Debevoise Digest: Securities Law Synopsis – May 2024

May 2024

Supreme Court Holds That “Pure Omissions” Are Not Actionable under Rule 10b-5(b)

On April 12, 2024, in a highly anticipated decision, the Supreme Court held in Macquarie Infrastructure Corp. v. Moab Partners, L.P. that omissions of line item disclosures (referred to as “pure” omissions) are not actionable in private litigation under Rule 10b-5(b) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”). 

Resolving a circuit split, the Court held that Rule 10b-5(b) does not support a “pure omissions” theory based on an alleged failure to disclose material information required by Item 303 of Regulation S-K (“Management’s discussion and analysis of financial condition and results of operations,” or “MD&A”) promulgated under the Securities Act of 1933 (the “Securities Act”). Instead, a “failure to disclose information required by [MD&A] can support a Rule 10b-5(b) claim only if the omission renders affirmative statements made misleading.” 

While the decision arose in the context of Item 303 of Regulation S-K, which requires disclosure of known trends and uncertainties that have had or are reasonably likely to have a material impact on net sales, revenues or income from continuing operations, the decision stands for the broader principle that Rule 10b-5(b) does not support pure omissions theories based on alleged violation of any disclosure requirement. Such claims remain viable, however, under Section 11 of the Securities Act. This ruling provides welcome clarity to issuers and eliminates the risk of pure-omission claims under Rule 10b-5(b) based on the judgment-based requirements of MD&A.

The Supreme Court’s decision resolved a split between the Second Circuit and the Ninth Circuit. In 2014, the Ninth Circuit in In re NVIDIA Corporation Securities Litigation held that a violation of Item 303 of Regulation S-K was not actionable by private litigants under Section 10(b) of the Exchange Act. Just a few months later, the Second Circuit in Stratte-McClure v. Morgan Stanley held that a violation of MD&A’s requirements would be actionable under Section 10(b) and Rule 10b-5 if plaintiffs met the materiality requirements set forth in Basic Inc. v. Levinson. The Second Circuit reasoned that courts “have long recognized that a duty to disclose under Section 10(b) can derive from statutes or regulations that obligate a party to speak” and that a “reasonable investor would interpret the absence of an Item 303 disclosure to imply the non-existence of ‘known trends or uncertainties.’”

The Supreme Court’s landmark decision confirms that a failure to make disclosure that is responsive to a disclosure requirement, standing alone, does not give rise to a private right of action under Rule 10b-5(b) and has reach beyond Item 303 of Regulation S-K. In so doing, it removed significant uncertainty and risk of Rule 10b-5(b) liability based on pure omissions theories under the judgment-based disclosure regime of MD&A. Although the Court declined to expand the scope of the private right of action under Rule 10b-5(b), issuers are also subject to SEC review and enforcement action regarding omissions in MD&A and so must remain vigilant about their disclosures. Moreover, the Court’s decision does not foreclose plaintiffs from filing claims concerning Item 303 of Regulation S-K under a “half-truths” theory—i.e., that the information omitted from MD&A renders other statements made misleading. In addition, pure omissions theories remain viable under Section 11 of the Securities Act.

For more information, see Debevoise Insights here.

Jury Affirms SEC’s Shadow Insider Trading Theory against Former Pharma Executive 

On April 5, 2024, Matthew Panuwat, a former business development executive at biopharmaceutical company Medivation Inc. (“Medivation”), was found liable by a California federal jury in a closely watched case. Panuwat had allegedly traded in the stock of another pharmaceutical company on the basis of inside information he obtained from Medivation. 

The SEC filed a complaint in 2021 alleging that Panuwat engaged in insider trading, violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, when he traded in options of Incyte Corporation (“Incyte”), a Medivation competitor, based on material non-public information that Panuwat received about a potential sale of Medivation. The SEC argued that Panuwat expected that a potential acquisition of Medivation would increase the attractiveness of peer companies like Incyte, who would themselves become potential acquisition targets, thereby causing their share prices to increase. 

The SEC’s case against Panuwat proceeded to trial, at which the SEC and Panuwat’s counsel presented arguments on whether (i) Medivation and Incyte could be considered competitors, (ii) their stock price movements were correlated, and (iii) Panuwat acted with scienter. At the end of the trial, the court provided jury instructions requiring findings that Panuwat (a) owed a duty to Medivation, (b) possessed non-public information material to Incyte as a result of his relationship with Medivation, (c) purchased Incyte call options on the basis of the alleged material non-public information and in breach of his duty to Medivation and (d) knew, at the time of his trades, that the information was non-public and material or acted recklessly. Following a short deliberation, the jury found that the SEC had established the elements of insider trading against Panuwat by a preponderance of the evidence.

While Panuwat may appeal the decision against him, there are some significant immediate takeaways from the jury’s decision:

  • The basic elements of misappropriation-theory insider trading are consistent with the Panuwat case, and the verdict illustrates the fact that, in certain instances, confidential, non-public information may be material to a broader set of third-party issuers in the insider-trading context than some might expect. 
  • The determination of what constitutes a “competitor” or an entity with “market connection” will be a heavily factual inquiry based on a combination of business operations, industry analysis and market price movements, and the SEC will be acting with the benefit of hindsight, knowing, for example, that the stock price in Company B moved following an announcement by Company A. Although “spillover” market effects are likely to be difficult to predict, a broad prohibition on such trading in polices, accompanied by training on the issues and risks, is important to inform trading employees and to help protect companies or firms from allegations of policy- or control-related failures.
  • Given that the jury’s Panuwat decision was based on a “preponderance of the evidence” standard, it is unclear whether shadow insider trading claims will be extended to a criminal setting with the more rigorous “beyond a reasonable doubt” requirement. However, it is likely that the SEC will continue to actively enforce insider trading laws with this new tool in its belt.
For more information, see Debevoise Insights here.

