U.S. Supreme Court Holds “Pure Omissions” Are Not Actionable Under Rule 10b-5

Item 303 violation cannot sustain Rule 10b-5 claim without allegations of otherwise misleading statements

Resolving a split among the circuit courts, the U.S. Supreme Court has issued a unanimous decision in Macquarie Infrastructure Corp. v. Moab Partners limiting a private plaintiff’s ability to bring claims based on “pure omissions” in a public company’s disclosure documents under the U.S. federal securities laws. 

In the absence of an otherwise misleading statement, the court held, a company’s failure to comply with Item 303 of Regulation S-K does not by itself support a private claim under Section 10(b) of and Rule 10b-5(b) under the U.S. Securities Exchange Act of 1934. Item 303 of Regulation S-K, one of the principal components of the U.S. public company disclosure framework, provides that a company’s management’s discussion and analysis of financial condition and results of operations must disclose, among other things, “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.” Item 303 disclosure is required by Forms 10-K, 10-Q and S-1, and there are nearly identical requirements in Forms 20-F and F-1. 

Moab claimed Macquarie violated Section 10(b) and Rule 10b-5(b) by failing to disclose the impact of a known regulation as required by Item 303. Macquarie’s subsidiary operated terminals to store commodities such as No. 6 fuel oil, which typically has a sulfur content close to 3%. In 2016, the United Nations’ International Maritime Organization formally adopted IMO 2020, a regulation capping the sulfur content of a certain fuel oil at 0.5% by 2020. Macquarie did not discuss IMO 2020 in its disclosure documents, including its annual report on Form 10-K. 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, and Macquarie’s stock price fell 41%. Moab argued that Macquarie violated Section 10(b) and Rule 10b-5(b) because it allegedly had a duty to disclose the IMO 2020 information under Item 303. 

The district court dismissed Moab’s complaint, but the Second Circuit reversed, holding that because Moab had adequately alleged a known trend or uncertainty that gave rise to a duty to disclose under Item 303, Macquarie’s Item 303 violation alone could sustain the Section 10(b) and Rule 10b-5(b) claim.

Rule 10b-5 makes it unlawful to “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.” The Supreme Court held that the plain text of the rule requires identifying affirmative assertions (i.e., “statements made”) before determining whether other facts are needed to make those statements “not misleading.” By contrast, the text of Section 11 of the Securities Act of 1933 creates liability for failure to speak by prohibiting any registration statement that “omit[s] to state a material fact required to be stated therein.” Consequently, the court concluded that “pure omissions” – when a speaker says nothing, in circumstances that do not give any special significance to that silence – are not actionable under Rule 10b-5(b).

The court also held that a duty to disclose (such as that under Item 303) does not automatically render silence misleading under Rule 10b-5(b). Accordingly, 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. 

Private plaintiffs have filed putative class action complaints in the Second Circuit for many years asserting Rule 10b-5 violations based on alleged failures to comply with Item 303, and this ruling eliminates the ability of private plaintiffs to bring such claims successfully. However, companies still need to take care when considering the omission of known trend information, since the SEC can continue to bring its own enforcement actions based solely on a violation of Item 303 without the need to invoke Rule 10b-5. Moreover, private plaintiffs will likely come up with novel ways of framing their complaints in terms of “half truths” rather than pure omissions, which may give rise to liability under Rule 10b-5(b).

We will continue to monitor developments in this area and encourage you to contact us if you have any questions.