Sec Lit IQ: MoFo’s Quarterly Federal Securities Litigation and Delaware Corporate Litigation Newsletter (Q3 2025)

In our latest edition of MoFo’s quarterly federal securities and Delaware corporate litigation newsletter, we provide a rundown of select developments from the third quarter of 2025, including:

• A Ninth Circuit ruling expanding potential disclosure duties for interim financial data in SEC filings;
• New SEC guidance signaling openness to mandatory arbitration provisions in corporate governance documents;
• A Ninth Circuit decision emphasizing that context and caveats matter when evaluating public statements;
• A Sixth Circuit opinion reaffirming strong privilege protections for internal investigations;
• A Delaware Supreme Court ruling holding that government investigations and lawsuits may establish a “credible basis” for Section 220 demands; and
• A Fifth Circuit decision requiring the SEC to reassess two major disclosure rules for their cumulative economic impact.

Ninth Circuit Examines Duty to Disclose Interim Financial Data

Companies may need to include interim financial data in their SEC filings following a recent Ninth Circuit ruling. In Sodha v. Golubowski, No. 24-1036, -- F.4th --, 2025 WL 2487954 (9th Cir. Aug. 29, 2025), the Ninth Circuit resuscitated a putative securities class action against Robinhood and several of its executives alleging that the defendants misled investors in the company’s IPO materials by failing to disclose an intra-quarter decline in the company’s financial performance.

Robinhood filed its IPO registration statement in July 2021. The registration statement contained only limited information about the company’s second quarter performance, which was still in progress. After the IPO, the company reported its second quarter results, and the stock price dropped. Plaintiffs sued, alleging that Robinhood’s IPO disclosures were misleading because they had omitted material information regarding the company’s second quarter performance.  In January 2024, the district court dismissed the case with prejudice, holding that a company need not disclose intra-period declines unless those declines reflected an “extreme departure” from the company’s historical data. On appeal, a split panel of the Ninth Circuit reversed and remanded.

Addressing Section 11 of the Securities Act, the Ninth Circuit held that the lower court had applied the incorrect legal standard concerning Section 11’s “misleading” prong. The standard, the Ninth Circuit held, is not whether the disclosure of the omitted information was necessary to make the statements in Robinhood’s registration statement not misleading. Instead, the disclosure duty “arises from the combination of a prior statement and a subsequent event, which, if not disclosed, renders the prior statement false or misleading.” In reaching this conclusion, the Ninth Circuit expressly rejected the First Circuit’s “extreme departure test,”[1] which requires certain intra-quarter disclosures only when the intra-quarter information reflects “an extreme departure from the range of results which could be anticipated based on currently available information.” Aligning instead with the Second Circuit, the Ninth Circuit held that the proper test for the duty to disclose intra-quarter information is the “test for materiality,” emphasizing a “more holistic approach” and a focus on the “total mix of information” available to investors.

The court further held that Item 303 of Regulation S-K requires a registrant to disclose known trends, demands, commitments, events, or uncertainties that are reasonably likely to cause a material change in the company’s financial condition or results of operations. The Ninth Circuit rejected the lower court’s definition of a “trend” as a “pattern of two months” or longer and instead held that whether a pattern constitutes a “trend” is a “more fact-specific inquiry.” Item 303, in turn, also requires the disclosure of certain “events” and “uncertainties.” In addition, a company’s disclosure of the revenue trends must be accompanied by a description of the trends’ expected effect on investors under Item 303, the court held.

Takeaways:

• Companies may face increased securities litigation risk if they do not disclose certain intra-period financial trends, events, and uncertainties.
• Potential disclosure of emerging patterns warrants careful consideration.

SEC Issues New Guidance Regarding Mandatory Arbitration Provisions in Corporate Governance Documents

On September 19, 2025, the SEC issued a policy statement that may open the door to mandatory arbitration provisions in the governance documents of companies filing registration statements.[2] According to the SEC’s policy statement, the existence of a mandatory arbitration clause will not impact decisions regarding whether to accelerate the effectiveness of the registration statement, marking a significant departure from prior practice. 

