In a unanimous decision issued on Friday, the U.S. Supreme Court held that a corporation’s failure to disclose information regarding known trends or uncertainties, required by SEC regulation, cannot be the basis for private securities litigation under Rule 10b-5(b), unless the omission would render an affirmative statement misleading.[1] The regulatory requirement at issue, Item 303 of Regulation S-K, calls for companies to disclose in the Management’s Discussion and Analysis (MD&A) section of periodic reports “known trends or uncertainties that have had or that are reasonably likely to have a material favorable or unfavorable impact” on the company’s net sales or revenues or income from continuing operations.[2]

Courts were previously split on whether an alleged failure to disclose under Item 303 could state a claim for private securities fraud, with the Second Circuit finding that it could,[3] and three circuits—the Third Circuit, the Ninth Circuit, and the Eleventh Circuit—finding that it could not.[4] The Supreme Court’s decision in Macquarie resolves this split, reversing the Second Circuit’s decision in favor of the rule adopted by other circuits.

The defendant in Macquarie, Macquarie Infrastructure Corporation (“Macquarie”), operated terminals for No. 6 fuel oil, a type of fuel that UN regulations in 2016 had significantly curtailed the use of by 2020. However, Macquarie did not discuss the new regulation in its public offering documents. Instead, the company waited to “announce[] that the amount of storage contracted for use by its subsidiary’s customers had dropped in part because of the structural decline in the No. 6 fuel oil market,” after which Macquarie’s stock price fell 41%.[5] Plaintiff brought claims under Section 10(b) and Rule 10b-5, alleging that Macquarie’s failure to disclose its assessment of the impact that the UN regulations were expected to have on the company was an actionable omission.

In its decision, authored by Justice Sotomayor, the Court emphasized that “[p]ure omissions are not actionable under Rule 10b-5(b).”[6] Instead, “the Rule requires identifying affirmative assertions (i.e., ‘statements made’) before determining if other facts are needed to make those statements ‘not misleading.’”[7] The Court contrasted this with Section 11(a) of the Securities Act, which expressly prohibits any registration statement that “omit[s] to state a material fact required to be stated therein.”[8] As there is no similar language in Section 10(b) or Rule 10b-5(b), the Court concluded, neither Congress nor the SEC intended to create liability for similar omissions under the Rule.[9]

The Court rejected the argument that, without private liability for pure omissions, there would be “broad immunity” for issuers to fraudulently omit information required by SEC regulations. The Court noted that not only do private parties remain free to bring claims based on Item 303 violations that create misleading half-truths, but the SEC retains authority to prosecute violations of its own regulations (including the Exchange Act rule requiring issuers to file reports in accordance with SEC rules).[10]

In what will undoubtedly be frequently quoted by both the plaintiffs’ and the defendants’ securities bar, the Court explained that “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.”[11]

The matter may not be entirely over for Macquarie, as a final footnote in the Court’s decision clarified that the decision did not reach related questions that were not presented by the lower court’s decision, including “what constitutes ‘statements made,’ when a statement is misleading as a half-truth, or whether Rules 10b-5(a) or 10b-5(c) can support liability for pure omissions.”[12]

In other words, though the Macquarie decision is a win for the defense bar, the Court’s holding is narrow and expressly leaves open whether the “scheme-liability” provisions in Rules 10b-5(a) or 10b-5(c) support liability for pure omissions. However, the Macquarie decision suggests that, with respect to the “scheme-liability” provisions, the Court may be expected to follow closely the statutory language and not expand liability in response to policy arguments.

The case has been remanded back to the Second Circuit for further proceedings.

[1] Macquarie Infrastructure Corporation v. Moab Partners, L.P., No. 22-1165, 2024 WL 1588706 (2024).

[2] See 17 CFR § 229.303(b)(2)(ii).

[3] Moab Partners, L.P. v. Macquarie Infrastructure Corp., No. 21-2524, 2022 WL 17815767, at *3 (2d Cir. Dec. 20, 2022).

[4] See Oran v. Stafford, 226 F.3d 275 (3d Cir. 2000); In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046 (9th Cir. 2014); Carvelli v. Ocwen Fin. Corp., 934 F.3d 1307 (11th Cir. 2019).

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

[6] Id. at *6.

[7] Id. at *4.

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

[9] Id.

[10] Id.

[11] Id. at *4.

[12] Id.at *5, n. 2.

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