April 15, 2024

SCOTUS Decides MD&A Omissions Case

On Friday, the Supreme Court issued its decision in Macquarie Infrastructure Corp. v. Moab Partners, L.P., a case from the Second Circuit addressing the ability to rely on a failure to disclose certain information in accordance with the requirements of Item 303 of Regulation S-K as a basis to state a securities fraud claim under SEC Rule 10b-5. A unanimous Supreme Court held that “pure omissions” are not actionable under Rule 10b–5(b). The opinion, authored by Justice Sotomayor, states:

Securities and Exchange Commission (SEC) Rule 10b–5(b) makes it unlawful to omit material facts in connection with buying or selling securities when that omission renders “statements made” misleading. Separately, Item 303 of SEC Regulation S–K requires companies to disclose certain information in periodic filings with the SEC. The question in this case is whether the failure to disclose information required by Item 303 can support a private action under Rule 10b–5(b), even if the failure does not render any “statements made” misleading. The Court holds that it cannot. Pure omissions are not actionable under Rule 10b–5(b).

As a result of the Supreme Court’s decision, the judgment of the Court of Appeals for the Second Circuit is vacated, and the case is remanded for further proceedings consistent with the Supreme Court’s opinion.

The Court explained, “A pure omission occurs when a speaker says nothing, in circumstances that do not give any particular meaning to that silence.” By contrast, a half-truth occurs when a speaker says something, but “state[s] the truth only so far as it goes, while omitting critical qualifying information.” The Court held that Rule 10b-5(b) prohibits half-truths but not pure omissions, noting that the text of Rule 10b5-1(b) prohibits omitting information from a public disclosure that is “necessary in order to make the statements made … not misleading.” Liability under that provision turns on there being “statements made” that were misleading. While other provisions of the securities laws, such as Section 11 of the Securities Act, prohibit pure omissions, neither Rule 10b-5(b) nor Section 10(b) contains this express prohibition. The Court made clear that it was not opining on other issues not presented to it, such as “what constitutes ‘statements made’” and “when a statement is misleading as a half-truth.”

– Dave Lynn