## Facts

- NL Industries, Inc. (NL) was a publicly traded parent of NLO, Inc. (NLO), a wholly owned subsidiary.
- NLO operated a uranium processing facility in Fernald, Ohio, under contract with the U.S. Department of Energy (DOE) from 1951 to 1985; DOE owned the facility.
- The DOE–NLO contract included indemnification covering categories of losses and expenses, including litigation expenses.
- A public disclosure on December 10, 1984 reported accidental emissions of uranium dust from the Fernald facility.
- On January 23, 1985, nearby residents and landowners filed a class action against NL and NLO alleging injury from radioactive emissions.
- On March 11, 1986, the State of Ohio sued DOE, NLO, and NL seeking cleanup costs, damages, and civil penalties for alleged environmental-law violations.
- Morton Levine, representing purchasers of NL common stock during the class period, sued NL under Exchange Act § 10(b) and Rule 10b-5.
- Levine alleged (1) NL failed to disclose that NLO operated Fernald in violation of environmental laws, creating significant undisclosed liability risk, and (2) NL made misleading statements about its petroleum services business.
- The district court granted summary judgment to NL on both theories and dismissed the complaint; Levine appealed.

## Issues

1. Whether Rule 10b-5 required NL to disclose alleged environmental-law violations at the Fernald facility, including whether SEC Regulation S-K Items 101(c)(1)(xii) and 103 imposed an actionable disclosure duty in a private damages suit.
2. Whether NL’s statements about its petroleum services business were materially misleading under Rule 10b-5.

## Decision

- The Second Circuit affirmed summary judgment for NL on both claims.
- The court held NL had no Rule 10b-5 duty, on this record, to disclose alleged environmental-law violations at Fernald as a matter of private securities-fraud liability.
- The court rejected the argument that Regulation S-K Items 101 and 103 created an independent disclosure duty enforceable by a private plaintiff or a per se Rule 10b-5 violation.
- The court held the challenged petroleum services statements were not materially misleading as a matter of law, including because they were generalized corporate optimism when viewed in context.

## Legal Principles

- Rule 10b-5 imposes liability for material misstatements or omissions; there is no freestanding obligation to disclose all contingent risks or regulatory violations absent a need to prevent existing statements from being misleading or an enforceable legal requirement.
- Regulation S-K line-item disclosure provisions (including Items 101 and 103) do not themselves create a private right of action and do not automatically establish Rule 10b-5 liability.
- Alleged noncompliance with SEC disclosure rules must still be evaluated under traditional Rule 10b-5 elements, including materiality and scienter.
- In assessing materiality of contingent environmental liabilities, courts consider context, probability and magnitude of loss, what the market already knows, and contractual indemnification that may reduce net exposure.
- Vague, optimistic statements about business prospects commonly constitute nonactionable puffery when not tied to concrete, verifiable misstatements and when accompanied by contextual disclosures.

## Conclusion

The Second Circuit affirmed dismissal of the shareholder class action, holding that the alleged environmental omissions did not create Rule 10b-5 liability and that Regulation S-K Items 101 and 103 did not supply an independent private disclosure claim, while the petroleum-services statements were not materially misleading when read in context.


Levine v. NL Indus., Inc., 926 F.2d 199 (2d Cir. 1991)