A providing a narrative description of various trends and uncertainties. See Janus
Capital Grp., Inc. v. First Derivative Traders, 564 U.S.
135, 142 (2011) (“One ‘makes’ a statement by stating
it.”); Webster’s Third New International Dictionary
2229 (2002) (“statement” means “something stated,”
such as “a report or narrative”). And further disclosure
was “necessary” to make those statements “not misleading” “in light of the circumstances,” 17 C.F.R.
240.10b-5(b), because a reasonable investor would understand the MD&A section of petitioner’s filing as implicitly representing that the issuer had disclosed all the
information Item 303 required.
“[W]hether a statement is ‘misleading’ depends on
the perspective of a reasonable investor: The inquiry
* * * is objective.” Omnicare, Inc. v. Laborers Dist.

10
Council Constr. Indus. Pension Fund, 135 S. Ct. 1318,
1327 (2015). “The reasonable investor understands a
statement * * * in its full context.” Id. at 1330. When
an issuer submits a filing in purported compliance with
its disclosure obligations under the Exchange Act and
SEC regulations, the nature and scope of those obligations will affect the inferences that a reasonable investor draws from the filing. See In re Burlington Coat
Factory Sec. Litig., 114 F.3d 1410, 1432 (3d Cir. 1997)
(a reasonable investor’s understanding depends on “the
background regulatory structure,” including “the existing federal securities disclosure apparatus”).
In particular, a reasonable investor knows that issuers file Forms 10-K because Section 13(a) and SEC regulations require them. See 15 U.S.C. 78m(a) (“shall file”);
17 C.F.R. 249.310(a) (“shall” use Form 10-K). A reasonable investor also knows that issuers include an MD&A
section disclosing known trends and uncertainties because Form 10-K requires the issuer to include an MD&A
section “[f ]urnish[ing] the information required by
Item 303,” SEC, Form 10-K (Item 7), and because Item
303 requires an MD&A to disclose “any” known trends
or uncertainties that qualify, 17 C.F.R. 229.303(a)(1)
and (3)(ii). A reasonable investor in turn would expect
the MD&A section of a Form 10-K to disclose all the
information that Item 303 requires, at least in the absence of language specifically disclaiming that implication. See Resps. Br. 25. If (as respondents have alleged) petitioner omitted facts that Item 303 required
to be disclosed, petitioner’s MD&A was the sort of misleading half-truth that may constitute actionable securities fraud if the other prerequisites to liability can be
established.

11
2. Examples help to illustrate the point. If SEC regulations required a Form 10-K to identify every pending
lawsuit against the issuer in which the plaintiff sought
more than $10 million in damages, and an issuer filed a
Form 10-K listing ten such lawsuits, a reasonable investor would understand the filing as a representation that
the list was exhaustive. Cf. 17 C.F.R. 229.103 (requiring
disclosure of certain legal proceedings). If an additional
suit seeking $20 million was actually pending, the filing
would be misleading even though it did not explicitly
deny the existence of the eleventh suit.
Similarly, if SEC regulations required a Form 10-K
to disclose any pending personal bankruptcy petitions
filed by a director, and an issuer filed a Form 10-K that
omitted that section or left it blank, a reasonable investor likewise would understand the filing to represent
implicitly that no director had filed for bankruptcy. If
one of the company’s directors actually had, the Form
10-K would be misleading. Cf. In re Ciro, Inc., Exchange Act Release No. 34,767, 57 SEC Docket 1893
(Sept. 30, 1994).
The conclusion that such half-truths are misleading
would leave open questions of materiality or scienter. If
the undisclosed eleventh lawsuit sought $20 million in
damages but was frivolous and immaterial under Basic,
it would not be actionable under Section 10(b). The
company’s Form 10-K still would be misleading, however, because it would lead a reasonable investor to believe that the list of ten suits was exhaustive. If the issuer omitted the eleventh lawsuit through an innocent
mistake, its lack of scienter likewise would prevent the
imposition of liability under Section 10(b), but the form
would still be misleading, because “whether a statement

12
is ‘misleading’ depends on the perspective of a reasonable investor.” Omnicare, 135 S. Ct. at 1327.
The same principles apply here. An incomplete
MD&A is misleading because a reasonable investor
knows that an issuer must include an MD&A section to
comply with an SEC mandate (Item 303) that requires
disclosure of all the known trends and uncertainties
that meet the regulatory (“reasonable expectation”)
threshold. In light of that mandate, a reasonable investor understands an MD&A as implicitly representing
that no additional qualifying trends or uncertainties
exist. “[T]he reader of the disclosure sees that the issuer is responding to the disclosure obligation and is entitled to assume that the response is not only accurate
but complete as well.” Donald C. Langevoort & G. Mitu
Gulati, The Muddled Duty to Disclose Under Rule 10b5, 57 Vand. L. Rev. 1639, 1680 (2004).
To be sure, unlike the hypothetical requirement that
an issuer disclose all lawsuits against it seeking more
than $10 million in damages, Item 303 does not establish
a bright-line rule. Item 303 requires the issuer to disclose any known trends or uncertainties that are “reasonably likely to result in the registrant’s liquidity increasing or decreasing in any material way,” or that
“the registrant reasonably expects will have a material
favorable or unfavorable impact on net sales or revenues or income.” 17 C.F.R. 229.303(a)(1) and (3)(ii).
Although Item 303 applies only to trends or uncertainties that are presently known to the issuer, it sometimes
requires judgment to determine whether a given trend
or uncertainty satisfies the “reasonably likely to have
material effect” standard. See 2 Thomas Lee Hazen,
Treatise on the Law of Securities Regulation § 9:50
(7th ed. 2016).

