Many securities fraud lawsuits follow corporate disasters of some sort or another, claiming that known risks were concealed prior to the crisis. Yet for a host of doctrinal, pragmatic and political reasons, there is no clear-cut duty to disclose these risks. The SEC has imposed a set of requirements that sometimes forces risk disclosure, but does so neither consistently nor adequately. Courts in 10b-5 fraud-on-the-market cases, in turn, have made duty mainly a matter of active rather than passive concealment and thus, literally, wordplay: there is no fraud-based duty to disclose risks unless and until the issuer has said enough to put the particular kind of risk “in play.” The resulting incoherence could be rationalized by a more thoughtful assessment of how words matter to investors and better appreciation of the variable role that managerial credibility plays in the process of disclosure and interpretation, the main focus of this Article. Yet even with this, other hurdles remain that too often unnecessarily diminish the deterrence and compensatory value of these lawsuits. This study of disasters and disclosures offers a distinctive reference point for thinking about contemporary controversies associated with bringing matters of social responsibility (e.g., law abidingness) and sustainability (environmental compliance, cybersecurity, product safety, etc.) into the realm of securities law.

Continue reading Disasters and Disclosures: Securities Fraud Liability in the Shadow of a Corporate Catastrophe.