Supreme Court Holds “Pure Omissions” Are Not Actionable

Supreme Court Rules on SEC Rule 10b-5(b) in Macquarie Infrastructure Corp. v. Moab Partners

In the recent decision of Macquarie Infrastructure Corp. v. Moab Partners, No. 22-1165, 2024 WL 1588706 (U.S. Apr. 12, 2024) (“MIC”), the U.S. Supreme Court unanimously held that “pure omissions” in SEC filings do not support liability under SEC Rule 10b-5(b). This landmark ruling clarifies that the failure to disclose information does not constitute securities fraud under Rule 10b-5(b) unless it renders an affirmative statement misleading.

 Case Background

The case arose from a situation where Macquarie Infrastructure Corp. (MIC) did not disclose the implications of the International Maritime Organization's (IMO) 2020 regulation on its financial condition. Specifically, the IMO 2020 regulation capped sulfur content in shipping fuel, which adversely affected MIC’s business due to its substantial holdings in No. 6 fuel oil, a product with high sulfur content. After the regulation was enacted, MIC's stock price fell, prompting a lawsuit by shareholders.

The shareholders argued that MIC’s failure to disclose the IMO 2020 regulation constituted a violation of SEC Rule 10b-5(b), which prohibits fraud in connection with the purchase or sale of securities, including omissions that render statements misleading. They based their claim on Item 303 of Regulation S-K, which requires disclosure of known trends or uncertainties that could materially impact financial performance.

Court Ruling

The Supreme Court overturned the Second Circuit’s decision, siding with the Third, Ninth, and Eleventh Circuits in concluding that Rule 10b-5(b) does not cover "pure omissions"—situations where no affirmative statements are made, but information is simply not disclosed. The Court held that:

- Rule 10b-5(b) Requirements: The rule only addresses omissions that make affirmative statements misleading. It does not penalize pure silence on an issue unless it relates to a statement that was made.

- Half-Truths: Rule 10b-5(b) applies to “half-truths,” where a statement is partially true but misleading due to the omission of critical information. However, the Court did not clarify the exact parameters of what constitutes a “half-truth” or how closely the undisclosed information must relate to the statements made.

The Court's decision emphasizes that merely failing to disclose information, in the absence of misleading statements, does not constitute securities fraud under Rule 10b-5(b).

 Implications and Key Takeaways

1. Limitation on Liability: The ruling restricts the scope of Rule 10b-5(b) liability, making it clear that “pure omissions” alone cannot sustain a claim. Plaintiffs must demonstrate that the omission rendered an affirmative statement misleading to establish a Rule 10b-5(b) violation.

2. Affirmative Statements and Half-Truths: While the Court did not define the precise nature of a “half-truth,” it highlighted that actionable omissions must be linked to misleading affirmative statements. Future cases will likely explore how closely related undisclosed information must be to a statement to be considered a half-truth.

3. Other Avenues for Claims: The ruling does not impact other provisions of securities law. For example, pure omissions can still be actionable under:

   - Rule 10b-5(a) and (c): These subsections may cover fraudulent schemes and practices not directly addressed by Rule 10b-5(b).

   - Section 11(a) of the Securities Act of 1933: Prohibits omissions in registration statements.

   - SEC Enforcement: The SEC retains the authority to pursue actions for failure to disclose information under rules like Item 303.

 Conclusion

The MIC decision narrows the applicability of Rule 10b-5(b) to cases involving misleading affirmative statements rather than pure omissions. This clarification helps define the limits of securities fraud claims and provides guidance for companies and legal practitioners on the scope of disclosure obligations under securities laws.

To discuss “pure omissions” in SEC filings or any other issues relating to this topic contact, Lars Soreide, Esq., at Soreide Law Group:  888-760-6552.