13
Because Item 303 sometimes requires judgment calls,
it may be unclear whether Item 303 actually required
disclosure of particular information, and thus whether
the issuer’s omission of that information was misleading
in context. See Resps. Br. 52 n.23 (collecting cases dismissed on ground that Item 303 did not require disclosure). Furthermore, even in cases where the omission
is misleading, uncertainty about whether Item 303 requires disclosure makes it more difficult for a Section
10(b) plaintiff to plead or prove that the issuer omitted
the information with scienter, rather than due to a goodfaith (but erroneous) decision about the scope of its disclosure obligation. This difference, however, provides
no sound basis for petitioner’s proposed categorical rule
that an incomplete MD&A can never give rise to liability
under Section 10(b). When an issuer acted with scienter
in disclosing only some (but not all) required information, and the omitted information is also material under Basic, imposition of liability is wholly consistent
with the text of Section 10(b) and Rule 10b-5, as well as
this Court’s precedents.
3. The recognition that a half-truth can be misleading “recurs throughout the common law.” Universal
Health Services, 136 S. Ct. at 2000 n.3; e.g., Restatement (Second) of Torts § 529 (1977) (“A representation
stating the truth so far as it goes but which the maker
knows or believes to be materially misleading because
of his failure to state additional or qualifying matter is
a fraudulent misrepresentation.”); W. Page Keeton et al.,
Prosser and Keeton on the Law of Torts § 106, at 738
(5th ed. 1984) (“[H]alf of the truth may obviously amount
to a lie, if it is understood to be the whole.”).
The Court in Universal Health Services observed
that “[a] classic example of an actionable half-truth in

14
contract law is the seller who reveals that there may be
two new roads near a property he is selling, but fails to
disclose that a third potential road might bisect the
property.” 136 S. Ct. at 2000 (citing Junius Constr. Co.
v. Cohen, 178 N.E. 672, 674 (N.Y. 1931) (Cardozo, J.)).
The Court thus recognized that the disclosure of certain
information is often reasonably understood as an implicit representation that no additional risks or obstacles of the same general sort exist. There is no sound
basis for refusing to apply that principle to statements
made in a securities filing submitted in purported compliance with Item 303 or other SEC regulations that require the issuer to disclose all of some kind of information. To the contrary, it is particularly reasonable
to draw such an inference from such statements, because the background legal context further strengthens
the already natural inference that the statements made
deal comprehensively with the matter at hand.
In Universal Health Services, this Court relied in
part on the surrounding legal context in holding that a
healthcare provider’s claims for Medicaid reimbursement were misleading, and thus potentially actionable
under the False Claims Act, 31 U.S.C. 3729 et seq., even
though the claims did not contain any affirmative false
statement. See 136 S. Ct. at 2000-2001. The Court explained that, “by submitting claims for payment using
payment codes that corresponded to specific counseling
services, Universal Health represented that it had provided individual therapy, family therapy, preventive
medication counseling, and other types of treatment.”
Id. at 2000. The Court observed that “[a]nyone informed
that a social worker at a Massachusetts mental health
clinic provided a teenage patient with individual counseling services would probably—but wrongly—conclude

15
that the clinic had complied with core Massachusetts
Medicaid requirements,” including requirements that
the provider be licensed and have specialized training.
Ibid. The Court concluded that, “[b]y using payment
and other codes that conveyed this information without
disclosing [its] many violations of basic staff and licensing requirements for mental health facilities, Universal
Health’s claims constituted misrepresentations.” Id.
at 2000-2001.
Similarly here, a reasonable investor would construe
petitioner’s MD&A in light of the legal context in which
such filings are submitted, and would understand the
MD&A as implicitly representing that no additional
trends or uncertainties that met the regulatory threshold existed. If (as respondents allege) those representations were inaccurate, and if respondents can establish the remaining prerequisites for a private Rule
10b-5 action, petitioner can properly be held liable for
the misleading omission in its MD&A.
B. Even If An Incomplete MD&A Were Viewed As “Silence,”
It Could Still Serve As The Predicate For A Claim
Under Section 10(b)

Even if an incomplete MD&A were viewed as “silence”
rather than as a half-truth, it would still be misleading.
“Silence, absent a duty to disclose, is not misleading under Rule 10b-5.” Basic, 485 U.S. at 239 n.17 (emphasis
added). Where a duty to disclose exists, however, silence can be misleading because a reasonable investor
will be aware of the duty and will reasonably infer from
a regulated party’s silence that no circumstance for
which disclosure is required is actually present.
Petitioner contends that, even if it violated Section
13(a) by omitting required information from its MD&A,
that omission could not cause its conduct to be deceptive

