Answering a precise question increasingly raised by securities fraud plaintiffs, the United States Supreme Court held in Macquarie Infrastructure Corp. v. Moab Partners that a failure to disclose information cannot support a private action under Rule 10b–5(b) if the failure did not render any statements made misleading. Though the Court framed the case around the narrow issue of whether the failure to make required disclosures under SEC Regulation S–K Item 303 is actionable, it also resolved two separate circuit splits, holding that: (i) pure omissions are not actionable under Rule 10b–5(b); (ii) shareholders can bring claims based on Item 303 violations that create misleading half-truths; and (iii) a duty to disclose does not automatically render silence misleading under Rule 10b–5(b).
This decision closes the door on a pure-omissions theory of liability in Rule 10b–5. Although future securities plaintiffs are likely to attempt to reframe omissions claims as half-truths to try to state a valid cause of action, the Supreme Court, speaking unanimously, has issued a strong statement that courts should not countenance such tactics. Instead, plaintiffs must identify a statement made misleading by an alleged omission.
BACKGROUND: LEGAL FRAMEWORK
Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission (“SEC”) Rule 10b–5(b) operate together to, among other things, make it unlawful to omit material facts in connection with the purchase or sale of a security when that omission renders “statements made” misleading.1 Although the words of the statute and its implementing regulation do not expressly provide for a private right of action, the Supreme Court has held there to be a right by implication.2 Given that damages in such actions are typically measured against a defendant issuer’s outstanding shares, the potential recovery is often substantial. It is therefore little surprise that approximately 230 such class actions on average have been filed every year since passage of the Private Securities Litigation Reform Act of 1995.3
Courts have long grappled with the first required element in a claim brought under Section 10(b) and Rule 10b–5—“a material misrepresentation or omission by the defendant.”4 For omissions, in particular, courts have disagreed about when a company is obligated to speak.
Courts have generally distinguished between half-truths and pure omissions. Half-truths are “representations that state the truth only so far as it goes, while omitting critical qualifying information.”5 In other words, such statements may be literally true, but substantively misleading. An oft-cited example of a half-truth appears in a case decided by Judge Cardozo: A seller of property disclosed that two new roads might alter the property’s dimensions, but omitted the fact that a third new road might bisect the plot and render it useless.6 Courts have generally held that, in instances such as this when a company issues a material half-truth, it is obligated to make the half whole.7
By contrast, “[a] pure omission occurs when a speaker says nothing, in circumstances that do not give any particular meaning to that silence.”8 Courts have disagreed on whether a pure omission can be actionable under Section 10(b) and Rule 10b–5. The Second Circuit, for example, has held that “a pure omission [may be] actionable under the securities laws”—particularly pointing to instances in which “statutes or regulations [ ] obligate a party to speak.”9 Part of this theory traces to a footnote in a 1988 Supreme Court case, Basic Inc. v. Levinson, which notes that “[s]ilence, absent a duty to disclose, is not misleading under Rule 10b–5.”10 If this were true, the theory went, then the converse was true as well—silence in the face of a duty to disclose could be misleading.11 Although the Second Circuit has recognized a pure-omissions theory of liability, it also has conceded that such a theory is “relatively uncommon in securities litigation” and “not strictly within the letter of Rule 10b–5.”12 Other courts, such as the Fifth Circuit, have held that “pure-omission claims are not actionable.”13
Recognizing that some courts, like those within the Second Circuit, may allow omission claims under Section 10(b) and Rule 10b–5 where a particular statute or regulation creates a duty to speak, plaintiffs have pointed to SEC Regulation S–K as a basis for the duty. As relevant here, Item 303 of Regulation S–K requires issuers to “[d]escribe any 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.”14 This question of whether an Item 303 violation could constitute an actionable omission under Section 10(b) and Rule 10b–5 created yet another circuit split. In the Ninth Circuit, for example, “Item 303 does not create a duty to disclose for purposes of Section 10(b) and Rule 10b–5.”15 The Third, Fifth, and Eleventh Circuits have suggested similarly.16 According to the Second Circuit, however, “Item 303 imposes the type of duty to speak that can, in appropriate cases, give rise to liability under Section 10(b).”17
In 2016, the Supreme Court granted certiorari on the question of whether Item 303 “creates a duty to disclose that is actionable” under Section 10(b) and Rule 10b–5.18 That case settled shortly before argument, however, leaving the disagreement unresolved.19 The Court found its next opportunity to address this issue in Macquarie.
