United Food & Commercial Workers Union Local 880 Pension Fund v. Chesapeake Energy Corp.

FILED
United States Court of Appeals
Tenth Circuit
PUBLISH
August 8, 2014
UNITED STATES COURT OF APPEALS
Elisabeth A. Shumaker
Clerk of Court
TENTH CIRCUIT

UNITED FOOD AND COMMERCIAL
WORKERS UNION LOCAL 880 PENSION
FUND, individually and on behalf of all
others similarly situated,

Plaintiff - Appellant,
No. 13-6165
v.

CHESAPEAKE ENERGY CORPORATION;
AUBREY K. MCCLENDON; MARCUS C.
ROWLAND; MICHAEL A. JOHNSON;
RICHARD K. DAVIDSON; FRANK A.
KEATING; BREENE M. KERR; CHARLES
T. MAXWELL; DONALD L. NICKLES;
FREDERICK B. WHITTERMORE;
MERRILL A. MILLER, JR.,

Defendants – Appellees,

and

UBS INVESTMENT BANK; ABN AMRO;
BANC OF AMERICA SECURITIES LLC;
WELLS FARGO SECURITIES,

Defendants.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF OKLAHOMA
(D.C. No. 5:09-CV-01114-D)
Steven F. Hubachek (Eric Alan Isaacson and James I. Jaconette, with him on the briefs),
Robbins Geller Rudman & Dowd LLP, San Diego, California, for Plaintiff - Appellant.

Robert P. Varian (Kenneth Herzinger, M. Todd Scott, Christin J. Hill, and Alexander K.
Talarides, with him on the brief), Orrick, Herrington & Sutcliffe LLP, San Francisco,
California, for Defendants - Appellees.

Before HARTZ, EBEL, and GORSUCH, Circuit Judges.

HARTZ, Circuit Judge.

In 2008 Chesapeake Energy Corporation was one of the largest producers of

natural gas in the United States, with thousands of wells in several states. By early July

of that year the price of natural gas had risen to its highest level since the end of 2005 and

Chesapeake’s stock price had risen about 50% in the prior six months. Against that

background, on July 9, 2008, Chesapeake sold 25 million shares of common stock in a

public offering.

Soon thereafter, a financial crisis rocked the global economy. The New York

Stock Exchange Composite Index—tracking the exchange where Chesapeake was

listed—fell more than 30% in the three months after the Chesapeake offering.

Chesapeake was hit even harder, with sharp drops in the prices of natural gas and

Chesapeake’s stock.

United Food and Commercial Workers Union Local 880 Pension Fund (Plaintiff),

representing the class of all persons who purchased securities in the offering, contends
2
that Chesapeake and named individual defendants (collectively Chesapeake), violated

§§ 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77k, 77l(a)(2), and

77o, because the Registration Statement for the offering was materially false and

misleading. (Plaintiff also raised claims against other defendants associated with the

underwriting of the offering.) According to Plaintiff, Chesapeake should have disclosed

(1) that it had expanded a risky gas-price hedging strategy that made it vulnerable to a fall

in natural-gas prices, and (2) that CEO Aubrey McClendon had pledged substantially all

his company stock as security for margin loans and lacked the resources to meet margin

calls. The district court granted summary judgment for Chesapeake. On June 21, 2013,

the court dismissed the claims against the underwriter defendants without prejudice and

granted a joint motion for entry of judgment under Fed. R. Civ. P. 54(b) as to

Chesapeake. Plaintiff appeals. Exercising jurisdiction under 28 U.S.C. § 1291, we

affirm because Chesapeake’s alleged omissions were not material or misleading.

I. BACKGROUND

Chesapeake was the country’s third-largest producer of natural gas at the time of

the offering. It produced billions of cubic feet of natural gas each day and had trillions of

cubic feet of reserves. Its strategy was to focus on the discovery, acquisition, and

development of natural gas in the United States. Before the offering the company had

increased production every year for 18 years, and in the first quarter of 2008 it had drilled

hundreds of new wells.

3
 The stock offering was on July 9, 2008. Information about Chesapeake and the

details of the offering were set forth in the Registration Statement, which included a

prospectus and incorporated by reference some of Chesapeake’s recent filings with the

Securities and Exchange Commission (SEC). Chesapeake sold 25 million shares of

common stock in the offering.

Natural-gas prices had been rising steeply. From December 31, 2007, to July 3,

2008, less than a week before the offering, the price had moved from $7.483 per million

Btu (British thermal units) to $13.577. Unsurprisingly, Chesapeake’s stock price had

also risen. In the six months preceding the offering its stock price had increased by

almost half. But the upward trends sharply reversed after the offering. In three months

the price of natural gas fell about 45%, an index of stock in Chesapeake’s industry peers

fell 56% , and Chesapeake’s stock fell about 70%.

This suit originated in 2009 when various parties filed complaints against

Chesapeake and its investment bankers in the Southern District of New York. The

district court consolidated the lawsuits and appointed Plaintiff to represent the class.