16
or misleading within the meaning of Section 10(b). Petitioner argues (Br. 15) that a “duty to disclose” exists
for these purposes only if (1) disclosure of additional information is necessary to prevent an affirmative statement from being misleading, or (2) the defendant is subject to the common-law duty to disclose or abstain that
arises from a fiduciary relationship of trust, e.g., Chiarella v. United States, 445 U.S. 222, 228 (1980). Even
assuming, arguendo, that the first basis for potential liability is inapplicable here (but see pp. 8-15, supra), petitioner offers no sound basis for disputing that the SEC
disclosure mandate here creates a “duty to disclose.”
1. Petitioner’s argument rests on the counter-intuitive
proposition that a judge-made rule drawn from the common law of trusts (the fiduciary duty discussed in Chiarella) imposes a “duty to disclose” that can make silence misleading, but that a disclosure requirement imposed by a federal statute or regulation does not. There
is no logical basis for that distinction. If Congress required issuers to disclose any tender offer within 24 hours,
a reasonable investor would understand an issuer’s silence to mean that no tender offers had been made
within the last day. Under petitioner’s approach, however, an issuer would not commit securities fraud even
if it deliberatively deceived potential investors by keeping a tender offer secret.
Disclosure requirements under federal securities
laws most obviously benefit investors by inducing issuers and other regulated parties to disclose information
that is relevant to investment decisions. But the existence of those requirements can benefit investors even
in circumstances where no actual disclosures are made,
by allowing investors to infer with confidence that the
types of events for which disclosure is required have not

17
occurred. A reasonable investor thus will view silence
differently in a legal context where various disclosures
are required than it would in an unregulated environment. Yet under petitioner’s approach, unscrupulous
parties could exploit the very trust that disclosure requirements are intended to foster, by engaging in strategic omissions that they expect investors to misconstrue. If that approach were accepted, disclosure obligations “designed to protect investors even when there
is no fraud, would afford a shelter or sanctuary for those
who defraud investors.” Fischman v. Raytheon Mfg. Co.,
188 F.2d 783, 787 (2d Cir. 1951) (Frank, J.).
2. The ordinary meaning of the term “duty” encompasses any “legal obligation that is owed or due to another and that needs to be satisfied.” Black’s Law Dictionary 615 (10th ed. 2014); see, e.g., 4 Oxford English
Dictionary 1143 (2d ed. 1989) (“Action, or an act, that is
due in the way of moral or legal obligation; that which
one ought or is bound to do; an obligation.”). A statute
or regulation that mandates disclosure thus creates a
“duty” to disclose as that term is commonly understood.
E.g., Stratte-McClure v. Morgan Stanley, 776 F.3d 94,
101 (2d Cir. 2015) (duty to disclose may arise “when
there is * * * a ‘statute or regulation requiring disclosure’ ” (quoting Glazer v. Formica Corp., 964 F.2d 149,
157 (2d Cir. 1992)); Gallagher v. Abbott Labs., 269 F.3d
806, 808 (7th Cir. 2001) (when “positive law creates a
duty to disclose”); Oran v. Stafford, 226 F.3d 275, 285
(3d Cir. 2000) (Alito, J.) (“when there is * * * a statute
requiring disclosure”); Shaw v. Digital Equip. Corp.,
82 F.3d 1194, 1202 n.3 (1st Cir. 1996) (“when a statute
or regulation requires disclosure”), abrogated in part on
other grounds by 15 U.S.C. 78u-4(b)(2). There is no rea-

18
son to suppose that the Basic Court had in mind a narrower meaning, or that it intended to exclude federal
statutory or regulatory disclosure requirements from
the principle that silence can give rise to Section 10(b)
liability if a “duty to disclose” exists. See 485 U.S. at
239 n.17. 2
The operative terms in Section 10(b) and Rule 10b-5
—“defraud,” “fraud,” and “deceit,” 15 U.S.C. 78j(b);
17 C.F.R. 240.10b-5—also comfortably encompass the
misconduct alleged here. E.g., Black’s Law Dictionary
491 (“deceit” means “[t]he act of intentionally leading
someone to believe something that is not true; an act
designed to deceive or trick”); id. at 775 (“fraud” means
“[a] knowing misrepresentation or knowing concealment of a material fact made to induce another to act to
his or her detriment”). An issuer that deliberately
omits material adverse information, in a legal context
where reasonable investors would infer from nondisclosure that no such adverse information exists, engages in “fraud” and “deceit” within the usual meaning
of those terms. Cf. SEC v. Zandford, 535 U.S. 813, 819
(2002) (stating that Section 10(b) “should be ‘construed
not technically and restrictively, but flexibly to effectuate its remedial purposes’ ”) (citation omitted). Indeed,

The Third Circuit’s statement in Oran that a “statute requiring
disclosure” may create a duty to disclose for these purposes,
226 F.3d at 285, contradicts petitioner’s position that a statute cannot have that effect. The court further explained that Item 303’s
materiality standard is broader than the Basic standard, and that a
violation of Item 303 “does not automatically give rise to a material
omission under Rule 10b-5.” Id. at 288. But the court did not
squarely decide whether an Item 303 violation would be actionable
under Rule 10b-5 if the omission were material under Basic, because the plaintiff had not adequately pleaded materiality. See ibid.
2

