CORPORATE DISCLOSURES
Macquarie Infrastructure Corp. v. Moab Partners L.P.
Date: April 12, 2024
Issue: Whether pure omissions are not actionable under Rule 10b-5(b).
Case Summary: In a unanimous decision written by Justice Sonia Sotomayor, the U.S. Supreme Court ruled not disclosing certain information required by Item 303 of SEC Regulation S–K cannot support a private securities fraud claim.
Item 303 requires companies to disclose “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” in periodic filings with the SEC. A pure omission occurs when a speaker says nothing in circumstances that do not give any specific meaning to that silence. In contrast, half-truths are representations omitting critical qualifying information.
Macquarie owns subsidiary operating terminals to store bulk liquid commodities, including No. 6 fuel oil, which typically has a sulfur content around 3%. In 2016, the United Nations’ International Maritime Organization formally adopted IMO 2020, which capped the sulfur content of fuel oil used in shipping at 0.5% by 2020. Afterward, Macquarie did not discuss IMO 2020 in its public offering documents. In 2018, Macquarie announced demand for its subsidiary storage terminals dropped due to the structural decline in the No. 6 fuel oil market. Macquarie’s stock price fell 41%.
Moab sued Macquarie alleging it violated SEC Rule 10b-5(b). Under Rule 10b-5(b), it is unlawful to omit material facts in connection with buying or selling securities when the omission renders “statements made” misleading. Moab argued Macquarie had a duty to disclose the IMO 2020 information under Item 303. The district court ruled for Macquarie, concluding Moab did not plead an uncertainty that should have been disclosed. On appeal, the Second Circuit reversed, holding Macquarie’s omission alone could not support Moab’s securities fraud claims. The Second Circuit’s decision created a split from the Third and Ninth Circuits, which previously ruled a pure omission could support a securities fraud claim.
In a unanimous decision, the Court concluded pure omissions are not actionable under Rule 10b-5(b). First, the Court determined Rule 10b-5(b)’s text does not proscribe pure omissions. The Court explained Rule 10b-5(b) prohibits omitting a material fact necessary “to make the statements made . . . not misleading.” In other words, Rule 10b-5(b) requires the disclosure of information necessary to ensure that statements made are already clear and complete. In effect, the Court concluded Rule 10b-5(b) covers half-truths, not pure omissions. Further, Rule 10b-5(b) requires an identifiable affirmative assertion (statement made) before determining whether other facts are needed to make those statements “not misleading.”
Second, the Court determined the statutory context supports its holding pure omissions are not actionable under Rule 10b-5(b). The Court compared the language of Rule 10b-5(b) to Section 11(a) of the Securities Act of 1933. In Section 11(a), Congress expressly imposed liability for pure omissions. Section 11(a) prohibits any registration statement that “contains an untrue statement of material fact or omits to state a material fact required to be stated therein or necessary to make the statements misleading.” The Court observed Rule 10b-5(b) does not contain similar language. Accordingly, when Congress wants to provide a remedy, it has little trouble in doing so expressly.
Third, the Court concluded Section 10(b) of the Exchange Act and Rule 10b-5(b) are about fraud, not a failure to disclose. Moab contended a plaintiff need not plead any statements rendered misleading by a pure omission because reasonable investors know Item 303 requires a management discussion and analysis (MD&A) to disclose all known trends and uncertainties. According to the Court, this argument reads the phrase “statements made” out of Rule 10b-5(b) and shifts the focus from fraud to disclosure. The Court declared: “Section 10(b) is aptly described as a catchall provision, but what it catches must be fraud.”
Bottom Line: The Court underscored its ruling will not create “broad immunity” when users fraudulently omit information. Misleading half-truths are still liable under Rule 10b-5(b).
Document: Opinion
