May 14, 2007
"If this is so irrelevant, why was there all this backdating going on?"
Posted by Christine Hurt

So now we have a new way to determine whether something is material.  If an activity is widespread, then it must be material.  This statement was made by the trial judge in the civil case brought by the SEC against Brocade ex-CEO Gregory Reyes in response to Reyes' argument that the backdating in that case was not material.  This seems to be an odd test for materiality.  (Law.com story here.)

Reyes' counsel (Skadden) used more scientific measures of materiality -- namely, whether the announcement of the backdating had any negative effect on the share price.  Although the price dipped the day of the announcement, by the second day, the stock was fully recovered.  The SEC pointed out that two weeks before, when Brocade announced that there would be a restatement of earnings, the price dropped 7%.  However, doesn't it undercut the SEC's argument if when faced with an unexplained restatement the market dropped but then it rebounded once it found it the restatement was due to backdating?  Anyway, the article reminds us that even though civil plaintiffs don't get very far when there are no market losses caused by an activity, to the SEC (and the parallel criminal case), materiality is not tied to market movement.

Supposedly, we would want companies to disclose material things because we think that facts that rise to that level would be important to shareholders in making decisions as to whether to buy, hold or sell securities.  Once we know that something doesn't seem to be a factor in those decisions, can it still be considered material?

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