## Facts

- A class of purchasers of Liggett & Myers, Inc. stock sued under Exchange Act § 10(b) and Rule 10b-5, alleging (1) failure to disclose deteriorating earnings, (2) failure to correct optimistic analyst projections, and (3) selective disclosure of adverse earnings information to analysts who prompted client trading.
- Liggett, a diversified public company, maintained ongoing communications with securities analysts as part of investor relations.
- On July 10, 1972, an analyst called Liggett’s corporate communications director about anticipated earnings; the analyst interpreted the response as negative and distributed that interpretation within his firm, after which at least one customer sold.
- On July 17, 1972, an analyst called Liggett’s CFO and asked whether a drop in earnings was anticipated; the CFO gave a confirmation of an earnings decline and characterized the information as confidential; the analyst relayed the information, and firm clients sold shares before public disclosure.
- On July 18, 1972, Liggett publicly announced that second-quarter earnings were substantially below expectations; the stock price fell after the announcement.
- After a bench trial, the district court rejected liability for pre-announcement nondisclosure and failure to correct analyst projections, but found Rule 10b-5 liability for selective disclosures on July 10 and July 17 and awarded class damages based on the pre-/post-disclosure price decline plus prejudgment interest.

## Issues

1. Whether an issuer has a Rule 10b-5 duty to disclose interim earnings deterioration or to correct analysts’ earnings projections the issuer did not expressly adopt.
2. Whether the July 10 and July 17 communications to analysts constituted material, nonpublic disclosures made with scienter sufficient for Rule 10b-5 “tipping” liability.
3. How to measure damages for uninformed purchasers harmed by selective disclosure, including whether recovery must be capped by tippee gains.

## Decision

- The court affirmed dismissal of the nondisclosure and failure-to-correct claims, holding Liggett had no duty on these facts to publish interim earnings data or to correct analysts’ projections it had not adopted.
- The court reversed liability based on the July 10 communication, finding insufficient materiality and scienter.
- The court affirmed that the July 17 disclosure could support Rule 10b-5 liability as a material, nonpublic communication made with scienter, but remanded for recalculation of damages consistent with proper limits.
- The judgment was otherwise affirmed.

## Legal Principles

- Rule 10b-5 does not impose a general obligation of continuous interim disclosure; a duty to disclose typically arises to prevent an issuer’s own statements from being materially misleading.
- An issuer generally has no duty to correct independent analyst forecasts unless the issuer has made materially misleading statements or has endorsed or adopted the projections as its own.
- Selective disclosure to favored analysts of material, nonpublic, reasonably definite financial information, made with intent or recklessness, can constitute actionable tipping under Rule 10b-5.
- For selective-disclosure claims by public investors, damages should reflect the economic advantage conferred by the inside information and should not be punitive; recovery may be limited to the gains realized by tippees who traded on the information.

## Conclusion

The Second Circuit held that Liggett was not liable for failing to disclose interim earnings weakness or for not correcting analysts’ forecasts it had not adopted, rejected tipping liability for an ambiguous July 10 exchange, and treated the July 17 confidential confirmation of an earnings decline as potentially actionable selective disclosure while requiring damages to be recalculated to track tippee gains rather than a broad market-loss measure.


Elkind v. Liggett & Myers, Inc., 635 F.2d 156 (2d Cir. 1980)