In a significant decision defining the scope of private securities litigation, the U.S. Supreme Court in Macquarie Infrastructure Corp. v. Moab Partners, L.P held that “pure omissions” are inactionable under the federal securities laws’ anti-fraud provisions, Section 10(b) of the Exchange Act and its enabling rule SEC Rule 10b-5.¹

The decision vacated the judgment of the Court of Appeals for the Second Circuit, which had reinstated securities fraud claims based on the defendant’s omission of information allegedly subject to disclosure under Item 303 of Regulation S-K—an SEC rule governing the contents of public companies’ periodic SEC filings.  The Supreme Court explained that “the failure to disclose information required by Item 303” cannot support a Section 10(b) claim “if the failure does not render any ‘statements made’ misleading.”

The Court’s decision in Macquarie Infrastructure corrects a line of precedent that had opened the door to pure omission securities fraud claims in the Second Circuit—the busiest circuit for securities class action litigation.  But the Court also noted that Section 11 of the Securities Act—which governs securities offerings—expressly prohibits omissions of material facts “required to be stated” in registration statements.  Thus, issuers may still face liability under Section 11 for “pure omission” of information required to be disclosed in securities offering materials.   

Background

The Supreme Court has long recognized an implied right of action under Section 10(b) of the Exchange Act and its enabling rule SEC Rule 10b-5.  Section 10(b) prohibits the use of “any manipulative or deceptive device or contrivance [in connection with a securities transaction] in contravention of such rules and regulations as the [SEC] may prescribe.”² Rule 10b–5 makes it unlawful, in connection with a securities transaction, to “make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.”³

Thus, Rule 10b-5 prohibits falsehoods (“untrue statements of material fact”) and half-truths (omissions of material facts necessary to make “statements made” not misleading).  But Rule 10b-5 does not “create an affirmative duty to disclose any and all material information.”⁴ “Even with respect to information that a reasonable investor might consider material, companies can control what they have to disclose under [Section 10(b) and Rule 10b-5] by controlling what they say to the market.”⁵

By contrast, other SEC rules—including Regulation S-K—impose affirmative disclosure obligations.  Regulation S-K governs the contents of “qualitative” or “nonfinancial statements” portions of periodic SEC filings.  Item 303 of Regulation S-K requires periodic filings to include, along with the issuer’s financial statements, “management’s discussion and analysis of” the financial statements—the so-called MD&A section.⁶ Among other things, Item 303 requires disclosure in the MD&A of “known trends or uncertainties that have had or that are reasonably likely to have a material favorable or unfavorable impact” on the company’s financial performance.  But, unlike Rule 10b-5, Regulation S-K does not create a private right of action for investors.

In recent years, shareholder plaintiffs have attempted to import Item 303’s affirmative disclosure obligations into Rule 10b-5, arguing that omission of information required to be disclosed under Item 303 is misleading in violation of Rule 10b-5 even in the absence of any affirmative statement.  Under this theory, a “pure omission” can give rise to Rule 10b-5 liability if Item 303 required disclosure of the omitted information.  

Given Item 303’s broad and highly subjective disclosure standard, permitting private securities fraud claims based on alleged Item 303 violations risked broad expansion of potential liability for pure omissions.  After virtually any business setback or negative development causing a company’s stock price to fall, an investor plaintiff with the benefit of hindsight could then argue that some “uncertainty” should have been disclosed earlier.  If the FDA denies a pharmaceutical company’s new drug application or a promising new product launch turns out to be a commercial flop or a defective product must be recalled or a senior executive engages in personal misconduct, plaintiffs may argue that the company should have disclosed (or said more about) the risk that the negative event might happen.  

Courts disagreed on the validity of this theory.  The Third and Ninth Circuit concluded that “Item 303 does not create a duty to disclose for purposes of Section 10(b) and Rule 10b-5.”⁷ In Stratte-McClure v. Morgan Stanley, the Second Circuit took the opposite approach holding that “Item 303 imposes the type of duty to speak that can, in appropriate cases, give rise to liability under Section 10(b).”  In 2017, the Supreme Court granted review of the Second Circuit’s decision in Indiana Public Retirement System v. SAIC Inc., to resolve this split, but the case settled before argument before the Supreme Court.⁸ In the years since, the Eleventh Circuit adopted the logic of the Third and Ninth Circuits and Second Circuit remained the only federal appellate court to recognize Section 10(b) claims based on alleged Item 303 violations.⁹ But Section 10(b) claims based on alleged Item 303 violations became increasingly common in the Second Circuit, the busiest circuit for securities litigation.  Based on statistics Macquarie Infrastructure compiled in support of its petition for Supreme Court review, roughly 20% of Section 10(b) class actions complaints filed in the Second Circuit between 2014 and 2022 (totaling more than 100 complaints) included Item 303 omission claims.  With its decision in Macquarie Infrastructure, the Supreme Court has now confirmed that “[t]he 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.”

