Securities Regulation Daily Wrap Up, FRAUD AND MAIPULATION—3d Cir.: Court abandons categorical materiality rule, (Oct 1, 2026)

By Mark S. Nelson, J.D.

The prior circuit rule held that lack of movement in the stock price following the truthful disclosure proved a false statement’s immateriality.

The Third Circuit has reconsidered its approach to judging materiality in federal securities fraud cases in light of Supreme Court precedent that called into question the circuit’s continued use of a “categorical” approach. Under the prior approach, the lack of movement in a company’s stock price following a truthful disclosure conclusively proved a false statement’s immateriality. Because the district court relied on the prior approach in dismissing a suit brought against Ocugen, Inc., the case was remanded so the district court can mull whether the complaint adequately pleaded materiality under a noncategorical standard regarding the alleged lack of price movement after the issuance of a corrective disclosure (In Re: Ocugen, Inc. Securities Litigation, No. 25-2653 (3d Cir. Sep. 30, 2026)).

Financial troubles. Ocugen is a biopharmaceutical company that emphasizes retinal diseases. The company had struggled financially despite entering into a deal with an overseas firm to develop Ocugen products for a foreign market. Multiple confidential witnesses told a combined story of a company that allegedly misled investors in equity and debt offerings by allegedly using fabricated numbers that were shared with investors, filing a misleading quarterly report that executives were reluctant to sign, and by making a big “R” restatement resulting from the company’s handling of revenues from the overseas deal. The plaintiffs filed a securities fraud complaint within nine days of a drop in Ocugen’s stock price. The district court dismissed the complaint for failure to plead materiality and falsity.

Supreme Court paves the way. The Third Circuit panel examined whether its Oran-Burlington per se rule that “negligible movement [of a company's stock price] means negligible significance,” such that materiality has not been adequately pleaded in a complaint alleging federal securities fraud.

The panel noted that the Exchange Act does not define “materiality,” but that the Supreme Court has defined the term in several cases to mean: “a substantial likelihood [exists] that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”

Despite the Supreme Court's approach, the Third Circuit had maintained its per se rule of materiality in the context of corrective disclosures. This rule in turn was based on the Third Circuit's strict understanding of the efficient markets theory, which posits generally that efficient markets will bake into a stock’s price any material information. For the Third Circuit, that baking into a stock's price would happen, if at all, immediately after a corrective disclosure.

Said the panel: “We took the theory a step further to conclude that efficient markets would incorporate significant information immediately, thereby resulting in swift stock price changes. Put differently, ‘[t]o the extent that information is not important to reasonable investors, it follows that its release will have a negligible effect on the stock price.’”

But, the panel further observed, the Supreme Court has never applied the efficient markets theory to the analysis of whether a complaint adequately alleged materiality. The panel said the main reason for this hesitancy by the Supreme Court was its understanding that the application of a bright-line or per se rule could result in a materiality analysis that is either under- or over-inclusive.

The Third Circuit panel then distilled the Supreme Court's teachings on materiality into two tenets: (1) “materiality cannot be based on categorical approaches”; and (2) “materiality must be based on a fact-specific assessment of the information available to, and hidden from, reasonable investors at the time of their investment decisions.”

As a result, said the panel, “[s]imple recourse to an issuer’s later stock price as a proxy for materiality will not suffice.”

The appeals court panel observed that while one Supreme Court case (Basic) may once have left room for the Third Circuit's per se rule, a later Supreme Court case (Matrixx) made it clear that a lower court should abandon per se rules like the Third Circuit’s no-price-movement-rule when the Supreme Court in similar cases used reasoning that would call into question the prior per se rule.

With respect to the Third Circuit's rule, the panel explained that: “our Oran–Burlington rule [is] necessarily underinclusive. It fails to assess, for example, what investors would have considered important at the time they decided to invest—even though that is the precise inquiry the Court directed us to undertake."

Remand. Ocugen and its CEO urged the panel to go beyond what the district court ruled (the panel said there are times when it can do so), but the panel ultimately concluded that it would be best for the district court to rule on issues such as materiality and scienter in the first instance, especially when application of the now defunct per se rule previously barred such considerations.

That said, however, the panel also instructed the district court on remand to probe the significance of the big “R” restatement to Ocugen’s financials and whether the complaint adequately pleaded such facts beyond a bare allegation. The panel also noted that it was not seeking to create a new rule for restatements. “We are mindful not to replace the Oran–Burlington rule with another categorical rule that restatements always render some prior disclosures materially false,” said the panel.

Moreover, the panel instructed the district court to mull whether the complaint adequately alleged scienter. The panel suggested some of the outlines of those allegations such that, if the district court finds that the complaint adequately pleaded material misstatements and thus advances to consider the element of scienter, it should determine “whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter” (emphasis in original).

The case is No. 25-2653.

Judge: Montgomery-Reeves, T.

Attorneys: Dean P. Ferrogari (Pomerantz LLP) for Farhan Beig. Jay A. Dubow (Troutman Pepper Locke LLP) for Ocugen Inc.

Companies: Ocugen, Inc.

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