Supreme Court Unanimously Rules “Pure Omissions” Not Actionable under SEC Rule 10b-5 Even If Disclosure Required by Item 303 of Regulation S-K

Background of the Legal Dispute
For many years a circuit split has existed over whether an alleged violation of Item 303 could form the basis of a private 10b-5 action. The Supreme Court previously granted certiorari to resolve this issue back in 2017, only to have the parties to that case settle. The Court long ago said: “Silence, absent a duty to disclose, is not misleading under Rule 10b-5.” Basic Inc. v. Levinson, 485 U.S. 224, 239, n.17 (1988). But, so the argument went, if Item 303 creates a duty to disclose something, doesn’t a failure to perform that duty and make that disclosure violate Rule 10b-5(b)?

Background of the Macquarie Case
Macquarie operates bulk liquid storage terminals, where it stores liquids such as petroleum and biofuels. One such commodity—No. 6 fuel oil—has a high sulfur content. In 2016, the United Nations’ International Maritime Organization adopted a regulation called IMO 2020 that, starting in 2020, effectively banned the maritime use of No. 6 fuel oil.

Macquarie did not mention IMO 2020 in its periodic SEC filings. But in 2018, it announced a substantial decline in demand for its storage space, in part because of a “structural decline” in the market for No. 6 fuel oil. Its stock price fell roughly 41% on the news.

Moab Partners brought suit under Rule 10b-5, alleging that Macquarie and various individual defendants violated Section 10(b) of the Securities Exchange Act of 1934 and its implementing regulation, Rule 10b-5, by failing to disclose under Item 303 that one of its largest sources of business, storing No. 6 fuel oil, would be harmed by IMO 2020. The Southern District of New York dismissed the action, but the Second Circuit reversed, holding that Moab had identified a material known trend or uncertainty that Macquarie had failed to disclose. This ruling continued the split between the Second Circuit and the Third and Ninth Circuits, which had both previously ruled that a failure to disclose something in violation of Item 303 did not give rise to a claim under Rule 10b-5 unless that omission made other statements misleading.

Relevant Statutes and Regulations
Item 303 of SEC Regulation S-K (17 C.F.R. § 229.303) requires that certain SEC filings, including registration statements and periodic reports on Forms 10-K and 10-Q, include in their MD&A “any known trends or uncertainties … likely to have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.” Moab alleged that Macqaurie’s failure to disclose IMO 2020 and its likely effect on the market for No. 6 fuel oil violated Item 303.

Section 10(b) of the Securities Exchange Act of 1934 makes it unlawful to “use or employ, in connection with the purchase or sale of any security … [,] any manipulative or deceptive device or contrivance in contravention” of SEC rules. Implementing Rule 10b-5(b) makes it unlawful to “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 the light of the circumstances under which they were made, not misleading … .”

The Court’s Decision
The Court’s decision hinged on whether Rule 10b-5(b)’s prohibition on omitting material facts necessary “to make the statements made … not misleading” only applied to half-truths or if it extended to pure omissions as well. The Court defined pure omissions as “when a speaker says nothing, in circumstances that do not give any particular meaning to that silence,” and half-truths as “representations that state the truth only so far as it goes, while omitting critical qualifying information.” Justice Sotomayor illustrated the difference: “a child not telling his parents he ate a whole cake” is a pure omission, but “telling them he had dessert” is a half-truth.

The Court explained that, under the plain text of Rule 10b-5(b), disclosure of information is required to ensure statements already made are clear and complete and, as such, it covers half-truths, not pure omissions. Quoting Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 44 (2011), the Court reemphasized that “§10(b) and Rule 10b-5(b) do not create an affirmative duty to disclose any and all material information.” Turning to the text of the statutes, Justice Sotomayor noted that Section 11(a) of the Securities Act of 1933 expressly creates liability for pure omissions of mandated disclosures in registration statements, and that not including similar language in Section 10(b) and Rule 10b-5(b) means they do not also extend to pure omissions. Therefore, said the Court, “the failure to disclose information required by Item 303 can support a Rule 10b-5(b) claim only if the omission renders affirmative statements made misleading.”

What Now?
The Supreme Court’s opinion resolves the circuit split on this issue. But it leaves companies, stockholders and the lower courts to grapple with which omissions are actionable half-truths and which are pure omissions. The Court also insisted that this decision does not create broad immunity for companies that fail to disclose required information: Private parties can still bring 10b-5 actions based on half-truths, and the SEC can still sue those who violate the SEC’s own regulations, including Item 303.