Plaintiff filed its amended complaint on September 11, 2009. On Chesapeake’s motion,

the case was transferred a month later to the Western District of Oklahoma. Chesapeake

moved for summary judgment on December 28, 2011.

The district court granted Chesapeake’s motion. It ruled (1) that the Registration

Statement “disclosed in detail the risks associated with Chesapeake’s hedging strategy,”

Order at 22, United Food & Commercial Workers Union v. Chesapeake Energy Corp.,
4
No. CIV-09-1114-D (W.D. Okla. Mar. 29, 2013), (2) that Chesapeake had adequately

disclosed that McClendon had pledged most of his shares as collateral, and (3) that

additional disclosure about his financial resources was “beyond the scope of that which is

reasonable because it requires speculation about unpredictable future events that could

not be ascertained at the time of the Offering,” id. at 34.

II. DISCUSSION

“We review the district court’s grant of summary judgment de novo, applying the

same standards that the district court should have applied.” Merrifield v. Bd. of Cnty.

Comm’rs, 654 F.3d 1073, 1077 (10th Cir. 2011) (internal quotation marks omitted).

Summary judgment shall be granted if “there is no genuine dispute as to any material fact

and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). When

considering a motion for summary judgment, “[w]e examine the record and all

reasonable inferences that might be drawn from it in the light most favorable to the non-

moving party.” Merrifield, 654 F.3d at 1077 (internal quotation marks omitted). “We

can affirm on any ground supported by the record, so long as the appellant has had a fair

opportunity to address that ground.” Id. (brackets and internal quotation marks omitted).

A. The Applicable Statutes

Plaintiff alleges violations of sections 11, 12(a)(2), and 15 of the Securities Act of

1933. Section 11 imposes liability on certain persons1 “[i]n case any part of the

1
Persons subject to liability include:
Continued . . .
5
registration statement, when such part became effective, contained an untrue statement of

a material fact or omitted to state a material fact required to be stated therein or necessary

to make the statements therein not misleading.” 15 U.S.C. § 77k(a). Plaintiffs “need not

allege scienter, reliance, or loss causation.” In re Morgan Stanley Info. Fund Sec. Litig.,

592 F.3d 347, 359 (2d Cir. 2010). “A statement is material only if a reasonable investor

would consider it important in determining whether to buy or sell stock.” McDonald v.

Kinder-Morgan, Inc., 287 F.3d 992, 998 (10th Cir. 2002) (internal quotation marks

omitted). Aside from disclosures required by regulation, “[a] duty to disclose arises only

where both the statement made is material, and the omitted fact is material to the

statement in that it alters the meaning of the statement.” Id. (brackets and internal

quotation marks omitted). An omission is material only if disclosure of what is omitted

would “significantly alter[] the total mix of information available.” Slater v. A.G.

(1) every person who signed the registration statement; (2) every person
who was a director of (or person performing similar functions) or partner in
the issuer at the time of the filing of the part of the registration statement
with respect to which his liability is asserted; (3) every person who, with
his consent, is named in the registration statement as being or about to
become a director, person performing similar functions, or partner; (4)
every accountant, engineer, or appraiser, or any person whose profession
gives authority to a statement made by him, who has with his consent been
named as having prepared or certified any part of the registration statement,
or as having prepared or certified any report or valuation which is used in
connection with the registration statement, with respect to the statement in
such registration statement, report, or valuation, which purports to have
been prepared or certified by him; (5) every underwriter with respect to
such security.

15 U.S.C. § 77k(a).

6
Edwards & Sons, Inc., 719 F.3d 1190, 1197 (10th Cir. 2013). Although the question of

materiality is “usually reserved for the trier of fact, we do not hesitate to dismiss

securities claims . . . where the alleged misstatements or omissions are plainly

immaterial.” Id. (internal quotation marks omitted).

Section 12(a)(2) similarly imposes liability on any person who “offers or sells a

security . . . by means of a prospectus or oral communication, which includes an untrue

statement of a material fact or omits to state a material fact necessary in order to make the

statements, in light of the circumstances under which they were made, not misleading.”

15 U.S.C. § 77l(a)(2). The definition of materiality is the same as under section 11 (and

under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b)), see

Morgan Stanley, 592 F.3d at 360, and the plaintiff, as with section 11, need not “allege

scienter, reliance, or loss causation,” id. at 359. Together, the two sections impose

liability for material misstatements or omissions in a registration statement or prospectus

for a stock offering. As the Second Circuit has put it:

[T]he language of sections 11 and 12(a)(2) creates three potential bases for
liability based on registration statements and prospectuses filed with the
SEC: (1) a misrepresentation; (2) an omission in contravention of an
affirmative legal disclosure obligation; and (3) an omission of information
that is necessary to prevent existing disclosures from being misleading.

Id. at 360.

