The Nutter Securities Enforcement Update is a periodic update of noteworthy recent securities enforcement activity, settlements, decisions, and charges. We provide brief summaries that highlight recent enforcement action filings and developments to help identify enforcement trends, changes in the law, new theories, and new areas of enforcement focus. For more information on these cases or about how they may impact you, contact your Nutter attorney.

SCOTUS Bars “Omission Only” Claims

In Macquarie Infrastructure Corp. v Moab Partners, LP, the U.S. Supreme Court unanimously held that “pure omissions” – that is, a failure to disclose information where the failure does not render any other “statements made” misleading – cannot support a private cause of action for securities fraud under Exchange Act Section 10(b) and Rule 10b-5.

Moab Partners, an investor in Macquarie, brought the securities fraud action to recover stock-drop losses, alleging that Macquarie had failed to disclose that a subsidiary’s largest product was “No. 6 fuel oil” on which a United Nations agency had imposed “a near-cataclysmic ban.” The district court dismissed the complaint because Moab had not alleged a risk that needed to be disclosed or specific filings that required such disclosure. The Second Circuit reversed, holding in pertinent part that Item 303 of the SEC’s Reg S-K required disclosure of known trends or uncertainties, such as the impact of the fuel oil ban. This ruling deepened a circuit split over whether a failure to make Item 303 disclosures, standing alone, can support a private cause of action under Rule 10b-5.

The Supreme Court held that Rule 10b-5 does not proscribe pure omissions, but only the omission to state material facts necessary to make other statements not misleading. The Court contrasted the rule’s language with that of Securities Act Section 11, governing registration statements, which prohibits omissions of both material facts “required to be stated” as well as those “necessary to make the statements therein not misleading.” In vacating the Second Circuit judgment, the Court noted that while “pure omissions” are not actionable, “half-truths” are. What’s the difference between a “pure omission” and a “half-truth”? The Court explained: “the difference between a pure omission and a half-truth is the difference between a child not telling his parents he ate a whole cake and telling them he had dessert.”

(NSEU 24-05)