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High Court Sides With Business on SEC Liability Requirement

Bloomberg Law

April 12, 2024

The US Supreme Court agreed that a “pure omission” in an SEC filing can’t give rise to a securities class action without some statement shareholders can point to that’s misleading.

The court’s narrow ruling Friday by Justice Sonia Sotomayor for a unanimous court agreed that some statement was required, but it didn’t go further to say how specific it must be.

Plaintiffs must identify “affirmative assertions” before a court can consider whether “other facts are needed to make those statements ‘not misleading,’” Sotomayor said.

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Laura Posner, who represents investors in securities suits, said the ruling is very narrow. “Pure omission” suits are an “extremely rare occurrence,” because investors “almost always allege at least a half-truth,” she said. Moab did so and will be able to move forward, said Posner, who’s with Cohen Milstein Sellers & Toll PLLC in New York and is also president of the Institute for Law & Economic Policy.

The US Court of Appeals for the Second Circuit revived Moab’s suit based on both types of allegations, and now the half-truth allegations will likely be remanded to the district court, she said.

The court isn’t “opining on anything related to half-truths,” she said. “It left open scheme liability under Rule 10-b5 a and c, and half-truths under Item 303.”

Moab alleged that Macquarie knew the International Maritime Organization’s impending regulation restricting No. 6 fuel oil would materially affect the company because it owned numerous fuel tanks for holding that type of oil—tanks that would have to be repurposed at considerable expense.

But Macquarie didn’t disclose the extent of its No. 6 tank holdings, the anticipated repurposing expense, and other factors, said Moab, which serves as the lead plaintiff in the proposed investors’ class action.

Moab argued that under Section 10(b) and Rule 10b-5, fraud liability encompasses misleading Item 303 statements. The requirement to report material information is a circumstance where omitting information can make other statements misleading, it said. Macquarie wasn’t silent when it wrote the report and certified the completeness of its annual filings, the investment fund said.

But that argument reads the requirement for an affirmative statement out of the rule and “shifts the focus” from fraud to disclosure, Sotomayor said.

The ruling won’t lead to “broad immunity” for a stock issuer’s fraudulent omission of information, the high court said. “For one thing, private parties remain free to bring claims based on Item 303 violations that create misleading half-truths. For another, the SEC retains authority to prosecute violations of its own regulations,” Sotomayor said.

Although the government participated in argument and supported Moab, attorneys didn’t see significant implications for the SEC from the ruling. “The SEC doesn’t typically go out on a limb,” Posner said. “I don’t know that I’ve seen an Item 303 pure omission suit by the SEC.”

Read High Court Sides With Business on SEC Liability Requirement.