In a short, unanimous opinion on April 12, 2024, the Supreme Court shut the door on “pure omission” claims under Rule 10b–5 and made clear that the Rule is limited to claims based on false or misleading statements.
The case, Macquarie Infrastructure Corp. v. Moab Partners, L.P., concerns alleged omissions in Defendant Macquarie’s SEC filings related to its subsidiary’s operation of bulk liquid storage terminals. In 2016, the United Nations’ International Maritime Organization issued a regulation limiting this subsidiary’s ability to store high-sulfur fuel oil, its single largest product. Though the regulation was set to take effect in 2020, Macquarie did not discuss the regulation in its public filings.
In 2018, in anticipation of this regulation, the market for high-sulfur fuel oil declined and Macquarie’s stock price fell by 41%. Plaintiff Moab Partners filed suit against Macquarie asserting that it had a duty to disclose information about its subsidiary’s reliance on high-sulfur fuel oil under Item 303 of SEC Regulation S-K, which requires disclosure of “known trends or uncertainties” that may have a material impact on future net sales and revenues, and that Macquarie’s omission of this information violated Section 10(b) of the Securities Exchange Act and SEC Rule 10b–5. The Second Circuit held that Rule 10b–5 imposes a duty to disclose omitted facts when another statute or regulation requires disclosure, and that as a result, Plaintiff could sustain a 10b–5 claim based on an alleged violation of Item 303.
The Supreme Court vacated the Second Circuit’s opinion. Emphasizing that “[s]ilence, absent a duty to disclose, is not misleading under Rule 10b–5,” the Supreme Court held that “[p]ure omissions are not actionable under Rule 10b–5(b),” even when Item 303 imposes a duty of disclosure.
In reaching this conclusion, the Supreme Court explained that Rule 10b–5 prohibits two types of statements. First, it prohibits untrue statements; that is, “false statements or lies.” Second, it prohibits misleading statements or half-truths; that is, statements that omit information necessary to make them not misleading, such as a child telling his parents he had some dessert when he ate a whole cake.
The Supreme Court contrasted these two types of statements with pure omissions, which occur “when a speaker says nothing, in circumstances that do not give any particular meaning to that silence.” The Supreme Court held that, unlike untrue statements and misleading statements, a pure omission cannot form the basis of a Rule 10b–5(b) violation.
The Macquarie decision imposes additional limitations on plaintiffs bringing claims under Section 10(b) and Rule 10b–5. Following Macquarie, plaintiffs bringing Rule 10b–5 claims will need to identify another statement that they allege was rendered misleading by an omission, and will not be able to pursue such claims based purely on an alleged omission alone.