Supreme Court Grants Certiorari to Resolve Circuit Split on Whether SEC Disclosure Rule Triggers Section 10(b) Liability

On Sept. 29, 2023, the U.S. Supreme Court granted certiorari in Macquarie Infrastructure Corp. v. Moab Partners, L.P.^[1] to review a decision by the Second Circuit reviving an investor lawsuit alleging Section 10(b) and Rule 10b-5 violations predicated on a failure to make disclosures required under Item 303 of the Security and Exchange Commission’s (SEC) Regulation S-K. This case presents significant questions regarding the scope of corporate liability under the securities laws and could potentially affect the nature and volume of investor lawsuits.

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. Plaintiffs 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. Plaintiffs further alleged that after the regulation took effect, the demand for MIC’s services plummeted, causing MIC’s stock price to decline. Plaintiffs 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 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 plaintiffs’ claims for failure to plead any material misrepresentations or omissions as well as scienter. The court found that plaintiffs 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 half-truths when made. Furthermore, the court rejected plaintiffs’ argument that MIC violated disclosure obligations under Item 303 because plaintiffs 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. 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 impact MIC’s revenue.

MIC filed a petition for rehearing en banc that the Second Circuit denied in January 2023.

Petition for Certiorari and Looking Ahead

In May 2023, MIC filed a petition for certiorari with the Supreme Court, seeking review of the Second Circuit’s decision. The petition presented one question for the Court’s consideration: 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. The petitioners contended that the Second Circuit’s holding conflicts with the Third, Ninth and Eleventh Circuits,^[5] which have held that because Item 303 articulates different disclosure and materiality standards than Rule 10b-5, a violation of Item 303 cannot automatically give rise to a Section 10(b) and Rule 10b-5 claim.^[6] The petitioners further argued that the Second Circuit’s rule would constitute an improper judicial expansion of Section 10(b) liability, inconsistent with Congress’ efforts to rein in meritless securities fraud actions as reflected in the Private Securities Litigation Reform Act, and would encourage opportunistic forum shopping unless reversed by the Supreme Court.

Various groups, including legal policy institutes and industry groups, filed amicus curiae briefs in support of the petition for certiorari, arguing that the Second Circuit’s decision contravenes well-established Section 10(b) law, expands Section 10(b)’s private right of action and would incentivize companies to overdisclose. In its opposition brief, Respondent Moab Partners L.P. argued that the Second Circuit’s conclusion that Item 303 creates a duty to disclose comports with Section 10(b) jurisprudence and would not expand Section 10(b)’s private right of action.

The Supreme Court’s decision to grant certiorari signals its willingness to resolve this divide among the appellate courts and clarify the extent to which an alleged Item 303 violation can serve as a predicate for Section 10(b) liability.

^[1] _{No. 22-1165, 2023 WL 6319659.}

^[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 Infrastructure Corp., No. 21-2524, 2022 WL 17815767 (2d Cir. Dec. 20, 2022).}

^[5] _{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).}

^[6] _{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).}