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(Article from Securities Law Alert, April 2021) 

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On March 17, 2021, the Southern District of New York dismissed with prejudice a putative securities fraud class action alleging that an online brokerage firm failed to disclose in its registration statement declines in commissions and trading volume for the first quarter of 2019, which had not concluded at the time of the IPO. Willard v. UP Fintech Holding, 2021 WL 1026571 (S.D.N.Y. 2021) (Furman, J.).[1] The court held that the brokerage firm was not required to disclose intra-quarter trading commission and trading volume information. The court also held that the allegedly omitted information was not material in light of the historical disclosures and risk warnings disclosed in the registration statement.

Background

Plaintiffs alleged that at the time of the brokerage firm’s IPO, which was shortly before the end of the first quarter of 2019, it “had already learned that its trading volume and commissions for the first quarter of 2019 were sharply declining[.]” Plaintiffs contended that Item 303 of SEC Regulation S-K “required [d]efendants to disclose the Q1 2019 declines in trading volume and commissions and that, by failing to do so in the Registration Statement, they violated Sections 11 and 15 of the Securities Act[.]”

The Obligations Imposed by Item 303

The court explained that “Item 303 does not call for disclosure of any trend or uncertainty.” Instead, under Litwin v. Blackstone, 634 F.3d 706 (2d Cir. 2011), Item 303 “imposes a disclosure duty where a trend, demand, commitment, event or uncertainty is both [1] presently known to management and [2] reasonably likely to have material effects on the registrant’s financial condition or results of operations.” The court noted that Item 303 requires a company “to explain in the prospectus if there has been an important change in the company’s business or environment that significantly or materially decreases the predictive value of the reported results so as to prevent the latest reported results from misleading potential investors.”

Item 303 Does Not Require Real-Time Disclosures of Trading Volume and Commission Revenue Fluctuations

The court held that plaintiffs “fail to plausibly allege that the alleged declines in trading volume and commissions even constituted a ‘trend,’ such that disclosure was required by Item 303.” The court pointed out that plaintiffs “conspicuously fail to allege the existence of any causal event or moment in time that the declines allegedly began. And their own allegations, drawn from the Registration Statement itself, make plain that there were significant fluctuations in both metrics on a quarter-to-quarter basis.”

The court further pointed out that “trading volume and commission revenue were not even directly correlated with one another—nor with overall revenue growth—so disclosure of intra-quarter trading volume data could itself be incomplete and misleading.” The court stated that “the gravamen of [p]laintiffs’ claim is that [d]efendants were required to report fluctuations in trading volume and commission revenue in real time.” Citing several Southern District of New York decisions, the court stated that “Item 303, however, does not require such real-time disclosures.”

Alleged Omissions Not Material Where Registration Statement Included Historical Disclosures and Risk Warnings

The court also explained that “the Registration Statement disclosed that [the brokerage firm] had seen dramatic swings in trading volume and commission revenue on a quarter-to-quarter basis[.]” The court further pointed out that “these data were accompanied by fulsome warnings that figures like trading activity and commission revenue were highly volatile and subject to factors beyond [the brokerage firm’s] control; that this volatility had been largely masked to date by [the brokerage firm’s] strong growth and there was no guarantee that that would continue; and that investors could not draw meaningful information through period-to-period comparisons.” The court concluded that “‘[i]n light of this total mix, a reasonable investor would not have considered the omitted interim financial information’—assuming arguendo that it was available and even known to [d]efendants—‘material’ and, thus, ‘the omissions are not actionable under Section 11.’” Quoting In re Barclays Bank PLC Sec. Litig., 2017 WL 4082305 (S.D.N.Y. 2017), aff’d, 756 F. App’x 41 (2d Cir. 2018) (summary order).