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How Investors Can File Claims for Concealment of Material Business Trends

Federal securities regulations require publicly-traded companies to disclose information about material business trends. Specifically, Item 303 of U.S. Securities and Exchange Commission (SEC) Regulation S-K requires companies to disclose any information that is, “necessary to an understanding of [their] financial condition, changes in financial condition and results of operations.”

What Constitutes a “Material Business Trend”?

Item 303 of SEC Regulation S-K references “trends” in three separate provisions. Among other mandatory disclosures, in order to comply with Item 303, publicly-traded companies must:

  • “Identify any known trends or any known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in the [company’s] liquidity increasing or decreasing in any material way.”
  • “Describe any known material trends, favorable or unfavorable, in the [company’s] capital resources. Indicate any reasonably likely material changes in the mix and relative cost of such resources.”
  • “Describe any known trends or uncertainties that have had or that are reasonably likely to have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.”

Under Item 303, the “material business trends” that companies have a duty to disclose fall into three categories: (i) trends impacting the company’s liquidity, (ii) trends impacting the company’s capital resources, and (iii) trends impacting the company’s net operating income. As a result, some examples of potential trends that may be subject to mandatory disclosure under Item 303 include:

  • A slowdown in sales
  • Customers switching to competitors
  • Deteriorating market conditions

What Constitutes “Concealment” of a Material Business Trend?

Since publicly-traded companies have a duty to disclose all material business trends in compliance with Item 303 of SEC Regulation S-K, failure to disclose any trend can potentially be classified as a concealment. Federal courts have found unlawful concealment in cases involving:

  • Making disclosures that are too generic to adequately inform investors of a material business trend
  • Emphasizing information about positive business trends while deemphasizing information about negative business trends
  • Omitting information about material business trends
  • Misrepresenting a company’s liquidity, capital resources or operating income in order to obscure evidence of a material business trend
  • Altering other financial data in order to obscure evidence of a material business trend
  • Failing to disclose events (such as loss of key customer contracts) that render the company’s representation of material business trends misleading

In many, but not all, cases, concealment of a material business trend in violation of Item 303 will constitute a violation of federal securities laws. For example, concealing a material business trend may violate Section 10(b) of the Securities and Exchange Act of 1934. Courts have also found concealment of material business trends to violate Sections 11 and 12(a)(2) of the Securities Act of 1933. Determining whether concealment of a material business trend gives rise to a cause of action for fraud requires a thorough assessment of the factual and legal issues involved. As a result, any investors who believe they may have claims should consult with an investor fraud attorney promptly.

How Do You Prove Concealment of a Material Business Trend?

Proving that a company has concealed information can be difficult. After all, by the nature of the violation, it involves withholding material information from investors. Since a trend can also be somewhat difficult to identify (in some cases), it can also be difficult to assess whether a company truly misled investors or circumstances changed following the publication of the company’s financial guidelines.

With all of that said, there are a variety of ways to prove that a company has concealed a material business trend. Various circumstances and events can trigger investors’ concerns; and, once this happens, there are ways that investors’ lawyers can seek to obtain additional information. Reviewing a company’s prior or subsequent disclosures may also reveal that a statement regarding a material business trend (or lack thereof) amounts to investor fraud. Due to the challenges involved in proving a cause of action for concealment of a material business trend, investors who believe they may have claims should speak with a lawyer as soon as possible.

Do You Have a Securities Fraud Claim for Concealment of a Material Business Trend?

Do you have a securities fraud claim for a company’s concealment of a material business trend? To find out, schedule a free and confidential consultation at Zamansky LLC. Call 212-742-1414 or request an appointment online to discuss your legal rights with an attorney today.