Shareholder lawsuits nearly always revolve around a basic accusation: You should have told us!
The Bank of America debacle – and the financial crisis in general – has brought disclosure issues to the forefront. Though these questions often seem black and white, listing every minute – and even not-so-minute – detail in a proxy statement is impossible and what is and is not “material” is often a judgment call.
The American Lawyer’s Susan Beck has an interesting article today highlighting disclosure lessons learned from a recent SDNY opinion tossing out, with prejudice, a shareholder lawsuit brought against Blackstone. The plaintiffs alleged Blackstone’s IPO failed to properly disclose lagging performance by some companies in its portfolio and misrepresented the state of the real estate market.
The Court acknowledged that there is no “bright line rule” for materiality, but pointed to a 2nd Circuit statement that a “starting place” may be if the misstatement represents an error representing less than 5% of the particular item on the defendant’s financial statement. In Blackstone, the poorly performing companies comprised only .4 and 3.6 per cent of the assets under Blackstone’s management.
As for failing to properly describe the condition of the real estate market – Blackstone described it as experiencing “high levels of growth and liquidity” – the Court pointed out that shareholders had access to a variety of public information about the general real estate market.
Bank of America, as Beck points out, has also put forth a similar “total mix” of available information argument – it told the Court that bonus information relating to Merrill Lynch was available from a variety of news sources and therefore known in the general business community.
The judge in the Blackstone case stated his opinion was not to be construed as approval for those who drafted the IPO; he just found the alleged errors to be immaterial. And that, of course, is often the bottom line with shareholder suits. Companies should err on the side of basic honesty and should seek to employ exacting maths. But whether a mistake is material is a legal question, not just an ethical one. And that’s where it gets complicated.
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