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Longman v. Food Lion, Inc. - 197 F.3d 675 (4th Cir. 1999)


To establish whether a defendant made a false statement or omission of material fact, the plaintiff must point to a factual statement or omission -- that is, one that is demonstrable as being true or false. Also, the statement must be false, or the omission must render public statements misleading. 17 C.F.R. § 240.10b-5. And finally, any statement or omission of fact must be material. Materiality is an objective concept, involving the significance of an omitted or misrepresented fact to a reasonable investor. Thus, a fact stated or omitted is material if there is a substantial likelihood that a reasonable purchaser or seller of a security (1) would consider the fact important in deciding whether to buy or sell the security or (2) would have viewed the total mix of information made available to be significantly altered by disclosure of the fact.


On the day after ABC aired its "PrimeTime Live" television broadcast on November 5, 1992, detailing allegedly widespread unsanitary practices and labor law violations in grocery stores owned by Food Lion, Inc., the price of Food Lion's Class A stock fell approximately 11%, and the price of its Class B stock fell approximately 14%. A week later, plaintiff stockholders David Longman, Jeffrey Feinman, and others who had purchased Food Lion stock during the 2-1/2-year period before the broadcast filed these two class actions against defendant Food Lion, which were later consolidated, alleging securities fraud under § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The plaintiffs alleged that Food Lion affirmatively misled the market and failed to disclose that its earnings during the 2-1/2-year period were artificially inflated due to its misrepresentations about and failure to disclose widespread violations of federal labor laws and pervasive, unsanitary food handling practices. The district court granted Food Lion's motion for summary judgment, concluding as a matter of law that Food Lion did not knowingly fail to disclose labor or sanitation problems and finding that plaintiffs could not "prove justifiable reliance" as to labor problems because they had already been disclosed and that the alleged sanitation problems were not material. Plaintiffs appealed.


By not disclosing its sanitation problems, did Food Lion, Inc. commit a violation of the Securities Exchange Act of 1934?




The Court agreed with the district court, and held that based on the record in the present case, Food Lion was not required to make public statements about the existence of various sanitation problems that were revealed from time to time. According to the Court, these day-to-day conditions were not shown to be material to the price of Food Lion's stock. The Court noted that the public statements Food Lion made were no more than soft, puffing statements about clean and conveniently located stores that no reasonable investor could rely upon in buying or selling Food Lion stock. Accordingly, the Court concluded that Food Lion did not defraud the market with false statements or omissions of material fact as required to maintain an action under § 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder.

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