The U.S. Supreme Court Resolves Circuit Split, Holds That Pure Omissions Are Not Actionable in Securities Fraud Cases

04/16/2024|4 minute read

Key Takeaways

• In Macquarie Infrastructure Corp. v. Moab Partners, L.P., the U.S. Supreme Court resolved a split among federal circuit courts, unanimously holding that a failure to make a disclosure required under Item 303 of SEC Regulation S-K cannot ground a private claim under Section 10(b) of the Exchange Act or SEC Rule 10b-5(b).
• While the Court's decision confirms that a 10b-5(b) claim must be premised on false or misleading statements, not pure omissions, private parties remain free to bring claims based on Item 303 violations that allegedly create misleading statements, and the SEC retains authority to prosecute violations of Item 303.

Background

SEC Rule 10b-5(b) makes it unlawful for issuers to make false statements or "to omit to state a material fact necessary in order to make the statements made . . . not misleading."[1] In addition to ensuring the truth of statements, the SEC promulgates rules and regulations governing the types of information an issuer must disclose. One of these rules is Item 303 of SEC Regulation S-K, which requires companies to disclose certain information, such as "known trends or uncertainties" reasonably expected to have a material impact on revenues, in periodic filings with the SEC.[2] In private securities litigation under Rule 10b-5(b), certain plaintiffs had predicated their claims not on false statements or half-truths allegedly made by an issuer, but rather on an issuer's failure to make a disclosure required by Item 303 (i.e., a "pure omission").

The Supreme Court's decision in Macquarie Infrastructure Corp. v. Moab Partners, L.P. follows from a class action lawsuit, filed in the U.S. District Court for the Southern District of New York, led by investor Moab Partners, L.P. (Moab) against Macquarie Infrastructure Corporation (Macquarie), which owns infrastructure-related businesses that operate large liquid storage terminals.[3] The suit alleged that Macquarie made material misrepresentations and omissions under Section 10(b) and Rule 10b-5 because the company did not disclose, as required under Item 303, the potential impact of new international regulations that would effectively ban high sulfur fuels, including No. 6 fuel oil-the company's largest storage product.

The District Court dismissed Moab's claims, concluding in relevant part that Moab had not actually pleaded an uncertainty that should have been disclosed under Section 10(b) and Rule 10b-5. On appeal, the Second Circuit reversed, holding that Moab adequately alleged a "known trend or uncertainty" that gave rise to a duty to disclose under Item 303. Applying its binding precedent, the Second Circuit concluded that Macquarie's Item 303 violation alone could sustain Moab's Section 10(b) and Rule 10b-5 claims.

On May 30, 2023, Macquarie filed a petition for a writ of certiorari with the U.S. Supreme Court to review the case. Macquarie asked the Court to consider whether the Second Circuit erred in holding-in conflict with the Third, Ninth, and Eleventh Circuits-that a failure to make a disclosure required under Item 303 can support a private claim under Section 10(b), even in the absence of an otherwise-misleading statement.

Opinion

On April 12, 2024, the U.S. Supreme Court issued a unanimous decision that pure omissions are not actionable under Rule 10b-5(b). The Court examined the plain meaning of the Rule and held that "[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.'"[4] The Court found that statutory context supported a plain reading of the Rule. The Court contrasted Section 11(a) of the Securities Act of 1933, which imposes liability for pure omissions by explicitly prohibiting any registration statement that "omit[s] to state a material fact required to be stated therein," from Section 10(b) or Rule 10b-5(b), which contain no similar language. The Court thus confirmed that "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."[5]

Moab argued that a plaintiff does not need to plead any affirmative statements rendered misleading by a pure omission because reasonable investors know that Item 303 requires disclosure of all known trends and uncertainties. The Court rejected this argument, holding that such a reading "shifts the focus of [Section 10(b) and Rule 10b-5(b)] from fraud to disclosure," and renders Section 11(a)'s pure omission clause superfluous.[6]

Moab further suggested that a private cause of action for pure omissions under Rule 10b-5(b) was necessary to protect against "broad immunity" for issuers who omit information they are required to disclose.[7] The Court also rejected this argument, holding both that Item 303 violations are still actionable if a private party alleges that the omission made an affirmative statement misleading, and that the SEC retains authority to prosecute violations of Items 303 or any other rule under the Exchange Act.

The Second Circuit's judgment was vacated, and the case remanded for further proceedings consistent with the Supreme Court's opinion.

Implications

There had been a federal circuit split with respect to whether pure omissions could support a private claim under Section 10(b) and Rule 10b-5(b) in the absence of an otherwise-misleading statement. Circuit Courts in the Third, Ninth, and Eleventh Circuits previously held that a violation of Item 303's reporting requirements did not automatically give rise to a cause of action under Rule 10b-5.[8] The Second Circuit, however, had held plaintiffs to a lower standard, finding that a failure to disclose under Item 303 could amount to an actionable omission for a Rule 10b-5 claim. The Supreme Court's opinion resolves the split regarding Item 303-based claims.

Macquarie is good news for public companies and their officers and directors. Yet they must remain vigilant in their disclosures: as the Court cautioned, private parties can still bring claims based on Item 303 violations that create misleading statements, and the SEC retains authority to prosecute violations of its own rules and regulations, including Item 303.

[1] 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5(b) (2022).

[2] 17 C.F.R. § 229.303(b)(2)(ii) (2022).

[3]Macquarie Infrastructure Corp. v. Moab Partners, L.P., 601 U.S. __, 2024 WL 1588706 (2024).

[4]Id. at *4.

[5]Id. at *5.

[6]Id.

[7]Id.

[8]SeeOran v. Stafford, 226 F.3d 275 (3d Cir. 2000); In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046 (9th Cir. 2014); Carvelli v. Ocwen Fin. Corp., 934 F.3d 1307 (11th Cir. 2019).

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