SEC Charges Now-Suspended Audit Firm BF Borgers with Massive Fraud Affecting More Than 1,500 SEC Filings

On May 3, 2024, the SEC announced settled enforcement proceedings against audit firm BF Borgers CPA PC and its owner, Benjamin F. Borgers, charging them with deliberate and systemic failures to comply with Public Company Accounting Oversight Board (“PCAOB”) standards in their audits and reviews of hundreds of public companies, which were incorporated in more than 1,500 SEC filings from January 2021 through June 2023.

The SEC found that BF Borgers failed to perform its audit and review engagements in accordance with PCAOB auditing standards, including by failing to adequately supervise the engagements, failing to obtain engagement quality reviews in connection with the engagements, failing to prepare and maintain sufficient audit documentation and fabricating certain audit documentation, all while falsely representing to its clients and in its audit reports that the firm’s work complied with PCAOB standards. Specifically, the SEC found that at Benjamin Borgers’ direction, BF Borgers’ staff simply “rolled forward” workpapers from previous engagements, changing only the relevant dates, and passed them off as workpapers for current-period engagements. These workpapers documented engagement planning meetings that did not occur and falsely represented that Benjamin Borgers and a separate engagement quality reviewer had reviewed and approved the work. Additionally, the SEC found that electronic “sign offs” on the firm’s engagement workpapers that were attributed to the engagement partner, engagement quality reviewer and staff auditor were in fact all applied by a single staff person within seconds of one another. The SEC’s order focused only on the firm’s public company audit and review engagements and did not address the firm’s work for private companies.

Each impacted registrant will need to file an Item Form 8-K when BF Borgers resigns or is dismissed. The Form 8-K must be filed within four business days of the resignation or dismissal and requires the inclusion of information called for by Item 304 of Regulation S-K. As BF Borgers is suspended from appearing before the agency and therefore unable to agree to the Item 304 disclosures, the SEC is permitting affected registrants to instead indicate that their prior auditor is not currently permitted to appear or practice before the SEC.

Issuers that had engaged BF Borgers to audit or review financial information to be included in any Exchange Act filings to be made on or after May 3, 2024 will need to engage a new qualified, independent, PCAOB-registered public accountant. Issuers that are currently in the registration process will need to file a pre-effective amendment with a new auditor before their registration statements can be declared effective.

Similarly, issuers with a pending Regulation A offering statement will need to file a pre-qualification amendment with a new auditor. Any issuer who has submitted a draft registration statement for nonpublic review that contains an audit opinion from BF Borgers must retain a new auditor before publicly filing the affected registration statement. Given the time required for a new audit firm to complete the required audit work, this is likely to delay any such capital raise by months, not weeks.

In addition, since any sales of securities in transactions registered under the Securities Act must be preceded or accompanied by a Securities Act Section 10(a)-compliant prospectus, issuers who relied on an audit opinion from BF Borgers with effective registration statements will no longer be able to use impacted registration statements.

The SEC order states that as a result of BF Borgers’ conduct, certain of the firm’s issuer and broker-dealer clients violated the reporting provisions of the Exchange Act by filing financial statements that had not been audited or reviewed by an independent public accountant in accordance with PCAOB standards. The plaintiffs’ bar is expected to explore creative ways to pursue private litigation against issuers that were impacted by this fraud and to possibly pursue theories that do not require proof of an issuer’s scienter.

For more information, see Debevoise Insights here.

SEC Rule-Making Agenda

The SEC’s Fall 2023 Regulatory Agenda was posted in December 2023. A summary of key pending rule changes is included below, along with the SEC’s announced release date. We expect the spring 2024 agenda to be released by June 2024. For more information, see the full regulatory agenda here.


Stage of Rulemaking

Announced Release Date

Human Capital Management Disclosure

Proposed Rule Stage

April 2024

Incentive-Based Compensation Arrangements

Financial Data Transparency Act Joint Rulemaking

Regulation D and Form D Improvements

Revisions to the Definition of Securities Held of Record

Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies

Final Rule Stage

April 2024

Cybersecurity Risk Management Rules for Broker-Dealers, Clearing Agencies, MSBSPs, the MSRB, National Securities Associations, National Securities Exchanges, SBSDRs, SBS Dealers, and Transfer Agents

Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices

Open-End Fund Liquidity Risk Management Programs and Swing Pricing; Form N-PORT Reporting

Further Definition of Dealers

Rule 14a-8 Amendments

Special Purpose Acquisition Companies

Registration for Index-Linked Annuities; Amendments to Form N-4 for Index-Linked and Variable Annuities

Proposed Rule Stage

June 2024

Corporate Board Diversity

Proposed Rule Stage

October 2024

Rule 144 Holding Period

Covered Clearing Agency Resiliency and Recovery and Wind-Down Plans

Final Rule Stage

October 2024

This publication is for general information purposes only. It is not intended to provide, nor is it to be used as, a substitute for legal advice. In some jurisdictions it may be considered attorney advertising.