JPMORGAN CHASE WHALE TRADES: A CASE HISTORY OF DERIVATIVES RISKS AND ABUSES

(1) Rule 10b-5
263
Materiality. Disclosures are of concern under federal securities laws when they involve
“material” information. The Supreme Court has ruled that information is “material” when there
is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the
reasonable investor as having significantly altered the ‘total mix’ of information made
available.” 1477 Another court characterized the standard as follows: “Material facts include
those that ‘affect the probable future of the company and [that] may affect the desire of investors
to buy, sell, or hold the company's securities.’” 1478 Courts have found that information about
earnings estimates is generally material, 1479 including any misrepresentation of a company’s
earnings. 1480 Changes in share price are also relevant to a materiality inquiry. 1481 “[W]ith
respect to contingent or speculative information or events, … materiality ‘will depend at any
given time upon a balancing of both the indicated probability that the event will occur and the
anticipated magnitude of the event in light of the totality of the company activity.’” 1482
In connection with buying or selling securities. Disclosures raising concerns under
federal securities laws must also be made in connection with the buying or selling of securities.
Courts have held that a statement is made “in connection with” the purchase or sale of securities
1483
when it “is reasonably calculated to influence the average investor[.]” In actions brought by
the SEC, this approach “remains as broad and flexible as is necessary to accomplish the statute’s
purpose of protecting investors.” 1484 For example, statements in press releases, annual reports,
quarterly and annual public SEC filings, and news articles can satisfy the “in connection with”
element, because investors rely on such documents. 1485 False and misleading statements in
analyst calls associated with quarter-end earnings releases are also considered “in connection
with” the purchase or sale of securities. 1486 A longstanding SEC Release has warned that the
prohibitions against false or misleading statements in Rule 10b-5, as well as Section 17 of the
Securities Act of 1933, “apply to all company statements that can reasonably be expected to
reach investors and the trading markets, whoever the intended primary audience.” 1487
1477 Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438,
449 (1976)).
1478 Castellano v. Young & Rubicam, Inc., 257 F.3d 171, 180 (2d Cir. 2001) (quoting SEC v. Texas Gulf Sulphur
Co., 401 F.2d 833, 849 (2d Cir. 1968)).
1479
In re J. Douglas Elliott, Securities Exchange Act Rel. No. 34-40043 (May 29, 1998).
1480
SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969).
1481
See Crowell v. Ionics, Inc., 343 F. Supp. 2d 1 (D. Mass. 2004).
1482
Basic, Inc. v. Levinson, 485 U.S. 224, 231-32, 240 (1988) (citing SEC v. Texas Gulf Sulphur Co., 401 F. 2d
833, 849 (CA2 1968).).
1483
SEC v. Rana Research, Inc., 8 F.3d 1358, 1362 (9th Cir. 1993) (quoting SEC v. Hasho, 784 F.Supp. 1059, 1106
(S.D.N.Y. 1992)).
1484 Id.
1485 See, e.g., In re Ames Dep't Stores Stock Litig., 991 F.2d 953, 969 (2d Cir.1993) (annual reports, public
statements, SEC filings).
1486 See SEC v. Koenig, No. CIV.A. 04-3370, at *2 (S.D. Tex. 2004) (final judgment); see also 8/25/2004 SEC
Litigation Rel. No. 18849, “SEC Charges Mark E. Koenig, Former Executive Vice-President and Director of
Investor Relations at Enron,” http://www.sec.gov/litigation/litreleases/lr18849.htm (alleging false and misleading
statements on an analyst call associated with a quarter-end earnings release).
1487 “Public Statements by Corporate Representatives,” Securities and Exchange Commission Rel. No. 6504 (Jan.
13, 1984) (“The antifraud provisions of the federal securities laws [citing Section 17 of the Securities Act of 1933
and Section 10(b) of the Exchange Act, and the rules thereunder, particularly Rule 10b-5] apply to all company