OPINION ANALYSIS

Justices limit securities liability for omission of material facts

As securities cases go, Macquarie Infrastructure Corp. v. Moab Partners is a simple one. The case involves Rule 10b-5 of the Securities and Exchange Commission. Among other things, that rule creates a private cause of action whenever a company omits material facts in connection with a securities transaction, if that omission would render any “statements made” by the company misleading.

The issue in the case is what to do about an omission that does not make anything that the company has said misleading. Here, for example, the company (Macquarie Infrastructure) had an obligation under a different SEC regulation to disclose material information about the company in its periodic filings with the SEC. Specifically, one of Maquarie’s principal assets is storage terminals for fuel oil, and a United Nations rule related to climate change is phasing out fuel oil with a high-sulfur content, for which some of those terminals were designed. Because the other SEC rule (Item 303 of the SEC’s Regulation S-K) required the firm to disclose material information, investors (including Moab partners) sued Macquarie arguing that its failure to disclose information required by Item 303 violated Rule 10b-5. The lower court agreed, but Justice Sonia Sotomayor’s succinct opinion for a unanimous court disagreed.

Sotomayor starts by explaining that Rule 10b-5 “accomplishes two things.” First, “[i]t prohibits … false statements or lies,” something not at issue here. Second, “[i]t also prohibits omitting a material fact necessary ‘to make statements made … not misleading.’” Her analysis turns on the distinction between a “pure omission” and a “half-truth.” For Sotomayor, a pure omission is “when a speaker says nothing, in circumstances that do not give any particular meaning to that silence.” By contrast, quoting an earlier decision on the topic, she explains that “[h]alf-truths … are ‘representations that state the truth only so far as it goes, while omitting critical qualifying information.’” Trying to bring the distinction down to earth, she summarizes: “[T]he difference between a pure omission and a half-truth is the difference between a child not telling his parents he ate a whole cake and telling them he had dessert.”

She then explains that Rule 10b-5 “does not proscribe pure omissions,’ because it only “requires disclosure of information necessary to ensure that statements already made are clear and complete (i.e., that the dessert was, in fact, a whole cake).” Parsing the rule, she points out that “by its plain text, the Rule requires identifying affirmative assertions (i.e., ‘statements made’) before determining if other facts are needed to make those statements ‘not misleading.’” Looking more broadly, she observes that other provisions of the securities laws (Section 11 of the Securities Act in particular) do proscribe pure omissions, pointing to that section’s prohibition of any registration statement that “omit[s] to state a material fact required to be stated therein.” For Sotomayor the absence of any “similar language in … Rule 10b-5 … is telling.” Accordingly, she concludes, “[p]ure omissions are not actionable under Rule 10b-5(b).”

Although the decision did resolve a conflict among the federal courts of appeals, it is not entirely clear how important it will be. Here, for example, it is not clear that the plaintiffs could not revise their complaint to allege that the information in Macquarie’s periodic filings in fact was misleading without disclosure of the adverse UN rule. Only time, and the imagination of the lawyers who represent securities plaintiffs, will tell.