19
many courts adjudicating state-law tort or similar actions have recognized that a statute or regulation mandating disclosure can impose a “duty to disclose” that
makes silence misleading. 3
3. Petitioner invokes (e.g., Br. 4, 18) this Court’s
statement that, “[e]ven with respect to information that
a reasonable investor might consider material, companies can control what they have to disclose under [Section
10(b) and Rule 10b-5(b)] by controlling what they say to
the market.” Matrixx Initiatives, Inc. v. Siracusano,
563 U.S. 27, 45 (2011) (Matrixx). Petitioner’s reliance
on that statement is misplaced.
Matrixx did not alter the rule that a duty to disclose
can make silence misleading. To the contrary, immediately before the sentence on which petitioner relies, the
E.g., Brown v. K & V Auto., Inc., 946 So. 2d 458, 466 (Ala. Civ.
App. 2006) (disclosure statute imposed a “duty to disclose” for statutory fraud action); SCC Acquisitions Inc. v. Central Pac. Bank,
143 Cal. Reptr. 3d 711, 715 (Cal. Ct. App. 2012) (“statute or other
prescriptive law”); Glazer v. Dress Barn, Inc., 873 A.2d 929, 961
(Conn. 2005) (“statute or regulation”); Abazari v. Rosalind Franklin Univ. of Med. & Sci., 40 N.E.3d 264, 275 (Ill. App. Ct. 2015)
(“statutory duty to disclose”), cert. denied, 136 S. Ct. 1526 (2016);
Rivermont Inn, Inc. v. Bass Hotels Resorts, Inc., 113 S.W.3d 636,
641 (Ky. Ct. App. 2003) (“when a statute imposes such a duty”);
Binette v. Dyer Library Ass’n, 688 A.2d 898, 903 (Me. 1996)
(“[S]ilence rises to the level of supplying false information when
such failure to disclose constitutes the breach of a statutory duty.”);
Williams v. East Coast Sales, Inc., 298 S.E.2d 80, 82 (N.C. App.
1982) (“legal duty imposed by statute”); France v. Chaprell JeepEagle Dodge, Inc., 968 P.2d 844, 847 (Okla. Civ. App. 1998) (“This
statute establishes a duty” to disclose.); Favors v. Matzke, 770 P.2d
686, 690 (Wash. Ct. App. 1989) (“statutory duty to disclose”); see
also Chroniak v. Golden Inv. Corp., 983 F.2d 1140, 1147 (1st Cir.
1993) (omission in violation of New Hampshire disclosure statute
qualified as an “unfair or deceptive practice or act” under state law).
3

20
Court stated that “[s]ilence, absent a duty to disclose, is
not misleading under Rule 10b-5.” 563 U.S. at 45 (emphasis added) (quoting Basic, 485 U.S. at 239 n.17). The
Court in Matrixx held that adverse drug reports could
be material even if they were not statistically significant. Id. at 30-31. In explaining that conclusion, the
Court observed that Section 10(b) and Rule 10b-5 themselves impose “an affirmative duty to disclose” only
“when necessary ‘to make . . . statements made, in
the light of the circumstances under which they were
made, not misleading.’ ” Id. at 44 (quoting 17 C.F.R.
240.10b-5(b)). But the Court did not discuss whether silence in breach of an independent statutory or regulatory disclosure requirement can mislead. And companies’ general freedom to “control[] what they say to the
market,” id. at 45, does not extend to circumstances
where a statute or regulation requires them to speak.
Chiarella is also inapposite. The Court in that case
addressed the circumstances in which a duty to disclose
may be inferred “despite the absence of statutory language * * * specifically addressing the legality of nondisclosure.” 445 U.S. at 230. Here, Section 13(a) and
SEC regulations specifically make nondisclosure unlawful. Petitioner also relies (Br. 25) on the Restatement (Second) of Torts and a student note. But those
sources discuss disclosure obligations imposed by the
common law or by Rule 10b-5 itself, and neither addresses whether breach of an independent statutory or
regulatory disclosure requirement can make silence
misleading. See Restatement (Second) of Torts § 551;
Frank F. Coulom, Jr., Note, Rule 10b-5 and the Duty to
Disclose Market Information: It Takes a Thief, 55 St.
John’s L. Rev. 93, 93-95 (1980).

21
4. The rationale for treating silence as misleading
when a “duty to disclose” exists applies with full force
here. As explained above, pp. 8-15, supra, a reasonable
investor understands an MD&A, in light of Item 303, to
represent implicitly that the issuer has disclosed all the
required information. “Due to the obligatory nature of
these regulations, a reasonable investor would interpret
the absence of an Item 303 disclosure to imply the nonexistence of ” additional trends or uncertainties meeting
the regulatory threshold. Stratte-McClure, 776 F.3d
at 102. If additional trends or uncertainties actually exist for which Item 303 mandates further disclosure, the
MD&A would be misleading, even if the issuer could be
described as “silent.”
Petitioner suggests (Br. 26) that an omission is insufficient, standing alone, to qualify as a fraudulent “device, scheme, or artifice” or “act, practice, or course of
business” within the meaning of paragraphs (a) or (c) of
Rule 10b-5. 17 C.F.R. 240.10b-5(a) and (c). But this
case does not involve an omission, standing alone, because petitioner did not entirely fail to file a Form 10-K
(or even file a Form 10-K without an MD&A). Rather,
petitioner filed a Form 10-K with an MD&A disclosing
known trends and uncertainties. This case thus falls
squarely within paragraph (b): Petitioner made “statements” that were misleadingly incomplete “in the light
of the circumstances under which they were made.”
17 C.F.R. 240.10b-5(b). In any event, respondents’
allegations—a deliberate scheme to prepare and file a
Form 10-K with an MD&A that violated Item 303 and
left undisclosed material information because of concerns about the stock price—involve far more than just
an omission and, if proven, would satisfy Rule 10b-5(a)
and (c) as well.

