On January 16, 2024, the Supreme Court of the United States
heard oral argument in Macquarie Infrastructure Corp. v.
Moab Partners, No. 22-1165, a case considering whether a
private plaintiff may plead a claim under Section 10(b) of the
Securities Exchange Act based on an issuer's failure to
disclose a known trend or uncertainty required to be disclosed
under Item 303 of Regulation S-K even without identifying a
particular statement rendered misleading by the alleged
omission.
The underlying lawsuit is a putative class action brought against a
company that operates a portfolio of infrastructure-related
businesses, including a provider of bulk liquid storage services
used to store refined petroleum products. Plaintiff alleged that
the company failed to disclose that a proposed regulation by a
United Nations agency regarding fuel oil would negatively impact
its subsidiary's petroleum storage business. The district
court granted defendants' motion to dismiss, holding that
plaintiff failed to adequately allege an Item 303 violation because
plaintiff failed to allege “an uncertainty that should have
been disclosed.” The district court therefore reasoned that
it was unnecessary to reach the question of whether the alleged
Item 303 violation could serve as the basis for a Section 10(b)
claim. The Second Circuit reversed, holding that plaintiff had
adequately alleged an Item 303 violation and that, based on prior
Second Circuit decisions, that alleged omission could serve as the
basis for a Section 10(b) claim if the other elements of such a
claim were sufficiently pleaded. Moab Partners, L.P. v.
Macquarie Infrastructure Corp., 2022 WL 17815767, at *2 (2d
Cir. Dec. 20, 2022) (citing Stratte-McClure v. Morgan
Stanley, 776 F.3d 94, 101–04 (2d Cir. 2015)).
The Supreme Court had previously granted certiorari to resolve this
issue in 2017, but that case settled before the Court could answer
it. The issue continues to divide the Courts of Appeals. The Third
Circuit, in an opinion authored by then-Judge Alito, as well as the
Ninth and Eleventh Circuits, has held that Item 303 does not impose
a duty to make disclosures for purposes of Section 10(b) and an
Item 303 violation therefore cannot constitute an
“omission” actionable under the Exchange Act in the
absence of an affirmative statement rendered misleading by the
claimed omission. The Second Circuit, however, as re-affirmed
in Moab, has held that an Item 303 violation may
be the basis for an Exchange Act claim, regardless of whether
plaintiff has identified a particular statement rendered misleading
by the allegedly omitted trend or uncertainty.
The specific question on which review was granted was whether an
alleged 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.” Defendants
argue that the answer must be “no,” because the plain
text of the Exchange Act and Rule 10(b)(5) mandates that an
omission can be actionable only if the omission renders “the
statements made” misleading.
The Justices noted that the parties did not appear to disagree on
the question on which review was granted. Indeed, at oral argument,
plaintiff and the United States government (which filed a brief in
support of plaintiff's position) appeared to agree that there
must be a statement that is rendered misleading in order for the
failure to make an Item 303 disclosure actionable under Section
10(b). Instead, the dispute centered on how such a statement must
be identified and pleaded.
Plaintiff and the government argued that the statement that could
be rendered misleading by an Item 303 omission could be the entire
Management's Discussion and Analysis (“MD&A”)
section of a Form 10-K. Specifically, plaintiff argued for a rule
that only required a complaint to identify where a defendant
discussed “the subject covered by the Item 303
requirement.” The government appeared to go even further,
arguing that a failure to disclose a trend or uncertainty could
make the entire MD&A section misleading even if no particular
statement within the discussion was misleading.
Given this, some justices appeared potentially open to issuing a
narrow ruling reversing the Second Circuit and remanding the matter
for further consideration under a standard requiring that an Item
303 violation can serve as the basis for an Exchange Act claim only
if the alleged omission can be tied to (thus rendering misleading)
a specific statement made by the defendant. A decision is expected
by this summer, which may provide clarity on whether, or the
circumstances in which, an Item 303 violation may serve as the
basis for an Exchange Act claim.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
