The U.S. Supreme Court has issued a decision in Macquarie Infrastructure Corp. v. Moab Partners, L.P. holding that the failure to disclose information required by Item 303 of Regulation S-K can support a Rule 10b-5(b) claim only if the omission renders affirmative statements misleading. It is a unanimous decision authored by Justice Sotomayor.
Item 303 of Regulation S-K requires companies to describe “known trends or uncertainties” that may have a material impact on the company’s operations. There has been a circuit split over whether a company’s failure to meet its Item 303 disclosure requirement can support a private claim under Section 10(b) and Rule 10b-5(b) in the absence of an otherwise-misleading statement. The Second Circuit has held that a private claim can be brought based on this omission, while other circuits – notably the Ninth Circuit and Third Circuit – have disagreed.
In Macquarie, the Court had little trouble concluding that the Second Circuit had gone too far in expanding the scope of potential securities fraud liability. The Court clarified that “Rule 10b-5(b) does not proscribe pure omissions.” Instead, it prohibits only affirmative misstatements and the omission of materials facts necessary to ensure that statements are not misleading (i.e., “half-truths”). The failure to provide required information under Item 303 is not a half-truth, but instead is a pure omission of information. Had Congress or the SEC wanted to make pure omissions a basis for liability under Section 10(b) or Rule 10b-5, the Court noted, they knew how to do so because that type of liability exists under Section 11 of the Securities Act for misstatements in registration statements.
Holding: Judgment vacated and case remanded for further proceedings consistent with opinion.
Quote of note: “[T]he difference between an 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. Rule 10b-5(b) does not proscribe pure omissions. . . . Put differently, it requires disclosure of information necessary to ensure that that statements already made are clear and complete (i.e., that the dessert was, in fact, a whole cake.)”
Disclosure: The author of The 10b-5 Daily participated in an amicus brief in support of Macquarie filed by the Washington Legal Foundation.
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