## Facts

- Purchasers of Belock Instrument Corporation common stock and 6% convertible subordinated debentures alleged they bought at artificially inflated prices due to false financial disclosures.
- Belock derived a substantial portion of fiscal-year 1964 income from alleged overcharges on U.S. government contracts and did not disclose that fact.
- After government scrutiny and repayments/settlements, Belock’s previously reported 1964 income and assets were allegedly materially overstated.
- Plaintiffs alleged Belock and various insiders, its outside auditors, and a broker-dealer disseminated materially false statements and omissions about net assets and past/prospective income.
- The alleged misstatements appeared in Belock’s annual report to shareholders (also transmitted to the SEC under proxy rules), Belock’s Form 10‑K filed with the SEC, and related public communications.
- Representative transactions included purchases of Belock stock and debentures in April–June 1965; two plaintiffs sought to proceed on behalf of a purchaser class for April 30, 1964 to June 21, 1965.

## Issues

1. Whether a shareholder annual report transmitted to the SEC under proxy rules can qualify as a “document filed” with the SEC for purposes of Exchange Act § 18(a), notwithstanding an SEC rule stating such annual reports are not deemed “filed” in certain contexts.
2. Whether the complaints adequately stated claims under Exchange Act § 10(b) and Rule 10b‑5 based on alleged material misstatements and omissions affecting market price.
3. Whether the pleadings sufficiently alleged the actual reliance element required for § 18(a) liability as to particular SEC-filed documents.
4. Under what circumstances auditors and a broker-dealer may be liable under § 10(b)/Rule 10b‑5 and/or § 18(a) for preparing, signing, or disseminating allegedly false financial statements.

## Decision

- The Second Circuit reversed in part and affirmed in part the dismissals.
- The court held that dismissal of the § 10(b)/Rule 10b‑5 claims was improper because the pleadings adequately alleged material misstatements/omissions connected to securities purchases.
- The court held that § 18(a) claims could proceed at least as to Belock’s Form 10‑K, which is plainly a filed document, subject to proof of statutory elements including reliance.
- The court rejected a categorical rule excluding the annual report from § 18(a), holding it could support § 18(a) liability in appropriate circumstances despite SEC proxy-rule language.
- The court affirmed dismissal as to certain defendants or theories where allegations did not sufficiently connect the defendant to a specific actionable statement or did not adequately plead the required mental state or responsibility.

## Legal Principles

- Rule 10b‑5 reaches materially false public corporate statements (including reports and filings) made in connection with securities trading; purchasers may sue when such statements allegedly distort market prices.
- Scienter-based liability under § 10(b)/Rule 10b‑5 may extend beyond the issuer to outside professionals who substantially participate in issuing or disseminating materially false statements, when adequately alleged.
- Exchange Act § 18(a) imposes liability for false or misleading statements in SEC “filed” documents, but requires the plaintiff to prove actual reliance on the specific filed document.
- SEC rules addressing whether certain shareholder communications are “filed” do not automatically foreclose § 18(a) when the communication is functionally placed in the SEC’s files and used as part of the reporting system on which investors may rely.
- At the pleading stage, plausible allegations of material falsity, market impact, and reliance-related elements generally should not be dismissed where proof is better tested on summary judgment or at trial.

## Conclusion

The Second Circuit reinstated core federal securities claims arising from alleged concealment of contract overcharges and resulting financial overstatements, allowing Rule 10b‑5 claims and significant § 18(a) claims (including potentially those tied to an annual report and those tied to a Form 10‑K) to proceed, while preserving § 18(a)’s actual-reliance requirement and affirming dismissal where allegations were insufficiently specific as to particular defendants.


Heit v. Weitzen, 402 F.2d 909 (2d Cir. 1968)