22
C.

The SEC’s Longstanding Position Supports The
Potential Imposition Of Section 10(b) Liability For
Misleading Omissions Like The One Alleged In This
Case

The SEC’s longstanding and consistent position is
that a violation of Item 303 or other SEC disclosure obligation can be the predicate for a Rule 10b-5 claim.
That view is entitled to deference. See Zandford, 535 U.S.
at 819-820; Basic, 485 U.S. at 239 n.16.
The SEC has instituted administrative proceedings
and imposed sanctions under Rule 10b-5 based on omissions from an MD&A in violation of Item 303. For example, in In re Fitzpatrick, Exchange Act Release No.
34,865, 57 SEC Docket 2178 (Oct. 20, 1994), the SEC
concluded that two executives had violated Rule 10b-5
by filing an MD&A that omitted material information in
breach of Item 303. Id. at 2182-2183 (“[T]he information omitted from First Capital Holdings’ 1990 Form
10-K was clearly material,” and the defendants “knew
or were reckless in not knowing of the disclosure failures.”). See, e.g., In re Cypress Bioscience Inc., Exchange
Act Release No. 37,701, 62 SEC Docket 2286, 2292
(Sept. 19, 1996) (finding Rule 10b-5 violation based on
issuer’s Form 10-Q that included false financial statements and “failed to disclose” information “in the MD&A
section” in violation of Item 303); In re Valley Sys., Inc.,
Exchange Act Release No. 36,227, 60 SEC Docket 541,
544 (Sept. 14, 1995) (similar); In re Westwood One, Inc.,
Exchange Act Release No. 33,489, 55 SEC Docket 2350,
2359 (Jan. 19, 1994) (similar). The SEC has taken the
same position in administrative actions involving other
disclosure obligations. For example, the SEC has found
that a company violated Rule 10b-5 by filing Forms 10-K
that “failed to disclose that [the company’s president

23
and chief executive officer] had filed for personal bankruptcy in October 1987, as required by Item 401(f ) of
Regulation S-K.” Ciro, 57 SEC Docket at 1896; see p. 11,
supra.
The SEC has long taken the same position in federal
court. For example, in Basic, the SEC argued that a
duty to disclose exists for these purposes “where regulations promulgated by the Commission require disclosure.” SEC Amicus Br. at 7, Basic, supra (No. 86-279).
The SEC gave as an example another provision (Item
504) of Regulation S-K. Id. at 7 n.3 (citing 17 C.F.R.
229.504 (1987)). And in SEC v. Conaway, 698 F. Supp.
2d 771 (E.D. Mich. 2010), the SEC argued that a company violated Rule 10b-5 by “fail[ing] to disclose in the
MD & A that [it] had experienced a material liquidity
event in the third quarter.” Id. at 822. The SEC further
argued that “Item 303 can be the basis for a Rule 10b-5
action” because it “provide[s] a duty to disclose, such
that liability may apply to omitted material information
if scienter exists.” D. Ct. Doc. 127, at 5, Conaway, supra (No. 05-cv-40263), 2009 WL 1719312; see, also e.g.,
D. Ct. Doc. 1, at 5-6, 10-11, SEC v. CVS Caremark Corp.,
No. 14-cv-177 (D.R.I. Apr. 8, 2014) (omission of information required to be disclosed in prospectus supplements). 4

Petitioner states (Br. 43) that it is unaware of any “standalone”
Rule 10b-5 claim brought by the SEC “based solely on information
allegedly omitted from the MD&A,” and that instead the SEC’s allegations have always “included a fraudulent scheme—not a pure
omission.” It is unclear what petitioner means by a “standalone”
“pure omission” claim. The SEC’s enforcement actions typically involve egregious conduct with multiple violations. In the actions described above, the SEC imposed penalties based on the position that
Regulation S-K creates a duty to disclose for purposes of Rule 10b-5.
4

24
The SEC has also promulgated regulations premised
on the view that regulatory disclosure requirements impose a duty to disclose for purposes of Rule 10b-5. For
example, Regulation FD mandates that an issuer’s disclosure of material nonpublic information must be made
to all investors simultaneously. See 17 C.F.R. 243.100.
When the SEC imposed that obligation, it also created
a safe harbor providing that “[n]o failure to make a public
disclosure required solely by §243.100 shall be deemed
to be a violation of Rule 10b-5.” 17 C.F.R. 243.102. That
regulation presupposes that, without a safe harbor,
Regulation FD’s disclosure requirement would create a
duty to disclose. The SEC explained that it was responding to concerns about “the prospect of private liability for violations of Regulation FD,” and that it intended to distinguish “other reporting requirements
under Section 13(a) or 15(d) which do create a duty to
disclose for purposes of Rule 10b-5.” 65 Fed. Reg. 51,726
& n.86 (Aug. 24, 2000) (emphasis added). See 17 C.F.R.
240.13a-11(c) (similar safe harbor for certain disclosure
requirements on Form 8-K).
II. Petitioner’s Arguments Lack Merit
A.