The new policy is part of a broader effort by SEC Chair Paul Atkins to make IPOs an “attractive proposition” for more companies by removing compliance requirements that “yield no meaningful investor protections,” limiting regulatory uncertainty, and “reducing legal complexities throughout the SEC’s rulebook.”[3] Mr. Atkins indicated that the guidance is intended to respond to prior policies that have effectively strangled IPOs by drawing out their approval process but clarified that the SEC will not be part of the debate about whether a company should adopt mandatory arbitration. Instead, the SEC will focus on “ensuring complete and adequate disclosure of material information.”

The SEC’s new position does not mean, however, that mandatory arbitration will immediately become the new normal for securities litigation claims. First, legal uncertainties remain regarding the enforceability of issuer-investor mandatary arbitration provisions’ enforceability under the Federal Arbitration Act (“FAA”) and whether the federal securities laws override the FAA. Second, some states have laws that may prevent such arbitration provisions. For example, Delaware, a long-favored state for incorporation, recently enacted changes to its corporation laws that may be interpreted as prohibiting such mandatory arbitration provisions.[4] Third, whether such mandatory arbitration provisions are desirable or business friendly remains an open question.

Takeaways:

• The SEC has signaled its openness to mandatory arbitration provisions for public companies, breaking with its long-held opposition to such provisions.
• State laws may also impact whether a company can or should adopt an arbitration provision.
• Even setting aside enforceability, companies should carefully consider the pros and cons of adopting such provisions in their governance documents.

Ninth Circuit Emphasizes that Investors Are Expected to Consider Public Statements in Context, Including Accompanying Caveats, Clarifications, and Disclaimers

In Sneed v. Talphera, Inc., No. 24-3560, 147 F.4th 1123 (9th Cir. 2025), the Ninth Circuit emphasized that reasonable investors are expected to seek out and consider the full context of public statements.

Talphera is a pharmaceutical company that marketed its under-the-tongue opioid with the slogan, “Tongue and Done.” After the U.S. Food and Drug Administration announced that it had issued a warning letter to the company concerning the company’s “false and misleading promotion” of the drug, the company’s stock fell. Shareholders filed a securities class action alleging that the company’s “snappy” slogan oversimplified the process of administering the drug and that the company overstated the product’s market potential.

On August 20, 2025, the Ninth Circuit affirmed dismissal of the suit, finding that the shareholder plaintiffs had failed to plead that the company made any false statements or that any of the statements were made with fraudulent intent. Emphasizing the importance of context, the court said that a “reasonable investor would not blindly accept a marketing slogan by itself when she has access to other contextual information.” Rather, a reasonable investor would read all the information available, including the fine print and caveats. The court pointed to the “copious clarifying information” about the drug that was provided by the company, including in the company’s advertisements, SEC disclosures, and website. With this context, even the FDA warning letter referencing a “false and misleading promotion” of the drug did not establish that the company made any misrepresentations.

As to plaintiffs’ attempt to plead that defendants acted with fraudulent intent, the court said that alleging fraudulent intent “necessarily becomes harder when the allegedly misleading statements are not flagrantly false.”  Analyzing the facts “holistically,” the court held that company executives “most likely made a good-faith determination” that the slogan would accurately highlight the drug’s major selling point. The court recognized that, based on the facts, it was a matter of speculation as to whether the slogan could mislead investors. As a result, plaintiffs failed to demonstrate that the company intended to provide false information.

Takeaways:

• When making public statements, the accompanying context and disclosures matter.
• Reasonable investors are expected to act with care, seek out all available public information, and read documents in their entirety (including scouring the fine print and caveats).
• Courts are less likely to find public statements to be misleading when they are accompanied by or refer to “copious clarifying information” that puts them in context.

Sixth Circuit Affirms Broad Privilege Protection for Internal Investigations

A case that has attracted wide-scale attention from the legal industry and corporations at large has confirmed that attorney-client privilege for internal investigations remains alive and well. In In re FirstEnergy Corp., the Sixth Circuit issued two orders confirming that the documents generated during internal investigations are subject to the protections of attorney-client privilege and the attorney work product doctrine. No. 24-3654, 2025 WL 2335978 (6th Cir. Aug. 7, 2025); -- F.4th --, No. 24-3654, 2025 WL 2814286 (6th Cir. Oct. 3, 2025).

