High Court Says “Pure Omissions” on Public Disclosures Not Actionable Under Rule 10b-5(b)

May 22, 2024

For about 90 years, public companies have devoted significant time and resources toward complying in their public disclosures with Rule 10b-5, a regulation created under the Securities and Exchange Act of 1934 that prohibits securities fraud.

Rule 10b-5(b) notes it is unlawful to, among other things, “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.”

In Macquarie Infrastructure Corp. v. Moab Partners, L.P., shareholder Moab Partners alleged Macquarie misled investors under Rule 10b-5(b) by not disclosing the impact a forthcoming ban on high-sulfur fuels would have on Macquarie’s oil storage business.

Macquarie’s allegedly unlawful conduct stemmed from its failure to “describe any 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,” as required by Item 303 of SEC Regulation S-K.

Rather than take a stab at complying with Item 303 in disclosing how the ban would affect its oil storage segment, Macquarie said nothing. When it later announced its storage capacity dropped as a result of the ban, its stock dropped 41%, and the lawsuit followed.

The district court dismissed the complaint, a ruling reversed by the U.S. Court of Appeals for the Second Circuit.

In an April 12, 2024, decision, a unanimous U.S. Supreme Court reversed the Second Circuit, holding that “pure omissions” are not actionable under Rule 10b-5(b). It reasoned that “pure omissions” are those that occur “when a speaker says nothing, in circumstances that do not give any special significance to that silence.” Rule 10b-5(b), in contrast, “requires disclosure of information necessary to ensure that statements already made are clear and complete.” Subsection (b), in other words, prohibits “half-truths.”

The Supreme Court’s ruling does not affect the SEC’s ability to enforce a violation of Item 303, but it does limit the instances where securities plaintiffs can assert fraud under Rule 10b-5(b), particularly when such claims are based on a failure to make mandatory disclosures.

On the other hand, given the wealth of information public companies must disclose, and the regularity with which companies make statements about their businesses (in press releases, on social media, during news broadcasts, etc.), it may be difficult for defendants to demonstrate — in the face of a complaint drafted by experienced plaintiff’s lawyers — the existence of a “pure omission.”