Section 15 states that “[e]very person who, by or through stock ownership,

agency, or otherwise, . . . controls any person liable under sections [11 and 12], shall also

be liable jointly and severally with and to the same extent as such controlled person.”
7
15 U.S.C. § 77o(a). In other words, section 15 allows “a person who controls a party that

commits a violation of the securities laws” to “be held jointly and severally liable with

the primary violator.” Maher v. Durango Metals, Inc., 144 F.3d 1302, 1304–05 (10th

Cir. 1998). Section 15 claims in this action thus depend upon the success of claims under

sections 11 and 12(a)(2).

Plaintiff argues that Chesapeake violated these securities laws because the

materials it provided in connection with its public stock offering should have disclosed

(1) that it had changed its risky hedging strategy and (2) that CEO McClendon had

pledged substantially all his company stock as security for margin loans and lacked the

resources to meet margin calls. We turn first to the allegations involving hedging and

then those involving McClendon’s margin loans. For each claim we set out additional

relevant background before discussing the merits of the claim.

B. Hedging Strategy (Knockout Swaps)

Chesapeake used a hedging strategy to manage price volatility in the market for

natural gas. Hedging enables a seller to lock down how much it will earn when it sells its

natural gas in the future so that it does not have to worry about dramatic fluctuations in

price. Perhaps to oversimplify a bit, say Chesapeake wanted to be assured that when it

sold a million Mcf (thousand cubic feet) of gas on a date 20 months in the future (the sale

date), it would be paid $9 per Mcf (the fixed price). It could enter into a contract (wholly

separate from Chesapeake’s sales of gas to customers) under which Chesapeake would

receive from (or pay to) a third party (often a financial institution like Morgan Stanley or
8
Lehman Brothers) the difference between the market price of that quantity of gas on the

sale date and the cost of that quantity at the fixed price. If the market price dropped

below the fixed price, Chesapeake would be protected by a payment from the third party

that equaled the difference between what it was paid on the market and what it would

have been paid if the market price had been $9 per Mcf. On the other hand, if the market

price on the sale date exceeded $9, Chesapeake would have to pay the third party the

excess of what it was paid on the market over what it would have been paid at $9 per

Mcf. These contracts—called swaps—matured up to 30 months in the future. Although

the swaps stabilized Chesapeake’s financial position and decreased its vulnerability to

fluctuations in the price of natural gas,2 the contracts in themselves could end up costing

Chesapeake money. If, as already explained, the market price exceeded the fixed price,

Chesapeake had to pay the other party to the swap contract. The loss on the swap

contract essentially represents how much more Chesapeake could have earned by selling

gas on the market without entering into a swap contract. One could say that swaps

represented bets that the price of natural gas would not exceed the fixed price.

Chesapeake also entered into more complicated hedging contracts. For example,

it used knockout swaps, which were like ordinary swaps except that the other party was

excused from paying if the market price of natural gas fell below a certain threshold (the

2
Swaps did not always work out as neatly as this idealized description. The Registration
Statement explained that they exposed the company to additional risk in certain
circumstances, such as if the other party to the swap failed to perform.

9
knockout price) on the date of maturity. The knockout price was generally set about

three dollars below the negotiated fixed price. Knockout swaps provided less protection

from falling prices than ordinary swaps because they did not limit Chesapeake’s risk if

the price of natural gas fell too far. In that event Chesapeake would be left with the

market price for its natural gas. On the other hand, the other party to a swap contract

would pay Chesapeake more to enter into a contract with a knockout feature because of

that added risk assumed by Chesapeake. If ordinary swaps represented a bet that natural-

gas prices would not exceed the fixed price, the knockout feature represented a bet that

prices would not drop below the knockout price.

Chesapeake had increased its income by hundreds of millions of dollars through

the use of knockout swaps. Its swaps had been “knocked out” by low natural-gas prices

only four times before the offering. But when natural-gas prices fell dramatically in

2008, the knockout provision was expensive for Chesapeake. Plaintiff estimates that the

losses exceeded $500 million.

The Registration Statement included general information about Chesapeake’s

hedging strategy. It explained that when natural-gas prices rose, its hedging strategy

would be costly: “[O]ur hedging strategy allows us to predict with greater certainty the

effective natural gas and oil prices to be received for our hedged production,” but “can

also limit the prices we actually realize for our natural gas and oil production and

therefore reduce our natural gas and oil revenues in the future.” Aplt. App., Vol. II at

949. The Registration Statement also disclosed that because natural gas and oil prices
10
had risen “dramatically” in 2008, its hedging strategy had “negatively impacted our

earnings in the first quarter of 2008 during which we incurred $1.1 billion of unrealized

losses.” Id. Not predicting the imminent fall in natural-gas prices, it assumed that prices

would continue to rise and said that “we anticipate incurring additional substantial

unrealized losses in the quarter ended June 30, 2008, and we expect such losses could

result in our reporting negative revenues from natural gas and oil sales and will result in

an overall net loss for such quarter.” Id.

Although absent from the Registration Statement itself, information about

knockout swaps could be found in the SEC filings incorporated in the statement. Of

those filings, the May 10-Q—a quarterly report with data through March 2008—provided

the most recent disclosures about Chesapeake’s knockout swaps. It listed the volume of

knockout swaps Chesapeake had entered into that would mature in 2008, 2009, and 2010,

and stated the average fixed price and the average knockout price for the contracts.

