Supreme Court Rules That “Pure Omissions” Are Not Actionable Under Section 10(b)

Authors: Samuel P. Groner, Peter L. Simmons, Elizabeth Kalanchoe, Katherine St. Romain

In Macquarie Infrastructure Corp. v. Moab Partners, L.P., 601 U.S. ____ (2024), the Supreme Court unanimously held that liability under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b) does not attach to pure omissions, even where there is a regulatory duty to disclose the omitted information. 2024 WL 1588706 (Apr. 12, 2024). Specifically, the Court held that the failure to disclose information required by Item 303 of SEC Regulation S-K cannot support a private action under Rule 10b-5(b) where the silence did not render any statements that were made misleading. The Court rejected the plaintiff's contention that the decision would create "broad immunity any time an issuer fraudulently omits information Congress and the SEC require it to disclose," explaining that "private parties remain free to bring claims based on Item 303 violations that create misleading half-truths" and that "the SEC retains authority to prosecute violations of its own regulations."

Background

Macquarie Infrastructure owns and operates infrastructure-related businesses, including a subsidiary that operates bulk liquid storage terminals for a high-sulfur product called No. 6 fuel oil. In 2016, the United Nations' International Maritime Organization adopted IMO 2020, a regulation that capped the sulfur content of fuel oil. Macquarie did not discuss IMO 2020 in its public securities filings, but in February 2018, upon news that its subsidiary's storage contracts dropped (in part due to a decline in demand for No. 6 fuel oil resulting from the limits imposed by IMO 2020), Macquarie's share price fell by about 41%.

Item 303 of SEC Regulation S-K requires issuers to disclose known trends or uncertainties that are reasonably likely to have a material impact on the issuer's financial position. In the aftermath of Macquarie's stock drop, Moab Partners filed a shareholder class action alleging (among other things) a violation of Section 10(b) and Rule 10b-5 for failing to make a required Item 303 disclosure in connection with IMO 2020. The district court dismissed Moab's complaint, but the Second Circuit reversed, finding that Moab pleaded "actionable omissions" because the "failure to make a material disclosure required by Item 303 can serve as the basis for claims under" Section 10(b). Moab Partners, L.P. v. Macquarie Infrastructure Corp., 2022 WL 17815767, at *2 (2d Cir. Dec. 20, 2022).

The Decision

In a unanimous decision, the Supreme Court reversed, and examined whether Rule 10b-5(b) "bars only half-truths or instead extends to pure omissions." 2024 WL 1588706, at *4. The Court explained that "[a] pure omission occurs when a speaker says nothing, in circumstances that do not give any particular meaning to that silence," such as "[i]f a company fails entirely to file an MD&A," in which case "the omission of particular information required in the MD&A has no special significance because no information was disclosed." Id. In contrast, half-truths are "representations that state the truth only so far as it goes, while omitting critical qualifying information." Id.

The Court's analysis focused on the text of Rule 10b-5(b), which "makes it unlawful '[t]o make any untrue statement 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.'" Id. The Court reasoned that "Rule 10b-5(b) does not proscribe pure omissions" because "[l]ogically and by its plain text, the Rule requires identifying affirmative assertions (i.e., 'statements made') before determining if other facts are needed to make those statements 'not misleading.'" Id.

The Court then turned to statutory context to support its holding, highlighting that Congress and the SEC know how to impose liability for pure omissions-such as under Section 11 of the Securities Act for public offering documents, which prohibits omitting material facts "required to be stated therein"-but did not do so in Section 10(b) or Rule 10b-5(b). 2024 WL 1588706, at *5. Thus, the Court aligned with the majority of circuits to opine on the issue and held "the failure to disclose information required by Item 303 can support a Rule 10b-5(b) claim only if the omission renders affirmative statements made misleading." Id.

Practical Implications

The Macquarie decision removes from the plaintiffs' securities bar's toolkit the ability to pursue Rule 10b-5 claims that fail to identify any affirmative misrepresentation or misleading half-truth but rather rest solely on silence, even in the face of a duty to disclose. The implications will be most significant in the Second Circuit, where courts had previously allowed some such claims to proceed past the pleadings stage.

However, the opinion leaves undisturbed an issuer's duties to make the disclosures required by Item 303 and other SEC regulations, and makes clear that the SEC retains authority to investigate and prosecute violations of the federal securities laws, including Item 303. It also leaves undisturbed potential claims by private plaintiffs for violations of Section 11(a) of the Securities Act of 1933 which, unlike Section 10(b) of the Exchange Act, does create liability for pure omissions in a registration statement.

Further, the fiduciary duty laws of the issuer's state of incorporation can independently impose liability for a failure to speak fully when there is a duty to disclose, and nothing in Macquarie limits a stockholder's ability to seek relief under that alternate theory.

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