On April 12, 2024, in Macquarie Infrastructure Corp. v. Moab Partners, L. P., 601 U.S. ___, 2024 WL 1588706 (2024), the United States Supreme Court unanimously ruled that a pure omission—“when a speaker says nothing, in circumstances that do not give any particular meaning to that silence”[1]—does not provide the basis for a securities fraud claim under Section 10(b) of the Securities Exchange Act of 1934 (Section 10(b)) or Securities and Exchange Commission (SEC) Rule 10b-5 (Rule 10b-5), which implements Section 10(b), and that a corporate registrant’s failure to disclose information required by Item 303 of SEC Regulation S-K (Item 303) can support a Rule 10b-5(b) claim only if the omission renders affirmative statements misleading.[2]
For reasons described below, the ruling has little significance for municipal securities transactions and is unlikely to warrant changes to antifraud compliance practices in municipal securities transactions, at least absent further judicial or regulatory clarification.
The Macquarie Infrastructure v. Moab decision
As noted in our earlier release, Moab argued that Macquarie Infrastructure omitted information required by SEC Regulation S-K (Reg. S-K) from its public filings and that the omission violated Rule 10b-5. In its opinion, the Supreme Court held that “Rule 10b-5(b) does not proscribe pure omissions”.[3] Rather, in the absence of an outright false statement of material fact, Rule 10b-5(b) requires that issuers disclose additional information only when necessary to ensure that statements actually made are clear and complete.[4]
The Court noted that plaintiffs can still bring claims based on violations of Item 303 of Reg. S-K that create half-truths—“representations that state the truth only so far as it goes, while omitting critical qualifying information”[5]—and that the SEC can police violations of its regulations, including violations of Item 303 whether or not they violate Rule 10b-5.[6]
The Court also noted that it granted certiorari to address only the Second Circuit’s pure omission analysis, not its half-truth analysis, and remanded the case “for further proceedings consistent with [its] opinion.”[7] The remand will presumably enable Moab to amend its pleadings, if necessary, to identify statements that were rendered misleading by the omission of Item 303 information.
The decision’s impact on municipal securities
The Macquarie Infrastructure holding is unlikely to have import for disclosure in municipal securities transactions, unless it results in further judicial or regulatory clarification. Municipal securities transactions are exempt from Reg. S-K and other disclosure requirements applicable to corporate registrants. Accordingly, there was never any possibility of liability for a “pure omission” of required information. Rather, municipal securities issuers can be held liable for omissions of material facts only if the omissions make actual statements misleading or operate as a fraud or deceit.
What remains to be seen is whether a misleading, implied (as opposed to express) statement can be a basis for Rule 10b-5 liability. The decision appears to foreclose the possibility of liability for at least one allegedly implied statement: that Macquarie’s registration statement complied with Reg. S-K, so failure to disclose information required by Item 303 was an implied statement that there was none. But will the same result apply to other implied statements?
Suppose, on remand, Moab alleges that the disclosure of comparative financial results implied a trend that was misleading without disclosing the information required by Item 303. Suppose Moab alleges that statements in the offering document as a whole created a misleading impression about the value of the securities compared to the initial offering price? Would either, together with the alleged 41% drop in Macquarie’s share price after disclosure, be sufficient to support liability under Rule 10b-5(b)? If not, then as a fraud or deceit under Rule 10b-5(a) or (c)?
Until these questions are answered, municipal issuers and underwriters should maintain their existing disclosure and diligence practices, and should include in continuing disclosure filings an express disclaimer to negate implied completeness and other statements.
[1] Macquarie Infrastructure Corp. v. Moab Partners, L.P., 601 U.S. ___, 2024 WL 1588706 (2024)
[2] Id., at *3.
[3] Id., at *4.
[4] Id.
[5] Id., at *5.
[6] Id., at *7.
[7] Id., at *8.
