It’s long been blackletter law that a Section 10(b) claim can be rooted in statements that are not targeted to the company’s investors, and are not specifically about the health of the company, so long as investors rely on them, or the speaker should have expected such reliance.  See, e.g., In re Carter-Wallace, Inc. Sec. Litig., 150 F.3d 153 (2d Cir. 1998); Semerenko v. Cendant Corp., 223 F.3d 165 (3d Cir. 2000).  As a result, even product advertisements and other consumer-facing material can form the basis of a securities fraud claim.  Notably, in the recent case of Roberts v. Zuora Inc. et al., 2020 WL 2042244 (N.D. Cal. Apr. 28, 2020), the plaintiffs based their 10(b) claims both on the company’s statements to investors and its general product advertisements, and the court – denying a motion to dismiss – drew no distinction between the two.

Which is why I thought Background Noise? TV Advertising Affects Real Time Investor Behavior by Jura Liaukonyte and Alminas Zaldokas was so interesting (you can read the paper at this SSRN link, and their summary at CLS Blue Sky Blog here).  In the paper, the authors find that after a television advertisement for a product airs, searches for the manufacturer’s SEC filings increase, as does trading volume in the manufacturer’s stock.  The findings validate the caselaw; it seems retail investors, at least, regularly consider product advertisements when deciding what stocks to buy.

 The broader issue, though, arises when we’re not talking about an individual fraud claim, where a particular investor can attest that he or she relied on some specific piece of information, but a fraud on the market action, when the Carter-Wallace principle translates to the rule that just about any statement made by the defendant in any context to any audience may trigger securities fraud liability, so long as it was, in some sense, “public.”  The plaintiffs generally do not prove that investors really did rely on the misstatements; rather, it becomes the defendants’ burden to prove the opposite (which may be, literally, impossible to do).  As a result, when the statements are far removed from investment context, courts may grope for a limiting principle, and arrive at doctrinally inconsistent results to get there. 

That’s always how I’ve always understood the result in Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011), anyway.  There, mutual fund prospectuses contained false information about fund policies, but the plaintiffs brought their claims not on behalf of fund investors, but on behalf of investors in the publicly-traded fund sponsor, who – it was claimed – misled its own investors about how it administered its funds.  Based on my experience as a plaintiffs’ attorney, I am quite confident that the reason the plaintiffs relied on mutual fund prospectuses to make an argument about the fund sponsor was that they looked, as hard as they could, for false statements made directly by the fund sponsor itself, and were unable to find any.  So they were forced to make the argument that buyers of the sponsor’s stock made their investment decisions based on the policies identified in the fund prospectuses.  And because that argument seems like a stretch but difficult to challenge factually, the Supreme Court took the easier route and simply said the fund sponsor was not responsible for the prospectuses.  Would the Court have reached the same result if investors in the funds had brought the same claim?  I suspect not – which is likely why the Court backtracked in Lorenzo v. SEC, 138 S.Ct. 2650 (2018).

Anyhoo, for those interested in more discussion along these lines, see Donald Langevoort’s papers Reading Stoneridge Carefully: A Duty-Based Approach to Reliance and Third Party Liability under Rule 10b-5 and Lies without Liars? Janus Capital and Conservative Securities Jurisprudence.