BACKGROUND: MACQUARIE INFRASTRUCTURE CORP. V. MOAB PARTNERS, L.P.
In Macquarie, the defendant company owned a business that operated storage tanks for a variety of liquids, including “No. 6 fuel oil,” which typically has a sulfur content around 3%.20 In 2016, the United Nations’ International Maritime Organization (“IMO”) implemented a rule capping the sulfur content of fuel oil used in shipping at 0.5%.21 Macquarie’s Item 303 disclosures did not discuss the extent to which the subsidiary’s tanks were used to store No. 6 fuel oil.22 In 2018, the company’s stock dropped 41% after it announced that the No. 6 fuel oil market had declined, and, along with it, the subsidiary’s storage contracts.23
Prospective plaintiffs wasted little time in finding a theory of securities fraud. Within two months of Macquarie’s announcement, two complaints, later consolidated and amended, were filed in the United States District Court for the Southern District of New York.24 The complaints claimed that the defendants had “‘a duty to disclose’ the extent to which [the subsidiary]’s storage capacity was devoted to No. 6 fuel oil.”25 The argument, as relevant here, was premised on Item 303.26 The plaintiff claimed that the IMO rule presented an “increasing uncertainty,” and that Item 303 required the company to “disclose that its profits, revenues, and dividends were at risk.”27
The district court’s opinion on the defendants’ motion to dismiss began its analysis by noting that “Section 10 [and Rule 10b–5] ‘do not create an affirmative duty to disclose any and all material information.”28 In keeping with Second Circuit precedent, the court further described “two relevant situations where a company will be bound to disclose facts.”29 First, when a company issues a “half-truth”—a specific statement that is “literally true” but “creates a materially misleading impression” due to omitted information—it may need to “speak more fully.”30 Second, a company must disclose facts when required by statute or regulation.31
Discussing the second situation, the district court cited Stratte-McClure v. Morgan Stanley. That 2015 case is part of the Second Circuit’s body of law holding that Item 303 omissions could “serve as the basis for a securities fraud claim under Section 10(b).”32 On the facts presented, however, the district court held that the alleged omission was insufficient to violate Item 303.33 For this and other reasons, the district court dismissed the complaint.34
After the shareholder plaintiff appealed, the Second Circuit first repeated the same standard for actionable omissions that the district court applied: A company need speak only when necessary to complete a half-truth, or to comply with a statute or regulation.35 But the Second Circuit ultimately disagreed with the district court, holding that “Plaintiff has adequately alleged a ‘known trend or uncertainty’ that gave rise to a duty to disclose under Item 303.”36 And then—holding that such an omission could be actionable— the Second Circuit held that “[t]he failure to make a material disclosure required by Item 303 can serve as the basis . . . for a claim under Section 10(b) if the other elements have been sufficiently pleaded.”37 This latter holding rested on two prior Second Circuit cases, including Stratte-McClure.38 The Second Circuit therefore vacated the district court’s dismissal of the complaint, and remanded the case for further proceedings.39
THE SUPREME COURT DECISION
Macquarie sought Supreme Court review and, on September 29, 2023, the Court granted certiorari.40 On April 12, 2024, the Supreme Court issued an eight-page decision.41 Authoring the opinion for a unanimous Court, Justice Sotomayor framed the question presented as “whether the failure to disclose information required by Item 303 can support a private action under Rule 10b–5(b), even if the failure does not render any ‘statements made’ misleading.”42
As a starting point, the Court reasoned that the crux of the case was whether the language of Rule 10b–5(b) bars only half-truths or instead extends to pure omissions.43 The Court then determined that “Rule 10b–5(b) does not proscribe pure omissions.”44 Rather, the Rule prohibits the omission of material facts necessary to make “the statements made . . . not misleading.”45 The Court thus concluded that actionable omissions cannot exist in a vacuum, and must therefore be pegged to already-made “affirmative assertions.”46