The case is a securities class action against FirstEnergy Corporation following the 2020 indictment of a state representative in a bribery scheme that implicated FirstEnergy. The indictment triggered federal and state inquiries into the company. In response, FirstEnergy hired outside counsel to conduct an internal investigation. Numerous private lawsuits followed, including the securities litigation in which plaintiffs sought materials from the company’s internal investigations. In a decision that garnered significant attention, the district court ordered the production of the investigation materials, finding that neither the attorney-client privilege or work product doctrine applied because FirstEnergy had received the advice of counsel for business (as well as legal) purposes and because the materials were not prepared in anticipation of litigation. The company moved to stay that order and filed a mandamus petition. 

On August 7, 2025, a unanimous Sixth Circuit panel granted the company’s motion to stay, making clear the court’s views on privilege and work product. Addressing attorney-client privilege, the Sixth Circuit explained that “[w]hat matters for attorney-client privilege is not what a company does with its legal advice, but simply whether a company seeks legal advice.” The court recognized that it is “rare” that a company facing potential litigation “would not have a business-related reason for seeking” the advice of counsel, emphasizing that the privilege inquiry turns on whether a communication “seeks to ‘render or solicit legal advice’ irrespective of a company’s reason for wanting that legal advice.” As to the attorney work product doctrine, the court explained that “whether work-product protection applies” is determined “by asking whether documents were created ‘because of’ a party’s ‘reasonable’ anticipation of litigation, as opposed to its ordinary business purposes.” The Sixth Circuit reasoned that the district court’s finding that the company “would have undergone the investigations” for business purposes “ignores” the “onslaught” of anticipated litigation that FirstEnergy faced at the time.

Then, on October 3, 2025, the Sixth Circuit granted FirstEnergy’s mandamus petition, reinforcing the reasoning in the stay order. Relying on the seminal case Upjohn Co. v. United States, 449 U.S. 383 (1981), the court reiterated its conclusion that the attorney-client privilege applied because FirstEnergy hired lawyers to “secure legal advice” with respect to the ongoing criminal investigation and received legal advice regarding “investigative findings, legal analyses, and assessments of potential criminal and civil liability.” As to the work product doctrine, the court again referred to the “onslaught of legal and regulatory action surrounding” the company as evidence that FirstEnergy reasonably anticipated litigation when it hired counsel. Notably, the court also rejected plaintiffs’ argument that FirstEnergy’s production and disclosure of non-privileged documents that “appear[ed] in the internal investigation,” including to its independent auditor, constituted waiver. The court explained that the independent auditor was not an adversary to the company, and therefore anything disclosed to the auditor would remain protected as work product.

Takeaways:

• Using legal advice for a business purpose does not undermine attorney-client privilege protections. The court recognized that companies seeking legal advice in connection with criminal and civil allegations will invariably use that advice for business purposes as well. The key is that they are seeking legal advice, not how they use that advice.
• Materials created during an investigation that was initiated in response to legal and regulatory actions—as opposed to being initiated as part of the company’s ordinary business purposes—will likely be deemed “prepared in anticipation of litigation” and therefore protected under the work product doctrine.

Certain Investigations and Lawsuits May Establish a “Credible Basis” of Wrongdoing in Delaware Books and Records Demands

The Delaware Supreme Court recently provided further clarity on what Delaware stockholders must show to obtain books and records under Section 220 of the Delaware General Corporation Law. In Roberta Ann K.W. Wong Leung Revocable Trust v. Amazon.com, Inc., No. 487, 2024, -- A.3d --, 2025 WL 2104036 (Del. July 28, 2025), the Delaware Supreme Court revived a Section 220 action brought by an Amazon stockholder, finding that a collection of government investigations, lawsuits, and fines was enough to establish a credible basis for the inspection demand. 

The stockholder sought to inspect books and records related to Amazon’s alleged anti-competitive behavior.  The Court of Chancery denied the stockholder’s inspection demand, finding that the stockholder’s stated purpose of investigating possible anticompetitive wrongdoing and mismanagement was “astoundingly broad” as it concerned “any possible anticompetitive conduct by a global conglomerate at any time anywhere in the world.” Finding no proper purpose, the Court of Chancery did not reach the question of whether the stockholder had demonstrated a credible basis. 