The Court Of Appeals Did Not Create A Private Right
Of Action To Enforce Regulation S-K Or Item 303

Contrary to petitioner’s contention (e.g., Br. 36-38),
the court of appeals’ decision does not have the legal or
practical effect of authorizing private suits to enforce
Regulation S-K or Item 303. An issuer’s mere failure to
disclose all of the information Item 303 requires does
not violate Section 10(b) or Rule 10b-5. To establish li-

And Fitzpatrick found a violation of Rule 10b-5 based solely on material omissions from an MD&A. See 57 SEC Docket at 2182-2183.

25
ability under those provisions, both the SEC and private plaintiffs must also plead and prove a connection
with the purchase or sale of a security, materiality as
defined in Basic, and scienter. Private plaintiffs must
further plead and prove reliance, loss, and loss causation. See Dura Pharm., Inc. v. Broudo, 544 U.S. 336,
341-342 (2005).
Materiality and scienter are particularly significant
requirements. A plaintiff cannot establish materiality
under Basic simply by identifying a violation of Item
303 because Item 303’s mandate “extend[s] considerably beyond th[at] required by Rule 10b-5.” Oran, 226
F.3d at 288. Item 303 requires disclosure of known
trends and uncertainties that are reasonably expected
to have a material effect on the issuer’s liquidity, capital
resources, or operations. See 17 C.F.R. 229.303(a)(1)
and (3)(ii). By contrast, Basic requires “a substantial
likelihood that the disclosure of the omitted fact would
have been viewed by the reasonable investor as having
significantly altered the ‘total mix’ of information made
available.” 485 U.S. at 231-232 (citation omitted).
Information that Item 303 requires to be disclosed
therefore is not “inevitably” or “automatically” material
under Basic. Oran, 226 F.3d at 288; see 54 Fed. Reg.
at 22,430 n.27 (Basic is “inapposite to Item 303 disclosure”). But the difference between the two standards
does not justify a categorical rule that an issuer can
never violate Section 10(b) by or through violating Item
303. To proceed on a Section 10(b) claim, plaintiffs must
prove both that disclosure was required by Item 303
and that the omitted information was material under
Basic. While many omissions will be material under
Item 303 but not the stricter Section 10(b) standard,

26
some omissions will be material under both Item 303
and Section 10(b). See Langevoort & Gulati at 1651.
A plaintiff also cannot establish scienter simply by
identifying a violation of Item 303. As discussed above,
see pp. 12-13, supra, Item 303 does not require disclosure of every known trend or uncertainty, and determining whether Item 303 requires disclosure sometimes requires judgment calls. It can be correspondingly difficult for a plaintiff to show that an issuer violated Item 303, let alone that it did so with scienter. The
Private Securities Litigation Reform Act of 1995
(PSLRA), Pub. L. No. 104-67, 109 Stat. 737, provides
additional protection in private suits by requiring plaintiffs to plead “with particularity facts giving rise to a
strong inference that the defendant acted with the required state of mind.” 15 U.S.C. 78u-4(b)(2)(A).
The district court dismissed most of respondents’
Item 303-related claims because of inadequate pleading
of Section 10(b)’s additional elements. Pet. App. 73a74a. And, as petitioner observes (Br. 49 n.6), “significant hurdles” remain “to pleading and proving a private
[Section 10(b)] claim based on an alleged omission of
Item 303 information.” There is consequently no danger that petitioner will be held liable for a mere violation of Item 303. But if respondents can establish all
the traditional elements of a private Section 10(b) cause
of action—that is, if respondents can prove that petitioner defrauded them by omitting material information
with scienter, and that they sustained losses as a result—it would make no sense to absolve petitioner of liability simply because its conduct also violated another
SEC rule for which no private right of action exists. Cf.
Blockburger v. United States, 284 U.S. 299, 304 (1932)
(in the criminal context, “the same act or transaction

27
[may] constitute[] a violation of two distinct statutory
provisions”).
B. The Court Of Appeals’ Decision Is Consistent With The
PSLRA And With Section 11

1. Petitioner contends (Br. 32) that the decision below subverts Congress’s determination, in enacting the
PSLRA, to “accept[] the § 10(b) private cause of action
as then defined” but “to extend it no further.’ ” Ibid.
(quoting Stoneridge Inv. Partners, LLC v. ScientificAtlanta, Inc., 552 U.S. 148, 166 (2008) (Stoneridge)).
Although the question presented in the certiorari petition (Pet. i) did not refer specifically to private suits, petitioner has reformulated it (Br. i) to ask whether a “privately enforceable” duty to disclose exists. Unlike in
Stoneridge, however, petitioner’s theory cannot be confined to private suits. The rule petitioner invokes—that
“[s]ilence, absent a duty to disclose, is not misleading
under Rule 10b-5,” Br. 4 (quoting Basic, 485 U.S. at 239
n.17)—applies equally in SEC enforcement actions.
Contrary to petitioner’s argument, moreover, respondents’ theory of liability is hardly new. Misleading
half-truths were treated as actionable misrepresentations even before the SEC promulgated Rule 10b-5(b)
in 1942. See 7 Fed. Reg. 3804 (May 22, 1942); Universal
Health Services, 136 S. Ct. at 2000 (citing a 1931 decision of the New York Court of Appeals as a “classic example” of that principle); pp. 13-14, supra. When Congress enacted the PSLRA, it was already settled that
Rule 10b-5 reached fraud committed by silence in
breach of a duty to disclose, Basic, 485 U.S. at 239 n.17,
and the SEC had already imposed penalties on the
ground that Regulation S-K (including Item 303) imposed such a duty, see pp. 22-23, supra (collecting cases).

