Second Circuit Upholds Dismissal of The Gap Securities Fraud Claim

The Second Circuit affirmed dismissal of a securities fraud complaint against The Gap, Inc.

On May 28, 2026, the United States Court of Appeals for the Second Circuit affirmed the dismissal of a securities fraud complaint against The Gap, Inc. in Smith v. The Gap, Inc..

The lawsuit arose after The Gap disclosed it had overestimated demand for its BODEQUALITY plus-size clothing line, resulting in surplus inventory sold at heavy discounts. Plaintiffs alleged securities fraud based on the company’s risk disclosures and statements about demand.

The court clarified that generic risk disclosures highlighting potential inventory misjudgments were not misleading, as they referenced common risks and acknowledged that such issues had occurred in the past. Specifically, the court rejected the plaintiffs’ claim that a risk disclosure is actionable merely because a risk later materialized, stating, "We reject Plaintiffs' proposed rule that a risk disclosure is actionable whenever a company fails to disclose that the risk already materialized in some way."

Additionally, the court deemed statements referring to demand as "strong" to be unactionable puffery — optimistic but not legally misleading. The decision also addressed the scope of disclosure obligations, emphasizing, "A company's decision to speak about one aspect of sales does not necessarily require it to address other issues." The court thus found no requirement under Section 10(b) of the Securities Exchange Act or SEC Rule 10b-5 to disclose every factor influencing sales or inventory.

This ruling distinguishes prior decisions where companies made assurances that known risks were unlikely to occur, affirming that generic risk warnings remain generally safe under securities laws even if the risk becomes real.