Corporate Disclosure of Government Enforcement Developments: U.S. District Court for the Southern District of New York Holds No General Duty for Issuers to Disclose SEC Investigations or Receipt of SEC “Wells Notices”

Sullivan & Cromwell LLP - January 27, 2016
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On January 22, 2016, the United States District Court for the Southern District of New York (Judge John Koeltl) dismissed In re Lions Gate Entertainment Corp. Securities Litigation, a putative securities fraud class action lawsuit, brought under Section 10(b) of the Securities Exchange Act of 1934.  The complaint alleged that the company should have disclosed publicly the pendency of a Securities and Exchange Commission (“SEC”) investigation, the company’s intention to settle with the SEC and the company’s receipt of a so-called “Wells Notice”—i.e., a letter from the SEC Enforcement Division staff informing the company that it “has decided to recommend that the Commission bring an enforcement proceeding.”  The Court held that, given the facts alleged, the company had no independent duty to disclose any of these enforcement developments and that they were not per se material to investors.  Judge Koeltl’s decision follows and expands upon a 2012 decision by Judge Paul Crotty in Richman v. Goldman Sachs Group, Inc. (a case in which S&C represented the defendants), which similarly held that the issuer had no duty to disclose its receipt of a Wells Notice.