Navigating the Disclosure Dilemma: Corporate Illegality and the Federal Securities Laws
Citation: 102 Geo L.J. 1647 (2014)
This Note demonstrates that courts have frequently but unpredictably circumvented the nondisclosure norm embodied in Matthews, creating confusion for issuers attempting to figure out whether and when to disclose uncharged criminal conduct. Greater clarity is needed. To alleviate the problem, this Note proposes a template courts can use to more reliably determine whether company statements trigger a duty to disclose uncharged criminal conduct. In addition to providing more guidance to issuers, certainty in disclosure obligations will also
benefit shareholders. Companies would be less likely to withhold material information solely because they are uncertain whether the statement would trigger a duty to disclose.
Part I describes the theory behind the federal securities laws and outlines the disclosure framework, which generally does not require companies to disclose information to investors unless the information is material and there is a duty to disclose it. The next two Parts use the Second Circuit’s opinion in Matthews as a springboard for understanding arguments courts have made on both sides of the disclosure divide. Part II explores the four justifications for nondisclosure set forth in Matthews and related cases, which collectively form the backbone of the pervasive nondisclosure norm. Part III then examines how other courts have rebutted these justifications and required disclosure. Although courts have found disclosure appropriate in numerous instances, the contours of these requirements are imprecise and there are few clear rules to guide issuers. Finally, Part IV considers how to clarify disclosure obligations for issuers. Proposals for the SEC to implement a new line item are rejected in favor of a decisional framework courts can use to apply the half-truth doctrine more consistently. Unlike a line item, clarifying the half-truth doctrine enables companies to retain control over when uncharged criminal conduct is disclosed.