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Materiality. Forward Looking Information. X. X. Oran v. Stafford. A merican H ome P roducts Corporation. annual report press releases. Forward Looking Information. Oran v. Stafford. MATERIALITY - failure to disclose Mayo Clinic data? failure to disclose European data?

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forward looking information
Forward Looking Information

X

X

  • Oran v. Stafford

American Home Products

Corporation

annual report

press releases

forward looking information1
Forward Looking Information
  • Oran v. Stafford
  • MATERIALITY
  • - failure to disclose Mayo Clinic data?
  • failure to disclose European data?
  • representation that FDA approval meant the drugs were safe?
  • failure to disclose the dates on which it learned of the Mayo data, European data, and adverse reaction reports?
slide4

Forward Looking Information

  • Oran v. Stafford
  • REG S-K, Item 303 – MD&A
    • “Describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales”
  • MATERIAL?
slide5

Forward Looking Information

  • Oran v. Stafford

EFFICIENT MARKET CAPITAL HYPOTHESIS

WEAK

SEMI-STRONG

STRONG

Current prices incorporate all historical information and all current public information.

All information concerning historical prices is fully reflected in the current price.

Prices incorporate all information, whether publicly available or not.

slide6

Forward Looking Information

  • Oran v. Stafford

1. Do you agree that data that fail to rise to the level of “statistical significance” do not alter the total mix of information?

slide7

Forward Looking Information

  • Oran v. Stafford

2. Should the lack of market movement inresponse to a disclosure establish the non-materiality of that disclosure?

slide8

Forward Looking Information

  • Stock Price Changes as Evidence of Materiality

– Abnormal return, or was entire market moving?

– Confounding disclosures?

– Litigation costs?

– Efficient market?

– Information leakage?

slide9

Forward Looking Information

  • Oran v. Stafford

3. Why would the SEC mandate disclosure under Item 303 of information that is notlikely to influence reasonable investors?

slide10

Forward Looking Information

  • Oran v. Stafford

4. If a company has made a misstatement, why excuse it from liability if the misstatement was not material?

slide11

Forward Looking Information

  • Oran v. Stafford

5. What business reasons did AHP have for withholding the information?

Are these business reasons relevant in determining materiality?

forward looking information2
Forward Looking Information

SIX FEET

inc.

  • Six Feet Inc. (Hypothetical 2)

10-15% growth in revenues for the foreseeable future.

Cremations form 20% of Six Feet’s total business.

Material omission?

slide13

Forward Looking Information

Six Feet Inc. (Hypothetical 2)

  • REG S-K, Item 303 – MD&A
    • “Describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales”
forward looking information3
Forward Looking Information
  • Summary
  • Materiality measured by probability/magnitude standard
  • Concern over hindsight bias
  • Market reaction relevant, but not necessarily dispositive
  • SEC requirements not co-extensive with antifraud requirements
    • a. 3rd Cir. and 9th Cir. disagree
historical facts
Historical Facts

CITIZENSUTILITIESCOMPANY

HUNGARIANTELEPHONE & CABLE

CORPORATION

?

10.1m

  • Ganino v. Citizens Utilities Company
historical facts1
Historical Facts

$10.1m

= 1.7%

CITIZENSUTILITIESCOMPANY

  • Ganino v. Citizens Utilities Company

DISTRICT COURT

Auditors and their clientsdefine materiality asevents that might affectearnings by 3% to 10%

historical facts2
Historical Facts

$10.1m

= 17.7%

HUNGARIANTELEPHONE & CABLE

CORPORATION

  • Ganino v. Citizens Utilities Company

SECOND CIRCUIT

Court cannot dismiss unless the information is “so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance”

historical facts3
Historical Facts
  • Ganino v. Citizens Utilities Company

1. Why did Citizens emphasize that it had reported 50 years of increased revenue?

Is a 5 year upward trend by a small company better than a 50 year upward trend by a larger company?

What motives would Citizens have for not reporting earnings until 1996?

historical facts4
Historical Facts
  • Ganino v. Citizens Utilities Company

3. Why did the court reject the district court’s holding that a 1.7% discrepancy in total revenues was immaterial as a matter of law?

historical facts5
Historical Facts
  • Ganino v. Citizens Utilities Company

4. Why did the court reverse the district court’s finding of immateriality based on the lack of stock price reaction at the time of Citizens’ Form 10-Q filing?

historical facts6
Historical Facts

SIX FEET

???

inc.

MATERIALLYMISLEADING

  • Six Feet Inc. (Hypothetical 3)

LOANS

- interest rate above prime rate

- substantial default rate

“LOAN LOSS” RESERVE

- loan loss reserve is made public

- reserve includes 10-15% of outstanding loans

- loans 35-40% of Six Feet’s profits

- “smoothing” earnings by ~2% per year

historical facts7
Historical Facts
  • Summary
  • Numerical rule of thumb not controlling
  • 2. Confounding events may undermine probative value of stock price reaction
  • 3. Information leakage will also undermine probative value of stock market reaction
opinions
Opinions

FirstAmericanBankshares

AmericanBank ofVirginia

freeze-out merger

sub

VirginiaBankshares

Minority

Shares

= $42/sh

85% shareholder

C

Board approval

  • Virginia Bankshares Inc. v. Sandberg

“high” value

“fair” price

opinions1
Opinions
  • Virginia Bankshares Inc. v. Sandberg

BOARD OPINIONS

- based on inside information and expertise

- required to be in shareholders’ best interest

- directors’ are acting for the reasons given

- verifiable through objective evidence

- no risk of open-ended liability or litigation

opinions2
Opinions
  • Virginia Bankshares Inc. v. Sandberg

1. Examples of “conclusory or qualitative” statements expressing “opinion”?

The company made “revenues last year equal to $100 million”.

The company is going “great”.

“My life is a peach.”

opinions3
Opinions
  • Virginia Bankshares Inc. v. Sandberg

2. What is the risk of “open-ended liability or uncontrollable litigation”?

opinions4
Opinions
  • Virginia Bankshares Inc. v. Sandberg

3. Why didn’t the directors’ conflict ofinterest and FABI’s domination of theBank render the directors’ opinions immaterial?

opinions5
Opinions

Stock-for-StockMerger

DearlyDepartedInc.

SIX FEET

inc.

???

MATERIAL

  • Six Feet Inc. (Hypothetical 4)

cash sale = 50% premium

stock merger is “great deal”

opinions6
Opinions
  • Summary
  • Opinions actionable if:
    • a. Not honestly held and
    • Not accurate
  • Identity of speaker matters
  • 3. Specificity of opinion matters