On April 12, 2024, the Supreme Court in Macquarie Infrastructure Corp. v. Moab Partners, L.P., [1] unanimously held that pure omissions cannot form the basis of a securities fraud claim under Rule 10b-5(b) of the Securities Exchange Act of 1934 (“Exchange Act”). The Court held that an “omission” under Rule 10b-5(b) refers solely to when a defendant’s statements are made misleading by non-disclosure. In other words, when a defendant makes “representations that state the truth only so far as it goes, while omitting critical qualifying information,” only then will there be a violation of Rule 10b-5(b).[2] Omissions of statements not otherwise required to be disclosed are not actionable.

Background

Plaintiff-shareholders filed a putative class action complaint in the U.S. District Court for the Southern District of New York.[3] The complaint alleged that defendant Macquarie Infrastructure Corporation (“MIC”) owned a subsidiary that operated “bulk liquid storage terminals.” These storage terminals stored commodities, 40% of which were No. 6 fuel oil.

In 2016, the United Nations (“UN”) sought to adopt a regulation banning the use of fuels with a sulfur content of 0.5% or more, of which No. 6 fuel oil was one. However, MIC did not discuss this proposed regulation and its potential implications for its business in any of its public filings. Then, in 2018, MIC missed its financial projections and announced a decrease in storage customers of its subsidiary due to a reduction in the No. 6 fuel oil sale price. MIC stock fell around 41%.

Plaintiffs alleged violations of Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder. Specifically, plaintiffs asserted that MIC concealed from investors that No. 6 fuel oil could soon be banned under the proposed UN regulation. Plaintiffs further alleged that MIC failed to make a required disclosure under Item 303 of Securities and Exchange Commission Regulation S-K (“Item 303”). Item 303 requires public issuers to disclose in the Management, Discussion and Analysis (“MD&A”) section of their filings whether there are any “known trends or uncertainties” that may impact sales, revenue, or income of the company. Plaintiffs argued that MIC violated Section 10(b) and Rule 10b-5(b) by failing to disclose in its MD&A sections that its subsidiary’s business was heavily reliant on the storage of No. 6 fuel oil and that the UN’s regulation was a potential risk to that business.

Lower Court Decisions

The district court dismissed the complaint, holding that (1) plaintiffs did not identify any statements that were “actionable as half-truths due to defendants’ failure to disclose its business reliance on storing No. 6 fuel oil,” and (2) plaintiffs did not “actually plead an uncertainty [with respect to MIC’s business] that should have been disclosed” under Item 303 in order not to violate its disclosure obligations.[4]

The Second Circuit reversed this decision. It held that a duty to disclose will arise when either (1) disclosure is necessary to tell the whole truth about the subject on which an issuer speaks or (2) there is “a statute or regulation requiring disclosure,” such as Item 303.[5]

The Second Circuit was the first Circuit to find that omissions of information required to be disclosed under statute, without further affirmative statements, could lead to liability under Section 10(b). The Third, Ninth, and Eleventh previously held that a violation of a statute requiring disclosure alone cannot support a Section 10(b) claim.[6]

Supreme Court Decision

The Supreme Court, in a unanimous decision, reversed the Second Circuit. The Court held that the language of Rule 10b-5, and specifically its prohibition on omitting a material fact necessary “to make the statements made . . . not misleading,”[7] only “covers half-truths, not pure omissions.”[8] As an example of this principle, the Court stated that “the difference between a pure omission and a half-truth is the difference between a child not telling his parents he ate a whole cake and telling them he had dessert.”[9]

Additionally, the Court compared the language of Rule 10b-5(b) with that of Section 11 of the Securities Act of 1933 (the “Securities Act”), which prohibits a registration statement that “omit[s] to state a material fact required to be stated therein or necessary to make the statements therein not misleading.”[10] The Court explained that this language, unlike that in Section 10(b) or Rule 10b-5, prohibits both half-truths and pure omissions.[11]

Therefore, the Court held that MIC’s filing a document with the SEC that did not reference the potential UN regulation was merely a “pure omission” that was not actionable under Rule 10b-5(b).

Key Takeaways

The Court’s decision clarifying what are actionable “omissions” under Rule 10b-5(b) resolves a Circuit split and reverses the law in the Second Circuit—where most securities lawsuits are filed. The Court emphasized that reversing the Second Circuit would not create “broad immunity” from liability for the nondisclosure of negative business trends.[12] This is because, even if Rule 10b-5 does not provide a private right of action for a pure omission, the following still apply:

• Private parties may still bring claims that other affirmative statements in a company’s disclosures were rendered misleading by an omission and therefore are actionable “half-truths.”
• Public companies may be subject to potential liability under Section 11 of the Securities Act for “pure omissions” of information.
• The SEC is empowered to investigate violations of any provision of the Exchange Act, which requires that companies file reports in accordance with SEC rules and regulations. Therefore, “pure omissions” of information required to be disclosed may result in an SEC enforcement action.

Therefore, public companies should still be cognizant of their requirements to disclose and potential liability from failure to do so.

[1] Macquarie Infrastructure Corp. v. Moab Partners, No. 22-1165, 2024 WL 1588706 (U.S. Apr. 12, 2024).

[2] Id. (quoting Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U.S. 176, 188).

[3] Compl., City of Riviera Beach Gen. Emps. Ret. Sys. v. Macquarie Infrastructure Corp., No. 1:18-cv-03608 (S.D.N.Y. Apr. 23, 2018), ECF No. 1.

[4] City of Riviera Beach Gen. Employees Retirement System v. Macquarie Infrastructure Corp., No. 18-cv-3608, 2021 WL 4084572 (S.D.N.Y. Sept. 7, 2021).

[5] Moab Partners, L.P. v. Macquarie Infrastructure Corp., No. 21-2524, 2022 WL 17815767 (2d Cir. Dec. 20, 2022).

[6] See Oran v. Stafford, 226 F.3d 275 (3d Cir. 2000); In re NVIDIA Sec. Litig., 768 F.3d 1046 (9th Cir. 2014); Carvelli v. Ocwen Fin. Corp., 934 F.3d 1307, 1331 (11th Cir. 2019).

[7] 17 CFR § 240.10b–5(b).

[8] Macquarie, 2024 WL 1588706, at 258.

[9] Id. at 264.

[10] 15 U.S.C. § 77k(a).

[11] Macquarie, 2024 WL 1588706, at 264.

[12] Id. at 265-66.