Plaintiff argues that Chesapeake violated securities laws when its Registration

Statement did not disclose that it had entered into more knockout swaps and raised the

knockout prices after it filed the May 10-Q. For specific data on the increase in

knockout-swap volume and the increase in knockout prices after the May 10-Q and

before the July offering, Plaintiff points to Chesapeake’s August 8-K, which came out

after the offering. (8-Ks are forms to notify investors of certain events important to the

company.) Plaintiff contends that Chesapeake’s failure to disclose these changes

concealed two kinds of risk: (1) more swaps with knockout provisions meant increased
11
vulnerability to a fall in natural-gas prices; and (2) the knockout swaps were riskier than

they had been in the past because they had higher knockout prices (natural-gas prices

would not need to fall to as low a price before the knockout provision was triggered).

According to Plaintiff, investors would have wanted to know about Chesapeake’s

increased emphasis on knockout swaps because “[w]hen natural gas prices hit a knockout

price, the consequences are severe: the counterparty need not perform, and Chesapeake

loses its hedged price.” Aplt. Br. at 39. It says that once Chesapeake chose to provide

information about its knockout hedging strategy by incorporating the May 10-Q, “it had a

duty to be both accurate and complete.” Id. at 38 (internal quotation marks omitted). We

hold, however, that there was no violation of Chesapeake’s disclosure duties. We doubt

that the Registration Statement was misleading. Certainly, Plaintiff has failed to support

its claim that Chesapeake changed its knockout hedging strategy in the second quarter of

2008.

In any event, Chesapeake had publicly disclosed before the offering the gist of

what was later disclosed in the August 8-K. We look first at the Registration Statement

and the documents it incorporates. Rather than indicating that the May 10-Q, a quarterly

report with data through the end of March 2008, reflected what Chesapeake’s hedging

positions would be on July 9, 2008, the offering materials signaled that Chesapeake’s

hedging commitments and the value of its hedging contracts changed substantially over

time. The most recent annual report said that “[c]ommodity markets are volatile and

Chesapeake’s hedging activities are dynamic.” Defs.-Appellees Req. for Judicial Notice
12
at 51, United Food & Commercial Workers Union v. Chesapeake Energy Corp.,

No. 13-6165 (10th Cir. Dec. 9, 2013). The Registration Statement itself said that

Chesapeake had “incurred $1.1 billion of unrealized losses” in the first quarter of 2008

and “we anticipate incurring additional substantial unrealized losses in the quarter ended

June 30, 2008.” Aplt. App., Vol. II at 949. One could see the variability in hedging

activity by comparing Chesapeake’s most recent annual report (with data through 2007)

with the May 10-Q (with data through March 2008): during the first quarter of 2008,

Chesapeake had increased the volume of knockout swaps maturing in the fourth quarter

of the year by 29% and its 2009 knockout swaps by 84%.

The authorities relied on by Plaintiff do not support its contention that

Chesapeake’s disclosures were misleading. Plaintiff cites In re Lehman Brothers

Securities & ERISA Litigation, 799 F. Supp. 2d 258 (S.D.N.Y 2011), for the proposition

that “‘a statement regarding a company’s hedging strategy obliges it to disclose when it

alters or suspends that strategy.’” Aplt. Br. at 46 (emphasis and internal quotation marks

omitted) (quoting Lehman, 799 F. Supp. 2d at 283). But the opinion cannot be read as

saying that disclosure is required of any alteration in application of a hedging strategy

that reportedly makes frequent adjustments in response to market conditions. The

nondisclosure in Lehman was qualitatively far different from the alleged nondisclosure

here. The defendants in Lehman allegedly did not disclose that they had repeatedly

entered into a particular type of financial transaction (called a “Repo 105,” which we

need not define) whose sole purpose was to influence a financial metric called net
13
leverage. See Lehman, 799 F. Supp. 2d at 269, 283. The metric mattered to investors

“because it was an indicator of the company’s ability to absorb any losses sustained by its

riskiest assets.” Id. at 269. Lehman Brothers discussed net leverage in its offering

materials, and company officers mentioned it in oral statements, without any disclosure

that the company used short-term Repo 105 transactions at the end of each financial

quarter to “temporarily and artificially” improve the net leverage announced in its

quarterly reports. Id. at 283. In contrast, Chesapeake disclosed that it used knockout

swaps and provided past financial statements that showed how the company historically

used them.

