Wednesday, April 27, 2016 Plaintiffs also argued that the company had a duty to disclose the ongoing SEC investigation and the Wells Notices because the company previously disclosed it did not believe that “any currently pending claims or legal proceedings in which the Company is currently involved will have a material adverse effect on the Company’s financial statements.” The court rejected this argument, as well. As the court explained, based on the allegations in the complaint, the challenged disclosure accurately described the company’s assessment of the legal proceedings then pending against it. Moreover, the challenged disclosure did not selectively disclose details about some proceedings but not others. Rather, the company acknowledged the existence of ongoing proceedings without providing further details. As a result, the court concluded that the company’s disclosure would not mislead a reasonable investor about the existence of an ongoing SEC investigation.11 In this regard, the decision highlights the importance of reviewing a company’s specific disclosures to ensure they are accurate in light of the existence of a proceeding.

As the court explained in Lions Gate, generalized disclosure that a company is the subject of government or regulatory investigations does not require specific disclosure of any particular investigation.12 If, however, a company’s general disclosures could be read by a reasonable investor to suggest that the company is not currently subject to any investigations, then the failure to disclose an existing investigation may be deemed misleading. In In re BioScrip, Inc. Securities Litigation, for example, the Southern District held that a company’s disclosures that it received subpoenas “from time to time” and there could be “no assurance that we will not receive” subpoenas was misleading because a reasonable investor would read it to “suggest[ ] [the company] routinely responded to investigatory requests from the Government, but was not presently in the process of responding to such a request.”13 Thus, if a company chooses not to disclose an ongoing investigation, it should carefully review its other disclosures to ensure that they cannot be read to affirmatively suggest the company is not subject to any investigation. Conclusion The court’s decision in Lions Gate provides useful guidance for companies considering whether to disclose an ongoing government investigation, including the receipt of a Wells Notice from the SEC. Companies should review their previous disclosures to make sure that failing to disclose the investigation would not make their earlier disclosures misleading.

Companies should also consider whether the particular circumstances suggest litigation is “substantially certain to occur.” Even if the company determines disclosure is not legally required under the circumstances, there may be other reasons to voluntarily disclose the investigation, as well, ranging from concerns about rumors or contemplated stock sales to investor-relations issues. ••••••••••••••• •••••••••••••• 1. See In re Lions Gate Enter. Corp. Sec. Litig., 14 Civ.

5197 (JGK), 2016 WL 297722, *11 (S.D.N.Y. Jan. 22, 2016); Richman v.

Goldman Sachs Grp., 868 F.Supp.2d 261, 273-74 (S.D.N.Y. 2012). 2. See, e.g., Matrixx Initiatives, Inc. v. Siracusano, 563 U.S.

27, 45 (2011) (“it bears emphasis that §10(b) and Rule 10b–5(b) do not create an affirmative duty to disclose any and all material information”). 3.  CFR §240.10b–5(b); see also In re 17 L ­ ululemon Sec. Litig., 14 F.Supp.3d 553 (S.D.N.Y. 2014) (duty to disclose may arise either “(1) expressly pursuant to an independent statute or regulation; or (2) as a result of the ongoing duty to avoid rendering existing statements misleading by failing to disclose material facts”). 4.  17 CFR §229.103. 5.  17 CFR §240.10b–5(b). 6. The investigation related to defensive measures that Lions Gate took in response to a tender offer by activist investor Carl Icahn. 7.  In re Lions Gate, 2016 WL 297722, *11. 8.  See, e.g., In re Bank of Am. AIG Disclosure Sec.

Litig., 980 F.Supp.2d 564 (S.D.N.Y. 2013) (“Even though [U.S. securities law] imposes no duty to disclose all material non-public information, once a party chooses to speak, it has a ‘duty to be both accurate and complete.’” (quoting Caiola v.

Citibank, N.A., N.Y., 295 F.3d 312, 331 (2d Cir. 2002))); In re Intern. Bus. Mach.

Corp. Sec. Litig., 163 F.3d 102, 110 (2d Cir.

1998) (“A duty to update may exist when a statement, reasonable at the time it is made, becomes misleading because of a subsequent event.”). 9.  In re Lions Gate, 2016 WL 297722, at *13. 10. Id. 11.  See id. 12.  See id.; see also Richman, 868 F.Supp.2d at 273–74. 13. See In re BioScrip, Inc. Sec. Litig., 95 F.Supp.3d 711, 726-27 (S.D.N.Y.

2015). Reprinted with permission from the April 27, 2016 edition of the NEW YORK LA JOURNAL © 2016 ALM Media Properties, LLC. All rights reserved. Further W duplication without permission is prohibited.

For information, contact 877-257-3382 or reprints@alm.com. # 070-04-16-26 .