The Supreme Court recently took away an often-used weapon by shareholder plaintiffs in securities fraud cases, ruling that "pure omissions" from periodic SEC filings (absent any other duty to disclose) are not actionable under SEC Rule 10b-5. In Macquarie Infrastructure Corp. v. Moab Partners, L.P., a subsidiary of Macquarie operated a fuel storage facility that included tanker and other ocean shipping fuel storage. In 2016, the United Nations' International Maritime Organization adopted a regulation that capped the sulfur content of fuel used in shipping. Macquarie did not discuss the regulation in its public offering documents, or how this regulation might affect its future financial results. After Macquarie's stock price fell substantially when it announced a decline in storage capacity due to the regulation, Moab Partners, a Macquarie shareholder, sued Macquarie for fraud. Moab claimed, among other things, a violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b). Moab argued that Macquarie had a duty to disclose the potential consequences of the new regulation because Item 303 of SEC Regulation S-K requires disclosure of trends "that have had or that are reasonably likely to have a material favorable or unfavorable impact on net sales or revenues."
Rule 10b-5 makes it unlawful for issuers of securities to make untrue statements of material fact or to omit a material fact necessary in order "to make statements made, in light of the circumstances under which they were made, not misleading." While Rule 10b-5 plainly prohibits false statements or lies, its prohibition on omitting a material fact necessary "to make the statements made . . . not misleading" has caused confusion and mixed results in the lower courts. In holding that Rule 10b-5(b) covers only half-truths, but not pure omissions, the Supreme Court explained that the Rule requires disclosure of information necessary to ensure that statements already made are clear and complete. In other words, Rule 10b-5(b) requires affirmative assertions (i.e., "statements made") before determining whether other facts are needed to make those statements "not misleading." Silence on an issue therefore cannot create liability under Rule 10b-5(b).
The Supreme Court also rejected Moab's argument that Item 303 created a duty to disclose the change in fuel regulations and the negative impact those changes would likely have on Macquarie's revenues. The Supreme Court stated that Moab's argument would "read the words 'statements made' out of Rule 10b-5(b)" and would shift the focus of the Rule from fraud to disclosure. But the Supreme Court also recognized that even though a pure omission may not create liability under Rule 10b-5(b), shareholder plaintiffs remain free to bring claims based on Item 303 violations that create misleading half-truths and the SEC retains authority to prosecute any violation of its own regulations (including a pure omission under Item 303).
The decision settles a Circuit split over whether a failure to make a disclosure required by Item 303 can support a private claim under Rule 10b-5 in the absence of an otherwise-misleading statement. The decision also provides clearer guidance to corporate officers and directors (and significantly limits their potential exposure to stockholders) over whether public companies must disclose potentially adverse business conditions in their periodic SEC filings. It is important to note, however, that even though pure omissions may not create liability under Rule 10b-5, Section 11(a) of the Securities Act of 1933 still prohibits any registration statement that "omit[s] to state a material fact required to be stated therein or necessary to make the statements therein not misleading." The Court's decision specifically noted this distinction between Section 10(b) of the 1934 Act and Section 11(a). Issuers should therefore be mindful of their disclosure obligations, depending on the nature and context of the disclosure.
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