Alphabet Seeks Rehearing of Securities Fraud Appeal

Prior to the Fourth of July holiday weekend, Alphabet Inc. asked the Ninth Circuit Court of Appeals to rehear a case concerning whether it misled investors in quarterly financial reporting forms filed with the Securities and Exchange Commission (SEC) following the revelation of security vulnerabilities in a Google application. In the petition, Google’s parent company claims that the panel made errors of law that must be reversed because they contravene precedent.

Specifically, in its 2018 complaint, Rhode Island asserted that Alphabet’s April and July 2018 Form 10-Qs, which incorporated risk factors from the prior year’s Form 10-K, were misleading for failure to disclose a bug on its Google+ social network. Google contended it complied with disclosure laws, specifically 15 U.S.C. § 78j(b), a provision governing deceptive statements.

The state lost before the district court last April on the elements of falsity and scienter. Judge Jeffrey S. White concluded that Alphabet need not have disclosed the fully-remediated breach, and noted that the exposure did not reveal sensitive information.

On appeal, a Ninth Circuit panel reversed. On June 16, the court held that the complaint plausibly alleged that the omission of the software bug made those statements materially misleading because Alphabet was aware of the risks the vulnerability posed.  

In its petition for rehearing or rehearing en banc, Alphabet contended that the decision conflicts with Supreme Court and Ninth Circuit precedent regarding the provision’s scope of liability. If the decision stands, it threatens to expose “every company in any industry ‘based on security and privacy’ and whose business model is ‘based on trust’ to securities fraud liability for failing to disclose any past remediated problem—even if the omission had no bearing on the veracity of statements made to the market,” Alphabet argued.

Alphabet further claimed that the panel incorrectly folded its analysis of statement falsity and duty-of-disclosure into the materiality assessment. The two are distinct, Alphabet argued, and had they been properly applied, would have led to a different result. 

Google is represented by Wilson Sonsini Goodrich & Rosati, while Robbins Geller Rudman & Dowd LLP is lead counsel for Rhode Island.