The internet blew up last week when rumors leaked that Apple was preparing to buy Dr. Dre’s and Jimmy Iovine’s Beats headphones company for $3.2 billion. Steve Jobs never would have done that! It’s confusing! It’s brilliant! Amid the noise, Farhad Manjoo had a suggestion: “If this is true, Tim Cook should get advice from Mark Zuckerberg about how to keep big acquisitions quiet.” It was a sensible thought. Henry Blodget continued it on Monday when he asked: “Would Apple have duty to deny Beats report if wrong?”
I think the short answer to Blodget’s question is no. At least twice the Second Circuit has held that a party is not responsible for misstatements made by others in the public marketplace. See Wright v. Ernst & Young, LLP, 152 F.3d 169, 176 (2d Cir. 1998) (E&Y not liable when its audit client issued a press release without E&Y’s guidance or input and the release did not mention E&Y); Electronic Specialty Co. v. Int’l Controls Corp., 409 F.2d 937, 949 (2d Cir. 1969) (“While a company may choose to correct a misstatement in the press not attributable to it . . . , we find nothing in the securities legislation requiring it to do so.”).
So that’s the end of the story, right? Not exactly. A public company would be stepping into dangerous waters if it allowed false rumors to run free. As Daniel Rubin pointed out, exchange listing requirements put real obligations on their member companies. NASDAQ Rule IM-5250-1 says in part, “In certain circumstances, it may also be appropriate to publicly deny false or inaccurate rumors, which are likely to have, or have had, an effect on the trading in its securities.” Section 202.03 of the NYSE Listed Company Manual is even stronger: “If rumors or unusual market activity indicate that information on impending developments has leaked out, a frank and explicit announcement is clearly required. If rumors are in fact false or inaccurate, they should be promptly denied or clarified.” In short, if this Beats story isn’t true, Apple would be running a risk to let it go unrefuted.
Also, on Monday – the very day when Blodget asked his question – the SEC sued some guys for “insider trading” on information that was true and public, but which the market widely believed to be false. It might have been an odd theory for the SEC to sustain on a motion to dismiss or at trial, but it’s not always a lot of fun to take the SEC to trial. Be careful out there.