Why not more securities disclosure?

Larry Ribstein —  5 April 2011

Steve Davidoff discusses materiality issues in the GS Abacus transaction, Gupta/Galleon, Apple and Jobs’ health and Sokol. He questions “quirky” American securities laws that don’t require continuous disclosure of material information, and a materiality standard which “allows lawyers and others to argue that something is not material because they didn’t think it was certain or important enough to affect the stock price of the company significantly.” 

Davidoff also says that “efforts to find distinctions between material and nonmaterial can seem baffling” to non-lawyers, and that “the current disclosure scheme and its definition of materiality* * * is increasingly disconnected from the desires of investors and the marketplace.” He adds that “a failure to act here may lead to increasing distrust of the markets by an already wary public.”

Davidoff may be right that investors want more information, but fails to identify a key reason why the legal standard can’t and shouldn’t be tighter:  litigation.  A looser materiality standard could expose every statement or non-statement to judicial second-guessing. 

This also answers Davidoff’s question of why companies don’t just disclose on their own “what investors will find important,” and why companies don’t seem to “understand that information disclosure is not just a legal game.”:  Every disclosure is a potential securities fraud claim.

More disclosure may be a good idea.  But the way to get it is to fix securities litigation.

Larry Ribstein


Professor of Law, University of Illinois College of Law

5 responses to Why not more securities disclosure?

    north fork investor 6 April 2011 at 1:16 pm

    Davidoff’s smart little essay identifies an extremely pervasive cynical game played between counsel and the principals at the expensive of outside shareholders. Particularly in a world where instaneous disclosure is electronically available. I believe your comment Prof Ribstein inaccurately identifies the culprit for such gamesmanship as the specter of (frivolous?) securities litigation (quelle horror!) Far more likely explanations include concerns about compensation, general embarassment in the boardroom or with the public shareholders and general apathy. If every disclosure is a potential securities fraud claim every failure to disclose is too. Both statements are hardly true or if true only marginally.


    Please amend my comment by changing the last sentence as follows:
    The trier of fact should be given the opportunity to determine if the facts are as pleaded and in fact caused the harm rather than some other cause alleged by the defendant.


    The problem is certainly not our materiality standard. Lawyers can argue all day but they wont determine the outcome. The standard is objective: Is the mis- or nondisclosure likely to impact the market price. The problem is much deeper than Ribstein’s analysis suggests. The courts have generally applied the Private Securities Litigation Reform Act of 1995 to put the burden of proof on the plaintiff that the harm claimed to have resulted from the alleged misconduct did not result from some other cause. See In Re Williams Sec. Litig.,496 F. Supp. 1195, 1275 (N.D.Okla.2007) and my comments thereon in LexisNexis Emerging Issues Analysis, Research Solutions July 2009, wherein I propose that where wrongful conduct is properly pleaded, the burden of going forward with the evidence should be shifted to the defendant, even though the burden of proof overall must remain with the plaintiff (per the PLSRA). The trier of fact should determine if the case is properly pleaded (or if facts are presented sufficient to meet the test of a motion for summary judgment), not the court.


    Just in case and to clarify any potential confusion, issuers whose securities are listed or approved for listing on a national exchange like NYSE or the Nasdaq are obligated to disclose material facts whenever they arise (which is the main purpose of SEC Form 8-K), as well as on a quarterly and annual basis (on SEC Forms 10-Q and 10-K). In addition, it is interesting note that the SEC’s materiality standards have evolved to require disclosure of items that are qualitatively material even if they are not quantitatively material (see, e.g., SEC Staff Accounting Bulletin No. 99 and Regulation S-K provisions setting forth the disclosures required concerning business trends, operating segments, and other aspects of the issuer’s results of operations). I agree that issuers have an incentive to withhold information, to avoid litigation where possible. We all saw how the SEC and other gov’t agency “regulators” looked the other way when it came to Madoff, leaving me wondering how less private litigation is the answer. In the end, the best way to avoid litigation is to promptly disclose all information a reasonable investor would consider important, as the federal securities laws require, rather than engage in sneaky, nuanced, behind-the-scenes debates about what what counts as material.

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