SCOTUS: Pure Omissions Are Not Actionable Under Rule 10b-5

On April 12, 2024, the unanimous United States Supreme Court confirmed that the mere fact of an issuer's silence does not give rise to a private claim under Rule 10b-5(b), even though the silence combined with an existing disclosure obligation under Regulation S-K might create an implication that the issuer had nothing to disclose.¹ The Court narrowed the scope of actionable omissions in a private civil action to those that "render[] affirmative statements made misleading."²

Background

Defendant Macquarie Infrastructure Corporation, an energy supply company, owns infrastructure-related businesses that handle and store liquid commodities. In 2016, the International Maritime Organization (IMO) signaled that it would be implementing a ban on shipping fuel known as "No. 6 fuel oil," which Macquarie sold in significant quantities and which contains high sulfur content.³ Macquarie Infrastructure did not disclose that it faced a business risk related to the regulation, in part, because it was unclear at the time whether shippers would be able to continue using No. 6 fuel oil in conjunction with abatement methods.⁴ Ultimately, shippers completely avoided purchase of the fuel and, in an earnings call in 2018, Macquarie Infrastructure disclosed to investors that it expected a structural decline in the market for No. 6 fuel oil.⁵ The company's stock dropped 41% on the day of the announcement.⁶
Shareholders of the company filed suit in the U.S. District Court for the Southern District of New York alleging that Macquarie Infrastructure violated Section 10(b) of the Exchange Act and Rule 10b-5 because it was allegedly aware of the significant impact that the IMO's regulation would have on its business and failed to disclose that risk to investors.⁷ More specifically, stockholder plaintiff Moab Partners alleged that the purported omission violated disclosure requirements under Item 303 of Regulation S-K. Item 303 of Regulation S-K, which governs what companies must disclose in the narrative portion of their financial statements, broadly requires companies to provide an outlook for the company, including material risks.⁸

The district court ruled in favor of the defendants.⁹ The U.S. Court of Appeals for the Second Circuit reversed, holding that the plaintiff had adequately alleged material omissions based on a "known trend or uncertainty" that are required to be described by Item 303.¹⁰ Relying in part on SEC guidance, the Second Circuit reasoned that disclosure of the IMO regulation was required because there was a reasonable likelihood that the regulation would have a material effect on Macquarie Infrastructure and therefore the generic disclosures provided in the company's financial statements were inadequate.¹¹

Supreme Court's Analysis

"Rule 10b-5(b) makes it unlawful '[t]o make any untrue statements of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.'"¹² Rule 10b-5(b) is intended to prohibit (a) false statements or lies, and (b) omitting facts necessary to make a statement made not misleading.¹³ Justice Sotomayor, writing for a unanimous Court, explained that "Rule 10b-5(b) "does not proscribe pure omissions."¹⁴ Instead, the Rule "requires disclosure of information necessary to ensure that statements already made are clear and complete" and "therefore covers half-truths, not pure omissions."¹⁵ Accordingly, "the Rule requires identifying affirmative assertions . . . before determining if other facts are needed to make those statements 'not misleading.'"¹⁶

Congress, the Court noted, "imposed liability for pure omissions in § 11(a) of the Securities Act of 1933," but that neither § 10(b) nor Rule 10b-5(b) includes a similar proscription on failing to "speak on a subject at all."¹⁷ Moreover, even the existing regulatory duty to disclose "does not automatically render silence misleading under Rule 10b-5(b)."¹⁸ Instead, the Court held that "the failure to disclose information . . . can support a Rule10b-5(b) claim only if the omission renders affirmative statements made misleading."¹⁹

Takeaways

Resolving a Circuit split conflict that escaped review in Leidos Inc. v. Ind. Pub. Ret. Sys.,²⁰ the Court held that pure omissions standing alone are not actionable in a shareholder litigation under Rule 10b-5(b), seemingly restoring boundaries of the rule. Any other resolution may have incentivized companies to over-disclose with low-quality information. Nonetheless, the Court stated in a footnote that the "Court granted certiorari to address the Second Circuit's pure omission analysis, not its half-truth analysis,"²¹ and thus does not necessarily preclude plaintiffs from filing claims concerning Item 303 of Regulation S-K under a "half-truth" theory. Notably, the Court also did not opine on "what constitutes 'statements made,' when a statement is misleading as a half-truth, or whether Rules 10b-5(a) and 10b-5(c) support liability for pure omissions."

The Court also confirmed that Congress has imposed liability for pure omissions in Section 11(a) claims of the Securities Act of 1933,²² although it did not address Section 12(a)(2) claims. And it likewise made clear that the SEC can investigate "whether any person has violated . . . any provision of the [the Exchange Act], [or] the rules and regulations thereunder," including Item 303.²³ As such, it is still crucial to focus on Item 303 to mitigate the risk of litigation or regulatory action.

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