The Court then addressed the respondents’ argument that a plaintiff need not plead any statements rendered misleading by a pure omission, because reasonable investors know that Item 303 requires a company’s periodic filings—in a section known as the Management’s Discussion & Analysis—to disclose all known trends and uncertainties.47 Relying again on the words “statements made” in Rule 10b–5(b), the Court rejected the plaintiff’s argument, explaining that it “shifts the focus . . . from fraud to disclosure.”48
In its closing passages, the Court’s opinion addressed the potential effects of its decision. Quoting the line in Basic with which the Second Circuit had previously supported pure-omissions liability, the Court again noted that “[s]ilence, absent a duty to disclose, is not misleading under Rule 10b–5.”49 But the Court continued: “Even a duty to disclose, however, does not automatically render silence misleading under Rule 10b–5(b). Today, this Court confirms that the failure to disclose information required by Item 303 can support a Rule 10b–5(b) claim only if the omission renders affirmative statements made misleading.”50
TAKEAWAYS
In ruling that “[p]ure omissions are not actionable under Rule 10b–5(b),” the decision affects all omission-based claims brought under Rule 10b–5(b), not only those based on Item 303 disclosures. Other common theories of liability, such as omissions from the “Risk Factors” disclosure under Item 105 of Regulation S-K, are also likely to be barred by the Macquarie decision.51 Additionally, given that the main body of law that was overturned came from the Second Circuit—in which a substantial number of omissions-based securities actions have been filed—it is possible the Macquarie holding may dampen plaintiffs’ jurisdictional preference for the Second Circuit in certain cases.52
Plaintiffs and defendants may disagree on the practical implications of the Macquarie decision. Indeed, even where plaintiffs plead a Rule 10b–5(b) cause of action based on Item 303 (or Item 105) violations, such claims are often tacked on as an additional, rather than primary, liability theory. Accordingly, it is unlikely that plaintiffs will abandon many potential matters; instead, plaintiffs will undoubtedly attempt to reframe omissions as half-truths. Chief Justice Roberts presaged this issue in oral argument, when he opined that “the distinction [between] half-truths and omissions strikes me as one that might be hard to apply in practice.”53 Indeed, this is the theory that the Macquarie plaintiff has now promised to pursue in its case.54
In any event, the Macquarie decision makes clear that shareholder plaintiffs must identify one or more statements that are made misleading by an alleged omission. Presumably, the connection between the affirmative statement and alleged omission need be more than illusory to avoid arguments that the claim is simply an impermissible omission theory. In a footnote at the end of its opinion, however, the Court expressly stated that it was not opining on other issues not presented, including “what constitutes ‘statements made’” and “when a statement is misleading as a half-truth.”55 Thus, while the Court made clear that a Rule 10b–5(b) claim must be tied to an affirmative statement, it did not provide express guidance on how strong the connection between the statement made and the alleged omission must be. But given the unambiguous language in the unanimous opinion rejecting a pure-omissions theory of liability, it is likely that courts will require plaintiffs to plead a strong connection between the affirmative statement and the alleged omission. For example, it is unlikely that a general statement about demand or other revenue indicators would be enough to support a claim based on omissions of “known trends or uncertainties.” Ultimately, the answers to these questions will be left to the lower courts to sort out: As Macquarie’s counsel responded in answer to Chief Judge Roberts, “that’s [the] kind of question that district courts answer every day.”56
1 15 U. S. C. § 78j(b); 17 C.F.R. § 240.10b–5(b).
