In Macquarie Infrastructure Corp., et al., v. Moab Partners, L. P., et. al, a unanimous United States Supreme Court held that failure to make MD&A disclosures required by Item 303 of Regulation S-K does not violate Rule 10b-5(b).  The Court reiterated the tenet of Basic Inc. v. Levinson that “Silence, absent a duty to disclose, is not misleading under Rule 10b–5.”

The facts are straightforward. Macquarie owned a subsidiary that operateed terminals to store bulk liquid commodities, including No. 6 fuel oil, a byproduct of the refining process with a typical sulfur content close to 3%. In 2016, the United Nations’ International Maritime Organization formally adopted IMO 2020, a regulation capping the sulfur content of fuel oil used in shipping at 0.5% by 2020. In the ensuing years, Macquarie did not discuss IMO 2020 in its public offering documents. In February 2018, however, Macquarie announced a drop in the amount of storage contracted for use by its subsidiary due in part to the decline in the No. 6 fuel oil market. Macquarie’s stock price fell 41%.

In response, Moab Partners, L. P., sued Macquarie and various officer defendants. Moab alleged, among other things, that Macquarie violated SEC Rule 10b–5(b)—which makes it unlawful to omit material facts in connection with buying or selling securities when that omission renders “statements made” misleading—because it had a duty to disclose the IMO 2020 information under Item 303 of SEC Regulation S–K. Item 303 requires companies to disclose “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” in periodic filings with the SEC. The District Court dismissed Moab’s complaint. The Second Circuit reversed, concluding in part that Moab’s allegations concerning the likely material effect of IMO 2020 gave rise to a duty to disclose under Item 303, and Macquarie’s Item 303 violation alone could sustain Moab’s §10(b) and Rule 10b–5 claim.

Reversing the Second Circuit, the Supreme Court held pure omissions are not actionable under Rule 10b–5(b). 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.”  In addition to prohibiting “any untrue statement of a material fact”—i.e., false statements or lies—the Rule also prohibits omitting a material fact necessary “to make the statements made . . . not misleading.”  According to the Court, this case turned on whether this second prohibition bars only half-truths or instead extends to pure omissions.

The Court stated a pure omission occurs when a speaker says nothing, in circumstances that do not give any special significance to that silence. Half-truths, on the other hand, are “representations that state the truth only so far as it goes, while omitting critical qualifying information.” Rule 10b–5(b) requires disclosure of information necessary to ensure that statements already made are clear and complete. Logically and by its plain text, Rule 10b–5(b) therefore covers half-truths, not pure omissions, because it requires identifying affirmative assertions (i.e., “statements made”) before determining if other facts are needed to make those statements “not misleading.”

The Court bolstered its conclusion by comparing the foregoing analysis to the Section 11(a) of the Securities Act of 1933. Section 11(a) of the Securities Act of 1933 prohibits any registration statement that “omit[s] to state a material fact required to be stated therein.” By its terms, §11(a) creates liability for failure to speak. Neither §10(b) nor Rule 10b–5(b) contains language similar to §11(a), and according to the Court, that omission is telling.

Concluding the analysis, the Court looked to Basic Inc. v. Levinson, noting “Silence, absent a duty to disclose, is not misleading under Rule 10b–5.”  The Court noted a duty to disclose, however, does not automatically render silence misleading under Rule 10b–5(b). The failure to disclose information required by Item 303 can support a Rule 10b–5(b) claim only if the omission renders affirmative statements made misleading.

Moab and the SEC suggested that a plaintiff does not need to plead any statements rendered misleading by a pure omission because reasonable investors know that the Exchange Act requires issuers to file periodic informational statements in which companies must furnish the information required by Item 303. But that argument reads the words “statements made” out of Rule 10b–5(b) and shifts the focus of that Rule and §10(b) from fraud to disclosure.

What remains open after Macquarie?  Macquarie only addresses whether a pure omission violated Rule 10b-5(b).  The Court did not opine on issues that were either tangential to the question presented or were not passed upon by the lower courts, including what constitutes “statements made,” when a statement is misleading as a half-truth, or whether Rules 10b–5(a) and 10b–5(c) support liability for pure omissions.