Decision Alert: Supreme Court Unanimously Holds That Pure Omissions Are Not Actionable Under SEC Rule 10b-5(b)

On April 12, 2024, the Supreme Court unanimously held in Macquarie Infrastructure Corp. v. Moab Partners, L.P. that SEC Regulation S-K, Item 303 could not support a private right of action under Rule 10b-5(b) for pure omissions made in required disclosures.  Justice Sotomayor delivered the opinion of the Court, which reversed the Second Circuit’s decision and remanded the case.

As previously summarized in Dykema’s February 2024 edition of Last Month at the Supreme Court, Macquarie Infrastructure Corporation (MIC) is a publicly traded company that owns and operates infrastructure-related businesses. Despite a sudden decline in demand for its bulk liquid storage services, MIC reported successful fourth-quarter and year-end 2017 financial results. When MIC announced a reduction in its 2018 dividend guidance and MIC’s stock price dropped, Moab Partners, L.P. (Moab) filed a lawsuit alleging that MIC had concealed important information from investors in its disclosures. The Second Circuit broke from the majority of other circuits by finding that Moab could bring an action against MIC under Item 303 for MIC’s pure omission in its disclosures.

The Court’s unanimous opinion noted that the text of Rule 10b-5(b), which forbids the omission of material facts in connection with buying or selling securities, does not ban pure omissions when that omission would render disclosed information misleading or superfluous. Silence, the Court stated, is not itself misleading. The Court declined Moab’s invitation to ignore the words “statements made” in Rule 10b-5(b) and found that such an interpretation would render Section 11(a)’s pure omissions clause superfluous. Finally, the Court rejected Moab’s argument that without private liability for pure omissions, there would be broad immunity for issuers who fraudulently omit information in their disclosures. The Court observed that the SEC retains authority to prosecute violations of its regulations.

Takeaways

• The Court confirmed that Item 303 is not an avenue for private actions for pure omissions in required disclosures: plaintiffs must establish an affirmative statement to trigger liability.
• The SEC retains authority under 15 U.S.C. § 78m(a) to prosecute regulatory violations, including pure omissions in required disclosures.

For more information, please contact Chantel Febus, James Azadian, Cory Webster, Christopher Sakauye, Monika Harris, Puja Valera, or A. Joseph Duffy, IV.