Silence Is Insufficient: The Supreme Court Limits Rule 10b-5(b) Claims Premised on Item 303 Omissions to Statements Made

A half truth is a whole lie, or so the adage goes. But if a plaintiff can plead only a defendant’s silence, has the plaintiff still alleged a lie? On April 12, 2024, the Supreme Court issued its unanimous decision in Macquarie Infrastructure Corp. v. Moab Partners, L.P., holding that stockholder plaintiffs cannot pursue claims under Section 10(b) of the Securities Exchange Act of 1934 based solely on an alleged omission where that omission is not alleged to have rendered an affirmative statement false or misleading.¹ The Court’s holding resolved a circuit split and should eliminate a common strategy in the stockholder plaintiffs’ bar of arguing that an issuer’s failure to disclose information required under Item 303 of Securities and Exchange Commission Regulation S–K, standing alone, can support a Section 10(b) claim.

Relevant Background

Moab Partners, L.P., filed a putative securities fraud class action against Macquarie Infrastructure Corp. after Macquarie lowered its earnings guidance in 2018 and its stock dropped substantially. That stock drop was caused, in part, by falling demand at one of Macquarie’s storage facilities triggered by a new United Nations regulation.² The plaintiffs alleged that Macquarie had violated Section 10(b) by failing to disclose the effect of the U.N. regulation under Item 303.³ Of course, Section 10(b) and Rule 10b-5(b) make it unlawful “[t]o 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.” 17 C.F.R. § 240.10b–5(b). But rather than point to any omission that rendered an affirmative statement misleading, the plaintiffs claimed that Macquarie’s failure to make any disclosure about the U.N. regulation and its expected impact on the company’s bottom line gave rise to a securities fraud claim.⁴

The district court disagreed, ruling that a pure omission could not support a viable Section 10(b) claim, but the Second Circuit reversed, holding that a plaintiff could pursue a Section 10(b) claim where an independent statute or regulation (such as Item 303) required the omitted information to be disclosed. The Supreme Court granted certiorari to resolve the circuit split between the Second Circuit, which had allowed such “pure omission” claims, and the Third, Ninth, and Eleventh Circuits, which had not.

The Court’s Decision

The Court’s unanimous decision directly addressed whether an omission of information required to be disclosed by Item 303 could support a Section 10(b) claim even if the omitted information did not render some other affirmative statement false or misleading.⁵ The Court’s straightforward decision, written by Justice Sotomayor, held that such an omission cannot support a Section 10(b) claim. The Court focused on the plain text of Section 10(b)’s implementing regulation, Rule 10b-5(b), which only prohibits omissions that are necessary “to make statements made . . . not misleading.”⁶ The Court noted that reading that provision to cover “pure omissions,” as the plaintiffs argued, would effectively “read the words ‘statements made’” out of the rule.⁷ Thus, to pursue a pure omission-based Section 10(b) claim, plaintiffs must plead affirmative statements made by the defendants that the alleged omissions render false or misleading. To address the plaintiffs’ argument that this interpretation of Section 10(b) would create a so-called “license to lie,” the Court noted that plaintiffs still may pursue claims based on half-truths and that the SEC could separately pursue claims for violations of Item 303.⁹

Practical Implications

• One Stock Drop Suit Tactic Eliminated – The approach taken by the Macquarie plaintiffs has become common in stockholder class action litigation. Over time, plaintiffs have increasingly pointed to Item 303 as imposing a standalone duty of disclosure even absent a half-truth. The Court’s decision forecloses this argument. Plaintiffs will of course still be able to pursue Section 10(b) claims based on “half-truths” where omitted information makes a partial disclosure false or misleading.
• Supplemental Briefing – Defendants in active litigation involving Section 10(b) claims premised on an omission under Item 303 must consider whether the plaintiffs have identified an affirmative statement that was rendered false or misleading by an alleged omission. As we have observed in current cases, certain courts have already requested supplemental briefing from the parties on this issue.