The Supreme Court agreed to hear another securities case this week. Leidos, Inc. v. Indiana Public Retirement System, No. 16-581. The only other securities action currently on the High Court’s docket is Kokesh v. Securities and Exchange Commission, No. 16-529. In that action, which will be argued on April 18, 2017, the Court will consider whether the five year statute of limitations of 28 U.S.C. Section 2462 applies to “disgorgement.”
Leido , a securities class action based on Exchange Act Section 10(b) and Rule 10b-5 thereunder, presents the following question, according to the Petition for a Writ of Certiorari: “Whether the Second Circuit erred in holding – in direct conflict with the decisions of the Third and Ninth Circuits – that Item 303 of SEC Regulation S-K creates a duty to disclose that is actionable under the Section 10(b) . . .” of the Exchange Act.
Petitioner framed this issue by stating that under Exchange Act Section 10(b) an “omission may be fraudulent only if the omitted information is necessary to make an affirmative statement “not misleading.” Thus “companies can control what they have to disclose . . . by controlling what they say to the market,” Petition at i, quoting Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 45 (2011). The decision in this case by the Second Circuit does not adhere to this rule.
Leidos, Inc., known as SAIC, Inc., and certain of its officers, were initially named as defendants in a securities fraud suit brought by the Indiana Public Retirement System and others as a securities class action. The complaint centers on a contract SAIC entered into with the City of New York in 2001 known as City Time. The project called for SAIC to develop and implement an automated time, attendance and workforce management solution of for city agencies. During the project two firm employees and others formulated a kickback scheme under which the employees received certain payments.
Scheme participants took steps to launder the payments to avoid detection. Nevertheless, it was discovered and participants were prosecuted. The City demanded repayment for SAIC. The firm offered to make repayment. It also entered into a deferred prosecution agreement with the U.S. Attorney’s Office, paying over $500 million in fines and forfeitures. The firm accepted responsibility for the conduct of its employees.
The suit brought by the Pension Funds alleged violations of Exchange Act Sections 10(b) and 20(a) by the company and certain of its officers. Specifically, the complaint alleged that SAIC made certain false statements and omissions regarding City Time in filings made with the SEC. The firm’s March 2011 10-K, for example, did not comply with GAAP and omitted disclosures required by Item 303 in the Management Discussion and Analysis section of the filing. The district court dismissed the complaint for not complying with the pleading requirements of the PSLRA.
The Second Circuit reversed. That Court concluded that omitting statements required by Section 303 from the MD&A Section of the Form 10-K constitutes an “‘omission that can serve as the basis for a Section 10(b) securities fraud claim.’” Petition at 7, quoting the lower Court, 776 F. 3d 94, 100 (2nd Cir. 2015). The Second Court acknowledged that its determination is in conflict with In re NVIDIA Corp. Securities Litigation, 768 F. 3d 1064 (9th Cir. 2014). The case will be heard next term.