As a result of the Municipalities Continuing Disclosure Cooperation Initiative, the SEC may be hard pressed to punish bond underwriters and issuers in court if they choose litigation instead of settlement. A recent Ballard Spahr webinar addressed this issue and how materiality is proven in court under federal securities laws.

"Materiality has become very similar to pornography, and [Supreme Court Justice Potter] Stewart's famous statement that 'I know it when I see it,'" said M. Norman Goldberger, who heads Ballard Spahr's Securities Enforcement and Litigation Group. Mr. Goldberger told webinar participants that proving materiality in court entails reviewing the impact on bond prices when something is disclosed. Economist Vinita Juneja of NERA Economic Consulting said that if a bond's price doesn't fall because of a failure to disclose information, that could be used as evidence that the information lacked materiality.

In a phone interview following the webinar, Ballard Spahr partner John C. Grugan told The Bond Buyer the SEC has set the materiality bar lower with the MCDC than was set by the U.S. Supreme Court in a 1976 ruling. Mr. Grugan said that the SEC's settlement order outlining the likelihood that a reasonable investor "would attach importance to" the disclosure failures of a California school district "isn't the standard."  

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Municipal Securities Regulation and Enforcement
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