Beware of the Warning

Last week, a district court in California denied a motion to dismiss a securities fraud lawsuit brought by Snap shareholders.  See In re Snap Inc. Secs. Litig., 2018 U.S. Dist. LEXIS 97704 (C.D. Cal. June 7, 2018).  The shareholders alleged that the Snap IPO prospectus omitted certain critical information in violation of Sections 10(b) and 11, namely, information about the effect of competition from Instagram, and information about the risks posed by a lawsuit filed by an ex-employee – a lawsuit that I previously blogged about here (prior to the IPO, it should be noted).  There was also an additional claim regarding post-IPO statements, brought only under Section 10(b).

Among other things, the defendants argued that there was sufficient information in the public domain about both the Instagram risk, and the lawsuit risk, to render any nondisclosure immaterial as a matter of law.  The district court rejected that argument because Snap’s own prospectus contained the following language:

You should rely only on statements made in this prospectus in determining whether to purchase our shares, not on information in public media that is published by third parties.

Thus, in the district court’s view, Snap's own statements “counteracted” any contrary information made publicly available.

This is an issue that comes up with surprising frequency.  For example, when shareholders sued Facebook in the wake of its IPO, Facebook argued that information allegedly omitted from its prospectus had in fact been heavily publicized in the media.  At that point, the court hoist Facebook on its own petard, highlighting prospectus language that said, “In making your investment decision, you should not rely on information in public media that is published by third parties.  You should rely only on statements made in this prospectus in determining whether to purchase our shares.”  In re Facebook, Inc. IPO Sec. & Derivative Litig., 986 F. Supp. 2d 487 (S.D.N.Y. 2013).  This point also tripped up the defendants in Fresno Cty. Emples. Ret. Ass'n v. comScore, Inc., 268 F. Supp. 3d 526 (S.D.N.Y. 2017), and S.E.C. v. Bank of Am. Corp., 677 F. Supp. 2d 717 (S.D.N.Y. 2010).

What’s interesting in the Snap example, though, is that all of the prior cases involved claims that did not require proof of reliance.  Facebook involved Section 11 alone; comScore decided the issue in the context of Section 14; and Bank of America was a government enforcement action.  Snap represents the first time (that I’m aware) that this argument has prevailed even in the fraud-on-the market context – i.e., the context where you could imagine that disclaimer or no, some investors would price the extraneous information into the stock, thereby correcting any artificial inflation in the market price and defeating any allegation of reliance by most public purchasers. 

In any event, I gather that at least some companies have gotten wise and omitted or altered these kinds of non-reliance instructions.  I couldn’t find comparable language in the prospectuses for Roku and Dropbox at all (did I miss it?), and the Twitter prospectus – issued before the Facebook opinion, but in the midst of the Facebook briefing – says:

In making your investment decision, you should understand that we and the underwriters have not authorized any other party to provide you with information concerning us or this offering.

You should carefully evaluate all of the information in this prospectus. We have in the past received, and may continue to receive, a high degree of media coverage, including coverage that is not directly attributable to statements made by our officers and employees, that incorrectly reports on statements made by our officers or employees, or that is misleading as a result of omitting information provided by us, our officers or employees. We and the underwriters have not authorized any other party to provide you with information concerning us or this offering.

Note the distinction: It’s not telling investors not to rely on extraneous information, or even that all such information is false; it’s just saying some might be false, and none of it was authorized by Twitter.

Point being, I assume that whatever law firms haven’t gotten the message will soon enough.