IMPORTANT COURT DECISION ON WHEN TO DISCLOSE AN SEC INVESTIGATION
For a public company, determining whether and when to disclose a Securities and Exchange Commission (SEC) investigation can be a tough judgment call. There are no bright-line rules, and the legal precedents are sparce. The decision may hinge on many factors. How far has the investigation progressed? What has the SEC said? For example, has it issued a ‘Wells notice’ indicating a likely enforcement proceeding? And what has the company previously said publicly about the subject now under investigation?
In May 2022, the US Court of Appeals for the Second Circuit, which sits in New York City, provided guidance on this subject in Noto v. 22nd Century Group, Inc. (2022). The Noto decision highlights circumstances in which courts may disapprove of companies’ decisions not to disclose a pending investigation. While it remains to be seen whether the decision will lead to more such disclosures, the decision suggests that courts may more closely scrutinise companies that do not disclose an SEC investigation pertaining to a subject previously discussed by the company.
Noto – the facts
Noto was an appeal from the granting of a motion to dismiss a securities class action complaint alleging that a public company, 22nd Century, had misled investors by engaging in an illegal stock promotion scheme and by failing to disclose an SEC investigation into the company’s financial control weaknesses. The Second Circuit affirmed the dismissal of the claims about the promotion scheme but vacated the dismissal of the claims about failing to disclose the SEC investigation. The court held that these allegations – assumed to be true on a motion to dismiss – stated a material misrepresentation actionable under SEC Rule 10b-5(b).
Oct-Dec 2022 issue
Pillsbury Winthrop Shaw Pittman LLP