Supreme Court Resolves Circuit Split and Holds ‘Pure Omissions’ Outside Reach of Section 10(b) Liability

On April 12, a unanimous Supreme Court held in Macquarie Infrastructure Corp. v. Moab Partners, L.P. that material omissions are actionable under Section 10(b) of the Exchange Act and its enabling SEC Rule 10b-5 only if the omission renders an affirmative statement misleading.^[1]  The decision resolved a divide among appellate courts and clarified the extent to which an alleged Item 303 violation can serve as a predicate for Section 10(b) liability.

Litigation Background

The underlying action dates back to 2018 when Moab Partners L.P. filed a securities class action alleging that defendant Macquarie Infrastructure Corp. (MIC) made material misrepresentations and omissions regarding the potential impact of a new international fuel regulation on MIC’s fuel storage business.^[2]  One of the main components of MIC’s business was the storage of No. 6 fuel oil, which would effectively be banned when the new international regulation took effect. Plaintiff alleged that although MIC made statements to investors predicting that demand for its services would decline in the short term due to certain refinery closures, MIC did not disclose that the new regulation would likely have a long-term impact on MIC’s business. Plaintiff further alleged that after the regulation took effect, the demand for MIC’s services plummeted, causing MIC’s stock price to decline. Plaintiff argued that Item 303 of SEC Regulation S-K obligated MIC to disclose the impending regulation and its likely impact on MIC’s business and that MIC’s failure to do so violated Section 10(b) of the Exchange Act and Rule 10b-5. Item 303 obligates a company to make a disclosure in its periodic SEC filings when a “trend, demand, commitment, event or uncertainty is both presently known to management and reasonably likely to have material effects on the registrant’s financial conditions or results of operations.”^[3]

The district court dismissed plaintiff’s claims for failure to plead any material misrepresentations or omissions as well as on scienter grounds. The court found that plaintiff failed to (1) identify any statements that were actionable as “half-truths” due to MIC’s failure to disclose its business reliance on storing No. 6 fuel oil or (2) adequately plead that MIC knew that any alleged statements were untrue or a half-truth when made. Furthermore, the court rejected plaintiff’s argument that MIC violated disclosure obligations under Item 303 because plaintiff did not actually plead an “uncertainty” that should have been disclosed and did not adequately plead that any omitted information was material.

Second Circuit Court of Appeals’ Decision

In a summary order, a unanimous panel of the Second Circuit vacated the decision and remanded the case for further proceedings.^[4]  The court found that plaintiff had adequately pled actionable omissions and “half-truths” because Item 303 required MIC to disclose that the new regulation’s significant restriction on No. 6 fuel was reasonably likely to have material effects on MIC’s financial condition. Under the Second Circuit’s prior ruling in Stratte-McClure v. Morgan Stanley, a failure to make a required Item 303 disclosure in a 10-Q filing was an omission that could serve as the basis for a Section 10(b) securities fraud claim.^[5]  In the court’s view, MIC’s decision to make statements regarding its base of customers triggered a duty to speak accurately and provide all material facts addressing those issues. The court also found that plaintiff had adequately alleged scienter because the complaint contained sufficient circumstantial evidence that MIC executives knew that a significant portion of the company’s business relied on the storage of No. 6 fuel oil and that the impending regulation was likely to affect MIC’s revenue.

Supreme Court’s Decision

The Court granted certiorari to address one question: whether the Second Circuit erred in holding that 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. MIC contended that the Second Circuit’s holding conflicted with those of the Third, Ninth and Eleventh Circuits,^[6]  which have held that because the disclosure and materiality standards under Item 303 differ from those under Rule 10b-5, a violation of Item 303 cannot automatically give rise to a Section 10(b) and Rule 10b-5 claim.^[7]

In the unanimous decision authored by Justice Sotomayor, the Supreme Court vacated and remanded the Second Circuit’s judgment, holding that a failure to disclose information required by Item 303 can sustain a Rule 10b-5(b) claim only if the omission causes affirmative statements by the defendant to be misleading. In reaching its decision, the Court analyzed the plain text of Rule 10b-5(b) and distinguished between “half-truths” — “representations that state the truth only so far as it goes, while omitting critical qualifying information” — and “pure omissions” —”when a speaker says nothing, in circumstances that do not give any particular meaning to that silence.” The Court held that “half-truths” are actionable under Rule 10b-5(b), but “pure omissions” are not. Additionally, the Court found that the “[s]tatutory context confirms what the text plainly provides,” noting the distinction between Rule 10b-5’s reference to “statements made” and Section 11’s prohibition of any registration statement that “omit[s] to state a material fact required to be stated therein.” In comparing the two, the Court found significance in Section 11’s explicit creation of “liability for failure to speak” and the absence of similar language in either Section 10(b) or Rule 10b-5(b). The Court therefore reasoned that a plaintiff alleging a Rule 10b-5(b) violation must identify affirmative statements, i.e., a “statement made,” before determining whether additional facts are necessary to make those statements “not misleading.”

Looking Ahead

While the Supreme Court’s decision in Macquarie Infrastructure is an important clarification of Rule 10b-5’s scope of liability and confirmation of the principle that “silence … is not misleading,”^[8]  the decision’s pragmatic effect, if any, will only become clear as lower courts apply the Court’s reasoning to future securities litigation cases.

Although Moab argued that this decision would result in broad immunity anytime an issuer fraudulently omits information Congress and the SEC require it to disclose, the foreclosure of private liability for pure omissions under Rule 10b-5(b) is likely a narrow subset of Section 10(b) claims alleging Item 303 violations. In its decision, the Court emphasized that omissions creating misleading half-truths remain actionable by private parties, and the SEC retains authority to prosecute violations of its regulations.

Notably, the Court declined to provide guidance as to what may constitute a “statement made,” when a half-truth might be misleading, or whether Rules 10b-5(a) and 10b-5(c) concerning “scheme liability” support liability for pure omissions.

^{[1] No. 22-1165, 2024 WL 1588706.}

^{[2] City of Riviera Beach Gen. Empl. Ret. Sys. v. Macquarie Infrastructure Corp., No. 18-CV-3608 (VSB), 2021 WL 4084572 (S.D.N.Y. Sept. 7, 2021).}

^{[3] Indiana Pub. Ret. Sys. v. SAIC, Inc., 818 F.3d 85, 94 (2d Cir. 2016); 17 C.F.R. § 229.303(a)(3)(ii).}

^{[4] Moab Partners, L.P. v. Macquarie Infra. Corp., No. 21-2524, 2022 WL 17815767 (2d Cir. Dec. 20, 2022).}

^{[5] Stratte-McClure v. Morgan Stanley, 776 F.3d 94 (2d Cir. 2015).}

^{[6] See Oran v. Stafford, 226 F.3d 275 (3d Cir. 2000); In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046 (9th Cir. 2014); Carvelli v. Ocwen Fin. Corp., 934 F.3d 1307 (11th Cir. 2019).}

^{[7] In 2017, the Supreme Court granted certiorari in a case raising similar issues, but the parties settled prior to oral argument. See Leidos Inc. v. Indiana Pub. Ret. Sys., No. 16-581 (2017).}

^{[8] Basic Inc. v. Levinson, 485 U. S. 224, 239, n. 17 (1988).}