Sec Lit IQ: MoFo’s Quarterly Federal Securities Litigation and Corporate Litigation Newsletter (Q2 2026)

In our latest edition of MoFo's Quarterly Federal Securities and Corporate Litigation Newsletter, we provide a rundown of select developments from the second quarter of 2026, including:

• A Second Circuit ruling holding that risk disclosures are not misleading simply because some aspect of the risk materialized;
• A Second Circuit dismissal of securities claims concerning reverse stock splits and Section 11 tracing;
• A Supreme Court ruling that the SEC is not required to prove investor losses to secure equitable disgorgement; and
• A proposed SEC rule that would give qualifying public companies the option to file semiannual, rather than quarterly, interim reports.

Risk Disclosures Are Not Misleading Merely Because Business Risks Materialize

On May 28, 2026, the Second Circuit issued its decision in Smith v. Gap, Inc., affirming the dismissal of securities fraud claims against The Gap, Inc. (“Gap”) and rejecting plaintiffs’ proposition that risk-disclosure statements were actionable where the company failed to disclose that a risk had already materialized.[1] Instead, the Second Circuit held that whether such a statement is actionable depends on how a reasonable investor would understand the company’s statements taken together and in context.

As alleged in the complaint, Gap launched its BODEQUALITY initiative in August 2021, requiring every Old Navy store to carry each women’s clothing item in every size. According to the complaint, Gap overestimated plus-size demand, leading to stockouts in medium sizes and surplus in extended-size inventory. By early 2022, Gap rolled back extended-size offerings and ultimately pulled the initiative in stores, disclosing in May 2022 that Old Navy’s first quarter results had been negatively impacted. Plaintiffs sued, alleging Gap’s public statements and risk disclosures were false or misleading.

The Second Circuit rejected plaintiffs’ misrepresentation claims, holding that generic, industry-wide risk disclosures are not misleading simply because some aspect of the risk had materialized—especially where, as here, Gap had acknowledged it had “not always predicted [its] customers’ preferences . . . with accuracy.” Unlike cases where risk disclosures were framed as purely hypothetical, Gap admitted its risks had materialized in the past and could reoccur. The court also noted that identical disclosures were issued both before and after the launch of BODEQUALITY without mentioning the initiative, making it more likely that a reasonable investor would read the disclosures as generally applicable to the clothing industry. The Second Circuit rejected plaintiffs’ challenges to certain of Gap’s earnings call statements and press releases as inactionable puffery and not giving rise to a duty to disclose certain inventory issues.

The Second Circuit also rejected plaintiffs’ scienter allegations, concluding that the inventory reports allegedly received by executives were too generalized and that store-level reports from only two locations did not establish company-wide knowledge. The court further declined to hold that the “core operations” doctrine was sufficient to independently establish scienter.

The decision provides an important reminder that securities laws target misleading statements, not incomplete business updates. Companies that disclose one factor affecting performance do not necessarily need to identify every other contributing factor. The analysis, however, remains context-specific, and omitted information may still be actionable where disclosure is necessary to make the company’s affirmative statements, in light of the circumstances in which they were made, not misleading.

Takeaways:

• A risk disclosure is not actionable merely because the warned-of risk later—or even already—occurred. The key question is whether the disclosure, in context, would lead a reasonable investor to believe the risk remained merely hypothetical.
• Companies should evaluate whether risk disclosures accurately reflect known developments, especially where a risk has become tied to a specific initiative, product, or event.
• Disclosure of one factor that affects sales or inventory does not necessarily require disclosure of all other contributing factors, but omitted information may still be actionable where necessary to make the company’s affirmative statements not misleading. 

Reverse Stock Splits Must Meaningfully Change the Investment to Count as New Sales

On March 24, 2026, the Second Circuit issued its decision in Knapp v. Barclays PLC, affirming dismissal of Securities Act claims against a securities issuer and addressing two issues of first impression concerning reverse stock splits and Section 11 tracing.[2] The court held that a reverse split of exchange-traded notes (ETNs) did not constitute a “sale” under Section 12(a)(1) and that plaintiffs failed to trace their post-split notes to the challenged registration statement for purposes of Section 11.

