The Bounds of Silence: Pure Omissions Are Not Actionable Under Rule 10b-5(b)

Client Alert

In the context of a purchase or sale of a security, Rule 10b-5(b) (17 CFR § 240.10b-5(b)) makes it unlawful “[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.”  The United States Supreme Court has recently held in Macquarie Infrastructure Corp. et al. v. Moab Partners, L.P. et al. that pure omissions are not actionable under Rule 10b-5(b). The Court held that even a regulatory duty to disclose is insufficient to support liability under Rule 10b-5(b) unless the omission renders prior affirmative “statements made” misleading.

In its consolidated putative class action complaint, Moab Partners, L.P. (“Moab”) alleged, inter alia, that the issuer violated Rule 10b-5(b) by failing to comply with its disclosure obligations under Item 303 of SEC Regulation S-K, 17 C.F.R. § 229.303, which requires a company to publicly disclose certain “known trends or any known demands, commitments, events or uncertainties” that are reasonably likely to have material impacts on the company’s financial condition or results of operations. Specifically, Moab alleged that the issuer failed to discuss a 2016 regulation (“IMO 2020”) that effectively banned No. 6 fuel oil starting in 2020. According to Moab’s complaint, when the regulation became effective in 2020, it materially impacted the issuer’s fuel storage business, and its stock price fell around 41%. Crucially, Moab’s complaint did not allege that the alleged omission rendered untrue any statements made by the issuer in prior public disclosures.

The SDNY granted defendants’ motion to dismiss and held that plaintiff did not identify any prior statements made that became half-truths due to defendants’ alleged failure to disclose IMO 2020 and its potential impact.

Moab appealed the SDNY’s decision to the Second Circuit. On appeal, the Second Circuit vacated the district court’s judgment dismissing the complaint finding that Item 303’s affirmative duty to disclose can support a securities fraud claim under Rule 10b-5(b). The Second Circuit’s ruling was inconsistent with decisions of the Third and Ninth Circuits which have held that the disclosure requirements of Item 303 do not, by themselves, support a claim under Rule 10b-5(b).

The Supreme Court granted certiorari on the issue of  “whether the failure to disclose information required by Item 303 can support a private action under Rule 10b-5(b), even if the failure does not render any ‘statements made’ misleading.”  The Court answered that question in the negative concluding that “pure omissions”—which the Court defined as “when a speaker says nothing, in circumstances that do not give any particular meaning to that silence”—are not actionable under Rule 10b-5. The Court distinguished between pure omissions and half-truths (“[T]he difference between a pure omission and a half-truth is the difference between a child not telling his parents he ate a whole cake and telling them he had dessert.”) and held Rule 10b-5(b) covers half-truths but not pure omissions. Accordingly, in order to state a claim under Rule 10b-5(b), a plaintiff must identify affirmative assertions (i.e. “statements made”) that were rendered misleading by the alleged omission. Importantly, the Supreme Court explicitly stated that it was not opining whether a pure omission would support liability under Rule 10b-5(a) and 10b-5(c) thus leaving the door open for creative plaintiffs’ counsel to draft an omission claim in the context of a scheme to defraud or a deceitful practice.

Why it matters: The Supreme Court has overruled the law in the Second Circuit (which includes New York) that previously allowed the disclosure requirements of Item 303 to support a Rule 10b-5(b) claim. In addition, the Supreme Court has clarified that pure omissions, standing alone, will not support such a claim. 



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