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

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.