Introduction to the Supreme Court’s Decision
In a decision that has important implications for the private securities bar, the Supreme Court held in Macquarie Infrastructure Corp. v. Moab Partners, L.P., No. 22-1165 (U.S. April 12, 2024), that a pure omission of material facts in connection with buying or selling securities is not actionable under SEC Rule 10b-5(b). In general, Rule 10b-5 is the primary tool used by the SEC and individuals to combat securities fraud.
Case Details: Macquarie vs. Moab Partners
The case began when Moab Partners, L.P., sued Macquarie Infrastructure Corporation, alleging that Macquarie violated Rule 10b-5(b) when it failed to disclose, in its public offering documents, that a regulation could have a materially unfavorable impact on its business. Specifically, the documents did not disclose that the United Nations International Maritime Organization had adopted a regulation (IMO 2020), that capped the sulfur content of fuel oil used in shipping at 0.5% by 2020. One of Macquarie’s subsidiaries operated a storage terminal that stored a high sulfur fuel with a sulfur content of closer to 3%.
Moab alleged that Macquarie’s public statements were false and misleading because they omitted information about IMO 2020, which would have a “near-cataclysmic” impact on its subsidiary. According to Moab, Macquarie had a duty to disclose IMO 2020 information under Item 303 of SEC Regulation S-K, which requires companies to disclose, in periodic SEC filings, “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.”
Circuit Court Disagreements and Supreme Court Review
The Second Circuit had held that because Moab adequately alleged a duty to disclose under Item 303, he adequately alleged a claim under Rule 10b-5(b), setting up a circuit split with the Ninth and Third Circuits, which had held that Item 303 does not create a duty under Rule 10b-5(b) not to omit material information. The Supreme Court agreed to hear the case to resolve the disagreement among the circuit courts.
Supreme Court’s Unanimous Opinion
In a unanimous opinion written by Justice Sotomayor, the Court held “[p]ure omissions are not actionable under Rule 10b-5(b).” The Supreme Court explained that a pure omission is when a speaker says nothing under circumstances that do not attribute any meaning to that silence. In contrast, a half-truth is when the speaker states the truth, as far as it goes, but omits information to make the statement not misleading. As the Court explained, “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 held that the failure to disclose information under Item 303 does not support a claim under Rule 10b-5(b), absent a “statement made” that is rendered misleading.
Legal Implications and Future Outlook
In reaching its decision, the Court focused on the plain language of Rule 10b-5(b), which does not impose a duty to disclose all material facts, but rather focuses on “statements made.” The Court viewed this reading as confirmed by context, as in the Exchange Act, Congress chose to include liability for pure omissions in Section 11(a) but not in Section 10(b), which Rule 10b-5(b) implements. Section 11(a) prohibits any registration statement that “omit[s] to state a material fact required to be stated therein or necessary to make the statements therein not misleading.”
The Court’s opinion resolves the circuit split and imposes limits on suits to enforce Rule 10b-5(b) claims. However, in rejecting Moab’s argument that the Court’s decision would provide broad immunity to issuers who fraudulently omitted information Congress required to be disclosed, the Court noted that the SEC retains authority to prosecute violations of its own reporting regulations, which include Item 303 of Regulation S-K. The Court also noted that private parties remain free to prosecute misleading half-truths.
The SEC has made it clear that companies with publicly traded securities have an affirmative duty to disclose certain important information to the investing public, in addition to their duty not to make misstatements. Past SEC enforcement actions show the Commission will not hesitate to investigate and prosecute matters involving either type of conduct either as fraud under Rule 10b-5 or Section 303 of Regulation S-K.
Role of Whistleblowers and Legal Representation
Whistleblowers can help expose securities fraud and Phillips & Cohen can help. Phillips & Cohen is the most successful law firm representing whistleblowers, with recoveries from cases totaling over $13 billion and 21 awards for clients under Dodd-Frank whistleblower reward programs. The firm’s partners include the former first head of the SEC Office of the Whistleblower, the former director of the CFTC’s Whistleblower Office, and numerous attorneys with decades of experience representing whistleblowers.
If you are aware of securities fraud and would like to talk to experienced whistleblower lawyers, contact us for a free, confidential review of your matter.
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