[W]e must apply a different analytical framework to cases based on affirmative misrepresentations, as opposed to omissions, and [recognize] that different rules apply when the misrepresentation or omission concerns hard, as opposed to soft, information. In re Omnicare, Inc. Securities Litigation, 769 F. 3d 455 (6th Cir. 2014).
A misrepresentation is an affirmative statement that is misleading or false. When an alleged misrepresentation concerns "hard information" — "typically historical information or other factual information that is objectively verifiable" — it is actionable if a plaintiff pleads facts showing that the statement concerned a material fact and that it was objectively false or misleading. Murphy v. Sofamor Danek Grp., Inc. (In re Sofamor Danek Grp., Inc.), 123 F.3d 394, 401 (6th Cir. 1997) (internal quotation marks omitted); see City of Monroe Emps. Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 669-70 (6th Cir.2005). When an alleged misrepresentation concerns "soft information," which "includes predictions and matters of opinion," id., a plaintiff must additionally plead facts showing that the statement was "made with knowledge of its falsity," Omnicare I, 583 F.3d at 945-46. In re Omnicare, Inc. Securities Litigation, ibid.
In lieu of targeting a defendant's misleading or false statements, a plaintiff may focus on a defendant's omission — its failure to disclose information when it had a duty to do so. "A duty to affirmatively disclose 'may arise when there is insider trading, a statute requiring disclosure,' or, [ ] 'an inaccurate, incomplete[,] or misleading prior disclosure.'" City of Monroe, 399 F.3d at 669 (quoting In re Digital Island Sec. Litig., 357 F.3d 322, 329 n. 10 (3d Cir. 2004)). In re Omnicare, Inc. Securities Litigation, ibid.
To complicate matters further, when a person or corporation comes into possession of information that makes a prior statement "inaccurate, incomplete, or misleading," different duties to disclose the new information arise, perhaps unsurprisingly, depending on whether the new information is hard or soft. If the new information is hard, then a person or corporation has a duty to disclose it if it renders a prior disclosure objectively inaccurate, incomplete, or misleading. See Zaluski, 527 F.3d at 576 (citing City of Monroe, 399 F.3d at 673). If the new information is soft, then a person or corporation has a duty to disclose it "'only if [it is] virtually as certain as hard facts'" and contradicts the prior statement. Sofamor Danek, 123 F.3d at 402 (quoting Starkman v. Marathon Oil Co., 772 F.2d 231, 241 (6th Cir. 1985)). In other words, the new information must be so concrete that the defendant must have actually known that the new information renders the prior statement misleading or false and still did not disclose it. Whether newly acquired soft information is sufficiently concrete to trigger a duty to disclose will undoubtedly depend upon the facts in a given case, and the nature of both the prior disclosure and the new information will determine whether new information makes a prior disclose false or misleading. In re Omnicare, Inc. Securities Litigation, ibid.
Regardless of whether a plaintiff chooses to proceed under a misrepresentation theory or one based on an omission, he will have to allege facts that satisfy § 10(b)'s materiality component. In re Omnicare, Inc. Securities Litigation, ibid.
Traditional insider trading occurs "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information." United States v. O'Hagan, 521 U.S. 642, 651-652, (1997). In contrast, misappropriation focuses on deceptive trading by outsiders who owe no duty to shareholders. It occurs when a person "misappropriates confidential information for securities trading purposes, in breach of a duty [to disclose] owed to the source of the information." O'Hagan, 521 U.S. at 652, 117 S.Ct. 2199 (emphasis added). If the trader discloses to the source his intent to trade, there is no deception and no § 10(b) liability. Id. at 655, 117 S.Ct. 2199. The [Supreme] Court first recognized the misappropriation theory in O'Hagan, in which a lawyer traded in a company's securities after learning that his firm's client was planning a takeover of the company. 521 U.S. at 652, 117 S.Ct. 2199. Because he was an outsider to the target company, the lawyer could not be liable for traditional insider trading. Id. at 653 n. 5, 117 S.Ct. 2199. He could nevertheless be held liable for misappropriation because he violated a duty to disclose to his client and firm, the sources of the information. Id. at 655, 659, 117 S.Ct. 2199. US v. McGee, 763 F. 3d 304 (3rd Cir. 2014).
THIS CASEBOOK contains a selection of 30 U. S. Court of Appeals decisions that analyze and interpret the duty to disclose under SEC Rule 10b-5. The selection of decisions spans from 2005 to the date of publication.