-
Supreme Court Unanimously Holds Item 303 Violation, Standing Alone, Cannot Support A “Pure Omission” Claim Under Section 10(b) Of The Exchange Act
04/16/2024On April 12, 2024, the United States Supreme Court unanimously reversed a decision of the United States Court of Appeals for the Second Circuit which held that Section 10(b) of the Securities Exchange Act of 1934 permitted a private right of action based solely on an issuer’s alleged failure to disclose a known trend or uncertainty required to be disclosed under Item 303 of Regulation S‑K. Macquarie Infrastructure Corp. v. Moab Partners, L.P., —U.S.—, 2024 WL 1588706 (2024). As explained in our prior post addressing the oral argument before the Supreme Court, the case concerned whether a company that operates a portfolio of infrastructure-related businesses needed to disclose that a proposed regulation by a United Nations agency would negatively impact one of its subsidiary’s businesses. Writing for a unanimous Court, Justice Sotomayor explained that the “pure omission” of information required to be disclosed by Item 303—i.e., a situation where there is no allegation that the omission rendered any affirmative statement misleading—is insufficient to support a claim under Section 10(b) of the Exchange Act.
The Court first explained the difference between a “pure omission” and a “half-truth.” Id. at *4. The Court explained that, in the case of a pure omission, “a speaker says nothing, in circumstances that do not give any particular meaning to that silence,” while in the case of a half‑truth, the speaker makes “representations that state the truth only so far as it goes, while omitting critical qualifying information.” Id. In the Court’s words, “the 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.” Id.
While half-truths are actionable under Section 10(b) and Rule 10b-5 promulgated thereunder, the Court held that pure omissions are not, because speakers subject to these provisions are only required to disclose “information necessary to ensure that statements already made are clear and complete”—these provisions do not impose an affirmative duty to disclose information. Id. The Court contrasted this framework with Section 11 of the Securities Act, which prohibits a registration statement that “contain[s] an untrue statement of a material fact or omit[s] to state a material fact required to be stated therein or necessary to make the statements therein not misleading,” and thus “creates liability for failure to speak on a subject at all” for material facts “required to be stated therein.” Id. at *5 (emphasis added). While the Court had previously held in Basic Inc. v. Levinson, that “[s]ilence, absent a duty to disclose, is not misleading under Rule 10b-5,” 485 U. S. 224, 239, n.17 (1988), the Court now clarified that “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.” Macquarie, 2024 WL 1588706, at *5.
The Court also rejected the argument that an Item 303 omission could be actionable without the need to identify any statements rendered misleading because, according to plaintiff’s argument, reasonable investors know that the Management’s Discussion and Analysis (“MD&A”) section of a Form 10-K is required to disclose all known trends and uncertainties. The Court held this argument failed because it reads “statements made” out of Rule 10b-5 and would render Section 11’s pure omission clause superfluous. Id. The Court also rejected plaintiff’s contention that failing to allow a private cause of action would broadly immunize companies that failed to disclose information in their MD&A discussions because plaintiffs can still bring claims based on half-truths, and the SEC can bring claims for any violations of Item 303. Id.