Plaintiff similarly cites Caiola v. Citibank, N.A., 295 F.3d 312 (2d Cir. 2002), as

establishing that “once [Chesapeake] chose to discuss its hedging strategy, it had a duty

to be both accurate and complete.” Aplt. Br. at 38 (brackets omitted) (quoting Caiola,

295 F.3d at 331). But again Plaintiff reads too much into the court’s statement. Caiola

was not requiring disclosure of every detail of a hedging strategy. In Caiola, which

reversed the dismissal on the pleadings of a 10b-5 claim, Citibank allegedly had agreed to

perform a sophisticated type of hedging for a client but then ended the hedging without

providing any notice. See 295 F.3d at 317–18. The client entered into trades worth

millions of dollars (and paid Citibank millions in commissions) with the expectation that

he was protected from certain risks because Citibank was hedging his position. See id. at

318. The client alleged that he ultimately lost tens of millions of dollars pursuing an

investment strategy that had become extremely risky when Citibank secretly terminated
14
the hedging program. See id. at 319. Citibank’s failure to inform its client that it had

stopped hedging is a far cry from Chesapeake’s failure to include the most recent

information about its knockout hedges in the Registration Statement.

Moreover, almost all the change in Chesapeake’s knockout-swap hedging was

disclosed before the offering date in the May 8-K filed by Chesapeake with the SEC. To

support its claims that the changes in the hedging were “dramatic,” Aplt. Br. at 37, and

“substantial[],” id. at 38, Plaintiff’s brief compares the data in the May 10-Q with the data

in the August 8-K, which showed that after the first quarter of 2008 Chesapeake

increased the volume of knockout swaps and the knockout prices. In the interval between

the two reports Chesapeake increased the volume of swaps maturing in the last two

quarters of 2008 by 12%, the volume of swaps in 2009 by 25%, and the 2010 swaps by

61%. (The knockout prices are harder to compare because the 10-Q reports an average

price while the 8-K reports a range.) Almost all these increases, however, are reported in

the May 8-K. Between the May 8-K and the August 8-K the increase in volume was only

3% for 2009 swaps and there was no increase for 2010 swaps;3 and the knockout-price

range increased by only 15% (one dollar) for 2008 swaps and 3% (25 cents) for 2009 and

3
The comparison for 2008 swaps must take into account that some swaps matured in the
interim. Although the August 8-K shows a decrease of 26% from the May 8-K, the
August 8-K reports on one fewer quarter. Neither report discloses swap volume by
quarter; but the May 8-K shows swap volumes of about 24,000 bbtu maturing per month
for the rest of 2008, and the monthly average in the August 8-K is about 28,000, about a
17% increase. The monthly increase between the May 10-Q and the May 8-K was about
15%.

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2010. The disclosures in the three relevant reports are summarized in the following

chart:

2008* 2009 2010
Swap Swap Swap
Filing Reporting Volume KO Volume KO Volume KO
Form Date Through (bbtu) Price** (bbtu) Price** (bbtu) Price**
10-Q*** 5/12/08 3/31/08 186,750 6.22 280,100 6.13 109,500 6.13
8-K**** 5/2/08 5/1/08 191,301 5.45 to 6.50 339,636 5.45 to 7.25 175,956 5.45 to 7.25
8-K**** 8/1/08 7/31/08 141,174 6.45 to 7.50 350,889 5.45 to 7.50 175,956 5.45 to 7.50

* 2008 volumes are not for the entire year (they include the last three quarters for the May filings and the last two
quarters for the August filing)
** Knockout price is reported as an average in the 10-Q and a range in the 8-K
*** The 10-Q reports quarterly volumes in 2008 as follows: 2Q-60,380; 3Q-62,560; 4Q-63,810
**** 8-Ks report in billion cubic feet (bcf), which have been approximately converted to billion btu (bbtu) by
multiplying by 1,023.

Plaintiff argues that it is inappropriate to consider the May 8-K because it was not

part of the offering materials. But the report is still relevant. The claim here is that

Chesapeake failed to disclose material information, and “[m]ateriality . . . depends on the

information that already exists in the market.” Slater, 719 F.3d at 1197. Undisclosed

information is material only if its disclosure would have “significantly altered the total

mix of information available” to a reasonable investor. Id. (internal quotation marks

omitted). Public documents are part of that total mix if an investor interested in a

particular type of information about a company would know of the existence of the

record and could readily access it. See United Paperworkers Int’l Union v. Int’l Paper

Co., 985 F.2d 1190, 1199 (2d Cir. 1993) (“The total mix of information may also include

information already in the public domain and facts known or reasonably available to the

shareholders.” (internal quotation marks omitted)); Garber v. Legg Mason, Inc., 347

16
F. App’x 665, 668–69 (2d Cir. 2009); In re Keyspan Corp. Sec. Litig., 383 F. Supp. 2d

358, 372–76 & n.6 (E.D.N.Y. 2003); Greenhouse v. MCG Capital Corp., 392 F.3d 650,

656–57 (4th Cir. 2004). As Greenhouse observes, “[A] ‘reasonable investor’ is neither

an ostrich, hiding her head in the sand from relevant information, nor a child, unable to

understand the facts and risks of investing.” 392 F.3d at 656. Here, the May 8-K was

readily available on the SEC website, and a reasonable investor interested in

Chesapeake’s swap practices would know from prior 8-Ks that these disclosures provide

the latest information on the subject.

