Macquarie Infrastructure Corp. v. Moab Partners, L.P.

Issues 

Can investors bring a private claim of action against an issuer under § 10(b) of the Securities Exchange Act based on the omission of information required under Item 303 of Regulation S-K when the omitted information is not accompanied by a misleading statement?

Oral argument: 
January 16, 2024

This case asks the court to determine whether investors may bring a private claim against an issuer under § 10(b) of the Securities Exchange Act of 1934 for an omission without an associated misleading statement, known as a “pure omission,” based on the disclosure requirements set by Item 303 of SEC Regulation S-K. Macquarie Infrastructure Corporation argues that investors cannot bring a private claim for a pure omission because the text and statutory context of § 10(b), Rule 10b-5, and Item 303 do not support such claims. In opposition, Moab Partners, L.P. argues that investors may bring a private claim for a pure omission because Supreme Court precedent and statutes comparable to § 10(b) indicate that investors may bring such claims. This case touches on important questions regarding disclosure requirements, issuer liability for omissions, and the suitability of enforcement of securities regulations through private lawsuits.

Questions as Framed for the Court by the Parties 

Whether the U.S. Court of Appeals for the 2nd Circuit erred in holding that a failure to make a disclosure required under Item 303 of SEC Regulation S-K can support a private claim under Section 10(b) of the Securities Exchange Act of 1934, even in the absence of an otherwise misleading statement.

Facts 

Macquarie Infrastructure Corporation (“Macquarie”) is a publicly traded holding company managed by MIMUSA, with several subsidiaries. City of Riviera Beach Gen. Emples. Ret. Sys. v. Macquarie Infrastructure Corp. at 2-3. One subsidiary is International-Matex Tank Terminals-Bayone, Inc (IMTT), which operates “bulk liquid storage terminals” used for storing various liquids, including a fuel used by large shipping vessels known as “No. 6 fuel oil.” Id. at 1, 3.

In 2008, the International Marine Organization (IMO) adopted IMO 2020, which banned using fuels with sulfur contents of 0.5% or more. Id. at 3. The IMO then “formally fixed” IMO 2020 in October 2016. Id. at 4. Because No. 6 fuel oil exceeded IMO 2020’s sulfur content limit, many predicted that demand for No. 6 fuel oil would drop once the IMO formally adopted IMO 2020. Id.

In a 2012 earnings call, Macquarie acknowledged the risk of lower demand for storing “heavy oil residual product[s]” and that IMTT owned several tanks for storing heavy oil but stated that it would not immediately convert IMTT’s heavy oil tanks to store other products. Id. Between November 2012 and February 2018, Macquarie did not mention IMO 2020 or the storage of No. 6 fuel oil during earnings calls but did indicate its belief several times that its business would not be impacted by economy-wide price changes for crude oil or petroleum products. Id. at 4-6.

On November 13, 2016, MIMUSA announced a public offering of Macquarie common stock, with Barclays serving as the underwriter. Id. at 6. Then, on February 21, 2018, Macquarie announced that the percentage of IMTT’s storage tank capacity contracted for use had dropped. Id. at 7. Macquarie also announced that it had missed its financial projections, and that it would cut its dividend guidance. Id. The next day, Macquarie acknowledged that falling prices for No. 6 fuel oil were responsible for it missing its financial projections and that many of IMTT’s customers had terminated contracts for storing No. 6 fuel oil. Id. Macquarie’s stock price then fell around 41% that day. Id.

On April 23, 2018, the City of Riviera Beach General Employees Retirement System initiated a securities fraud class action against Macquarie, MIMUSA, Barclays, and individual officers of Macquarie and MIMUSA in the District Court for the Southern District of New York. Id. at 8. On January 30, 2019, the district court granted a motion to consolidate the action and appointed Moab Partners, L.P. (“Moab”) as the lead plaintiff. Id. On April 22, 2019, the defendants filed motions to dismiss, which the district court granted. Id. at 8, 28. The district court found that the plaintiffs did not plead actionable misstatements by the defendants that would obligate disclosing IMTT’s reliance on storing No. 6 fuel oil. Id. at 12. The district court also found that the defendants were not obligated under Regulation S-K, Item 303 to make disclosures regarding Macquarie’s No.6 fuel oil storage business. Id. at 20.

