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Materiality

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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Materiality

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  1. Materiality

  2. Forward Looking Information X X • Oran v. Stafford American Home Products Corporation annual report press releases

  3. 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?

  4. 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?

  5. 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.

  6. 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?

  7. Forward Looking Information • Oran v. Stafford 2. Should the lack of market movement inresponse to a disclosure establish the non-materiality of that disclosure?

  8. 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?

  9. 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?

  10. 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?

  11. 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?

  12. 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?

  13. 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”

  14. 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

  15. Historical Facts

  16. Historical Facts CITIZENSUTILITIESCOMPANY HUNGARIANTELEPHONE & CABLE CORPORATION ? 10.1m • Ganino v. Citizens Utilities Company

  17. 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%

  18. 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”

  19. 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?

  20. 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?

  21. 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?

  22. 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

  23. 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

  24. Opinions

  25. 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

  26. 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

  27. 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.”

  28. Opinions • Virginia Bankshares Inc. v. Sandberg 2. What is the risk of “open-ended liability or uncontrollable litigation”?

  29. 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?

  30. Opinions Stock-for-StockMerger DearlyDepartedInc. SIX FEET inc. ??? MATERIAL • Six Feet Inc. (Hypothetical 4) cash sale = 50% premium stock merger is “great deal”

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

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