Any party who issues, sells or promotes securities is forbidden from making false or misleading statements and from omitting material information regarding the security.
What is a material omission? According to the U.S. Securities and Exchange Commission (SEC), a fact is material when “there is a substantial likelihood that a reasonable investor would attach importance (to it) in determining whether to buy or sell the securities registered.” When such information is omitted in required public reporting, the party responsible for reporting may be subject to potential penalties, fines and other legal recourse.
Tested in court
In this context, the definition of “material” has been the subject of much litigation in the securities world. In a recent case, a pension fund sued Alphabet Inc., the parent company of Google, for what the pension fund alleged were material omissions regarding the tech giant’s stock.
The suit alleged that Alphabet Inc. knew about security vulnerabilities but failed to disclose them in its quarterly filings. A trial court dismissed the lawsuit, finding that the information that was omitted did not meet the definition of a material omission; that is, a reasonable investor would not consider the information about security vulnerabilities critical in making investment decisions.
The decision did not stand upon appeal. The appeals court found that the information was material, in part because Alphabet Inc. had previously admitted that cybersecurity vulnerabilities were a risk factor affecting the company’s profitability.
Meeting regulatory requirements
If you are uncertain about whether information is material or not, tread carefully before declining to disclose it. Consult with the securities law attorneys at Ford O’Brien, LLP. Our firm advises and represents clients in New York and nationwide.
Source: In Re Alphabet, Inc. Securities Litigation: www.cdn.ca9.uscourts.gov