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Justices Leave Lower Courts To Parse Corporate ‘Half-Truths’


April 15, 2024

A recent U.S. Supreme Court ruling that corporate silence isn’t enough to form the basis of a securities fraud suit pointedly declined to wade into the question of what counts as a “half-truth,” leaving it to lower courts to wrestle with which corporate statements are blurry enough to sustain a shareholder class action.

The high court issued a unanimous decision Friday vacating and remanding a Second Circuit ruling in favor of shareholder Moab Partners LP, which hopes to lead a class of Macquarie Infrastructure Corp. investors who were allegedly left in the dark about the impact that an anticipated global ban on high-sulfur fuels would have on its fuel storage business.

The justices ruled that the omission of information a business must disclose could not alone form the basis of a lawsuit under the anti-fraud regulation known as U.S. Securities and Exchange Commission Rule 10b–5(b). Instead, such an omission would have to be coupled with an affirmative statement that converts the silence into a “half-truth,” the justices said.

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Laura Posner of investor-side law firm Cohen Milstein Sellers & Toll PLLC said that corporations might try to use the Macquarie opinion to get shareholder lawsuits thrown out, but she doesn’t think they’ll be successful.

“I think from a practical standpoint, the decision is going to be very limited,” Posner said. “It is extremely rare for us to bring a claim that doesn’t allege in some way a half-truth or just straight misstatements.”

She said she believes corporations that use the Macquarie defense will run into the same problems they’ve faced trying to combat shareholder class actions by referencing the high court’s 2021 decision in Goldman Sachs v. Arkansas Teacher Retirement System.

That decision requires courts to examine whether allegedly misleading statements are too generic to form the basis of class certification, but few courts have applied the ruling thus far.

The only circuit court to apply the Goldman decision to date is the Second Circuit, which last year decertified the very same Goldman class at the center of the Supreme Court challenge.

“Goldman has been almost uniformly, if not uniformly, unsuccessful for defendants,” Posner said. “They’re just not getting the wide interpretation of the rule that they were hoping for, and they’re not getting the language by the Supreme Court that would allow them to do so.”

The court could have, for example, waded into the half-truth debate, but noted in a footnote to Friday’s opinion that it wasn’t going to go there, Posner pointed out.

Read Justices Leave Lower Courts To Parse Corporate ‘Half-Truths’.