Supreme Court Weighs Private Actions Under Securities Exchange Act

SEC Regulation S-K, Item 303, requires issuers to identify in SEC filings “any known trends or uncertainties that have had or that are reasonably likely to have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.” The Supreme Court, in Macquarie Infrastructure Corp. v. Moab Partners, L.P., will determine if that provision allows a private right of action. Most circuits hold that Item 303 does not support a private right of action, but the Second Circuit recently broke out from the pack to hold that it does.

Petitioner Macquarie Infrastructure Corporation (MIC) is a publicly-traded company that owns and operates infrastructure-related businesses. One of these businesses, International-Matex Tank Terminals (IMTT), provides third-party bulk liquid storage services in the United States, handling high-sulfur fuel oil. In late 2017 and early 2018, IMTT experienced a sudden and unexpected decline in demand for storage at its facilities due to changes in both domestic and global demand for the product and market conditions for trading customers. Despite this decline, MIC reported successful fourth-quarter and year-end 2017 financial results. When MIC announced a reduction in its 2018 dividend guidance and MIC’s stock price dropped, Moab Partners, L.P. (Moab) filed a lawsuit alleging that MIC had concealed important information from investors regarding the demand for heavy oils.

The district court dismissed the complaint for failure to state a claim, but the Second Circuit reversed, finding that Item 303 could support a private claim against MIC for its alleged failure to report the impacts of the decreased demand for heavy oils. In its brief to the Supreme Court, MIC argued that a private right of action under §10(b) and Rule 10b-5 of the Securities Exchange Act is available only for “misrepresentations and half-truths” but not “pure omissions” where the speaker said nothing on the subject at all. MIC argues that such omissions are within the confines of §11, which entrusts enforcement to the SEC. In response, Moab argues that §10(b) is a broad anti-fraud provision and includes consideration of the “circumstances” in which an omission occurs. Additionally, common law has recognized that omissions can be fraudulent when they cause other statements to be misleading.

During oral argument, Chief Justice Roberts questioned the realistic distinction between a half-truth and an omission, and Justice Kagan followed up with tough factual hypotheticals. Justice Jackson questioned the limits of the circumstances that could give rise to liability under Item 303. Justice Thomas questioned the SEC’s role in the enforcement of Item 303 omissions. Justice Kavanaugh questioned whether omissions by themselves were enough to constitute a claim at all.

The case was argued on January 16, 2024. A decision is expected later in the term. Stay tuned for Dykema’s client alert discussing the Court’s opinion.

For more information, please contact Chantel Febus, James Azadian, David Schenck, Cory Webster, Christopher Sakauye, McKenna Crisp, Monika Harris, or Puja Valera.