On 22 January 2016, in In re Lions Gate Entertainment Corp. Securities Litigation, the United States District Court for the Southern District of New York dismissed securities fraud claims alleging that the defendants did not sufficiently disclose SEC enforcement activities. The case was a putative securities fraud class action brought under Section 10(b) of the Exchange Act.
Lions Gate had been investigated by SEC and had received a “Wells Notice” (a letter from the SEC Enforcement Division staff informing the company that it has decided to recommend that the SEC bring an enforcement proceeding). In a similar case, Richman v. Goldman Sachs Group, Inc., which was heard by the same court in 2012, the court held that Goldman Sachs was not liable for failing to publicly disclose the receipt of a Wells Notice. Expanding on its decision in Richman, the court in In re Lions Gate held that the defendant had no independent duty to disclose any of the enforcement developments and that they were not per se material to investors.
The plaintiffs alleged that Lions Gate should have disclosed publicly the pendency of an SEC investigation, the company’s intention to settle with the SEC and Lions Gate’s receipt of the Wells Notice. The judge dismissed the case in part because Lions Gate had made no statements about the SEC investigation and therefore did not make any materially incomplete or inaccurate statements, or, in the alternative, the SEC investigation and Wells Notice were not material because the penalty amounted to less than 1% of Lions Gate’s consolidated revenues and because the mere possibility that a piece of information may be material to the company’s financial condition is not necessarily sufficient to satisfy the plaintiff’s burden to plead materiality. In its SEC filings, Lions Gate disclosed that “[f]rom time to time, the Company is involved in certain claims and legal proceedings arising in the normal course of business,” and that “the Company does not believe, based on current knowledge, that the outcome of 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 here ruled that Lions Gate’s statements were not false or misleading because a Wells Notice may not necessarily culminate in litigation and therefore does not render the company’s disclosure inadequate. Lastly, the court held that Lions Gate did not breach Regulation S-K Items 103, 303 and 503.
The case sheds further light on companies’ duties of disclosure and confirms that courts will continue to be guided by established principles of quantitative and qualitative thresholds of materiality. The court thus held that the company was not required to disclose the SEC’s ongoing investigation or the company’s receipt of a Wells Notice, but left open the possibility that the principles described above might require the disclosure of these types of facts in a different set of circumstances.