2 Macquarie Infrastructure Corp. v. Moab Partners, No. 22-1165, 601 U.S. ___, slip op. at 2 (Apr. 12, 2024) (citing Stoneridge Inv. Partners v. Sci.-Atlanta, Inc., 552 U.S. 148, 157 (2008)).
3 Stanford Law School, Federal Securities Class Action Litigations 1996 – YTD, https://securities.stanford.edu/charts.html (last visited Apr. 19, 2024). Because securities class actions are frequently followed by shareholder derivative suits, meanwhile, the total number of related lawsuits is considerably higher.
4 Stoneridge Inv. Partners, 552 U.S. at 157. The elements of a claim under Section 10(b) and Rule 10b–5 are: “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Id.
5 Universal Health Servs., Inc. v. United States, 579 U.S. 176, 188 (2016).
6 Junius Const. Co. v. Cohen, 178 N.E. 672, 672 (N.Y. 1931) (Cardozo, J.).
7 See Universal Health Servs., 579 U.S. at 188 & n.3.
8 Macquarie, slip op. at 5.
9 In re Vivendi, S.A. Sec. Litig., 838 F.3d 223, 239 & n.8 (2d Cir. 2016) (quotation marks omitted).
10 Basic Inc. v. Levinson, 485 U.S. 224, 239 (1988).
11 Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 100–01 (2d Cir. 2015).
12 In re Vivendi, 838 F.3d at 239–40 n.9.
13 Heinze v. Tesco Corp., 971 F.3d 475, 483 (5th Cir. 2020).
14 17 C.F.R. § 229.303(b)(2)(ii).
15 In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046, 1056 (9th Cir. 2014).
16 Oran v. Stafford, 226 F.3d 275, 288 (3d Cir. 2000) (“[T]he ‘demonstration of a violation of the disclosure requirements of Item 303 does not lead inevitably to the conclusion that such disclosure would be required under Rule 10b–5. Such a duty to disclose must be separately shown.’” (quoting Alfus v. Pyramid Tech. Corp., 764 F. Supp. 598, 608 (N.D. Cal. 1991))); Carvelli v. Ocwen Fin. Corp., 934 F.3d 1307, 1331 (11th Cir. 2019) (“On its face, Item 303 imposes a more sweeping disclosure obligation than Rule 10b-5, such that a violation of the former does not ipso facto indicate a violation of the latter.”); Mun. Emps.’ Ret. Sys. of Mich. v. Pier 1 Imports, Inc., 935 F.3d 424, 436 (5th Cir. 2019) (“We have never held that Item 303 creates a duty to disclose under the Securities Exchange Act, and other circuits are split. . . . In any event, we need not address this issue . . . .”).
17 Stratte-McClure, 776 F.3d at 102.
18 Pet. for a Writ of Cert., Leidos, Inc. v. Ind. Pub. Ret. Sys., No. 16-581, 2016 WL 6472615, at *i (U.S. Oct. 31, 2016); see Leidos, Inc. v. Indiana Pub. Ret. Sys., 580 U.S. 1216 (2017) (granting certiorari).
19 Leidos, Inc. v. Indiana Pub. Ret. Sys., 138 S. Ct. 2670 (2018).
20 City of Riviera Beach Gen. Emps. Ret. Sys. v. Macquarie Infrastructure Corp., 2021 WL 4084572, at *2 (S.D.N.Y. Sept. 7, 2021).
21 Id.
22 Id. at *3, *10.
23 Id. at *4.
24 See 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; Compl., Fajardo v. Macquarie Infrastructure Corp., No. 1:18-cv-03744 (S.D.N.Y. Apr. 27, 2018), ECF No. 1.
25 City of Riviera, 2021 WL 4084572, at *6 (quoting Lead Pl.’s Omnibus Mem. of Law in Opp’n to Defs.’ Mots. to Dismiss (MTD Opp’n) at 19–20, City of Riviera Beach Gen. Emps. Ret. Sys. v. Macquarie Infrastructure Corp., No. 18-CV-3608 (S.D.N.Y. June 21, 2019), ECF No. 110).
