April 12, 2024
Macquarie Infrastructure Corp. v. Moab Partners, LPNo. 22-1165 โ Decided on April 12, 2024.
On April 12, the Supreme Court unanimously held that a company's failure to disclose information required by SEC regulations (such as Rule 303 of Regulation SK) cannot support a private securities fraud claim unless that the omission renders the company's affirmative statements misleading.
"Sheer omissions are not actionable under Rule 10b-5(b)."
Justice Sotomayor, writing for the Court
Background:
Regulation SK requires public companies to provide information on certain prescribed topics. Section 303 of the regulation, โManagement's Discussion and Analysis of Financial Condition and Results of Operationsโ (MD&A), specifically requires companies to disclose โknown trends or uncertainties that have had or are reasonably likely to haveโ a material impact on the net result. sales, income or income. 17 CFR ยง 229.303(b)(2)(ii). And Rule 10b-5(b) makes it illegal for companies.โ[t]or make any false statement as to a material fact or omit to state a material fact necessary so that the statements made, in light of the circumstances under which they were made, are not misleading.โ ID. ยง 240.10b-5(b). Both the SEC and private parties can sue companies for violations of Rule 10b-5(b).
Several circuits had held that a failure to disclose under Section 303 cannot support a securities fraud claim under Rule 10b-5(b) without an affirmative statement that the omission is misleading. But the Second Circuit disagreed, holding that a violation of Section 303 alone can give rise to a securities fraud claim. The Supreme Court granted review to resolve the conflict.
Affair:
Whether the lack of disclosure required under Rule 303 of Regulation SK can support a private claim under Rule 10b-5(b) even in the absence of an otherwise misleading statement.
Court decision:
No. Rule 10b-5(b) does not prohibit outright omissions, so failure to disclose the information required under Section 303 does not support a claim of private securities fraud under Rule 10b-5(b) without an affirmative statement that is misleading on the part of the omission.
Meaning:
- The Court's decision clarifies that Rule 10b-5(b) does not permit private lawsuits based on pure omissions, including omitted information that must be disclosed under SEC regulations such as Section 303. Instead, Rule 10b-5(b) b) allows lawsuits based solely on affirmative misrepresentations and โhalf-truthsโ that are misleading because they omit critical qualifying information.
- The Court rejected the plaintiff's and the government's argument that the omission of any information required by Section 303 is necessarily misleading because investors expect companies to disclose all known trends or uncertainties. The Court clarified, however, that โprivate parties remain free to bring claims based on violations of Article 303 that create misleading half-truths.โ The Court also contrasted the language of Rule 10b-5(b) with Section 11(a) of the Securities Act of 1933, under which the Court noted that Congress expressly imposed liability for pure omissions.
- The Court's decision represents an important check on claims under Rule 10b-5(b), reaffirming that the private right of action that the Court recognized many decades ago should not be extended any further.
- Although the Court framed the issue presented in terms of โprivateโ rights of action, the Court's interpretation of Rule 10b-5(b) does not appear to be limited to that context. Accordingly, the Court's decision likely means that the SEC itself will also be unable to bring enforcement actions alleging fraud under Rule 10b-5(b) based on a theory of pure omission. However, the Court made clear that the SEC retains the authority to prosecute violations of Section 303 and other SEC regulations requiring what disclosures must be made in public records.
- The Court did not rule on any issue except whether a pure omission is actionable under Rule 10b-5(b). It did not address what would qualify as a misleading statement by omission, or whether the other parts of Rule 10b-5โthe โscheme liabilityโ provisions of Rules 10b-5(a) and 10b-5(c)โ support liability for pure omissions. These issues are likely to be the subject of further litigation.
The Court's opinion is available here.
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This alert was prepared by associates Patrick Fuster, Matt Aidan Getz and Robert Batista.
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