As alleged in the complaint, after defendant gave up its status as a “well-known seasoned issuer,” it inadvertently issued ETNs in excess of the amount that it had registered with the SEC. During that period, defendant allegedly implemented a 4:1 reverse split, replacing every four outstanding ETNs with one ETN worth four times the value. On the same day that it implemented the reverse split, defendant allegedly circulated a new pricing supplement that disclosed its implementation of the split and addressed the initial sale of post-split ETNs that defendant still held in inventory.

Plaintiffs alleged that the reverse split was an unregistered sale under Section 12(a)(1). The Second Circuit disagreed, concluding that “a split does not qualify as a statutory ‘sale’ unless it meaningfully changes the nature of the asset underlying the securities holders’ investment.” Defendant had an “ironclad right” to initiate the split, and investors made no investment decision to exchange four ETNs for one ETN. As the court reasoned, “[t]he presence of an investment decision is crucial to the finding of a purchase or sale,” and investors’ lack of choice in participating in the reverse split could not “transform such an involuntary and immaterial swap into a ‘sale.’”

The Second Circuit also affirmed dismissal of plaintiffs’ Section 11 claim on tracing grounds. Relying on Slack Technologies, LLC v. Pirani,[3] the court explained that plaintiffs must plead that they acquired securities traceable to the allegedly defective registration statement. The Second Circuit rejected plaintiffs’ attempt to trace their ETNs to the pricing supplement that was issued on the day of the split, concluding that the supplement governed only the “initial sale” of post-split ETNs that defendants still held in inventory and not ETNs transferred to investors through the split.

The decision reinforces that plaintiffs cannot plead a Section 12 claim without pointing to a meaningful change in the nature of the investment or plead a Section 11 claim without facts tracing their securities to the particular registration statement they challenge.

Takeaways:

• A stock split or similar adjustment is not a “sale” under the Securities Act merely because securities are exchanged. The inquiry turns on whether the transaction meaningfully changes the nature of the investment or an “investment decision” is affirmatively made.
• Section 11 traceability remains a meaningful pleading requirement such that plaintiffs must plead facts tying their securities to the particular registration statement alleged to be false or misleading. It is not enough to summarily plead some connection between an offering document and plaintiffs’ securities. 

Supreme Court Holds the SEC Need Not Prove Investor Losses to Obtain Disgorgement

On June 4, 2026, the U.S. Supreme Court issued its decision in Sripetch v. SEC, resolving a circuit split between the First and Ninth Circuits and the Second Circuit as to whether the SEC may obtain equitable disgorgement under 15 U.S.C. §§ 78u(d)(5) and (7) without showing that investors suffered pecuniary harm.[4] The Court sided with the First and Ninth Circuits in holding that a finding of pecuniary harm is not required to order disgorgement.

The case arose from Ongkaruck Sripetch’s involvement in “numerous fraudulent schemes,” including several pump-and-dump operations, for which the SEC charged Sripetch. Sripetch ultimately consented to the entry of judgment against him and agreed that the court could order disgorgement. When the SEC attempted to seek millions in disgorgement, however, Sripetch objected and argued that the request would violate Liu v. SEC[5] because the SEC lacked evidence that his schemes caused investors to suffer any financial loss and thus there were no “victims” for whom disgorgement could be awarded. The district court sided with the SEC, concluding that the SEC had produced evidence showing that Sripetch’s investors had suffered a pecuniary loss, sidestepping the question of whether a showing of financial loss was required.[6] On appeal, the Ninth Circuit held that a finding of pecuniary harm is not required before a court orders disgorgement, but it did not address the question of whether the SEC had, in fact, made such a showing.[7]

Writing for a unanimous Court, Justice Gorsuch framed the question as “whether the SEC must show that an investor suffered a pecuniary loss before it may secure a disgorgement remedy under either § 78u(d)(5) or § 78u(d)(7).” As the Court explained, “courts sitting in equity have long issued remedies designed to ‘depriv[e] wrongdoers of their net profits from unlawful activity,’” requiring “a showing that the defendant interfered with the plaintiff’s legally protected rights,” with a common feature to those remedies being that “[g]enerally, the final award . . . is not measured by the [victim’s] loss but by the defendant’s gain attributable to his wrongdoing.” Equity strips wrongdoers of their unlawful profits, and one who has suffered “an interference with protected interests” can recover the defendant’s wrongful gain even under circumstances where he has suffered “no measurable loss whatsoever.” The Court declined to resolve, however, whether 15 U.S.C. § 78u(d)(7), which expressly authorizes the SEC to seek disgorgement, freed the SEC from Liu’s holding that disgorgement be awarded to victims.

