Failure to State the “Obvious” Does Not Give Rise to a Securities Violation
Commercial Division Justice Andrew Borrok recently issued a decision in Lonny Matlick et al. v. AmTrust Financial Services, Inc., addressing the following question:
Can an issuer be held liable under the Securities and Exchange Act of 1933 for the failure to disclose the risk that certain securities could be delisted when the issuer never guaranteed the listing of such securities in the first instance?
The answer, as Justice Borrok explained, is no.
In January 2019, AmTrust announced that it would delist and deregister certain securities that it had issued between 2013 and 2016, effective the following month. As a result of this announcement, the stock price of the securities fell by approximately 35%. Each offering of the relevant securities was registered through a number of offering documents that included representations, including that the securities were listed with the SEC, and AmTrust would list the securities on the New York Stock Exchange.
Plaintiffs sued AmTrust for delisting the securities asserting claims for violations of Sections 11 and 12(a)(2) of the Securities and Exchange Act, based on AmTrust’s alleged material misstatements in and omissions from the offering documents, as well as claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and promissory and equitable estoppel.
Justice Borrok focused on the language of the offering agreements in ruling for AmTrust. As the Court explained, “the gravamen of the Plaintiffs’ Complaint is that AmTrust failed to disclose in its Offering Documents that delisting the Securities was a possibility.”[i] However, courts evaluate whether statements are false or misleading at the time they were made—“not retroactively, in hindsight.”[ii]
The Court held that Plaintiffs had failed to allege any actionable misstatement or omission as required to state their Securities and Exchange Act claims because AmTrust was under no obligation to disclose publicly available information and its “ability to delist is publicly set forth by statute, in regulation, and in the NYSE rules.”[iii] The Commercial Division went on to explain that “all the Complaint alleges is that AmTrust should have disclosed the fact that the company could delist at some point in the future,” and this “is, indeed, too speculative (and, indeed, too obvious) to have required disclosure.”[iv]
Justice Borrok also dismissed the contract claims, concluding that there was no contractual promise to list the securities or to keep them listed forever. Other claims were dismissed on technical grounds.
Under the Commercial Division’s ruling in Matlick, the onus is on purchasers of securities to familiarize themselves with publicly available information, which need not be disclosed in the offering documents.