We recognize that in United Paperworkers the court refused to consider

disclosures in a 10-K not submitted to the shareholders with the proxy materials. But

there were several circumstances different from what are present here. United

Paperworkers concerned a proxy request to vote on a shareholder proposal to require the

company to undertake certain environmental initiatives. Garber, 347 F. App’x at 669,

distinguished United Paperworkers on the ground that it involved a proxy statement

rather than a registration statement and investors would be likely to consider a wider

universe of information when deciding whether to buy stock than when voting on a

specific issue. Keyspan, 383 F. Supp. 2d at 374 n.6, further distinguished it on the

grounds that it predated “the explosion in Internet availability” of SEC filings and

involved an affirmatively misleading representation rather than a nondisclosure. Perhaps

most significantly, in United Paperworkers the court reasoned that “a reasonable

shareholder [voting on the environmental proposal, who] had read both the Proxy
17
Statement and the annual report would have received no indication that additional

information pertinent to [the proposal] was available in the 10-K Report.” 985 F.2d at

1200. In contrast, here, as mentioned above, an interested investor would have clear

notice that 8-Ks would report knockout-swap activity.

Also distinguishable are the two cases cited by Plaintiff to support its view that the

May 8-K should not be considered. In New Jersey Carpenters Health Fund v. Royal

Bank of Scotland Group, PLC, 709 F.3d 109, 126–27 (2d Cir. 2013), the court held that

the defendant could not escape nondisclosure liability based on “sporadic news reports”

that did not even supply the undisclosed information. Id. at 127 (internal quotation marks

omitted). As for MidAmerica Federal Savings & Loan Ass’n v. Shearson/American

Express, Inc., 886 F.2d 1249 (10th Cir. 1989), the claim there (which was actually under

the Oklahoma statutory equivalent to section 12(a)(2)) was based on an oral statement

that was undeniably false. We did not address the issue of materiality but held that

liability for the false oral statement could not be escaped by the delivery of a prospectus

(containing correct information) after the customer had agreed to enter into the new

investment strategy when the customer “had no reason to believe the prospectuses would

reveal information that would radically change the transaction.” Id. at 1256. We are not

holding that an outright false statement is immaterial if publicly available information

contradicts it. What is involved here is a claim that information that was correct when

published must be updated; in this circumstance, we think the “total mix” includes readily

available information providing that update.
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 Finally, Plaintiff argues that summary judgment was inappropriate on materiality

because it offered expert testimony that the omissions were material, the stock price

dropped after the August 8-K was released, and Chesapeake restructured its hedges in the

fall of 2008 to avoid the consequences of falling gas prices. But none of that evidence

can overcome the fact that the May 8-K supplied essentially all the information whose

absence in the Registration Statement is the basis of Plaintiff’s claim. Additional

disclosure would not have “altered the total mix of information available” to investors.

Slater, 719 F.3d at 1197 (internal quotation marks omitted).

C. McClendon’s Margined Stock

Chesapeake’s CEO at the time of the offering, Aubrey McClendon, owned more

than 5% of the company. Most of his shares were held in margin accounts and pledged

as collateral for hundreds of millions of dollars of loans. McClendon had purchased the

shares on margin using borrowed money. So long as the price of Chesapeake stock rose,

the shares provided sufficient collateral for the loans. In fact, the quantity of shares held

in the accounts would be in excess of collateral requirements and federal regulations

would allow him to take excess cash or securities out of the margin accounts. See

12 C.F.R. § 220.4(e)(1), (2).

Unfortunately for McClendon, Chesapeake stock plummeted during the financial

crisis. Rather than enjoying excess collateral, he had to sell nearly all his Chesapeake

stock between October 8 and 10, 2008, to meet margin calls. These sales were disclosed

after the market closed on October 10. McClendon released a public statement saying:
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“These involuntary and unexpected sales were precipitated by the extraordinary

circumstances of the worldwide financial crisis . . . . In no way do these sales reflect my

view of the company’s financial position or my view of Chesapeake’s future performance

potential.” Aplt. App., Vol. II at 535 (internal quotation marks omitted). The closing

price of Chesapeake’s stock declined from 27.567 on October 3 to 15.7471 on Friday,

October 10, although it bounced back up to close at 20.5704 on October 14.

Plaintiff argues that the Registration Statement was inadequate because it did not

disclose that McClendon “had risked nearly all his Chesapeake shares on margin loans.”

Aplt. Br. at 51. This failure to disclose, it argues, violated section 11 both because it was

required by 17 C.F.R. § 229.403(b) (Item 403(b)) and because it made the Registration

Statement misleading. See Slater, 719 F.3d at 1196 (liability under section 11 attaches

“for omissions of facts that are required as part of a registration statement or those

necessary to make the statement not misleading”). We disagree. The Registration

Statement included the disclosures about McClendon’s stock that are required by

Item 403(b), and further disclosure was not required.

