## Facts

- Blackstone conducted an IPO of common units on June 21, 2007 using a registration statement and prospectus.
- Purchasers of the IPO securities sued Blackstone and certain senior executives, alleging material misstatements and omissions in the offering materials.
- Plaintiffs focused on nondisclosure or inadequate disclosure of adverse developments and risks affecting portfolio companies and business segments, including Blackstone’s interest in FGIC and exposure to deteriorating conditions in subprime-linked markets.
- Plaintiffs also alleged omissions concerning negative trends affecting real estate-related holdings and other investments relevant to Blackstone’s Corporate Private Equity and Real Estate segments.
- The claims were brought under Securities Act of 1933 §§ 11 and 12(a)(2), including a theory that the offering materials omitted “known trends or uncertainties” required to be disclosed by Regulation S-K Item 303 (MD&A).

## Issues

1. Whether the complaint plausibly alleged material misstatements or omissions in the IPO registration statement and prospectus actionable under Securities Act §§ 11 and 12(a)(2).
2. Whether alleged failures to disclose “known trends or uncertainties” under Regulation S-K Item 303 can support §§ 11 and 12(a)(2) liability when the omitted information is material.
3. Whether materiality could be rejected at the pleading stage based primarily on the omitted matters’ small quantitative impact on Blackstone’s overall financial statements, notwithstanding qualitative or segment-level significance.

## Decision

- The Second Circuit vacated the district court’s judgment dismissing the complaint under Rule 12(b)(6) and remanded for further proceedings.
- The court held plaintiffs plausibly alleged that the offering materials omitted or misstated material information, including disclosures allegedly required by Item 303.
- The court rejected a strictly quantitative approach to materiality that treated the challenged matters as immaterial as a matter of law because they represented a small percentage of Blackstone’s total assets.
- The court emphasized that, at the pleading stage, dismissal on materiality grounds is improper unless the alleged misstatements or omissions are so obviously unimportant to a reasonable investor that reasonable minds could not differ.

## Legal Principles

- Under Securities Act § 11, an issuer may be liable for material misstatements or omissions in a registration statement; § 12(a)(2) imposes similar liability for material misstatements or omissions in a prospectus used to offer or sell securities.
- An omission is material if there is a substantial likelihood that disclosure would have significantly altered the “total mix” of information available to a reasonable investor.
- A violation of Regulation S-K Item 303’s MD&A disclosure requirements can serve as the basis for §§ 11 and 12(a)(2) claims when the omitted trend or uncertainty is material.
- Item 303 requires disclosure of known trends or uncertainties that have had, or are reasonably expected to have, a material favorable or unfavorable impact on revenues or income from continuing operations.
- Materiality is fact-intensive; qualitative factors and segment-level importance may make information material even when the issuer-wide quantitative effect appears small, and no rigid numerical threshold controls.

## Conclusion

The Second Circuit reinstated the Securities Act claims, holding that plaintiffs plausibly alleged material omissions and misstatements in Blackstone’s IPO disclosures, including potentially actionable failures to disclose known trends and uncertainties under Item 303, and that materiality could not be resolved against plaintiffs on a motion to dismiss based on a purely quantitative analysis.


Litwin v. Blackstone Grp., L.P., 634 F.3d 706 (2d Cir. 2011)