On appeal, the Delaware Supreme Court reversed, finding that the stockholder had established both a proper purpose and credible basis for the inspection demand. As to proper purpose, the court noted that the stockholder had sufficiently limited the scope of its demand to “regulatory inquiries or lawsuits in the U.S. and Europe.”  Regarding credible basis, the Supreme Court held that the stockholder’s reliance on existing government investigations and suits—including a Federal Trade Commission action that followed after a four-year investigation—was sufficient to establish a credible basis that there was “possible mismanagement that would warrant further investigation.” The court explained that meeting this burden requires more than an untested allegation of wrongdoing but not that the underlying litigation result in a full victory on the merits against the company.  The court emphasized that the credible basis test is a “highly fact-intensive analysis” and resistant to a bright-line rule. Applied to the case at hand, the court said that each of the investigations or suits viewed in isolation may not be enough for the stockholder to meet its burden, but when taken together, they were “sufficient to establish a credible basis.”

Takeaways:

• Whether a stockholder has demonstrated a credible basis required for a Section 220 demand for books and records is a highly fact-intensive analysis for which Delaware courts decline to fashion a bright-line rule.
• In certain circumstances, investigations and lawsuits that “have advanced beyond untested allegations” may form a credible basis from which the court could infer possible wrongdoing.
• In the context of stockholder books and records demands, courts may find government lawsuits to be “especially probative” of possible wrongdoing.

SEC to Review Short Sale and Stock Lending Disclosure Rules for Their Collective Economic Impact

On August 25, 2025, the Fifth Circuit remanded two SEC rules—Rule 10c-1a (the “Securities Lending Rule”) and Rule 13f-2 (the “Short Sale Rule”)—to allow the SEC to consider and quantify the rules’ cumulative economic impact. National Association of Private Fund Managers v. SEC, 151 F.4th 252 (5th Cir. 2025).

The Securities Lending Rule and the Short Sale Rule were both adopted by the SEC on October 13, 2023. Although the rules were promulgated in tandem and adopted concurrently, the SEC analyzed the economic impact of the Securities Lending Rule in the Short Sale Rule, but not vice versa. Several hedge funds and industry groups brought suit against the SEC challenging the rules on numerous bases.

The Fifth Circuit found that the SEC had failed to consider the rules’ cumulative economic impact and remanded the rules accordingly. The court’s holding turned on the timing of the rules’ proposals and adoptions: the rules “traveled through the rulemaking process together” and were adopted at the same meeting. As a result, the SEC was “not free to pick one [rule] and treat it as ‘adopted’ while discounting the other as just an ephemeral ‘proposed rule’ to sidestep considering the combined economic impact of the two.”

The court, however, was quick to note “the limited nature” of its holding, emphasizing that its ruling should not be taken as a “general view on when or how cumulative economic impact analyses should be conducted in other cases involving multiple proposed rules with potentially overlapping economic implications.” 

This ruling is the latest in a string of decisions from the Fifth Circuit siding with hedge funds in challenges to SEC regulations. Last year, the Fifth Circuit vacated rules requiring more fee transparency from hedge funds,[5] and a district court in Texas vacated a rule requiring certain funds to register as dealers.[6] On September 5, 2025, SEC Chairman Paul Atkins indicated that the SEC will evaluate the rules in light of the Fifth Circuit opinion and make recommendations, including “potential changes to the rules and adjustments to the related compliance dates.”

Takeaways:

• SEC Chairman Paul Atkins has confirmed that the SEC will evaluate the Securities Lending Rule and the Short Sale Rule for their cumulative economic impact, pursuant to the Fifth Circuit’s order.
• Although it required the SEC to review the Securities Lending Rule and the Short Sale Rule, the Fifth Circuit stopped short of requiring the SEC’s reconsideration of other rules “with potentially overlapping economic implications.”

[1] See Shaw v. Digital Equip. Corp., 82 F.3d 1194 (1st Cir. 1996). 

[2] Acceleration of Effectiveness of Registration Statements of Issuers with Certain Mandatory Arbitration Provisions, 17 C.F.R. §§ 231, 241 (Sept. 19, 2025).

[3] Paul S. Atkins, Open Meeting Statement on Policy Statement Concerning Mandatory Arbitration and Amendments to Rule 431 of the Commission’s Rules of Practice, U.S. Sec. & Exch. Comm’n (Sept. 17, 2025).

[4] 8 Del. C. § 115.

[5] Nat’l Ass’n of Private Fund Managers v. SEC, 103 F.4th 1097 (5th Cir. 2024).

[6] Nat’l Ass’n of Private Fund Managers v. SEC, No. 4:24-cv-00250, 2024 WL 4858589 (N.D. Tex. Nov. 21, 2024).