## Facts

- Torch Offshore, Inc. provided offshore oil and natural-gas pipeline construction and related services, with demand tied to oil and gas price levels and trends.
- Torch conducted an initial public offering of common stock on June 7, 2001 using a registration statement and prospectus.
- The prospectus discussed price volatility and Torch’s dependence on oil and natural-gas prices, including a lag between price changes and demand for Torch’s services.
- The prospectus stated that natural-gas prices had increased about 133% from February 1999 to June 6, 2001 and referred to “recent increases” in natural-gas prices.
- Purchasers alleged the prospectus omitted that natural-gas prices had declined roughly 60% during the approximately five months immediately preceding the IPO, even though price data were publicly available.
- After the IPO, prices remained weak; on August 2, 2001 Torch stated declining gas prices were adversely affecting its business, followed by a significant stock price drop.
- Purchasers who bought Torch stock from the IPO through August 1, 2001 sued under Securities Act of 1933 § 11 (and related theories), alleging the registration statement/prospectus contained material misstatements and omissions.
- The district court dismissed under Rule 12(b)(6), reasoning the omitted information was publicly available, industry-wide pricing data and thus not material or required to be disclosed.

## Issues

1. Whether § 11 liability can rest on omission of publicly available, industry-wide information when the omission is alleged to be material or necessary to prevent existing statements from being misleading.
2. Whether accurate statements emphasizing long-term and “recent” price increases can be actionable “half-truths” when recent, ongoing price declines are allegedly omitted.
3. Whether Item 303 of Regulation S-K (MD&A) requires disclosure of known trends reasonably expected to have a material impact even if the trend is public and industry-wide.
4. Whether the complaint plausibly stated a § 11 claim sufficient to survive a Rule 12(b)(6) motion.

## Decision

- The Fifth Circuit reversed the Rule 12(b)(6) dismissal and remanded.
- The court held § 11 disclosure obligations are not categorically limited to firm-specific or non-public information; public, industry-wide data may be material.
- The court held plaintiffs plausibly alleged the prospectus was misleading by stressing “recent increases” and a multi-year rise while omitting an immediate, substantial pre-IPO decline.
- The court accepted that Item 303 can require disclosure of known trends reasonably likely to materially affect the issuer, even if the trend is public and industry-wide.
- Because materiality and misleading context are fact-intensive and plaintiffs plausibly pled them, dismissal at the pleading stage was improper.

## Legal Principles

- Section 11 imposes liability if a registration statement contains an untrue statement of a material fact or omits a material fact required to be stated or necessary to make statements made not misleading.
- Materiality focuses on what a reasonable investor would consider important; it is not defeated solely because the omitted information is publicly available.
- When an issuer speaks on a subject, it must avoid misleading half-truths; literally accurate statements can be actionable if omission of additional facts makes the disclosure misleading in context.
- Item 303 requires MD&A disclosure of known trends or uncertainties reasonably expected to have a material favorable or unfavorable impact; the duty is not confined to non-public or issuer-specific trends.
- At the motion-to-dismiss stage, courts must accept well-pleaded allegations as true and should not resolve close materiality questions on the pleadings where the complaint plausibly alleges a misleading omission.

## Conclusion

The Fifth Circuit held that plaintiffs adequately pled a § 11 claim that Torch’s IPO disclosures about natural-gas prices could mislead by emphasizing “recent increases” while omitting a sharp, ongoing pre-IPO decline, and that disclosure duties under § 11 and Item 303 can extend to public, industry-wide trends when they are known and potentially material to the issuer.


Kapps v. Torch Offshore, Inc., 379 F.3d 207 (5th Cir. 2004)