On April 12, 2024, the U.S. Supreme Court decided Macquarie
Infrastructure Corp. v. Moab Partners, L.P.,1 and
held that SEC Rule 10b–5(b)2 prohibits only
affirmative misstatements and half-truths (i.e., an affirmative
statement that is misleading because it omits information). It does
not prohibit pure omissions.
In our view, this decision should not have a significant practical
impact on future securities litigation.
Macquarie Infrastructure Corporation, through its subsidiary
International-Matex Tank Terminals ("IMTT"), operated
terminals that stored, among other things, No. 6 fuel oil. In 2016,
the United Nations International Maritime Organization adopted
regulation IMO 2020, which capped the sulfur content of fuel oil
used in shipping at 0.5% by the beginning of 2020. No. 6 fuel oil
has a sulfur content closer to 3.0%. Macquarie did not discuss IMO
2020 until February 2018, when Macquarie announced that IMTT's
contracted storage capacity had dropped in part because of the
structural decline in the No. 6 fuel oil market. Macquarie's
stock price fell around 41%.
Moab Partners sued Macquarie, alleging violations of Section 10(b)
of the Securities Exchange Act of 1934 and Rule 10b-5(b). Pursuant
to the authority in Section 10(b), Rule 10b-5(b) makes it unlawful
for persons 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
Moab alleged that Macquarie's statements were "false and
misleading" because Macquarie "concealed from investors
that IMTT's single largest product . . . was No. 6 fuel
oil," which "faced a near-cataclysmic ban on the bulk of
its worldwide use through IMO 2020."4 Moab alleged,
among other things, that (a) Macquarie was required to disclose the
impact of IMO 2020 under Item 303 of SEC Regulation S-K, which
requires disclosure of "a trend, demand, commitment, event or
uncertainty is both presently known to management and reasonably
likely to have material effects on the registrant's financial
conditions,"5 and (b) the omission of this
information rendered affirmative statements false and
misleading.
The District Court dismissed the complaint. The Second Circuit
Court of Appeals reversed and reinstated the complaint. On review
of the Second Circuit's decision, the Supreme Court unanimously
held that "[p]ure omissions are not actionable under Rule
10b–5(b)."6 The Court looked to the text of
Rule 10b-5, which prohibits omitting material facts necessary to
make the "statements made . . . not misleading," and
concluded that "[l]ogically and by its 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.'"7
While this decision is important, in our view it is likely to have
limited impact. Under Section 11 of the Securities Act of 1933,
investors can still allege claims for pure omissions in connection
with IPOs, SPOs, and other securities offerings. Section 11
prohibits any registration statement that "contain[s] an
untrue statement of a material fact or omit[s] to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading."8 As the Court
noted when comparing Section 11 to Rule 10b-5, Section 11 creates
liability for both half-truths and a "failure to speak on a
subject at all."9 Also, most complaints alleging
violations of Rule 10b-5(b) already allege affirmative statements
that were rendered misleading due to the defendants' omissions.
This is because prior to the Court's decision in
Macquarie, there was a circuit split since at least three
Courts of Appeals (Third, Ninth, and Eleventh) covering 15 states
had ruled that a failure to disclose information required by Item
303 did not support a Rule 10b-5(b) claim.
Further, Macquarie does not address pure omissions under
Rule 10b-5(a) or 10b-5(c),1] which make it unlawful for
any person to "employ any device, scheme, or artifice to
defraud" or "engage in any act, practice, or course of
business which operates or would operate as a fraud or deceit upon
any person."1] In 2019, the Supreme Court stated
that "[i]t would seem obvious that the words in these
provisions are, as ordinarily used, sufficiently broad to include
within their scope the dissemination of false or misleading
information with the intent to defraud."1] We
expect future securities actions to allege that pure omissions are
violations of Rule 10b-5(a) and 10b5-(c), and for courts to opine
whether these rules are broad enough to include claims for pure
omissions.
Footnotes
1 601 U.S. 257 (2024).
2 17 C.F.R. § 240.10b-5(b).
3 Id.
4 Macquarie, 601 U.S. at 261 (quoting City of Riviera Beach Gen. Emps. Ret. Sys. v. Macquarie Infrastructure Corp., 2021 WL 4084572, *6 (S.D.N.Y. Sept. 7, 2021)).
5 17 C.F.R. § 229.303(a)(3)(ii).
6 Macquarie, 601 U.S. at 266.
7 Id. at 264.
8 15 U.S.C. § 77k.
9 Macquarie, 601 U.S. at 264.
10 Id. at 266 n.2.
11 17 C.F.R. § 240.10b-5.
12 Lorenzo v. SEC, 587 U.S. 71, 78 (2019).
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