Securities and Derivative Litigation: Report

Forward-Looking Risk Disclosures After Facebook: A Widening Circuit Split

As we reported previously, Facebook, Inc. v. Amalgamated Bank,¹ which the Supreme Court dismissed as improvidently granted in 2024, presented the Court with an opportunity to decide whether a disclosure warning investors a risk “could” or “may” happen in the future is materially misleading by omission if that risk has already materialized—an opportunity it ultimately declined to address. The dismissal has since led to a circuit split on that question. Two recent decisions illustrate the resulting divide: the Ninth Circuit continues to treat an “already materialized” risk disclosure as potentially actionable in its own right, while a majority of circuits, including the Second Circuit, continue to hold that the inquiry remains tethered to the specific content and context of the disclosure.

Construction Laborers Pension Trust of Greater St. Louis v. Funko Inc.

On September 2, 2026, the United States Court of Appeals for the Ninth Circuit amended its opinion in Constr. Laborers Pension Tr. of Greater St. Louis v. Funko Inc.², affirming in part and reversing in part the dismissal of a putative securities fraud class action against Funko Inc., the maker of collectible figurines, and denied petitions for panel rehearing and rehearing en banc.

The panel’s underlying decision, amended from its February 4, 2026 opinion,³ had revived in part a securities fraud claim against Funko based on the following forward-looking risk disclosure in the company’s SEC filings:

Our success depends, in part, on our ability to successfully manage our inventories. We must maintain sufficient inventory levels to operate our business successfully, but we must also avoid accumulating excess inventory, which increases working capital needs and lowers gross margin. If demand or future sales do not reach forecasted levels, we could have excess inventory that we may need to hold for a long period of time, write down, sell at prices lower than expected or discard.⁴

Plaintiffs argued that this disclosure was misleading because it framed excess inventory as a hypothetical risk when Funko had, in fact, already accumulated significant excess inventory. Relying on Facebook, the Ninth Circuit agreed, reiterating its view that “[r]isk disclosures in an SEC filing can give rise to liability under the Exchange Act where they warn that risks could occur when, in fact, those risks had already materialized”.⁵ The court reasoned further that Funko’s disclosure, though framed as forward-looking, in substance described conditions that already existed, placing it outside the PSLRA’s safe harbor. The Ninth Circuit’s decision signals that it intends to hold companies to the substance of their risk disclosures, but the Second Circuit, confronting a similar question weeks later, struck a different balance.

Smith v. Gap, Inc.

Smith v. Gap, Inc.⁶ reflects a different approach, one shared by a majority of circuits to have addressed the question. There, plaintiffs likewise challenged forward-looking, inventory-related risk disclosures in Gap’s SEC filings—specifically, Gap’s warnings that “[w]e must successfully gauge apparel trends and changing consumer preferences to succeed” and that, “[t]o the extent we misjudge the market for our merchandise . . . the markdowns required to move the resulting excess inventory will adversely affect our operating results.”⁷ In affirming the dismissal of plaintiffs’ claims, the Second Circuit acknowledged that a risk disclosure can be misleading if it leads a reasonable investor to believe that the risk has not yet materialized, but it declined to adopt a categorical rule that a disclosure becomes actionable whenever a company fails to disclose that the risk has already materialized “in some way,” noting that the “inquiry depends on context.”⁸ Applying that framework, the court held that Gap’s disclosures addressed generic, industry-wide risks that, read in context, would not have led a reasonable investor to conclude that the described risk had not occurred before or would not occur again.⁹ In doing so, the court declined the categorical theory the plaintiffs’ bar has increasingly pressed since Facebook.

Funko and Gap leave companies navigating materially different standards depending on the forum in which a claim is filed. In the Ninth Circuit, a disclosure framed as hypothetical may itself support liability once the warned-of risk has, in fact, occurred, regardless of whether the disclosure otherwise remains specific and contextually accurate. The Second Circuit and like-minded courts, by contrast, continue to ask whether the disclosure, read in context, would lead a reasonable investor to conclude that the risk had not already occurred or could not recur; generic, industry-wide risk language will generally survive that inquiry even where the risk has materialized to some degree. 

Further guidance from the Supreme Court seems unlikely in the near term, given its decision to dismiss Facebook as improvidently granted. In the interim, companies should: (i) revisit risk factor disclosures periodically to ensure that language originally drafted as forward-looking still accurately reflects current conditions; (ii) avoid characterizing a risk as purely prospective once it has begun to materialize in any meaningful respect; and (iii) for companies with a material nexus to the Ninth Circuit, apply heightened scrutiny to risk factors addressing conditions that may already exist, given that circuit’s greater willingness to treat such disclosures as independently actionable.

Third Circuit Abrogates the Oran-Burlington Materiality Rule

On September 30, 2026, the Third Circuit issued a precedential decision in In re Ocugen, Inc. Sec. Litig.,¹⁰ reversing a dismissal entered on materiality grounds and abrogating the longstanding Oran-Burlington materiality rule as irreconcilable with the Supreme Court’s decision in Matrixx Initiatives, Inc. v. Siracusano.¹¹

Ocugen investors had alleged that the company and its chief executive officer misrepresented the company’s finances and internal accounting controls from 2020 through 2023, a period in which the company generated no meaningful revenue and repeatedly raised capital through equity and debt offerings.¹² The company later announced that it would restate fifteen quarters of financial statements (Q1 2020 through Q3 2023) because of improper accounting for a collaboration agreement.¹³ Its stock fell 10.38% the next day following this disclosure but rebounded within two trading sessions—a recovery the district court treated as dispositive, dismissing the complaint with prejudice under the Oran-Burlington rule.¹⁴ The Third Circuit disagreed. Relying on Matrixx, where the Supreme Court applied the full “total mix” standard despite a three-day stock rebound and rejected any bright-line statistical threshold,¹⁵ the panel held that materiality cannot be resolved through categorical rules and explained that “[s]imple recourse to an issuer’s later stock price as a proxy for materiality will not suffice.”¹⁶ In reversing, the court closed the door on nearly three decades of circuit precedent. 

