Securities lawyers are familiar with Item 303 of Regulation S-K, which calls for companies to disclose in the Management Discussion and Analysis (“MD&A”) section of an annual report “known trends or uncertainties that have had or that are reasonably likely to have a material favorable or unfavorable impact” on the company’s financial condition.[1] But, does an alleged failure to meet this requirement state a claim for securities fraud under Section 10(b)? In three circuits—the Third Circuit, the Ninth Circuit, and the Eleventh Circuit—the answer is no. The Second Circuit, however, disagrees. The Supreme Court has now accepted this issue for review. The Supreme Court’s decision in this case—Macquarie Infrastructure Corporation v. Moab Partners, L.P., No. 22-1165—could open a new avenue for plaintiffs to bring securities fraud claims in circuits that had previously rejected this theory, and place increased importance on the statements in the MD&A section of company filings. 

The case arose from a lawsuit filed by Moab Partners LP, the plaintiff, alleging that Macquarie Infrastructure Corporation had failed to disclose its assessment of the impact that a new oil regulation was expected to have on the company. The plaintiff brought claims under Section 10(b) of the Securities Exchange Act, which allows for a private right of action where a company fails to disclose a material fact necessary to make statements by the company not misleading. In a five-page opinion, the Second Circuit found that the company was required to disclose the impact of this new regulation under Item 303 as it “was known to Defendants and reasonably likely to have material effects.”[2] Reaffirming the Second Circuit’s position in Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 103 (2d Cir. 2015), the court held that a “failure to make a material disclosure required by Item 303 can serve as the basis for . . . a claim under Section 10(b) if the other elements have been sufficiently pleaded.”[3]

The Second Circuit’s decision is at odds with decisions reached by at least three other circuits, which have previously found that a failure to make a disclosure required under Item 303 cannot support a claim under Section 10(b).[4] In Oran v. Stafford, an opinion authored by then-Circuit Judge Samuel Alito, the Third Circuit analyzed the applicable standards for Item 303 disclosure, and found that they differed significantly from the requirements of Rule 10b-5 established by Supreme Court precedent.[5] To read Section 10(b) to encompass violations of this administrative rule, the court found, would considerably expand the reach of this rule.[6] The Ninth Circuit, in In re NVIDIA Corporation Securities Litigation, likewise found that Item 303’s standard for disclosure differed from the test imposed for a violation under Rule 10b-5.[7] More recently, the Eleventh Circuit agreed in Carvelli v. Ocwen Financial Corporation, stating that “[o]n 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.”[8]

This question was previously poised for Supreme Court review in 2017, but the case—Leidos Inc. v. Indiana Public Retirement System, No. 16-581—settled before it could be decided. Barring repeat circumstances, the Supreme Court’s decision should resolve this question and create a uniform rule across the circuits. If the Supreme Court upholds the Second Circuit’s reasoning, its decision could expand the availability of Rule 10(b) as a vehicle for private securities plaintiffs.

The Macquarie Infrastructure case will be argued and decided next year.

[1] See 17 CFR § 229.303(b)(2)(ii).

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

[3] Id.

[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] Oran, 226 F.3d at 287-88.

[6] Id.

[7] NVIDIA, 768 F.3d at 1054.

[8] Carvelli, 934 F.3d at 1331.

[View source.]