In U.S. v. Schiff, --- F.3d ----, 2010 WL 1338141, April 07, 2010, defendants were "high-ranking corporate executives" at a pharmaceutical company, indicted for orchestrating a securities fraud scheme in violation of 15 U.S.C. § 78j(b) and SEC Rule 10b-5. The government filed an interlocutory appeal over a district court order addressing several contested theories of liability as well as expert witness issues under Daubert.
In a lengthy opinion only briefly summarized here, the Court first addressed, and rejected, the viability of the government's legal theory that defendant had a fiduciary duty to rectify codefendant's allegedly material misstatements in subsequent SEC filings. Absent a duty to disclose, silence is not fraudulent or misleading under Rule 10b-5. Pursuant to Oran v. Stafford, a duty to disclose under Rule 10b-5 may arise only in three circumstances: when there is  insider trading,  a statute requiring disclosure, or  an inaccurate, incomplete or misleading prior disclosure. The Court rejected the government’s theory that "high corporate executives" have any general fiduciary obligation to disclose under Rule 10b-5. To the extent the Government argued an alternative theory that this duty to disclose based on statements of another rests instead on prong three of Oran (misstatements), the issue was waived.
The Court next rejected the government’s three liability theories – "all of a piece," "duty to update," and "duty to correct," – with respect to defendant’s omissions from his own statements, which did fall under Oran’s third prong as the allegations failed to suffice under those theories.
With regard to exclusion of the government's proposed expert-who would have testified to Bristol's stock price drop as evidence of Rule 10b-5's materiality element- the Circuit found no abuse of discretion. The methodology of the government's expert, did not fit the issues and was not relevant to primary issue of materiality, as the methodology failed to control for unrelated adverse events that were simultaneously disclosed and that could have caused stock price drop.