On January 16, 2024, the Supreme Court heard oral argument in Case Number 22-1165, Macquarie Infrastructure Corp., et al. v. Moab Partners, L.P., et al.   Before the Court was whether a “failure to make a disclosure under Item 303 of the SEC regulation S-K can support a private claim under Section 10b of the Exchange Act, even in the absence of an otherwise misleading statement.”

Between February 2016, and February 2018, Macquarie Infrastructure Corporation (MIC) in various Management’s Discussion and Analysis allegedly “disclosed a few known trends that would affect their bottom line but omitted” a new rule “that would decimate 40 percent of their revenue” to its investor, Moab Partners, L.P. Moab, as the lead plaintiff of a class action, pursued MIC through a private cause of action under Rule 10b-5 of the Exchange Act, alleging that these omissions were misrepresentations that afforded them a private right of action.

Item 303 of the SEC Regulation S-K, known as the Management’s Discussion and Analysis (MD&A), requires that management provide investors with an understanding of trends that could affect the business’s financial condition. There is currently no recognized private cause of action for alleged violations under Item 303. Instead, the SEC has the power to enforce investors’ rights under Item 303. Rule 10b-5(b) of the Exchange Act, on the other hand, provides a private civil cause of action for investors when the company in question “make[s] any untrue statement of a material fact or to omit to state a material fact[.]” MIC’s private lawsuit pursued Moab Partners under Rule 10b-5 of the Exchange Act for statements made in the context of an MD&A governed by Item 303.

This lawsuit therefore raised two issues: (1) whether these alleged omissions qualified as misleading statements giving rise to this private cause of action , and (2) whether there existed a private cause of action for statements made during the MD&A. The Supreme Court granted certiorari of the following question: “Whether the Second Circuit erred in holding . . . that a failure to make a disclosure required under Item 303 can support a private claim under Section l0b, even in the absence of an otherwise misleading statement.”

With regards to the first question, the parties at oral argument appeared to agree on one narrow issue: there must be a statement in order for a class action to move forward on the basis of a misleading statement. The parties, however, disagreed as to whether Moab could meet that standard in this case. MIC argued that there was no specific statement that Moab could point to in this case that was misleading. Moab Partners, on the other hand, argued that the entirety of the statements regarding the few known trends, while omitting a trend that would decimate close to half of MIC’s revenue, was a classic lie by omission, or a “half-truth[].” Justice Kagan recognized that the parties’ argument centered on “just sort of how narrow or how capricious we should understand the requirement that there needs to be another statement that’s rendered misleading[.]”

With regards to the second question, MIC argued that the law was clear that the remedy for this cause of action is through the SEC, and the Court has been “loath to expand” private causes of action when none is given in the law. Moab argued that giving the SEC the sole power to pursue these causes of action was an inadequate remedy. Moab asserted that the SEC’s staff is too “meager compared the resources and opportunities for institutional investors . . . to bring private actions.” The United States, appearing as amicus curiae agreed that there should be a private cause of action, stating that “the SEC’s resources in this area . . . are limited[,]” and the “Court has repeatedly said that private litigation under Rule 10b-5 is an essential supplement to SEC enforcement actions.”

The Supreme Court’s decision may have sweeping implications on investors’ rights. For example, a decision in Moab’s favor might incentivize managers like MIC to limit their statements to their investors for fear of “omitting” a material fact. On the other hand, such a decision in favor of Moab could require managers to transparently disclose trends that would affect a company’s bottom line. Moreover, if the Supreme Court also holds that there is a private cause of action for alleged misleading statements made during the MD&A, this could greatly expand the rights of private investors.