Opinion ID: 2366732
Heading Depth: 1
Heading Rank: 11

Heading: Materiality of Omissions Related to FGIC and Freescale

Text: As to the materiality of the omissions related to FGIC and Freescale, Blackstone first argues that the relevant information was public knowledge, and thus could not be material because it was already part of the total mix of information available to investors. Specifically, Blackstone contends that, as the complaint itself alleges based on citations to news articles and analysts' calls, the shift in FGIC's strategy toward a less conservative approach to bond insurance and Freescale's loss of its exclusive contract with Motorola were facts publicly known at the time of the IPO. It is true that, as a general matter, the `total mix' of information may . . . include information already in the public domain and facts known or reasonably available to [potential investors]. United Paperworkers Int'l Union v. Int'l Paper Co., 985 F.2d 1190, 1199 (2d Cir.1993) (internal quotation marks omitted); see also Garber v. Legg Mason, Inc., 537 F.Supp.2d 597, 612 (S.D.N.Y.2008) (holding that defendants had no duty under the securities laws to disclose the publicly reported departure of an asset manager), aff'd, 347 Fed.Appx. 665 (2d Cir.2009) (summary order). But case law does not support the sweeping proposition that an issuer of securities is never required to disclose publicly available information. See, e.g., Kapps v. Torch Offshore, Inc., 379 F.3d 207, 213, 215 (5th Cir.2004) (holding that the definition of `material' under Section 11 is not strictly limited to information that is firm-specific and non-public and noting that the SEC requires an issuer to disclose certain `trends' that could affect its business, and in appropriate circumstances this requirement may extend to certain trends that are not firm-specific or are publicly available); United Paperworkers, 985 F.2d at 1199 (stating that the mere presence in the media of sporadic news reports . . . should not be considered to be part of the total mix of information that would clarify or place in proper context the company's representations in its proxy materials); see also Kronfeld v. Trans World Airlines, Inc., 832 F.2d 726, 736 (2d Cir.1987) (There are serious limitations on a corporation's ability to charge its stockholders with knowledge of information omitted from a document such as a . . . prospectus on the basis that the information is public knowledge and otherwise available to them.), cert. denied, 485 U.S. 1007, 108 S.Ct. 1470, 99 L.Ed.2d 700 (1988). In this case, the key information that plaintiffs assert should have been disclosed is whether, and to what extent, the particular known trend, event, or uncertainty might have been reasonably expected to materially affect Blackstone's investments. And this potential future impact was certainly not public knowledge, particularly in the case of FGIC, which was not even mentioned in Blackstone's Registration Statement and thus cannot be considered part of the total mix of information already available to investors. Again, the focus of plaintiffs' claims is the required disclosures under Item 303plaintiffs are not seeking the disclosure of the mere fact of Blackstone's investment in FGIC, of the downward trend in the real estate market, or of Freescale's loss of its exclusive contract with Motorola. Rather, plaintiffs claim that Blackstone was required to disclose the manner in which those then-known trends, events, or uncertainties might reasonably be expected to materially impact Blackstone's future revenues. While it is true that Blackstone's investments in FGIC and Freescale fall below the presumptive 5% threshold of materiality, we find that the District Court erred in its analysis of certain qualitative factors related to materiality. First, the District Court and Blackstone place too much emphasis on Blackstone's structure and on the fact that a loss in one portfolio company might be offset by a gain in another portfolio company. Blackstone is not permitted, in assessing materiality, to aggregate negative and positive effects on its performance fees in order to avoid disclosure of a particular material negative event. Cf. SAB No. 99, Fed.Reg. at 45,153 (noting in the context of aggregating and netting multiple misstatements that [r]egistrants and their auditors first should consider whether each misstatement is material, irrespective of its effect when combined with other misstatements). Were we to hold otherwise, we would effectively sanction misstatements in a registration statement or prospectus related to particular portfolio companies so long as the net effect on the revenues of a public private equity firm like Blackstone was immaterial. The question, of course, is not whether a loss in a particular investment's value will merely affect revenues, because even after aggregation of gains and losses at the fund level, it will almost certainly have some