Supreme Court narrows scope of omissions liability under the Securities Exchange Act

In Macquarie Infrastructure Corporation v. Moab Partners, L.P., the Supreme Court unanimously held that pure omissions based on a failure to disclose information required by Item 303 of Regulation S-K (Item 303) are not actionable under Securities Exchange Act Section 10(b) and Rule 10b-5(b), thereunder, unless the omission renders an affirmative statement misleading. Item 303 requires companies to disclose "known trends or uncertainties" in SEC filings that could have a material impact on net sales, revenues, or income. This decision resolves a circuit split between the Second Circuit Court of Appeals, which has permitted a private right of action under Section 10(b) and Rule 10b-5(b) based on pure omissions in Item 303 disclosures, and the Third and Ninth Circuits, which have not.

A pure omission occurs when a company chooses to stay silent on material information they are required to disclose. The second prong of Rule 10b-5(b) states that it is unlawful 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.” While the Second Circuit has taken the position that this includes pure omissions, the Supreme Court’s opinion by Justice Sotomayor stated that a duty to disclose on its own does not render silence misleading. The Court reasoned that Rule 10b-5 requires the disclosure of information, which means that affirmative assertions must be made in order to determine whether the statements are misleading. 

The Court further reasoned that the statutory context confirms what the plain language provides. Congress imposed liability for pure omissions under Section 11(a) of the Securities Act of 1933 by prohibiting any registration statement that “contain[s] an untrue statement of a material fact or omit[s] to state a material fact required to be stated therein or necessary to make the statements therein not misleading” (emphasis added). There is no similar language for omissions in Section 10(b) or Rule 10b-5(b). The Court rejected efforts by the plaintiff to read the words “statements made” out of Rule 10b-5(b) and to shift the focus of that rule and Section 10(b) from fraud to disclosure.

Despite this narrowing of omissions liability scope, the Court maintained that the omission of material facts under Rule 10b-5 still applies to half-truths, representations that state some of the truth while omitting critical information. Additionally, plaintiffs can pursue pure omissions violations on registration statements under Section 11, as applicable. 

This decision gives issuers a strong argument against securities fraud claims alleging violations of the disclosure requirements of Item 303 and other violations under Section 10(b) and Rule 10b-5. It will also be more difficult for a private plaintiff to identify a statement that is half true compared to one that is missing. Private plaintiffs are likely to test this decision, as it is yet to be seen how courts will distinguish a pure omission from a half-truth going forward. Courts may be challenged to determine where the line between a half-truth and a pure omission is drawn. For example, how vague does a statement have to be before a court will consider a fact to be missing from it altogether? Despite the direction of the decision, however, issuers should not view it as a signal that vigilance can be lessened when it comes to ensuring that disclosure related to the purchase or sale of securities is complete.

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