By Lene Powell, J.D.
In a unanimous opinion, the Supreme Court ruled that absent a misleading statement, pure omissions are not actionable as securities fraud under Rule 10b–5(b). However, private parties remain free to bring claims based on Regulation S-K Item 303 violations that create misleading half-truths, and the SEC retains authority to prosecute violations of its own rules and regulations, including Item 303 (Macquarie Infrastructure Corp. v. Moab Partners, L.P., April 12, 2024, Sotomayor, S.).
The Supreme Court vacated and remanded the Second Circuit’s judgment, which found that the respondent investors could bring a private securities fraud claim based on failure to make disclosures under Item 303 “trends and uncertainties” provisions.
The ruling resolves a circuit split. The Second Circuit has allowed private securities fraud claims under Item 303, while the Third, Ninth, and Eleventh Circuits have not.
Alleged fraud. Macquarie Infrastructure Corporation owns infrastructure-related businesses, including a subsidiary that operates large storage terminals for fuel oil and other commodities. In 2016, the United Nations’ International Maritime Organization announced a new regulation that would cap sulfur content in fuel oil at.5% beginning in 2020. Macquarie stored No. 6 fuel oil, which has a sulfur content closer to 3%.
Macquarie did not disclose to investors any anticipated impact from the regulation. In February 2018, it announced that the amount of storage capacity contracted for use by its subsidiary’s customers had dropped in part because of the structural decline in the No. 6 fuel oil market. Macquarie’s stock price fell around 41 percent.
In a complaint filed in the Southern District of New York, Moab Partners, L. P. alleged that Macquarie and various officer defendants had violated Section §10(b) of the Exchange Act and Rule 10b–5. Moab argued that Macquarie’s public statements were false and misleading because Macquarie concealed from investors that its subsidiary’s single largest product was No. 6 fuel oil which “faced a near-cataclysmic ban on the bulk of its worldwide use through IMO 2020.” Moab contended that Macquarie violated Item 303 of Regulation S-K by failing to disclose the extent to which its storage capacity was devoted to No. 6 fuel oil.
Prior proceedings. The district court dismissed the complaint, finding in part that Moab had not actually pleaded an uncertainty that should have been disclosed, nor in what SEC filing or filings the defendants were supposed to disclose it.
The Second Circuit vacated and remanded, concluding that Moab had adequately alleged a “known trend or uncertainty” that gave rise to a duty to disclose under Item 303. Crediting Moab’s allegations as true, the panel found that IMO 2020’s significant restriction of No. 6 fuel oil use was known to Macquarie and reasonably likely to have material effects on Macquarie’s financial condition or results of operation. Under Second Circuit precedent, the court concluded that Macquarie’s Item 303 violation alone could sustain Moab’s §10(b) and Rule 10b–5 claim.
The Supreme Court granted certiorari to resolve a circuit split on whether a failure to make a disclosure required by Item 303 can support a private claim under §10(b) and Rule 10b–5(b) in the absence of an otherwise-misleading statement. The court heard oral argument on January 17, 2024.
Rule 10b-5(b): pure omissions and half truths. Focusing on the rule text, the court concluded that Rule 10b-5(b) does not proscribe pure omissions in the absence of a misleading statement. Rule 10b–5(b) 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.”
The case turned on whether the prohibition bars only half-truths or instead extends to pure omissions, the court said. A pure omission “occurs when a speaker says nothing, in circumstances that do not give any particular meaning to that silence.” In contrast, half-truths are “representations that state the truth only so far as it goes, while omitting critical qualifying information.”
For example, said the court, if a company fails entirely to file an MD&A, then the omission of particular information required in the MD&A has no special significance because no information was disclosed.
“In other words, the difference between a pure omission and a half-truth is the difference between a child not telling his parents he ate a whole cake and telling them he had dessert,” the court wrote.
Statutory context confirmed the plain meaning of the rule text. While Congress imposed liability for pure omissions in §11(a) of the Securities Act of 1933, there is no similar language in §10(b) or Rule 10b–5(b).
Item 303. Turning to affirmative disclosure obligations, the court held that the failure to disclose information required by Item 303 of Regulation S-K can support a Rule 10b–5(b) claim only if the omission renders affirmative statements made misleading.
The court rejected the suggestion that a plaintiff does not need to plead any statements rendered misleading by a pure omission because reasonable investors know that Item 303 requires an MD&A to disclose all known trends and uncertainties. This argument failed because it reads the words “statements made” out of Rule 10b–5(b) and shifts the focus of that Rule and §10(b) from fraud to disclosure, said the court. It would also make §11(a)’s pure omission clause superfluous by making every omission of a fact “required to be stated” a misleading half-truth.
The court also disagreed that a lack of private liability for pure omissions under Rule 10b–5(b) would bring about “broad immunity” for issuers to fraudulently omit information required by the SEC to be disclosed. Here, the court noted that private parties are still free to bring claims based on Item 303 violations that create misleading half-truths. Further, the SEC retains authority to prosecute violations of its own regulations.
Outcome. The court found that pure omissions are not actionable under Rule 10b–5(b) and vacated and remanded the judgment to the Second Circuit.
This is case No. 22-1165.