Discussion

The Second Circuit decision in Macquarie Infrastructure—which the Supreme Court has now vacated—illustrates how Item 303 claims expanded the scope of potential liability for pure omissions.

Macquarie Infrastructure owns infrastructure-related businesses, including a subsidiary that operates large “bulk liquid storage terminals,” used to store liquid commodities, including  No.6 fuel oil, a high-sulfur fuel oil that is a byproduct of the refining process and typically has a sulfur content around 3%.  In 2016, the United Nations’ International Maritime Organization adopted IMO 2020, a regulation that would cap sulfur content of fuel oil used in international shipping at 0.5% by the beginning of 2020. Macquarie Infrastructure said nothing about IMO 2020 in its SEC filings.  But, in 2018, it announced disappointing financial results because of falling demand for storage in its subsidiary’ bulk liquid storage terminals due to the structural decline in the No. 6 fuel oil market.

Moab Partners, a Macquarie Infrastructure investor, sued, arguing that the company’s failure to “disclose the extent to which [its subsidiary’s] storage capacity was devoted to No. 6 fuel oil … violated disclosure obliga¬tions under Item 303” and, therefore, violated Section 10(b) and Rule 10b–5.  The district court dismissed but the Second Circuit reversed.  While the court recognized that Moab had not identified any false statements or half-truths that Macquarie Infrastructure had made on the topics of IMO 2020 or the No. 6 fuel oil market, the court applied its binding precedent under Stratte-McClure, holding that a pure omission may violate Section 10(b) and Rule 10b-5 when there is “‘a statute or regulation requiring disclosure,’ . . . such as Ite[m] 303.”  And “[c]rediting [Moab’s] allegations as true,” the court found that “IMO 2020’s significant restriction of No. 6 fuel oil use was known to [Macquarie] and reasonably likely to have material effects on [Macquarie’s] financial condition or results of operation.” As a result, the court found that Moab had “adequately alleged a ‘known trend[] or uncertaint[y]’ that gave rise to a duty to disclose under Item 303” and, thus, had adequately alleged a violation of Section 10(b) and Rule 10b-5.

The Supreme Court reversed. In a unanimous opinion delivered by Justice Sotomayor, the Court drew a distinction 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 framed the question before it as whether Rule 10b-5(b)’s prohibition of “omitting a material fact necessary ‘to make the statements made . . . not misleading’ … bars only half-truths or instead extends to pure omissions.”

The court noted that “Rule 10b–5(b) requires disclosure of information necessary to ensure that statements already made are clear and complete.”  Thus, “[l]ogically and by its plain text, Rule 10b–5(b) … covers half-truths, not pure omissions, because it requires identifying affirmative assertions (i.e., ‘statements made’) before determining if other facts are needed to make those statements ‘not misleading.’”

In its analysis, the Court also considered the statutory context, distinguishing Rule 10b-5’s reference to “statements made” with the Section 11’s prohibition of  any registration statement that “omit[s] to state a material fact required to be stated therein.”¹⁰ Thus, the Court explained, Section 11 expressly “creates liability for failure to speak.”  The Court found the absence of similar language in either Section 10(b) or Rule 10b–5(b) “telling.”  

Conclusion

When public companies—and other participants in the capital markets—choose to speak, they must take care to do so accurately.  In particular, companies should continue to carefully consider the value of making voluntary affirmative disclosures beyond the scope of what is required by Regulation S-K.  But they should not face potential liability for fraud-by-hindsight claims when they have chosen not to speak about a topic.  The Supreme Court’s decision in Macquarie Infrastructure is an important confirmation of the principle that “silence … is not misleading.”¹¹ That said, the Court confirmed that omission of information required to be disclosed in registration statements for securities offerings is actionable under Section 11 of the Securities Act.

¹ Macquarie Infrastructure Corp. v. Moab Partners, L.P., No. 22-1165, 601 U. S. ____ (2024).
² 48 Stat. 891, 15 U. S. C. §78j(b).
³ 17 CFR §240.10b–5(b) (2022).
⁴Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 44 (2011).
⁵ Id. at 44-45.
⁶ 17 C.F.R. § 229.303.
⁷ In re Nvidia Sec. Litig., 768 F. 3d 1046, 1056 (9th Cir. 2014); Oran v. Stafford, 226 F. 3d 275, 288 (3d Cir. 2000).
⁸Ind. Pub. Ret. Sys. v. SAIC, Inc., 818 F.3d 85, 94 (2d Cir. 2015), cert. granted sub nom. Leidos Inc. v. Ind. Pub. Ret. Sys., 137 S. Ct. 1395, 1396 (2017).
⁹ Carvelli v. Ocwen Fin. Corp., 934 F.3d 1307 (11th Cir. 2019).
¹⁰ 15 U. S. C. §77k(a).
¹¹ Basic Inc. v. Levinson, 485 U. S. 224, 239, n. 17 (1988)

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