To be sure, the disclosures about McClendon’s holdings were limited. The

Registration Statement included an SEC form DEF 14A filed on April 29, 2008, stating

only that McClendon owned 29,529,975 shares of Chesapeake (5.5% of the total shares

outstanding) and that 29,332,493 of those shares were “held in bank or brokerage margin

accounts or escrow accounts securing brokerage accounts.” Aplt. App., Vol. I at 177

20
n.(d). But Item 403(b) does not require much on form DEF 14A. It states in pertinent

part:

Security ownership of management. Furnish the following information, as
of the most recent practicable date, in substantially the tabular form
indicated . . . . Show [in the first two columns the class of stock and the
name of the owner,] in column (3) the total number of shares beneficially
owned and in column (4) the percent of the class so owned. Of the number
of shares shown in column (3), indicate, by footnote or otherwise, the
amount of shares that are pledged as security . . . .

17 C.F.R. § 229.403(b).4

Plaintiff contends that Chesapeake’s disclosure did not comply with Item 403(b)

because the disclosure of how many shares McClendon held in margin accounts did not

disclose how many shares were pledged as collateral. It correctly points out that just

because a security is held in a margin account does not mean that it serves as collateral.

See Capital Mgmt. Select Fund LTD. v. Bennett, 680 F.3d 214, 228 (2d Cir. 2012)

(“Margin accounts move up or down with . . . the price movements of the collateral. . . .

[I]f [the broker] was not asking for more collateral, some of [the client’s] securities [held

in margin accounts] were probably excess collateral.”). Federal regulations prescribe

special rules for excess margin securities, which are defined as securities in a margin

account “having a market value in excess of 140 percent of the total of the debit balances

4
These disclosure requirements apply “to each class of equity securities of the registrant
or any of its parents or subsidiaries, including directors’ qualifying shares, beneficially
owned by all directors and nominees, naming them, each of the named executive officers
as defined in Item 402(a)(3) (§ 229.402(a)(3)), and directors and executive officers of the
registrant as a group, without naming them.” 17 C.F.R. § 229.403(b).

21
in the customer’s account . . . which the broker or dealer identifies as not constituting

margin securities.” 17 C.F.R. § 240.15c3-3(a)(5). And regulations provide that margin

excess—securities or cash held in a margin account that exceed collateral requirements—

can be taken out of a margin account. See 12 C.F.R. § 220.4(e)(1), (2).

But while Plaintiff is correct that not all shares held in margin accounts necessarily

serve as collateral, there is no merit to its claim that Chesapeake’s Item 403(b)

disclosures were misleading. Item 403(b) requires disclosure of shares pledged as

security and permits doing so “by footnote or otherwise.” Given that context, a

reasonable investor would have understood that Chesapeake included its Schedule 14A

footnote to satisfy the Item 403(b) obligation to report shares pledged as security. As

Chesapeake explains, there is “no requirement that officers and directors list or describe

the accounts in which they hold corporate stock.” Aplee. Br. at 33. The obvious purpose

of the footnote was to fulfill Chesapeake’s Item 403(b) obligation, not to needlessly

inform investors about what types of accounts McClendon owned. Indeed, Plaintiff

adopted this commonsense reading of Chesapeake’s disclosure in the allegations of its

amended complaint. Paragraph 34 of the amended complaint describes the disclosure as

“the statement that Defendant McClendon had margined his stock.”5 Aplt. App., Vol. I at

5
In full, the relevant paragraph of the complaint reads as follows:

The Registration Statement failed to disclose the true risk and uncertainties
concerning Defendant McClendon’s holdings of Chesapeake stock.
Chesapeake’s Form 14A, dated April 29, 2008, which was incorporated by
Continued . . .
22
54. Nowhere does the complaint allege that the disclosure violated Item 403(b) or was

misleading because it communicated only which types of accounts McClendon’s shares

were held in, without stating how many shares were actually pledged as collateral.

Rather than complain about lack of disclosure of pledges, it complains of lack of

disclosure of McClendon’s personal financial resources (which proved to be inadequate

to protect against the need to sell stock on the market to cover margin calls). But

Item 403(b) does not require that.

Far from being misleading, Chesapeake’s disclosure method was a conservative

way to fulfill Item 403(b)’s requirement. Securities that are excess margin one day can

become required collateral the next day if they decline in value. See Securities Credit

Regulation § 3:53 (2d ed. 2013) (“If, as a result of changes in market values, the

reference in the Registration Statement, represented that Defendant
McClendon beneficially controlled 29,529,975 shares of Chesapeake stock
and footnoted that 29,332[,]493 of those shares were “held in bank or
brokerage margin accounts or escrow accounts securing brokerage
accounts.” This statement was an inaccurate statement of material fact
because the Registration Statement failed to disclose that Defendant
McClendon lacked the cash necessary to satisfy his margin loans such that
if there was a significant decline in the value of his investments, the stock
would be seized and sold into the market, thereby causing a significant
decline in the price of Chesapeake stock. Furthermore, the statement that
Defendant McClendon had margined his stock did not fully and adequately
advise investors of the true risks and uncertainties regarding this action.
Indeed, investors did not know that Defendant McClendon lacked the
financial resources necessary to satisfy his margins loans such that, if the
value of his investments declined, his stock would be seized and sold into
the market.

Aplt. App., Vol. I at 53–54 (emphasis added).

