US Supreme Court: Pure omissions not misleading under Rule 10b-5(b)
In a short and unanimous opinion in Macquarie Infrastructure Corp. v. Moab Partners, L.P., the Supreme Court confirmed what should have always been clear: “[p]ure omissions are not actionable under Rule 10b-5(b).”
The Supreme Court, in so holding, reversed a decision by the United States Court of Appeals for the Second Circuit holding that failure to make a disclosure required by Item 303 of SEC Regulation S-K can “support a private claim under Section 10(b) [of the Securities Exchange Act of 1934] and Rule 10b-5(b) [thereunder even] in the absence of an otherwise-misleading statement.” It also thus resolved a circuit split between the Second Circuit on the one hand and the Third, Ninth, and Eleventh Circuits on the other.
The petitioner in the case, Macquarie Infrastructure Corp., owns various infrastructure-related businesses, including a subsidiary that operates bulk liquid storage terminals. Among the liquids stored is No. 6 fuel oil. 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 percent beginning in 2020. Typical No. 6 fuel oil has a sulfur content of 3 percent. Macquarie never discussed IMO 2020 in its public filings, although, in 2018, it disclosed a decrease in the amount of storage capacity contracted by its subsidiaries’ customers, in part because of a decline in the No. 6 fuel oil market. In response to this 2018 disclosure, Macquarie’s stock price declined.
Thereafter, respondent Moab Partners, L.P. sued, alleging violations of Section 10(b) and Rule 10b-5. Moab claimed that Macquarie failed to disclose the potential impact on its business associated with IMO 2020 given the extent to which its subsidiary’s storage capacity “was devoted to No. 6 fuel oil,” violating its disclosure obligations under Item 303 and thereby giving rise to a claim under Rule 10b-5(b).
The district court dismissed Moab’s complaint and the Second Circuit reversed. The Second Circuit held that an issuer must disclose facts “when there is a statute or regulation requiring disclosure … such as Item 303” and that IMO’s “significant restriction of No. 6 fuel oil … was reasonably likely to have material effects on Macquarie’s financial condition.” The Second Circuit thus held that Moab had stated a claim under Rule 10b-5(b) because the impact of IMO 2020 was a “known trend or uncertainty” that gave rise to a duty to disclose under Item 303.
The Supreme Court granted Macquarie’s petition for certiorari on the question as to “[w]hether . . . a 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.”[1] In its April 12, 2024 unanimous opinion, the Supreme Court disagreed with the Second Circuit’s affirmative answer to this question and reversed and remanded.
Based on an analysis of the language of Rule 10b-5(b), it held that Rule 10b-5(b) prohibits false statements and half-truths (“representations that state the truth only so far as it goes while omitting critical qualifying information”), but not pure omissions (“when a speaker says nothing, in circumstances that do not give any particular meaning to that silence”). The Supreme Court contrasted the language of Rule 10b-5(b) with the language of Section 11(a) of the Securities Act of 1933 which, unlike Section 10(b) and Rule 10b-5(b), states that there can be liability when a registration statement “omits to state a material fact required to be stated therein.” It also noted that “silence, absence a duty to disclose, is not misleading under Rule 10b-5” and “[e]ven a duty to disclose . . . does not automatically render silence misleading under Rule 10b-5(b).” Lastly, the Supreme Court rejected the theory that a “plaintiff does not need to plead any statements rendered misleading by a pure omission because reasonable investors know that Item 303 requires … disclos[ure] of all known trends and uncertainties” because such interpretation “reads the words ‘statements made’ out of Rule 10b-5(b) and shifts the focus of that Rule and [Section] 10(b) from fraud to disclosure.”
Despite urging by the respondent and the United States as amicus curiae on behalf of the respondent, the Supreme Court did not decide whether any of the actual statements made by Macquarie were misleading half-truths for failure to disclose the extent to which its subsidiary was dependent on No. 6 fuel oil. The Supreme Court noted that it did not grant certiorari to address that question. On that question, companies and others still need to analyze Supreme Court decisions on related issues[2] and decisions by the different courts of appeals (and district courts) as to what constitutes a misleading “half-truth.”[3]
The Supreme Court also did not address potential liability for “pure omissions” under the “scheme” provisions of Rule 10b-5 – 10b-5(a) and 10b-5(c). While the plaintiffs’ bar undoubtedly will test the theory that a pure omission can give rise to “scheme” liability, the assertion that Section 10(b) focuses on fraud not disclosure should decide the question. Also, while the SEC will not be able to bring enforcement proceedings for violation of Rule 10b-5(b) for a “pure omission,” it can likely argue that a “pure omission” where there is a duty to disclose under Item 303 violates other sections of the Securities Exchange Act of 1934 and the rules thereunder.
Going forward
In the Second Circuit and courts around the country that look to decisions from the Second Circuit because of its depth of experience in cases under the federal securities laws, the decision should make a difference. Some courts had seemingly applied a lower standard for Section 10(b) liability based on alleged Item 303 violations than Section 10(b) liability otherwise. These decisions have now been overruled. Also, the Supreme Court’s Macquarie decision should bring a stop to potential expansion of liability under Section 10(b) for alleged violations of other provisions of Regulation S-K such as Item 105 on risk factors.
An increasing number of cases have been filed in courts in the Second Circuit against issuers not headquartered in the states within the Second Circuit. That trend may have resulted in part from forum shopping to take advantage of the Second Circuit’s holding that violations of Item 303 could give rise to a claim under Section 10(b). To that extent, the trend should end with the Supreme Court’s Macquarie decision.
Find out more about the implications of Macquarie Infrastructure Corp. v. Moab Partners, L.P. for your business by contacting the authors or your usual DLA Piper relationship attorney.
[1] The Supreme Court had previously granted a petition for writ of certiorari to answer this same question in 2017 in Leidos, Inc. v. Indiana Public Retirement System, No. 16-581. The parties to that case, however, reached a resolution before the Supreme Court could decide the question.
[2] See, eg, Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System, 141 S. Ct. 1951 (2021) (inference that “back-end price drop equals front-end inflation [] starts to break down when there is a mismatch between the contents of the misrepresentation and the corrective disclosure”); Omnicare, Inc. v. Laborers Dist. Council Constr. Industry Pension Fund, 575 U.S. 175 (2015) (“an investor reads each statement …, whether of fact or of opinion, in light of all its surrounding text, including hedges, disclaimers, and apparently conflicting information”); Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011) (“misleading as to a material fact” means “there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available”) (internal quotations omitted).
[3] See, eg, FindWhat Investor Group v. FindWhat.com, 658 F.3d 1282, 1305 (11th Cir. 2011) (“[a] corporation has a duty to neutralize only the natural and normal implication of its statements”) (internal quotations omitted); Winer Family Trust v. Queen, 503 F.3d 319, 330 (3d Cir. 2007) (“Liability may exist under Rule 10b-5 for misleading or untrue statements, but not for statements that are simply incomplete”); Brody v. Transitional Hospitals Corp., 280 F.3d 997, 1006 (9th Cir. 2002) (“[t]o be actionable under the securities laws, an omission must be misleading; in other words it must affirmatively create an impression of a state of affairs that differs in a material way from the one that actually exists”); Backman v. Polaroid Corp., 910 F.2d 10, 16 (1st Cir. 1990) (“by revealing one fact about a product, [company does not need to] reveal all others that, too, would be interesting, market-wise, but means only such others, if any, that are needed so that what was revealed would not be ‘so incomplete as to mislead’”).