effect. The relevant question under Item 303 is whether Blackstone reasonably expects the impact to be material. We see no principled basis for holding that an historically private equity company that has chosen to go public is somehow subject to a different standard under the securities disclosure laws and regulations than a traditional public company with numerous subsidiaries. See Mohsen Manesh, Legal Asymmetry and the End of Corporate Law, 34 Del. J. Corp. L. 465, 482 (2009) (noting that Blackstone, as a publicly listed entity, is substantively indistinguishable from [its] publicly traded corporate counterparts). In a case of pure omissions, to the extent that the securities laws require information to be disclosed and the information in question is material in the eyes of a reasonable investor, Blackstone must disclose the information. Blackstone's structure is no defense on a motion to dismiss. [11] Second, the District Court erred in finding that the alleged omissions did not relate to a significant aspect of Blackstone's operations. In discussing considerations that may well render material a quantitatively small misstatement, SAB No. 99 provides that materiality . . . may turn on where [the misstatement] appears in the financial statements: [S]ituations may arise . . . where the auditor will conclude that a matter relating to segment information is qualitatively material even though, in his or her judgment, it is quantitatively immaterial to the financial statements taken as a whole. SAB No. 99, 64 Fed.Reg. at 45,152. SAB No. 99 also provides that one factor affecting qualitative materiality is whether the misstatement or omission relates to a segment that plays a significant role in the registrant's business. Id. In this case, Blackstone makes clear in its offering documents that Corporate Private Equity is its flagship segment, playing a significant role in the company's history, operations, and value. Blackstone states that its Corporate Private Equity fund is among the largest . . . ever raised, and that its long-term leadership in private equity has imbued the Blackstone brand with value that enhances all of [its] different businesses and facilitates [its] ability to expand into complementary new businesses. Because Blackstone's Corporate Private Equity segment plays such an important role in Blackstone's business and provides value to all of its other asset management and financial advisory services, a reasonable investor would almost certainly want to know information related to that segment that Blackstone reasonably expects will have a material adverse effect on its future revenues. Therefore, the alleged misstatements and omissions relating to FGIC and Freescale were plausibly material. Furthermore, with respect to Freescale in particular, Blackstone's investment in the company accounted for 9.4% of the Corporate Private Equity segment's assets under management, and the investment was nearly three times larger than the next largest investment in that segment as reported in Blackstone's Prospectus. Even where a misstatement or omission may be quantitatively small compared to a registrant's firm-wide financial results, its significance to a particularly important segment of a registrant's business tends to show its materiality. See In re Kidder Peabody, 10 F.Supp.2d at 410-11 (noting that while amount of false profits may have been minor compared to GE's earnings as a whole, they were quite significant to a subsidiary's profits, which, in turn, represented a significant portion of GE's balance sheet). Viewed in that light, we cannot hold that the alleged loss of Freescale's exclusive contract with its largest customer and the concomitant potential negative impact on one of the largest investments in Blackstone's Corporate Private Equity segment was immaterial. Finally, the District Court failed to consider another relevant qualitative factorthat the omissions mask[ ] a change in earnings or other trends. SAB No. 99, 64 Fed.Reg. at 45,152. Such a possibility is precisely what the required disclosures under Item 303 aim to avoid. Here, Blackstone omitted information related to FGIC and Freescale that plaintiffs allege was reasonably likely to have a material effect on the revenues of Blackstone's Corporate Private Equity segment and, in turn, on Blackstone as a whole. Blackstone's failure to disclose that information masked a reasonably likely change in earnings, as well as the trend, event, or uncertainty that was likely to cause such a change. All of these qualitative factors, together with the District Court's correct observation that the alleged omissions doubtless had `the effect of increasing management's compensation,' see id., show that the alleged omissions were material. Accordingly, we hold that plaintiffs have adequately pleaded that Blackstone omitted material information related to FGIC and Freescale that it was required to disclose under Item 303 of Regulation S-K.