The plaintiffs appealed to the Court of Appeals for the Second Circuit, which vacated the district court’s judgment. Moab Partners, L.P. v. Macquarie Infrastructure Corp. at 2. The Second Circuit found that although the majority of the defendants’ alleged statements were not actionable, the plaintiffs did plead actionable omissions. Id. at 5. The Second Circuit also found that Item 303 obligated the defendants to make the disclosures because the defendants were aware of the potential and reasonable impact that IMO 2020 might have on their business. Id. at 5-7. Following the Second Circuit’s ruling, Macquarie, MIMUSA, and the individual officers petitioned for a writ of certiorari, which was granted on September 29, 2023. SCOTUS Blog.

Analysis 

TEXTUAL ANALYSIS OF RULE 10B-5 AND § 10(B)

Macquarie argues that neither the text nor the statutory context of Rule 10b-5 or § 10(b) of the Exchange Act suggests that issuers are liable for “pure omissions,” which are omissions of information unaccompanied by a misleading statement. Brief for Petitioner at 20. Macquarie points out that § 10(b) never mentions omissions, pure or otherwise, and contends that the Security Exchange Commission (SEC) set the definitions of a “manipulative or deceptive device or contrivance” in § 10(b) when it promulgated Rule 10b-5. Id. at 21. Macquarie argues that Rule 10b-5(b) only defines deceptive nondisclosure as omissions that would be necessary to make other statements not misleading and cites the Second Circuit’s acknowledgement that liability for a pure omission would not be “within the letter of Rule 10b-5.” Id. at 21-22. Macquarie further asserts that the Court has never read Rule 10b-5 or § 10(b) to impose a duty on issuers “to disclose any and all material information,” but has read § 10(b) as a “catchall provision” for fraud. Id. at 22. Macquarie additionally dismisses Rule 10b-5(a) and (c) as inapplicable for claims solely concerning speech, and argues that allowing for plaintiffs to rely on Rule 10b-5(a) or (c) for such claims would render Rule 10b-5(b) superfluous. Id. at 23-24.

Moab Partners counters that whether Rule 10b-5 or § 10(b) covers pure omissions is irrelevant because Macquarie made statements that became misleading due to Macquarie’s omissions. Brief for Respondent at 28-29. Moab Partners specifically points to how Macquarie addressed IMTT’s petroleum storage and utilization rates as misleading and contends that disclosing such information without disclosing information about the “likely impact of a looming regulatory change” constitutes deception rather than omission. Id. at 29. Moab Partners also points to disclosures made by Macquarie’s competitors about IMO 2020 and potential disruption to the No. 6 fuel oil market as an indication that Macquarie should have disclosed the same information. Id. Moab Partners argues that plaintiffs may rely on Rule 10b-5(a) and (c) for claims of fraud involving speech because the Supreme Court found in Lorenzo v. SEC that individuals who disseminated false statements could be held liable under Rule 10b-5(a) and (c). Id. at 33-34.

STATUTORY CONTEXT OF RULE 10B-5 AND § 10(B)

Macquarie argues that Congress did not intend for § 10(b) to provide a private cause of action for pure omissions because § 10(b) does not use comparable language to statutes where Congress did provide a private cause of action for pure omissions, such as in § 11 of the Exchange Act, which imposes strict liability for omissions of material information “required to be stated” by disclosure requirements. Id. at 25-26. Macquarie also highlights § 18(a) of the Exchange Act, which permits a private right of action based on periodic public filings, but does not permit causes based on omissions without accompanying misleading statements, to assert that investors can only base private claims on false or misleading statements. Id. at 25. Macquarie additionally points out that Rule 10b-5, similar to § 18(a) and unlike § 11, never mentions omissions of facts “required to be stated.” Id. at 26. Macquarie subsequently contends that Congress did not intend for § 18(a) or § 10(b), and subsequently Rule 10b-5, to provide a private right of action for omissions without accompanying misleading statements. Id. at 25. Macquarie also argues that the Private Securities Litigation Reform Act (PSLRA) supports their interpretation of § 10(b) because the Supreme Court found in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. that the PSLRA was only meant to adopt the § 10(b) private cause of action without modification. Id. at 31. As evidence, Macquarie points to the lack of decisions prior to the enactment of the PSLRA permitting a plaintiff to pursue a private right of action under § 10(b) based on a pure omission and to the lack of language in the PSLRA expressly creating such a right. Id. at 31-32. Macquarie additionally highlights that the PSLRA requires plaintiffs’ complaints to specify which statements are misleading and why they are misleading, and that legislative history suggests that Congress intended to restrict securities fraud class actions and prevent “extortionate ‘settlements’ of questionable claims” by enacting the PSLRA. Id. at 32-33.

