-
Director, Center for Supreme Court AdvocacyNational Association of Attorneys General
May 6, 2024 | Volume 31, Issue 10
This Report summarizes opinions issued on April 12, 16, and 17, 2024 (Part I).
Opinion
Macquarie Infrastructure Corp. v. Moab Partners, L.P., 22-1165.
In a unanimous decision, the Court held that “[p]ure omissions are not actionable under [Securities and Exchange Commission] Rule 10b-5(b).” Section 10(b) of the Security Exchange Act and its implementing regulation, SEC Rule 10b-5, “make[ ] it unlawful to omit material facts in connection with buying or selling securities when that omission renders ‘statements made misleading’” and provide for a private cause of action for such violations. A separate rule, Item 303 of SEC Regulation S-K, requires companies to disclose “‘any known trends or uncertainties that have had or that are reasonably likely” to have a material impact―favorable or not―on a company’s “net sales or revenue or income.”
Respondents, Macquarie Infrastructure Corporation and its corporate officers, own a subsidiary company that operates large storage terminals for, among other things, high-sulfur fuel oil. In 2016, the United Nations’ International Maritime Organization adopted a regulation capping “the sulfur content of fuel oil used in shipping” by 2020. The sulfur content of Macquarie’s stored fuel oil exceeded the UN’s 2020 cap. Between 2016 and 2018, Macquarie never discussed in its public offering documents the UN’s adopted regulation. In early 2018, however, Macquarie “announced that the amount of storage capacity contracted for use by its subsidiary’s customers had dropped in part because of the structural decline in” the high-sulfur fuel oil market, which caused Macquarie’s stock price to fall dramatically. A group of investors―Moab Partners, L.P.―sued respondents, arguing that the company and its officers had violated §10(b) and Rule 10b-5 through “false and misleading” public statements because they had “‘concealed from investors that [the subsidiary’s] single largest product’” was the high-sulfur fuel oil, the worldwide use of which would be impacted by the UN’s 2020 cap. Additionally, Moab asserted that respondents violated Item 303, and by extension, §10(b) and Rule 10b-5, by failing to disclose “‘the extent to which [its subsidiary’s] storage capacity was devoted to’” the high-sulfur fuel. The district court granted respondents’ motion to dismiss, “concluding in relevant part that Moab had not ‘actually plead[ed] an uncertainty that should have been disclosed’ or ‘in what SEC . . . filings [respondents] were supposed to disclose it.’” The Second Circuit reversed, concluding that, based on its binding precedent, respondents’ alleged “Item 303 violation alone could sustain Moab’s §10(b) and Rule 10b-5(b) claim.” In an opinion by Justice Sotomayor, the Court vacated and remanded.
To begin, the Court noted that Rule 10b-5 “accomplishes two things. It prohibits ‘any untrue statement of a material fact’―i.e., false statements or lies. . . . It also prohibits omitting a material fact necessary ‘to make the statements made . . . not misleading.’” Because the Court’s decision “turn[ed] on whether this second prohibition bars only half-truths or instead extends to pure omissions,” it explained the difference between the two. “A pure omission occurs when a speaker says nothing, in circumstances that do not give any particular meaning to that silence.” Conversely, “[h]alf-truths . . . are ‘representations that state the truth only so far as it goes, while omitting crucial qualifying information,’” like, for example, where a property seller asserts that “‘there may be two new roads’” near said property, “‘but fails to disclose that a third potential road might bisect the property.’”
The Court reasoned that Rule 10b-5(b) proscribes half-truths, rather than pure omissions, because the rule merely “requires disclosure of information necessary to ensure that statements already made are clear and complete.” As a matter of logic and “plain text, the Rule requires identifying affirmative assertions (i.e., ‘statements made’) before determining if other facts are needed to make those statements ‘not misleading.’” This conclusion, the Court stated, is supported by the fact that where Congress has intended to “impose[ ] liability for pure omissions” in the context of securities law, it has explicitly done so. Specifically, §11(a) of the Securities Act of 1933 “prohibits any registration statement that,” among other things, “‘omit[s] to state a material fact required to be stated therein.’” The absence of any language in §10(b) and Rule 10b-5(b) that mirrored §11(a)’s pure omission language was “telling.” As a result, “[p]ure omissions are not actionable under Rule 10b-5(b).”
NAAG Center for Supreme Court Advocacy Staff
- Dan Schweitzer, Director and Chief Counsel
- Melissa Patterson, Supreme Court Fellow
- Amanda Schwartz, Supreme Court Fellow
The views and opinions of authors expressed in this newsletter do not necessarily state or reflect those of the National Association of Attorneys General (NAAG). This newsletter does not provide any legal advice and is not a substitute for the procurement of such services from a legal professional. NAAG does not endorse or recommend any commercial products, processes, or services.
Any use and/or copies of the publication in whole or part must include the customary bibliographic citation. NAAG retains copyright and all other intellectual property rights in the material presented in the publications.