Stuck with Steckman: Why Item 303 Cannot be a Surrogate for Section 11

Item 303 of SEC Regulation S-K requires companies to disclose “known trends and uncertainties” in certain public filings. In securities class action litigation, plaintiffs increasingly allege the omission of such “known trends and uncertainties” as a basis for liability. But Item 303 provides no private right of action. A private plaintiff can bring an Item 303 action only if there is a separate violation of a securities law for which there is a private right of action. To state a claim under section 11 of the 33 Act, plaintiffs (and courts) rely on a decades-old Ninth Circuit decision, Steckman v. Hart Brewing Co. Steckman held that an Item 303 violation automatically states a claim under section 11, short-circuiting any separate consideration under the statute. This post examines the Steckman decision and contends that it was wrongly decided. Analysis in recent decisions by the U.S. Courts of Appeal for the Second, Third, and Ninth Circuits contradict Steckman’s holding. These courts held that an Item 303 violation does not sufficiently state a claim for liability under section 10(b) of the 34 Act, for the simple reason that Item 303 sets a lower threshold for materiality than 10(b): Item 303 materiality is defined by a “reasonably likely” standard set by the SEC, but 10(b) materiality is subject to a heightened “substantial likelihood” standard set by the U.S. Supreme Court in Basic v. Levinson. This post argues that this materiality distinction applies equally to section 11. Courts agree that an omission under section 11—like section 10(b)—must be material under the heightened Basic standard. Given that (i) an Item 303 violation cannot sufficiently establish Basic materiality, and (ii) Basic materiality is required under section 11, it follows that an Item 303 violation cannot be sufficient to state a claim for liability under Section 11. Steckman should be reconsidered.

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