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customer’s debit balance increases . . . , the customer’s margin excess is eliminated, and

the amount is no longer available to the customer for new securities transactions or

withdrawals.”). All shares held in margin accounts are vulnerable to margin calls,

depending on movements in the market. The disclosure that Plaintiff insists on—listing

exactly the number of shares serving as collateral at the moment of reporting—can

understate risk by obscuring the fact that other shares held in margin accounts might be

needed as collateral in the future.

Chesapeake’s failure to specify how many of McClendon’s shares actively served

as collateral was not a material omission because, if anything, it provided an excessive

warning of risk by overstating the number of collateralized shares. The purpose of the

Item 403(b) disclosure was to alert investors to the possibility that McClendon’s interests

were not aligned with their own. See 71 Fed. Reg. 53158, 53197 (Sept. 8, 2006) (because

shares used as collateral “may be subject to material risk or contingencies that do not

apply to other shares,” they “have the potential to influence management’s performance

and decisions”). The amended complaint emphasized the importance of this purpose:

[A]n investor knowing of McClendon’s personal financial risk might fear
that McClendon would be motivated to cause Chesapeake to take short-
term risks in the hope of keeping stock prices high in the short-term at the
expense of long-term growth . . . or to make large bonus payments to him if
his personal investments sour.

Aplt. Br. at 59. Item 403(b) disclosures also alert investors to the possibility that a

company’s stock price will fall because a large shareholder like McClendon may be

forced to sell many shares at once. But a prudent investor worried about these risks
24
would assume that all of McClendon’s shares held in margin accounts were pledged as

collateral. A reasonable investor would have understood the risks inherent in

McClendon’s margined-stock holdings based on Chesapeake’s disclosures. (Plaintiff

does not argue that the omission was material because it could have made potential

investors less likely to purchase shares.)

Plaintiff argues, however, that even if Chesapeake complied with Item 403(b), it

had an independent duty “to disclose that McClendon lacked the resources to meet any

potential margin call.” Id. at 67. Because McClendon lacked the necessary financial

resources, he had to sell large numbers of shares over a short period of time, presumably

depressing the stock’s value.

We reject Plaintiff’s argument that further disclosure was required. The risk of

margin calls and the consequent need of the owner of the stock to sell shares is obvious.

Even the wealthiest investor could lack readily available liquid assets to cover a large

margin call, particularly when, as here, the call comes when financial markets are frozen

(meaning very few assets are truly liquid). No purpose would have been served by

“disclosing” that McClendon might have to sell a large portion of the margined stock if

the bottom dropped out of the market. In a similar context, Judge Sweet noted that “‘[i]t

is not a violation of any securities law to fail to disclose a result that is obvious even to a

person with only an elementary understanding of the stock market.’” Newman v. L.F.

Rothschild, Unterberg, Towbin, 651 F. Supp. 160, 164 (S.D.N.Y. 1986) (quoting Vaughn

v. Teledyne, Inc., 628 F.2d 1214, 1220 (9th Cir. 1980)).
25
 In addition, the omission of information regarding McClendon’s financial

resources is actionable only if the omission was necessary to make something in the

Registration Statement not misleading. See Slater, 719 F.3d at 1196. Yet Plaintiff has

not pointed to what statement was misleading because of the absence of the disclosure.

The Registration Statement contains no representation of McClendon’s capacity to cover

margin calls with his financial resources. In Slater the plaintiff contended that the

offering documents were misleading because they did not disclose that the repurchase

agreements entered into by the issuer of the stock had cross-default provisions (so that

default on one constituted a default on the others). We rejected the contention,

explaining:

[T]he Plaintiffs cannot show how the omission of the cross-default
provisions made the statement misleading. The statement merely mentions
Thornburg’s dependence on repurchase agreements to borrow money and
that a decline in the value of their ARM assets could trigger a margin call.
There is no mention about the possibility of failing to meet a margin call or
its consequences. Default, let alone cascading default, is an entirely
different subject that is not even broached in the statement. Because the
statement gives no impression, one way or the other, about the effect on the
company of failing to meet a margin call, there is no basis for believing the
statement was misleading.

Slater, 719 F.3d at 1204. So here as well.

In re Franchard Corp., 42 S.E.C. 163, 1964 WL 67454 (July 31, 1964), relied on

by Plaintiff, does not assist its cause. In that case the controlling shareholder, whose

reputation was the essential ingredient of the stock offering, had engaged in extensive

financial shenanigans, which, if disclosed, would have warned potential investors of his

26
questionable character and the financial precariousness of the new company. Nothing

remotely similar has even been alleged here.

In short, we reject Plaintiff’s contention that the Registration Statement was

misleading because of its failure to disclose that McClendon lacked the financial

resources to always be able to cover his margin calls. The Registration Statement said

nothing to the contrary and the risk was obviously inherent in the quantity of margined

stock disclosed.

III. CONCLUSION

We AFFIRM the district court’s grant of summary judgment to Chesapeake. We

GRANT Chesapeake’s request for judicial notice.

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