Robinhood IPO Ruling Widens Split, Beckoning to High Court (1)

The US Supreme Court might be persuaded to review a recent Ninth Circuit decision reviving a securities case against Robinhood Markets Inc. over disclosures before its initial public offering, attorneys say.

Changes in Robinhood’s financial metrics merely needed to be “material” to prompt updated disclosures in registration and prospectus documents filed before the IPO, the US Court of Appeals for the Ninth Circuit said. The Aug. 29 ruling reinstated a proposed class action alleging nondisclosure of trading trends following the meme stock craze of early 2021.

The 2–1 appeals court rejected a First Circuit standard requiring intra-quarter disclosures from companies headed toward IPOs only when there’s been an “extreme departure” from historical results.

With that decision, the Ninth Circuit panel amplified a clear split among appellate courts on an important securities law issue, a law professor and a defense litigator said.

“This one’s really nicely defined, and it’s a common situation,” said Erik Gordon of the University of Michigan’s Ross School of Business.

“As a defense attorney, the problem we have is these are the omissions that ate New York,” said Susan Hurd of Alston & Bird LLP. “They’re huge and unwieldy, and how do you defend against an amorphous theory like that? And so I think it’s a critical issue.”

Robinhood asked the Ninth Circuit for full-court rehearing Sept. 12.

Corporate Locales

On one side of the split are the circuits—the Second and Ninth—where the most securities cases are filed, Hurd said. “So you’ve got broad potential liability in the two circuits that see most of these cases,” she said.

The Second Circuit includes New York in its purview, and the Ninth Circuit includes California and Washington—states where many companies are headquartered. Across the divide, the First Circuit includes most of New England and its corporate hub, Boston.

Robinhood declined to comment, but referred to a statement at the time of the decision calling the investors’ claims meritless and saying it looked forward “to demonstrating again that all claims should be dismissed.”

An attorney for the investors declined to comment.

Even if Robinhood seeks top court review, the case may not be ready for the justices, or might not interest them, some attorneys said. For one thing, legal observers differ on how frequently the issue arises.

‘Broad Applicability’

On the ground, legal advice isn’t split between the standards. Attorneys advising companies that are in the process of going public generally urge disclosure of material changes. “Typically, in my practice when advising clients, we tend to focus on materiality,” said Megan Penick of Dorsey & Whitney LLP, who has an IPO practice.

“As a practical matter, companies and their advisors do and should use materiality as the touchstone,” said John Rizio-Hamilton, a partner at Bernstein Litowitz Berger & Grossmann LLP who represents investors.

“Because the decision rests on the well-established materiality standard and the text of an existing disclosure obligation, I think the case will be less attractive to the high court,” he said in an email. “And cases concerning intra-quarter disclosures are relatively rare.”

But University of Michigan’s Gordon said a change in results between a company’s last reported financial statement and its IPO “is a fact pattern that’s common and will probably be even more common.”

“We’re in volatile markets. We’ll probably be in volatile markets for quite a while,” so the issue is far from moot, the professor said. “It’s an important securities law question, and it’s a question that has broad applicability.”

The case continues a trend where investors believe they’re better off arguing they were misled by a “pure” omission than a misrepresentation or half-truth, Hurd said, pointing to Macquarie Infrastructure Corp. v. Moab Partners, LP, which reached the Supreme Court.

There, the justices shut down that theory in the context of securities fraud claims under the Securities Exchange Act, she said. “It’s not surprising that we’re now teeing up that pure omissions discussion” in the context of registration statement and prospectus claims under the Securities Act, she said.

“I’m hopeful that the Supreme Court would take a cert petition on this issue, because we need some resolution,” Hurd said.

First the Remand

Because the Ninth Circuit sent Robinhood back to the US District Court for the Northern District of California to assess whether the alleged nondisclosures were material, the justices might not want to take the case yet, said Mark Foster of Skadden, Arps, Slate, Meagher & Flom LLP.

“It may not be the fullest record,” Foster said. “It’s hard to predict what the court would do, but I think the Supreme Court is looking for the perfect cases right now in the securities realm” when it’s considering review, he said.

Penick agreed that the lower court is the first step. “Whether or not it goes to the Supreme Court depends on where the lower court comes out,” she said.

Meanwhile, the Ninth Circuit’s decision has implications for companies, their counsel, and other courts.

“If you’re a a company trying to go public, you want to know what the rule is, whether you like it or not,” said Foster. “Bringing the Ninth and Second Circuits together is at least helpful for the goal of uniformity,” particularly because those circuits see so much securities litigation due to the number of companies headquartered there, he said.

Even though lawyers already looked to the Second Circuit’s requirements, “the Robinhood decision underscores the importance of companies reviewing their interim financial results for a quarter in progress before their public offering to see whether there’s something they should be disclosing,” he said.

The majority opinion doesn’t contain a lot of guidance, which the dissent criticized, Foster said. It will be up to the district courts to determine what circumstances prompt a need for “quarter-in-progress” financial disclosures, Foster said. “There’s a lot of law to develop here,” he said.

“Lawyers advise, clients decide,” said Gordon. The Ninth Circuit’s decision strengthens corporate counsel’s advice, he said.

“Maybe clients will listen,” he said.