In a blow to the plaintiffs’ securities bar, the US Supreme Court in Macquarie Infrastructure Corp. v. Moab Partners unanimously held that a “pure omission”—the failure to disclose information in the absence of an inaccurate, incomplete, or misleading statement—cannot give rise to liability under Section 10(b) of the Securities Exchange Act of 1934 or Rule 10b-5 thereunder, even where there is an affirmative regulatory duty to disclose the omitted information.

The majority of securities class actions are brought under Section 10(b) of the Securities Exchange Act of 1934 (1934 Act) and Securities and Exchange Commission Rule 10b-5, while fewer cases are brought under the parallel provision of the Securities Act of 1933 (1933 Act), Section 11(a). That is because, on the one hand, securities plaintiffs may bring fraud claims under Section 10(b) based on any filing with the US Securities and Exchange Commission (SEC) such as annual and quarterly reports and other public statements. On the other hand, Section 11(a) of the 1933 Act claims may only be based on alleged misstatements and omissions in registration statements filed with the SEC.

In Macquarie [1] the Supreme Court held that claims based on pure omissions cannot be brought under Section 10(b) but can be brought under Section 11(a). The decision resolves a split between the circuit courts, and results in a change of the law in the US Court of Appeals for the Second Circuit (where many securities class actions are filed) that will make it more difficult for plaintiffs to plead securities fraud under Section 10(b).

BACKGROUND

“Rule 10b–5(b) makes it unlawful ‘[t]o 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.’” [2] Because Rule 10b–5 only applies to “statements made,” it has long been the case that “[s]ilence, absent a duty to disclose, is not misleading under Rule 10b–5.” [3] Generally, there are “two circumstances which impose a duty on a corporation to disclose omitted facts”: (1) When a statute or regulation requires disclosure; or (2) once a company speaks on an issue or topic, there is a duty to disclose information such that the statements made are not misleading. [4]

Given this framework, in recent years, the securities plaintiffs’ bar has predicated many pure omissions claims on the allegation that a corporation was duty-bound to disclose information under Item 303 of Regulation S-K, which requires a company to disclose known trends and uncertainties. Plaintiffs’ argument was straightforward: Under Section 13(a) of the 1934 Act, companies are required to file periodic informational statements with the SEC, including Management’s Discussion and Analysis of Financial Conditions and Results of Operation (MD&A), which must set forth information identified by Item 303 of Reg S-K. [5] Pursuant to Item 303, companies are required to “[d]escribe any known trends or uncertainties that have had or that are reasonably likely to have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.” [6] By relying on Item 303, securities plaintiffs’ were able to argue that companies had liability for failing to disclose a wide variety of information relating to “known trends or uncertainties.” [7]

Before the Court’s Macquarie decision, the federal circuits were split on whether failing to disclose information required by Item 303 sufficed to plead a claim under Section 10(b) of the 1934 Act and Rule 10b–5. The Third, Ninth, and Eleventh Circuits had held that the mere failure to disclose information required by Item 303 did not give rise to Section 10(b) liability. [8] As the Ninth Circuit observed, the information required to be disclosed under Item 303 and SEC Rule 10b-5 “differ considerably.” [9] Based on these differences, the Ninth Circuit held that for a Section 10(b) claim, “material information need not be disclosed unless omission of that information would cause other information that is disclosed to be misleading.” [10]

By contrast, the Second Circuit had rejected the Ninth Circuit’s analysis, holding that the “failure to make a required Item 303 disclosure in a 10-Q filing is . . . an omission that can serve as a basis for a Section 10(b) securities fraud claim.” [11] The Second Circuit reasoned that “omitting an item required to be disclosed on a 10-Q can render that financial statement misleading.” [12]

Several other circuits had recognized the split but declined to rule on the issue. [13] The Supreme Court previously granted certiorari in 2017 to resolve this split, but that action settled before a decision was reached. [14]

THE FACTS OF THE MACQUARIE CASE

Macquarie owns a subsidiary that operates fuel storage facilities. [15] The subsidiary’s facilities stored, among other things, “No. 6” fuel oil, which has around a 3% sulfur content. [16] In 2016, the United Nations International Maritime Organization (IMO) adopted a regulation that capped fuel oil sulfur content at 0.5%. [17] In February 2018, Macquarie announced that demand for its subsidiary’s facilities had dropped in part because of the decline in the No. 6 fuel oil market following the IMO regulation. [18] Following this announcement, Macquarie’s stock price fell around 41%, and shareholders filed a putative securities fraud class action. [19] Specifically, plaintiffs alleged that Macquarie and various of its officers had violated Section 10(b) and Rule 10b–5 by omitting information concerning “the extent to which [its subsidiary’s storage capacity was devoted to No. 6 fuel oil” from its public statements in violation of Item 303’s requirement to disclose “known trends or uncertainties” materially affecting its sales, revenue, or income. [20]

The district court dismissed plaintiffs’ complaint, concluding that plaintiffs had not “actually plead[ed] an uncertainty that should have been disclosed” or “in what SEC filing or filings [d]efendants were supposed to disclose it.” [21] The Second Circuit reversed, holding that a duty to disclose for purposes of Section 10(b) arises when there is “a stat¬ute or regulation requiring disclosure. . . such as Item 303.&rdquo[22]; Accordingly, the Second Circuit held that plaintiffs’ allegations concerning the likely material effect of the IMO regulation on Macquarie’s subsidiary’s business gave rise to a duty to disclose under Item 303, which was sufficient to sustain a Section 10(b) claim. [23]