In a separate concurring opinion, Justice Thomas raised the question of whether, in light of the Court’s decision, disgorgement under §78u(d)(7) is now a legal remedy that triggers the right to a jury trial under the Seventh Amendment and urged the Court to address whether the SEC should be permitted to “continue seeking disgorgement in equity at all.”

Takeaways:

• The Court’s decision strengthens the SEC’s power to claw back ill-gotten gains through disgorgement by determining that the SEC need not prove investors suffered pecuniary loss to obtain disgorgement.
• Additional questions of whether disgorgement must be “awarded for victims” and whether the SEC may keep disgorged funds rather than distribute them remain unanswered by the Court and are likely to drive future litigation.

SEC Proposes Optional Semiannual Reporting for Public Companies

On May 5, 2026, the SEC proposed rule and form amendments that would allow public companies to satisfy their interim reporting obligations through semiannual, rather than quarterly, reports.[8] If adopted, eligible companies could file one semiannual report on the new Form 10-S and one annual report on Form 10-K each fiscal year, in lieu of three Form 10-Qs and one Form 10-K. Companies that do not make the election would continue filing quarterly.

The proposal is designed to give companies the flexibility to choose the interim reporting frequency that best serves their business needs and investors. SEC Chairman Paul Atkins has stated that “the rigidity of the SEC’s rules has prevented companies and their investors from determining for themselves the interim reporting frequency that best serves their business needs and investors.”

Although it changes the frequency of interim reporting, the proposal does not alter the substance of required disclosures. Form 10-S would require the same narrative disclosures and financial information as Form 10-Q but would cover the first six months of the fiscal year. Companies would still be required to file Form 8-Ks for material events between period filings. Financial statements for the semiannual period would be prepared under U.S. GAAP and reviewed (but not audited), while existing disclosure-control, internal-control, and certification requirements would apply. The reporting cadence would be determined on an annual basis and could not be changed midyear except to correct an inadvertent election error within the specified period.

From a securities litigation perspective, while the proposal does not alter the underlying disclosure liability framework, a change in the frequency of reporting may impact the scope and nature of lawsuits. Companies electing semiannual reporting may face greater stock price volatility and an expanded class of potential shareholder plaintiffs due to delayed disclosure of adverse material information between reporting periods.

Although any final rule change remains several months away, public companies and their boards should begin considering whether semiannual reporting is right for their businesses.

Takeaways:

• If adopted, the proposed amendments would allow eligible public companies to elect to file a single semiannual report instead of three quarterly Form 10-Qs, providing flexibility to choose the interim reporting cadence that best serves the company and its investors.
• The proposal does not reduce the scope of required interim disclosures, and companies would remain obligated to file Form 8-Ks for material events between period filings.
• Companies that elect semiannual reporting should be mindful that less frequent disclosure could increase stock price volatility around reporting dates and expand the potential class of shareholder plaintiffs in the event of a significant stock price reaction to delayed adverse information.

[1] Smith v. Gap, Inc., 177 F.4th 405 (2d Cir. 2026).

[2] Knapp v. Barclays PLC, 171 F.4th 166 (2d Cir. 2026).

[3] Slack Techs., LLC. v. Pirani, 598 U.S. 759 (2023).

[4] Sripetch v. SEC, 608 U.S. ___ (2026); see also SEC v. Sripetch, 154 F.4th 980 (9th Cir. 2025).

For additional background on Sripetch v. SEC, please see MoFo’s Top 5 SEC Enforcement Developments for June 2026, Top 10 International Anti-Corruption Developments for June 2026, and Q1 2026 Quarterly Federal Securities Litigation and Delaware Corporate Litigation Newsletter.

[5] Liu v. SEC, 591 U.S. 71 (2020).

[6] SEC v. Sripetch, Case No. 20-cv-01864-H-BGS, 2024 WL 1546917 (S.D. Cal. Apr. 8, 2024); SEC v. Sripetch, Case No. 20-cv-01864-H-AGS, 2024 WL 3091397 (S.D. Cal. Apr. 17, 2024).

[7] SEC v. Sripetch, 154 F.4th 980 (9th Cir. 2025).

[8] SEC Proposed Rule Release No. 33-11414, Semiannual Reporting; Paul S. Atkins, SEC Chairman, Statement on Proposing Release for Semiannual Reporting, May 5, 2026.