Liability for pure omissions following the US Supreme Court’s decision in Macquarie Infrastructure

On April 12, 2024, the United States Supreme Court issued a unanimous decision in Macquarie Infrastructure Corp. v. Moab Partners, L.P. 

The Court held that “pure omissions,” including violations of Item 303 of Regulations S-K, are alone not actionable as misstatements under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b) promulgated thereunder. While this decision resolves a circuit split and imposes some limits on securities class actions, whether it will have a material impact remains an open issue for several reasons:

• The Court’s holding was relatively narrow.
• Securities class actions based solely on pure omissions are rare.
• The Court did not decide: (i) what constitutes statements made under Section 10(b); (ii) when a statement is misleading as a half-truth; or (iii) whether Rules 10b-5(a) or (c) support liability for pure omissions.
• The Court did not decide whether pure omissions are actionable under Section 12 of the Securities Act of 1933.

Section 10(b) and Rule 10b-5

Section 10(b) prohibits the use of any “manipulative or deceptive device or contrivance” in contravention of SEC rules and regulations.  Rule 10b-5 prohibits: (a) schemes to defraud; (b) misstatements of material fact and half-truths; and (c) deceptive business practices.

Subsection (b) was at issue in Macquarie Infrastructure.

Item 303 of Regulation S-K

Item 303 of Regulation S-K requires issuers of securities to disclose in their periodic filings with the SEC “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.”

Moab v. Macquarie

The Consolidated Amended Complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and asserted violations for each of the three subsections of Rule 10b-5 in connection with Macquarie’s alleged failure to disclosure the potential impact of a new UN regulation on its business despite having a duty to do so under Item 303.[1] 

On September 7, 2021, the District Court dismissed the case in its entirety for failure to state a claim. Lead Plaintiff appealed that decision to the Second Circuit Court of Appeals.

On December 22, 2022, the Second Circuit issued its decision reversing the holding of the District Court as to Macquarie’s duty to disclose the potential effect of the new UN regulation pursuant to Item 303. 

As discussed in the firm’s recent update, the Second Circuit’s decision reversing the District Court reflected a split between the circuits on whether pure omissions were actionable under Rule 10b-5(b). The Third Circuit, Ninth Circuit, and Eleventh Circuit Courts of Appeals have each held that pure omissions in violation of Item 303 alone were not actionable as misstatements.

Macquarie appealed the Second Circuit’s decision to the Supreme Court.

The Court’s Holding

On April 12, 2024, the Court issued its decision, reversing the Second Circuit.  The issue before the Court was limited to whether the omission of information required under Item 303 can support a private right of action under rule 10b-5(b).

The Court held that it cannot and that Rule 10b-5(b) “does not proscribe pure omissions.” Instead, Rule 10b-5(b) requires disclosure of information necessary to ensure that statements made “are clear and complete.” Therefore, as a threshold issue for potential liability under Rule 10b-5(b), a plaintiff must identify an affirmative assertion. Accordingly, Rule 10b-5(b) does not cover pure omissions but it does cover half-truths. A half-truth is a statement which is literally true, but “omit[s] qualifying critical information.” 

The Court noted that Section 11 of the Securities Act of 1933 contains plain language which proscribes pure omissions. Section 11 prohibits any registration statement which “omits to state a material fact required to be stated therein.” Neither Section 10(b) nor Rule10b-5(b) contain similar language.

Additionally, the Court rejected Lead Plaintiff’s moral hazard argument. Lead Plaintiff argued that holding that a violation of Item 303 is not actionable under Rule 10b-5(b) will lead to broad immunity for securities issuers. The Court noted that private investors are still able to bring claims for violations of Item 303 based on half-truths. Additionally, the SEC has the authority to prosecute violations of Item 303.

Impact

Because the issue before the Court was relatively narrow, it is possible that this decision will not have a material impact on the potential exposure faced by D&Os in connection with securities law violations.

The Court described the bounds of its decision as follows:

Given that the Court explicitly highlighted the limitations of its decision, we would expect to see investors putting a greater emphasis on the conduct of D&Os in connection with the company’s public statements. This could result in a greater emphasis on confidential witness allegations as investors seek to plead something beyond statements to show liability under Rule 10b-5(a) or (c). The inclusion of allegations from confidential witnesses generally makes it less likely that a court will grant dismissal at the pleading stage, driving up the costs of litigation.

Finally, while the mere omission of information required to be disclosed under Item 303 cannot support liability under Rule 10b-5(b), the Court’s decision leaves open the possibility that D&Os could be liable under the Rule’s other subsections for failing to disclose known material risks to business operations. 

[1] The complaint also contains causes of action under the Securities Act of 1933 which were not at issue on the appeal to the Court, but remain a part of the case going forward.