United States: U.S. Supreme Court Unanimously Resolves A Circuit Split: Pure Omissions Are Not Actionable Under Rule 10b–5

In Macquarie Infrastructure Corp. v. Moab Partners¹, the U.S. Supreme Court recently resolved a split among U.S. Circuit Courts of Appeal when it unanimously held that “[s]ilence absent a duty to disclose, is not misleading under Rule 10b–5”. While “half-truths” are still actionable under that provision, a pure omission is not.

What you need to know

• The Court's opinion rested on textual and statutory construction analyses. Justice Sotomayor resolved the question before the Court—"whether the failure to disclose information required by Item 303 can support a private action under Rule 10b–5(b), even if the failure does not render any ‘statements made' misleading”—by analyzing the Rule's text and broader statutory construction.
• The Court foreclosed a popular avenue for securities fraud claims.  By barring plaintiffs' use of a Regulation S–K, Item 303, disclosure violation to trigger an automatic Rule 10b-5 claim, the Court further narrowed the scope of anti-fraud provisions, and curtailed plaintiffs' attempts to shoehorn disclosure claims into fraud ones.
• Issuers are not altogether immune, however. The Court cautioned that private plaintiffs retain a right of action to bring Item 303 and Rule 10b-5(b) challenges where the alleged omissions render “statements made” misleading (“half-truths”). The SEC also retains enforcement authority over alleged breaches of its regulations.
• Pure omissions remain actionable under Canadian law. In provincial and territorial securities legislation in Canada, pure omissions may be actionable where the omission relates to material information an issuer is obliged to disclose.

Background

A subsidiary of Macquarie Infrastructure Corporation operates terminals to store bulk liquid commodities, including No. 6 fuel oil, which contains a sulfur content close to 3%. In 2016, the United Nations International Maritime Organization adopted IMO 2020, which capped the sulfur content of fuel oil used in shipping at 0.5% by 2020. Macquarie never disclosed the provisions, or potential impact, of IMO 2020 in its public offering documents in the following years. In February 2018, however, Macquarie announced a drop in demand for fuel storage at its subsidiary, in part, due to IMO 2020's impact on the No. 6 fuel oil market. Macquarie's stock price dropped 41%.

The litigation

Moab Partners, L.P. sued Macquarie and certain of its officers alleging Macquarie violated Section 10(b) of the Securities and Exchange Act of 1934 (1934 Act), and its implementing regulation, SEC Rule 10b-5(b). Section 10(b) makes it “unlawful for any person . . . [t]o use or employ, in connection with the purchase or sale of any security . . . [,] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe”². Rule 10b-5(b) implements Section 10(b) and makes it unlawful to omit material facts in connection with buying or selling securities when that omission renders “statements made” misleading.

Moab argued Macquarie's public statements were false and misleading given it hid from investors that No. 6 fuel oil would be significantly—and negatively—impacted by IMO 2020. To support its claim, Moab relied on Macquarie's independent obligation under Section 13(a) of the 1934 Act to file periodic information statements, which include the “Management's Discussion and Analysis of Financial Conditions and Results of Operation” (MD&A)³. Issuers must “furnish” in the MD&A information required by Item 303 of Regulation S-K, which, in turn, requires companies to “[d]escribe any known trends or uncertainties that have had or that are reasonably likely to have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations”⁴.

The District Court dismissed Moab's complaint because it had not “actually plead[ed] an uncertainty that should have been disclosed” or “in what SEC filing or filings Defendants were supposed to disclose it”⁵. Constrained by its own precedent, the Second Circuit reversed⁶. Accepting as true Moab's allegations that Macquarie was aware of IMO 2020's effects on No. 6 fuel oil, and that the regulation was “reasonably likely to have material effects” on Macquarie's operations or financials, the District Court held that Moab pled an Item 303 violation. The District Court concluded that the Item 303 violation alone was sufficient to establish Section 10(b) and Rule 10b-5(b) claims under binding Second Circuit law.

The Second Circuit's holding created a split with the Ninth and Third Circuits, which previously held that Item 303 did not create an independent duty to disclose under Section 10(b) and Rule 10b-5⁷. Macquarie appealed.

The appeal

The U.S. Supreme Court issued a unanimous opinion on April 12, 2024, vacating and remanding the Second Circuit's decision, holding simply that pure omissions are not actionable under Rule 10b-5(b).

The Court's succinct opinion centered on the relevant statutory text and rules of statutory construction. It began by explaining that Rule 10b-5(b) served two purposes: (1) prohibiting false statements or lies; and (2) prohibiting omissions of a material fact necessary “to make the statements made…not misleading”⁸. The Court examined whether the second prohibition bars only “half-truths” or, instead, could extend to bar pure omissions. The Court held it could not, because the Rule “requires disclosure of information necessary to ensure that statements already made are clear and complete”⁹.

The Court continued by drawing a distinction between Section 11(a) of the Securities Act of 1933, and Section 10(b) and Rule 10b-5(b). Whereas Section 11(a) prohibits lies and half-truths, including failing to address a subject at all¹⁰, there is no similar language in Section 10(b) or Rule 10b-5(b). That Congress knew how to create liability for pure omissions elsewhere (Section 11(a)), but not here (Section 10(b), Rule 10b-5(b)), was telling. To conclude differently would be to read the words “statements made” out of Rule 10b-5(b) and shift the focus of that provision from fraud to disclosure.

In response to Moab's claims that, absent private liability for pure omissions under 10b-5(b), issuers may otherwise have broad immunity from fraudulently omitting information otherwise subject to disclosure, the Court reminded Moab that private parties retain the right to file claims based on Item 303 violations, which create half-truths. It also noted that the SEC possesses enforcement authority over its own regulations.

The Canadian perspective: actionable pure omissions

In provincial and territorial securities legislation in Canada, pure omissions may be actionable where the omission relates to material information an issuer is obliged to disclose. Canadian securities law defines “misrepresentation”—the basis for actionable disclosure breaches in the primary and secondary market—to include the omission of a “material fact” required to be stated (and also defines materiality by reference to expected significant market impact). Assuming the Moab claim related to material information required to be disclosed by Macquarie, it would not face the pure omission problem encountered in its U.S. litigation.

Footnotes

1. 2024 WL 1588706, 601 U.S. ---- (2024).

2. 48 Stat. 891, 15 U. S. C. section 78j(b).

3. See 15 U. S. C. sections 78m(a)(1), 78l(b)(1).

4. 17 CFR section 229.303(b)(2)(ii).

5. City of Riviera Beach Gen. Employees Retirement System v. Macquarie Infrastructure Corp., 2021 WL 4084572, *10 (S.D.N.Y. Sept. 7, 2021).

6. 2022 WL 17815767, *1 (Dec. 20, 2022).

7. See In re Nvidia, 768 F. 3d 1046, 1056 (9th Cir. 2014); Oran v. Stafford, 226 F. 3d 275, 288 (3d Cir. 2000).

8. 17 CFR section 240.10b–5(b).

9. 2024 WL 1588706, *5.

10. 15 U. S. C. section 77k(a).

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