In recent years, several courts have held that a company's failure to disclose “any known trends or uncertainties” that are likely to have a material impact on a company's financial results, as required by Item 303 of SEC Regulation S-K, can give rise to liability in connection with an offering of securities pursuant to the Securities Act of 1933.

Perhaps not surprisingly, courts are now seeing an increase in cases under another commonly invoked federal securities statute—Section 10(b) of the Securities Exchange Act of 1934—alleging that a failure to make a disclosure under Item 303 constitutes a violation of that statute as well. In 2014, the U.S. Court of Appeals for the Ninth Circuit held that Item 303's disclosure duty is not “actionable under Section 10(b)….”1 However, earlier this year, in Stratte-McClure v. Morgan Stanley, the U.S. Court of Appeals for the Second Circuit held that a disclosure violation under Item 303 could potentially give rise to Section 10(b) liability, if the elements of a Section 10(b) claim are otherwise met.

Stratte-McClure concerned Morgan Stanley's alleged failure to quickly disclose its exposure to the subprime mortgage market at the start of the financial downturn in 2007. The Second Circuit held that plaintiffs adequately alleged that Item 303 obligated Morgan Stanley to disclose in its quarterly filings the company's exposure to the subprime market. But the Second Circuit also held that Morgan Stanley's alleged failure to do so could not serve as the basis for civil liability under Section 10(b), because plaintiffs did not adequately plead that Morgan Stanley's failure to disclose had been made with scienter, or fraudulent intent.2