26 Id. at *7, *10.
27 Id. at *10 (first quoting MTD Opp’n at 19; and then quoting Consol. Class Action Compl. for Viols. of the Fed. Sec. Laws at ¶ 278, City of Riviera Beach Gen. Emps. Ret. Sys. v. Macquarie Infrastructure Corp., No. 1:18-cv-03608 (S.D.N.Y. Feb. 20, 2019), ECF No. 56).
28 Id. at *6 (alteration omitted) (quoting Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 44 (2011)).
29 Id.
30 Id. (alteration incorporated).
31 Id. at *7.
32 Id. at *7 (citing Stratte-McClure, 776 F.3d at 101).
33 Id. at *10.
34 Id. at *13.
35 Moab Partners v. Macquarie Infrastructure Corp., 2022 WL 17815767, at *1 (2d Cir. Dec. 20, 2022).
36 Id. at *2 (alterations incorporated) (quoting Stratte-McClure, 776 F.3d at 101).
37 Id.
38 Id.; see Stratte-McClure, 776 F.3d at 101; Panther Partners Inc. v. Ikanos Commc’ns, Inc., 681 F.3d 114, 116 (2d Cir. 2012) (“We hold that the proposed complaint stated a claim because it plausibly alleged that the defects constituted a known trend or uncertainty that the Company reasonably expected would have a material unfavorable impact on revenues.” (citing Item 303)).
39 Moab Partners, 2022 WL 17815767, at *5.
40 Pet. for a Writ of Cert., Macquarie Infrastructure Corp. v. Moab Partners, No. 22-1165, 2023 WL 3778765 (U.S. May 30, 2023); Macquarie Infrastructure Corp. v. Moab Partners, 600 U.S. ___, 144 S. Ct. 479 (2023).
41 Macquarie, slip op.
42 Id. at 1.
43 Id. at 4–5.
44 Id.
45 Id. at 5; 17 C.F.R. § 240.10b–5(b).
46 Macquarie, slip op. at 5–6.
47 Id. at 7.
48 Id.
49 Id. (quoting Basic, 485 U.S. at 239).
50 Id.
51 The Macquarie plaintiff also brought an Item 105 (then known as Item 503) claim, which the district court dismissed without discussion. See Moab Partners, 2022 WL 17815767, at *3 n.2. The Second Circuit noted that “this court has at times assumed without deciding that a violation of Item 503 will sustain an actionable claim”; without deciding the issue, it vacated this dismissal for the same fact-based reasons as the Item 303 claim. Id.
52 Macquarie made this argument in its petition for a writ of certiorari: “The conflict in this case . . . opens the door to forum shopping—a trend that finds support in the data. By the numbers, the Second Circuit is the preferred filing destination for Item 303 plaintiffs—not just in terms of the sheer number of cases, but in the percentage of securities cases brought using an Item 303 theory. Notably, even as the Ninth Circuit has become a more popular jurisdiction for securities cases generally, the number of Item 303 cases filed there has seen no corresponding increase.” Pet. for a Writ of Cert., Macquarie Infrastructure Corp. v. Moab Partners, No. 22-1165, 2023 WL 3778765, at *13 (U.S. May 30, 2023) (citation omitted).
53 Oral Argument Tr. at 7:21–24, Macquarie Infrastructure Corp. v. Moab Partners, No. 22-1165 (U.S. Jan. 16, 2024).
54 Jessica Corso, Justices Limit Shareholder Suits Over Corporate Disclosures, LAW360 (Apr. 12, 2024, 10:29 AM EDT), https://www.law360.com/articles/1806902/justices-limit-shareholder-suits-over-corporate-disclosures (quoting plaintiff’s counsel as stating that “There is going to be no impact on our case, because the Supreme Court has given us a road map to plead a half-truth, which we have.”).
55 Macquarie, slip op. at 8 n.2.
56 Oral Argument Tr. at 8:14–16, Macquarie Infrastructure Corp. v. Moab Partners, No. 22-1165 (U.S. Jan. 16, 2024).
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