Arthur R. Lehman, L.L.C.

Supreme Court to hear appeal in investor fraud lawsuit

A lengthy and complex lawsuit involving a troubled New York City payroll contract is now headed to the United States Supreme Court. The Court has agreed to review a decision by the United States Court of Appeals for the Second Circuit that revived the plaintiff shareholders' securities fraud claims against Leidos, Inc., a large government contractor.

The complex business dispute arose out of a contract between Leidos and New York City over billing for Leidos' payroll system CityTime. New York City launched an investigation into whether Leidos overbilled for CityTime usage. Investigators found that two Leidos employees had set up an illegal kickback scheme. One pleaded guilty and one was convicted at trial. Leidos was able to settle the case by agreeing to pay more than $500 million in fines.

The plaintiffs, led by the Indiana Public Retirement System, are Leidos shareholders who allege that Leidos was required by Securities Exchange Commission rules to disclose the investigation, payment and other pending actions involving Leidos' overbilling in a filing with the SEC. Plaintiffs are relying on an SEC rule that requires a company to disclose "known trends and uncertainties" in their financial filings. Plaintiffs argue that the New York City investigation and subsequent settlement and payment satisfy the definition of "known trends and uncertainties" but that Leidos failed to disclose the information, thereby causing the investors to lose money. Leidos claims that the SEC rule at issue does not create any duty of disclosure. Leidos points to a decision of the Ninth Circuit that reached a different conclusion on the effect of the SEC regulation.

Oral arguments in the case will be heard by the Court during the new term that commences in October 2017. This is but one example of the complicated business disputes that can occur in the sophisticated business environment of New York.

Source: Reuters Business Insider, "U.S. Supreme Court to hear Leidos contracting fraud fight," Andrew Chung and Lawrence Hurley, March 27, 2017

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