You are here

18.2 Securities—Misrepresentations or Omissions—Materiality

Printer-friendly version


The plaintiff must prove by a preponderance of the evidence that the misrepresentation or omission of the defendant was material.

A factual representation concerning a security is material if there is a substantial likelihood a reasonable investor would consider the fact important in deciding whether or not to buy or sell that security.

An omission concerning a security is material if a reasonable investor would have regarded what was not disclosed to [him] [her] as having significantly altered the total mix of information [he] [she] took into account in deciding whether to buy or sell the security.

You must decide whether something was material based on the circumstances as they existed at the time of the statement or omission.


In Basic Inc. v. Levinson, 485 U.S. 224, 231 (1988), the Supreme Court adopted the standard for materiality developed in TSC Indus. v. Northway, Inc., 426 U.S. 438, 449 (1976) (whether a reasonable shareholder would "consider it important" or whether the fact would have "assumed actual significance") as the standard for actions under 15 U.S.C. § 78j(b).

In discussing materiality, the Ninth Circuit has applied TSC Indus. and Basic Inc. in various formulations. See, for example, Kaplan v. Rose, 49 F.3d 1363, 1371 (9th Cir.1994) (omission or misrepresentation would have misled a reasonable investor about the nature of his or her investment), cert. denied, 516 U.S. 810 (1995); In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1413 n.2 (9th Cir.1994) (substantial likelihood omitted fact would have been viewed by reasonable investor as having significantly altered the "total mix" of information; reasonable investor would have felt the fact "important" in deciding whether to invest), cert. denied, 516 U.S. 868 (1995); In re Stac Electronics Sec. Litig., 89 F.3d 1399, 1408 (9th Cir.1996) (same), cert. denied, 520 U.S. 1103 (1997); McGonigle v. Combs, 968 F.2d 810, 817 (9th Cir.) (substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in deliberations of the reasonable shareholder), cert. dismissed, 506 U.S. 948 (1992); No. 84 Employer-Teamster Joint Council Pension Trust Fund v America West Holding Corp., 320 F.3d 920, 934 (9th Cir.2003) (declining to adopt a bright line rule for materiality which would require an immediate market reaction and instead engaging in a "fact-specific inquiry" under Basic Inc.); Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940, 946-48 (9th Cir.2005) (citing Basic and applying to facts of the case).

Many cases deal with "forward-looking data." That term refers, generally, to management projections of future economic performance, such as sales, revenue or earnings per share forecasts. See 15 U.S.C. § 78(u)(5). The materiality of "forward-looking" data depends on the circumstances. United States v. Smith, 155 F.3d 1051, 1066 (9th Cir.1998) (observing that "determining materiality requires a nuanced, case-by-case approach"), cert. denied, 525 U.S. 1071 (1999).

The Private Securities Litigation Reform Act of 1995 affords a conditional "safe harbor" to "forward-looking" statements. See 15 U.S.C. § 78u–5(c). Under that act, "plaintiffs must prove that ‘forward-looking’ statements were made with ‘actual knowledge’ that they were false or misleading." In re Silicon Graphics Inc. Securities Litig., 183 F.3d 970, 993 (1999) (Browning, J., concurring in part and dissenting in part) (quoting 15 U.S.C. §§ 78u-5(c)(1)(B), 77z-2(c)(1)(B)), cited approvingly in In re Daou Systems, Inc. Sec. Litig., 397 F.3d 704, 717 (9th Cir.2005), cert. denied, 126 S. Ct. 1335 (2006). The "safe harbor" provisions are not applicable to statements of historical fact. Livid Holdings Ltd., 416 F.3d at 948.