Half-Truths: Protecting Mistaken Inferences by Investors and Others

Abstract

The concept of the "half-truth" -- the idea that the truth can be misleading if some important qualifier has been concealed -- has not been given much theoretical attention by either courts or commentators. Rather, the potentially misleading character of something that is by itself technically true is simply treated as a fact question. This paper is an effort to explain the half-truth doctrine, and show why courts apparently apply it more restrictively in securities cases than in common law fraud cases. The key insight comes from situating the half-truth roughly half way between the true misstatement and the failure to speak at all, and seeing the "normative" issue as one of what inferences a listener or reader should draw in light of background norms about how forthcoming the speaker is reasonably expected to be on a particular topic. The background norm in securities cases includes an ability to conceal (though not actively lie about) proprietary matters such as research and marketing initiatives. In this environment, in contrast to the settings in which many of the common law cases arise, a narrow use of the doctrine is appropriate. This leads to a theory of corporate discourse for fraud purposes that can be employed in other related subjects, such as the duty to update and the treatment of "general expressions of optimism."