The Supreme Court ruled unanimously on Friday in Macquarie Infrastructure Corp. vs Moab Partners that private parties cannot sue public securities issuers for “pure omissions” in disclosure documents. However, the case does not prevent the Securities and Exchange Commission from taking enforcement actions for such omissions.
According to the facts of the case, a subsidiary of Macquarie operated storage facilities for a liquid fuel called No. 6 fuel, a byproduct of oil refining that is used in the marine industry. In 2016, the United Nations International Maritime Organization adopted a regulation that would restrict the sulfur content of fuels to 0.5%. The normal sulfur content for No. 6 fuel was around 3%. The regulation was scheduled to become effective in 2020.
As a consequence, the demand for No. 6 fuel fell and Macquarie had to invest in repurposing its storage facilities that had been used for No. 6. This caused Macquarie’s stock price to decline by 41% in 2018, but Macquarie did not disclose the U. N. regulation or its anticipated effect on the company to investors according to the Supreme Court ruling. Moab then sued Macquarie for this omission.
A district court first dismissed the case, but the U.S. 2nd Circuit Court of Appeals reversed that decision. On review, the Supreme Court ruled that a pure omission, as opposed to false or misleading statement, is not actionable by a private party.
According to the decision, SEC rule 10b-5(b) says that a public issuer cannot 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.” This wording, according to the court, means omissions are only an issue if they make affirmative statements made misleading.
A half-truth, the court explained, represents “the truth only so far as it goes, while omitting critical qualifying information.”
Jay Gould, a special counsel with Baker Botts, says that “on those facts, that’s a poor decision.” He argues that the changing regulatory environment for the fuel “should have been disclosed.” Gould says that it does not make sense that if you misstate a fact you are in violation of SEC rules but “if you omit the entire fact then you’re not.”
Gould adds that the decision “sounds like they left the door open for the SEC to bring enforcement actions for complete omissions.”
Greg Baker, a former senior counsel with the SEC’s Division of Enforcement and current partner at Patterson Belknap Webb & Tyler LLP, says the ruling was a “very textualist interpretation,” and it “removes another arrow from the quiver” of plaintiff’s attorneys under the securities laws.
Baker adds that this decision probably will not change the way investors approach disclosures, but it will change how “plaintiffs think about their theories.”
Tags: SEC, Securities Fraud, US Supreme Court