28
In Stoneridge, this Court declined to extend the private right of action to reach a new category of defendants (aiders and abettors). 552 U.S. at 158. It did not
suggest that a primary actor (here, the issuer) could escape liability for securities fraud simply by establishing
that the precise fact pattern involved had not arisen in
pre-PSLRA cases. That rigid approach would undermine Rule 10b-5’s purpose of “encompass[ing] the infinite variety of devices that are alien to the ‘climate of
fair dealing’ that Congress sought to create and maintain.” Herpich v. Wallace, 430 F.2d 792, 802 (5th Cir.
1970) (quoting SEC v. Capital Gains Research Bureau,
375 U.S. 180, 201 (1963)).
Petitioner briefly suggests (Br. 17, 50-53) that the
decision below is wrong because the provision of Regulation S-K specifically requiring disclosure of certain legal proceedings, 17 C.F.R. 229.103 (Item 103), did not
mandate disclosure of the CityTime fraud. But that is
a factbound challenge to the adequacy of the allegations
that petitioner violated Item 303, and it is not fairly encompassed within the question presented. In any event,
even if Item 103 were inapplicable, that would not mean
that Item 303’s broader requirements were inapplicable
as well. See 53 Fed. Reg. 29,227 (Aug. 3, 1988) (explaining that disclosure of a pending investigation can be required by Item 103, Item 303, or both).
2. Section 11 of the Securities Act of 1933, 15 U.S.C.
77k(a), imposes liability on various persons who are associated with a registration statement that “contained
an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or
necessary to make the statements therein not misleading.” Ibid. (emphasis added). Petitioner suggests (Br.
29-31) that Congress’s failure to include the italicized

29
(or similar) language in Section 10(b) casts doubt on the
theory of liability that the court of appeals accepted
here. That argument lacks merit.
Section 10(b) broadly reaches “any manipulative or
deceptive device or contrivance in contravention of ”
SEC rules. 15 U.S.C. 78j(b). Rule 10b-5(b) reaches any
failure “to state a material fact necessary in order to
make * * * statements made, in the light of the circumstances under which they were made, not misleading.”
17 C.F.R. 240.10b-5(b). As explained above, see pp. 8-21,
supra, an MD&A that discloses some but not all required information may fall within that prohibition
whether the MD&A is viewed as a misleading half-truth
or as silence where a duty to disclose exists. The fact
that Section 11 uses somewhat different language in the
specific context of registration statements provides no
reason to decline to give Section 10(b) and Rule 10b-5
their natural reading. Cf. Herman & MacLean v. Huddleston, 459 U.S. 375, 382-383 (1983) (“Since § 11 and
§ 10(b) address different types of wrongdoing, we see
no reason to carve out an exception to § 10(b) for fraud
occurring in a registration statement just because the
same conduct may also be actionable under § 11.”).
C.

Petitioner’s Policy Arguments Provide No Sound Basis
For Exempting This Form of Securities Fraud From
Section 10(b)

Petitioner offers various policy arguments (Br. 4154) against imposing Section 10(b) liability in cases involving material omissions from an MD&A. Even if those
arguments accurately predicted the practical effects of
the court of appeals’ holding, they would not justify reversing the judgment below. See Omnicare, 135 S. Ct.
at 1331; Halliburton Co. v. Erica P. John Fund, Inc.,

30
134 S. Ct. 2398, 2413 (2014); Basic, 485 U.S. at 239 n.17.
They are also unpersuasive on their own terms.
1. Petitioner’s policy arguments “overstate[] * * *
the breadth of liability,” and the resulting deluge of immaterial information, the court of appeals’ decision can
be expected to produce. Omnicare, 135 S. Ct. at 1332.
Petitioner asserts (e.g., Br. 41, 47) that various problems would arise from “private enforcement” of Item
303. But the court of appeals did not authorize private
enforcement of Item 303; a plaintiff must plead and
prove all of the elements of Section 10(b), not merely
that an MD&A was incomplete. See pp. 24-27, supra.
Petitioner contends (Br. 47) that “nearly two dozen”
Section 10(b) cases have been filed within the Second
Circuit since it decided Stratte-McClure, compared
with a “handful” in the Ninth Circuit. Even if petitioner’s tally were accurate, it would shed little light on
the question here. By the time of Stratte-McClure, the
Ninth Circuit had already held (erroneously) that Item
303 violations can never be the predicate for a Section
10(b) claim. See In re NVIDIA Corp. Sec. Litig., 768
F.3d 1046, 1056 (9th Cir. 2014), cert. denied, 135 S. Ct.
2349 (2015). Moreover, petitioner’s figures would not
show that Stratte-McClure caused any uptick or that
the recent suits lack merit. It has long been understood
that a duty to disclose can make silence misleading; the
SEC has asserted that view for decades, including in
cases where Item 303 imposed the duty; and the Second
Circuit indicated that such cases were viable in 2001,
see In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 70-74
(2d Cir.), cert. denied, 534 U.S. 1071 (2001), long before
the cases petitioner identifies.
Petitioner contends (Br. 44) that the court of appeals’
rule would “undermine the flexibility inherent in the