SUPREME COURT’S DECISION IN MACQUARIE

In a unanimous decision authored by Justice Sonia Sotomayor, the Supreme Court agreed with the Ninth and other circuits and rejected the Second Circuit’s approach:

Rule 10b–5(b) does not proscribe pure omissions. The Rule prohibits omitting material facts necessary to make the ‘statements made . . . not misleading.’ Put differently, it requires disclosure of information necessary to ensure that statements already made are clear and complete (i.e., that the dessert was, in fact, a whole cake). This Rule there¬fore covers half-truths, not pure omissions. [24]

The Court’s decision noted further that, while they are not actionable under Section 10(b) of the 1934 Act, “pure omissions” may be actionable under Section 11(a) of the 1933 Act, which “prohibits any registration statement that . . . ‘omit[s] to state a material fact required to be stated therein.’” [25] The Court also confirmed that plaintiffs may bring claims under Section 10(b) where Item 303 violations create misleading half-truths, and that the SEC retains authority to prosecute violations of its own regulations. [26]

KEY TAKEAWAYS

The Macquarie decision is a major blow to the plaintiffs’ securities bar, which has sought in recent years to hold companies and their senior officers liable for “pure omissions.” Plaintiffs’ lawyers will have to predicate their claims on actual statements made rather than the mere theory that information that was later revealed was known at an earlier time and required to be disclosed as a “known trend” or “uncertainty” under Item 303. The Macquarie decision represents a major shift in the law of the Second Circuit in particular.

Macquarie also may impact other areas of federal securities law. For example, like Rule 10b-5, Section 12(a)(2) of the 1933 Act imposes liability in certain circumstances based on false or misleading statements. The Macquarie decision does not address whether pure omissions are actionable in a claim under Section 12(a)(2). However, because Section 12(a)(2) does not contain the key language found in Section 11(a) that authorizes a claim when a registration statement “omit[s] to state a material fact required to be stated therein,” the Court’s analysis suggests that plaintiffs cannot bring Section 12(a)(2) claims based on pure omissions. As a result, following Macquarie, courts should hold that alleged violations of Section 12(a)(2) cannot be predicated on a pure omission.

Macquarie does not impact the ability of plaintiffs to bring claims under Section 11(a) of the 1933 Act based on alleged failures to disclose known trends and uncertainties as required by Item 303. In addition, the Macquarie Court specifically acknowledged that the SEC may have the authority to investigate or pursue claims for a company’s failure to comply with federal securities laws and regulations, including Item 303. Notably, whatever recourse the SEC may have, Macquarie prevents the SEC, like private plaintiffs, from bringing claims under Section 10(b) and Rule 10b–5 for “pure omissions.”

[1] 2024 WL 1588706, 601 U.S. ---- (2024)

[2] Macquarie, 2024 WL 1588706, at *3 (quoting 17 CFR § 240.10b–5(b)).

[3] Basic Inc. v. Levinson, 485 U. S. 224, 239, n. 17 (1988).

[4] See Macquarie, 2024 WL 1588706, at *3.

[5] See 15 U. S. C. §§ 78m(a)(1), 78l(b)(1); SEC Form 10–K; SEC Form 10–Q.

[6] 17 CFR § 229.303(b)(2)(ii).

[7] Id.

[8] See In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046, 1056 (9th Cir. 2014) (“Item 303 does not create a duty to disclose for purposes of Section 10(b) and Rule 10b-5.”); Oran v. Stafford, 226 F.3d 275, 287–88 (3d Cir. 2000) (“[T]he ‘demonstration of a violation of the disclosure requirements of Item 303 does not lead inevitably to the conclusion that such disclosure would be required under Rule 10b–5. Such a duty to disclose must be separately shown’”); Carvelli v. Ocwen Fin. Corp., 934 F.3d 1307, 1331 (11th Cir. 2019) (“On its face, Item 303 imposes a more sweeping disclosure obligation than Rule 10b-5, such that a violation of the former does not ipso facto indicate a violation of the latter.”).

[9] NVIDIA, 768 F.3d at 1055; see also Carvelli, 934 F.3d at 1331 (“The disclosure obligations imposed by Item 303 and Rule 10b-5 are materially (no pun intended) different—the former is far more sweeping than the latter.”).

[10] 768 F.3d at 1056.

[11] Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 100, 103–04 (2d Cir. 2015).

[12] Id. at 102.

[13] Ind. Pub. Ret. Sys. V. Pluralsight, Inc., 45 F.4th 1236, 1270 (10th Cir. 2022); In re Triangle Cap. Corp. Sec. Litig., 988 F.3d 743, 756 (4th Cir. 2021); Mun. Emps.’ Ret. Sys. Of Mich. V. Pier 1 Imports, Inc., 935 F.3d 424, 436 (5th Cir. 2019).

[14] See Leidos, Inc. v. Ind. Pub. Ret. Sys., 137 S. Ct. 1395 (2017), cert. dismissed, 138 S. Ct. 2670 (2018).

[15] Macquarie, 2024 WL 1588706, at *3.

[16] Id.

[17] Id.

[18] Id.

[19] Id.

[20] Id.

[21] Id.

[22] Id.

[23] Id.

[24] Id. at *4.

[25] Id. at *5 (quoting 15 U.S.C. §77k(a)).

[26] Id.

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