Moab Partners counters that comparing §§ 11 and 18(a) with § 10(b), and subsequently Rule 10b-5, is misleading because § 10(b)’s text covers “any manipulative or deceptive device or contrivance” and therefore addresses a larger array of activities than §§ 11 and 18(a). Id. at 30-31. Moab Partners contends that the SEC chose not to mirror the restrictive language of § 11 to allow Rule 10b-5(b) to cover all omissions that render a speaker’s other statements to be misleading and instead compare § 11 with § 17(a) of the Securities Act, which the Supreme Court described as “virtually identical” to Rule 10b-5. Id. at 31-32. Moab Partners argues that the legislative history indicates that Congress crafted § 17(a) using broad language to permit companies and their officers to be held liable for making pure omissions when the act of omission would be misleading and contends that Congress intended for § 10(b) to cover omissions in the same manner. Id. at 32. Moab Partners also argues that the PSLRA does not support Macquarie’s interpretation of § 10(b) because Stoneridge only addresses whether investors may hold an issuer’s customers and suppliers liable under § 10(b), rather than § 10(b) in its entirety. Id. at 35. Moab Partners points to decisions prior to the enactment of the PSLRA where courts discussed the omission of information required under Item 303 in deciding a § 10(b) claim and contends that these cases suggest that, even prior to the PSLRA, issuers could be held liable under § 10(b) for pure omissions. Id. at 36-37. Moab Partners additionally contends that its complaint satisfied the PSLRA’s requirement that complaints include the alleged misleading statements and why they are misleading, and that pre-PSLRA decisions only reflect Congress’s commitment to a system of periodic reporting of material information, rather than a desire not to hold issuers liable for pure omissions. Id.

CAN ITEM 303 CONSTITUTE THE BASIS FOR A PRIVATE CLAIM?

Macquarie argues that the Second Circuit’s application of Item 303 is problematic because Item 303 relies on a materiality standard that is significantly different than § 10(b)’s materiality standard, and that these differences should preclude § 10(b) claims brought under a violation of Item 303. Brief for Petitioner at 41-42. Macquarie contends that Item 303’s materiality standard is intentionally open-ended and warns that allowing for courts to hear private claims based on Item 303 would permit plaintiffs to contort the materiality standard to support their claims that issuers were not providing proper disclosures, regardless of whether the issuers were providing proper disclosures. Id. at 43, 45. Macquarie also argues that holding issuers liable for pure omissions on the belief that their statements implicitly certify that no additional material information exists would render pure omissions and half-truths to be equal, despite the distinction established between them in securities regulations. Id. at 33-34. Macquarie further points out that Rule 10b-5(b) requires an issuer make an affirmative “untrue statement of a material fact” to be held liable, and contends that allowing issuers to be liable solely for omissions, even when based on an implicit certification of complete information, would conflict with the “statement” requirement of Rule 10b-5(b). Id. 34.

Moab Partners counters that the Second Circuit’s application of Item 303 is not problematic because plaintiffs can allege violations of Item 303 to support claims based on § 10(b). Id. at 43. Moab Partners argues that Item 303 clearly defines trends as material unless the trend is “not reasonably likely” to occur, and argues that this materiality definition benefits issuers because no court has relied solely on Item 303 violations to find an issuer liable under § 10(b). Id. at 42-43. Moab Partners also argues that issuers make an express certification of completion when they submit a periodic report, citing § 906 of the Sarbanes-Oxley Act of 2002. Id. at 39. Moab Partners further argues that issuers may be held liable under Rule 10b-5(b) for omissions because plaintiffs can target the untrue affirmative statements made by the issuer that became misleading as a result of the omission, rather than the omission itself. Id. at 40.