31
Commission’s disclosure regime” and “incentivize registrants to flood the market with immaterial and premature disclosures.” But the fact that the SEC has long
pressed Rule 10b-5 claims predicated on Item 303 violations (and is defending that position here) indicates
that the agency views the benefit to securities-fraud enforcement in this context as justifying any possible adverse impact on the quality of disclosure. Plaintiffs must
prove, inter alia, that the omitted information was material under Basic. This Court has been “careful not to
set too low a standard of materiality,” out of “concern[]
that a minimal standard might bring an overabundance
of information within its reach.” Basic, 485 U.S. at 231.
The materiality requirement can perform that same
function in the context of Section 10(b) suits premised
on Item 303 violations.
Contrary to petitioner’s contention (see Br. 42-43),
Section 10(b) enforcement complements rather than
subverts the SEC’s comment-letter process. The SEC’s
Division of Corporate Finance periodically reviews registrants’ public filings for compliance with SEC disclosure obligations. See Div. of Corp. Fin., SEC, Filing
Review Process (Jan. 19, 2017). 5 When a company “can
improve its disclosure or enhance its compliance,” the
Division “provides the company with comments,” initiating a “dialogue with a company about its disclosure”
in which a “company generally responds” and, if appropriate, amends its filings. Ibid. With respect to the
MD&A, SEC staff members encourage issuers to “emphasize material information that is required or promotes understanding [of the company’s financial condition, liquidity and capital resources, changes in financial
5

https://www.sec.gov/divisions/corpfin/cffilingreview.htm.

32
condition and results of operations,] and de-emphasize
(or, if appropriate, delete) immaterial information that
is not required and does not promote [that] understanding.” 68 Fed. Reg. at 75,059; see 81 Fed. Reg. at 23,919.
The comment-letter process and Section 10(b) enforcement thus both aim to improve the quality of information available to the market, without flooding investors with immaterial information. If MD&A quality declines or the comment-letter process becomes less effective, the SEC has targeted tools at its disposal. For
example, it could revise Item 303, modify the commentletter process, or adopt a tailored safe harbor from Rule
10b-5 liability, as it has done before. See p. 24, supra;
cf. Halliburton, 134 S. Ct. at 2413 (“These [policy] concerns are more appropriately addressed to Congress.”).
2. Acceptance of petitioner’s position would harm investors and the securities markets by exempting from
Section 10(b) liability conduct that is clearly fraudulent.
Under petitioner’s approach, an issuer could deliberately violate Item 303 and omit a material disclosure
precisely to dupe investors into believing that the security was less risky than it actually was. Petitioner’s legal theory would logically extend, moreover, to similar
schemes that exploit investors’ trust in the efficacy of
other statutory or regulatory disclosure requirements.
Petitioner’s approach would prevent defrauded investors from obtaining compensation for their losses,
and would prevent the SEC from obtaining various
sanctions that are available under Section 10(b) but not
under Section 13(a). E.g., 15 U.S.C. 78u(d)(2) (person
who violates Section 10(b) may be barred from serving
as an officer or director); 17 C.F.R. 230.405 (an issuer
found liable under Rule 10b-5 loses regulatory benefits
of being a “well-known seasoned issuer”); see also 17

33
C.F.R. 230.262(a)(5) and 230.506(d)(1)(iv) (cease-and-desist order entered because of a Section 10(b) violation
disqualifies issuer from certain securities offerings).
Petitioner’s approach also would lead to disparate
treatment of materially equivalent conduct. Under petitioner’s theory, the MD&A in this case would have
been actionable if it had opened with the statement,
“This section contains all the information required by
Item 303.” But because the SEC already requires every
MD&A to “[f ]urnish the information required by Item
303,” see SEC Form 10-K, Item 7, a reasonable investor
would understand the filing of an MD&A as an implicit
representation to the same effect. For purposes of Section 10(b) liability, there is no sound reason to distinguish between the two situations.
CONCLUSION

The judgment of the court of appeals should be
affirmed.
Respectfully submitted.
ROBERT B. STEBBINS
General Counsel
MICHAEL A. CONLEY
Solicitor
JEFFREY A. BERGER
Senior Litigation Counsel
RACHEL M. MCKENZIE
Attorney
Securities and Exchange
Commission

SEPTEMBER 2017

JEFFREY B. WALL
Acting Solicitor General
MALCOLM L. STEWART
Deputy Solicitor General
ZACHARY D. TRIPP
Assistant to the Solicitor
General

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3A4e41a2f3ce5b5f0c. Public record. Not legal advice.