Shearman And Sterling

News January 10, 2022

Litigation Team Prepares Amicus Brief for WLF Urging Supreme Court to Clarify Disclosure Obligations Under Federal Securities Law

Partner Lyle Roberts (Washington, D.C.-Litigation), counsel George Anhang (Washington, D.C.-Litigation) and associate Michael Holt (New York-Litigation) prepared an amicus brief on behalf of the Washington Legal Foundation (WLF) filed on December 13, 2021 asking the U.S. Supreme Court to review and reverse a decision of the U.S. Court of Appeals for the Ninth Circuit that would hold companies liable for failing to include irrelevant and stale information in their forward-looking risk disclosures. The amicus brief is in support of the Petitioners in Alphabet Inc. v. Rhode Island, and argues that the Ninth Circuit’s ruling will force companies to disclose extensive, immaterial information about past incidents, which will likely confuse investors who must navigate a company’s SEC filings to find information relevant to their investment decisions.

The case arose in connection with a software bug in the Google+ social network, which potentially allowed third-party applications to see the public profile information of a Google+ user’s friends. The software bug was promptly fixed upon discovery in March 2018, during the period in between the company’s annual SEC filing in January 2018 and its quarterly SEC filing in April 2018. Securities and Exchange Commission (SEC) regulations require companies to disclose, in their annual and quarterly filings, “risk factors” that may affect their business, including the risks of future potential threats or harms to the company’s bottom line. In its January 2018 SEC filing, Alphabet warned of the risk that its “security measures” could be breached, “resulting in the improper use and disclosure of user data.” This warning was incorporated by reference into Alphabet’s quarterly filings in April 2018 and July 2018. Because the software bug had been fully remediated in March, and Alphabet had found no evidence of improper data use, Alphabet did not disclose the software bug in its April or July 2018 quarterly filings. Upon learning about the short-lived bug in October 2018, the plaintiff sued Alphabet for securities fraud for failing to disclose the software bug in its SEC filings. The Ninth Circuit concluded that Alphabet misled investors when it disclosed in its securities filings a risk that it might suffer cybersecurity threats in the future, but did not state that it had previously identified and remediated the software bug related to the Google+ social network.

In addition to arguing that the Ninth Circuit’s ruling would force companies to include immaterial information in their filings, which would likely create confusion for investors, the WLF brief argues that companies will be subject to potentially frivolous securities litigation based on accurate forward-looking statements, which is exactly the outcome that Congress sought to avoid when it passed the Private Securities Litigation Reform Act.

WLF is a nonprofit public-interest law firm and policy center with supporters in the U.S. Founded in 1977, WLF promotes and defends free enterprise, individual rights, limited government and the rule of law.

The Team