Discussion 

HARM TO INVESTORS AND BUSINESS INTERESTS

In support of Macquarie, the Atlantic Legal Foundation (ALF) argues that interpreting § 10(b) to impose liability for pure omission would harm issuers’ abilities to protect their business interests. Brief of Amici Curiae Atlantic Legal Foundation, in Support of Petitioner, at 5. Specifically, the ALF argues that companies would be required to reveal potentially confidential business information and would thus lose any leverage that they had over their competitors. Id. at 6. Additionally, the Securities Industry and Financial Markets Association (SIFMA) and others, writing in support of Macquarie, contend that companies will begin to include unnecessary information in their disclosures for fear of accidentally omitting information. Brief of Amici Curiae Securities Industry and Financial Markets Association, et al., in Support of Petitioner, at 11. Further, the Society for Corporate Governance predicts that companies will need to hire more employees to assist with disclosure-related tasks and, because disclosure costs are high, companies will suffer financially for doing so. Brief of Amici Curiae The Society for Corporate Governance, in Support of Petitioner, at 29. SIFMA and others also assert that over-disclosure will harm investors by diluting relevant information, thereby making it harder for investors to see the management’s vision for the future of the corporation. Brief of Amici Curiae Securities Industry and Financial Markets Association, et al., in Support of Petitioner, at 11–12. In addition, the Washington Legal Foundation (WLF), in support of Macquarie, warns that this would negate the very purpose of the disclosure requirement: to provide investors with comprehensive information and to guide companies on which disclosures are required. Brief of Amici Curiae Washington Legal Foundation, in Support of Petitioner, at 23.

In support of Moab Partners, Former SEC Officials argue that the new standard will not harm investors and will not lead to over-disclosure because the SEC has repeatedly specified that companies are only liable for material omissions. Brief of Amici Curiae Former SEC Officials, in Support of Respondent, at 14–15. Former SEC Officials claim that decades of regulations have eliminated any ambiguity on what disclosures are required. Id. at 14. Additionally, Former SEC Officials contend that the SEC has clearly given companies the privilege of deciding the extent of their disclosures based on whether they perceive the information to be relevant and effective. Id. at 16. Institutional Investors, in support of Moab Partners, argue that interpreting § 10(b) to create a private cause of action for pure omission would benefit investors by ensuring that companies distribute complete and accurate disclosures. Brief of Amici Curiae Institutional Investors, in Support of Respondent, at 7. Institutional Investors thus maintain that the new standard will increase investor confidence in the validity of corporate statements, and will also allow investors to privately enforce the requirements of § 10(b); thereby allowing them to recover any losses from fraudulent disclosures. Id. at 8–9.

JUDICIAL FAIRNESS AND EXPEDIENCY

In support of Macquarie, the ALF warns that allowing a private cause of action to arise from pure omission would prompt many lawsuits on the basis of omitting any information that the plaintiff deemed was relevant to their own economic success. Brief of Amici Curiae Atlantic Legal Foundation, in Support of Petitioner, at 15–16. In support of Macquarie, the WLF contends that plaintiffs will have an unfair advantage in litigation because hindsight bias will drive their assertions for what omissions turned out to be relevant and which ones were rightfully omitted. Brief of Amici Curiae Washington Legal Foundation, in Support of Petitioner, at 25. The WLF asserts that this focus on hindsight would fall outside of the original fraud principle of § 10(b), as companies will be blamed for failing to predict the relevance of information rather than omitting information with the intent to mislead. Id. at 14–15.

In support of Moab Partners, Consumer Advocates contend that there is little chance of increased litigation. Brief of Amici Curiae Consumer Advocates, in Support of Respondent, at 15. Specifically, Consumer Advocates argue that the new standard would still require plaintiffs to show scienter and materiality, and the high cost of litigation would deter investors from filing frivolous suits. Id. at 16–18. Additionally, Consumer Advocates maintain that the standard affords corporations many protections—like safe harbors—that would aid in preventing hindsight bias; therefore, plaintiffs would have no significant advantage over corporations in lawsuits. Id. at 16. Accordingly, Former SEC Officials argue that the new standard will accord more closely with the language and history of § 10(b). Brief of Amici Curiae Former SEC Officials, in Support of Respondent, at 18–19. Lastly, Institutional Investors assert that the SEC has struck an appropriate balance between defending the rights of investors and protecting the financial interests of the company. Brief of Amici Curiae Institutional Investors, in Support of Respondent, at 23.

Conclusion 

Written by:

Anna Temchenko

Nick Sola

Edited by:

Rachel Lu

Acknowledgments 

Additional Resources