The Third Circuit’s decision expands the range of disclosures that may survive a motion to dismiss and narrows the arguments available to defendants at the pleading stage. To prevail on a materiality challenge, defendants must now show that the alleged misrepresentation or omission did not alter the total mix of information available to investors, rather than relying on a quick stock-price rebound as a dispositive defense. Loss causation remains a distinct element, however, and defendants may still argue separately that a corrective disclosure’s limited or short-lived effect on the stock price defeats loss causation, even where the same facts cannot defeat materiality. For plaintiffs, the decision removes a threshold obstacle to pleading materiality, but it does not relieve them of separately pleading loss causation. Plaintiffs must still show that the scope and significance of the restatement—not merely the fact that a restatement occurred—would have mattered to a reasonable investor's decision to buy or sell.

2026 Securities Class Action Settlement Trends

The first half of 2026 presents a preliminary but significant trend: settlement activity so far represents only a fraction of the litigation cycle, yet the dollar figures are well ahead of historical norms. There have been 39 securities class action settlements totaling $2.2 billion.¹⁷ This year’s median settlement of $20.0 million exceeded the typical annual figure, where the median settlement over the prior nine years ranged from $7.7 million to $17.6 million.¹⁸ Large settlements accounted for a disproportionate share of that total: four settlements of $100 million or more were reached in the first half of 2026, representing 10% of settled cases for the period. Although “mega settlements” make up a small share of case count, they have historically driven an outsized share of total settlement dollars, and their presence early in 2026 helps explain why aggregate settlement value is running ahead of what case count alone would suggest.¹⁹ Because settlement activity is historically weighted toward the second half of the year, this figure captures only an early-year snapshot rather than a full-year trend—one the underlying data suggest will grow stronger as the year continues.

The scale of alleged investor losses behind these settlements was similarly elevated. Median plaintiff-style damages for settlements involving Section 10(b) claims reached $660 million, exceeding the annual medians of the prior nine years,²⁰ and roughly 36% of such settlements involved plaintiff-style damages greater than $1.5 billion, compared with just 14% of settlements between 2017 and 2025.²¹

If the pace observed in the first half of 2026 continues through year-end, 2026 will surpass 2025 in both the number of cases settled and total settlement dollars, with annual settlement dollars projected to reach their highest level since 2020.²²

Fifth Circuit Vacates Class Certification in Cassava Sciences Securities Litigation Faulting District Court’s Market Efficiency Analysis

As we reported in our last issue, the Western District of Texas had certified a class of investors alleging that Cassava Sciences and several of its executives concealed unfavorable research data and overstated the prospects of “simufilam,” the company’s experimental Alzheimer’s treatment.²³ Securities fraud class actions depend on the fraud-on-the-market presumption established in Basic Inc. v. Levinson,²⁴ which allows courts to presume that investors rely on the integrity of the market price which, in turn, rests on the theory that in an informationally efficient market, publicly available information is rapidly and accurately reflected in share prices. At the class certification stage, the district court had brushed aside defendants’ contention that “meme-stock” or social-media-driven trading dynamics had rendered the market for Cassava stock informationally inefficient as “legally and factually inaccurate,” discounting defendants’ expert on the ground that he had stopped short of expressly declaring the market inefficient and proceeded instead to work through the factors in Cammer v. Bloom²⁵ and Krogman v. Sterritt²⁶ in sequence, ultimately certifying the class.²⁷ On October 16, 2026, a Fifth Circuit panel vacated that order and remanded, concluding that the district court abused its discretion by applying a legally incorrect standard to the Rule 23(b)(3) predominance inquiry.²⁸

The Fifth Circuit’s central holding is that the Cammer/Krogman factors serve as analytical tools within a broader, evidence-driven assessment of market efficiency, and a district court commits legal error when it defaults to those factors while refusing to engage with record evidence pointing against efficiency.²⁹ The court pointed in particular to testimony from defendants’ expert that Cassava’s stock experienced price swings in the absence of material news, that the share utilization rate peaked above 93 percent during the class period, and that borrowing costs reached as high as 67 percent, all of which, the court observed, were at minimum worthy of meaningful analysis as potential indicia of an informationally inefficient market.³⁰ The Fifth Circuit did not reach any conclusion on whether Cassava’s stock did or did not trade in an efficient market, leaving that determination for the district court on remand.³¹

This decision represents the first appellate-level treatment of meme-stock dynamics in the class certification context and offers defendants meaningful new ground on which to contest market efficiency where the evidentiary record supports it. The Fifth Circuit has made clear that satisfying the Cammer/Krogman factors alone is not sufficient to establish market efficiency at class certification. Where defendants marshal credible evidence of social-media-driven price distortion or other market anomalies, district courts are obligated to weigh that evidence as part of a holistic inquiry rather than treat the multi-factor test as dispositive.