Item 303 of Regulation S-K Creates No Duty To Disclose Under Section 10(b) and Rule 10b-5: Ninth Circuit | Practical Law

Item 303 of Regulation S-K Creates No Duty To Disclose Under Section 10(b) and Rule 10b-5: Ninth Circuit | Practical Law

In In re NVIDIA Corporation Securities Litigation, the US Court of Appeals for the Ninth Circuit held for the first time that Item 303 of Regulation S-K, 17 C.F.R. § 229.303, does not create a duty to disclose under Section 10(b) of the Securities and Exchange Act of 1934 and Securities Exchange Commission (SEC) Rule 10b-5.

Item 303 of Regulation S-K Creates No Duty To Disclose Under Section 10(b) and Rule 10b-5: Ninth Circuit

by Practical Law Litigation
Published on 07 Oct 2014 • USA (National/Federal)
In In re NVIDIA Corporation Securities Litigation, the US Court of Appeals for the Ninth Circuit held for the first time that Item 303 of Regulation S-K, 17 C.F.R. § 229.303, does not create a duty to disclose under Section 10(b) of the Securities and Exchange Act of 1934 and Securities Exchange Commission (SEC) Rule 10b-5.
On October 2, 2014, in In re NVIDIA Corporation Securities Litigation, the US Court of Appeals for the Ninth Circuit held for the first time that Item 303 of Regulation S-K, 17 C.F.R. § 229.303, does not create a duty to disclose under Section 10(b) of the Securities and Exchange Act of 1934 and Securities Exchange Commission (SEC) Rule 10b-5 (No. 11-17708, (9th Cir. Oct. 2, 2014)).
Defendant, NVIDIA Corporation, is a publicly traded manufacturer of semiconductors. In the spring of 2008, it disclosed information to investors about two product defects. A month later, NVIDIA further disclosed that it would be taking a $150-200 million charge to cover costs arising from one of those defects, resulting in a 31% drop in share price and a contraction of its market capitalization by $3 billion. Plaintiffs, investors in NVIDIA stock between November 2007 and July 2008, brought suit alleging that:
  • NVIDIA knew about the product defects as early as November 2007, and should have told investors about them.
  • Knowledge of the defects was material to investors.
  • Absent a disclosure about the defects, NVIDIA's intervening statements about its financial condition were misleading.
  • NVIDIA's statements violated Section 10(b) and Rule 10b-5.
In their consolidated complaint the plaintiffs argued, among other things, that NVIDIA's failure to disclose information about the product defects violated the disclosure requirements of Item 303 of Regulation S-K, which the plaintiffs contended was a material omission under Section 10(b) and Rule 10b-5. Item 303 requires corporate management to describe known trends or uncertainties that have had, or that the registrant reasonably expects will have, a material favorable or unfavorable impact on net sales, revenues or income from continuing operations (17 C.F.R. § 229.303(a)(3)(ii)). The lower court dismissed this claim without leave to amend on the ground that the plaintiffs insufficiently pled scienter, which is a necessary element for claims under Section 10(b) and Rule 10b-5.
The Ninth Circuit affirmed the district court's decision. The court explained that because the materiality standards for Item 303 and Rule 10b-5 are significantly different, demonstration of a violation of Item 303 does not necessarily mean that the registrant has violated Rule 10b-5. Consequently, the court held that a violation of the disclosure duty of Item 303 is not actionable under Section 10(b) and Rule 10b-5.