Private Suits Based on Item 303 Violations Remain Viable Post-Macquarie

• Date: 01 July 2024
• Author: Rachel Avan and Marco Antonio Duenas

American Bar Association | Litigation Section Class Actions & Derivative Suits Summer 2024, Vol. 34 No. 1 _________________________________________________________________________________________________________ Private Suits Based on Item 303 Violations Remain Viable Post- Macquarie By Rachel Avan and Marco Antonio Duenas On April 12, 2024, the U.S. Supreme Court unanimously held that “pure” omissions, where a public company remains silent and says nothing about a subject, are not actionable under Securities and Exchange Commission (SEC) Rule 10b-5(b). Macquarie Infrastructure Corp. v. Moab Partners, L.P. , 601 U.S. 257 (2024). The Court’s holding resolved a split between the Second, Third, and Ninth Circuits over whether an issuer’s failure to disclose “known trends or uncertainties” as required by Item 303 of SEC Regulation S-K, in the absence of an otherwise misleading statement, can serve as the basis of a securities fraud claim under section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5(b). While Macquarie answers this question in the negative—finding that a failure to disclose Item 303 information cannot support a Rule 10b-5(b) claim absent an otherwise misleading statement—the Court’s opinion is perhaps more notable because it left intact every other way Item 303 violations can support private rights of action under the federal securities laws. After Macquarie , issuers remain liable for Item 303 violations under Rule 10b-5(b) if they tell lies or “half-truths,” i.e., representations that partially state the truth while omitting critical qualifying information. While issuers are no longer liable for pure omissions involving Item 303 violations under Rule 10b-5, the Court expressly did not opine on what constitutes a lie, when a half-truth is misleading, or whether Rules 10b-5(a) and 10b-5(c)—the “scheme liability” provisions—can support a securities fraud claim for pure omissions. Issuers also remain liable for Item 303 violations under sections 11 and 12 of the Securities Act of 1933 whenever a registration statement or prospectus for an initial public offering or secondary public offering contains a lie, half-truth, or pure omission. Given the Court’s narrow holding in Macquarie , investors will continue to be able to assert private rights of action based on Item 303 violations under both the Exchange Act and the Securities Act. Statutory and Regulatory Background Section 13(a) of the Exchange Act requires issuers to file periodic documents, e.g., quarterly and annual reports on Forms 10-Q and 10-K, respectively. These reports include Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 303 sets forth affirmative disclosures issuers must include in it: “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.” 17 C.F.R. § 229.303(b)(2)(ii) (2021). Further, if the issuer “knows of events that are reasonably likely to cause a material change in the _________________________________________________________________________________________________________ © 2024 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. American Bar Association | Litigation Section Class Actions & Derivative Suits Summer 2024, Vol. 34 No. 1 _________________________________________________________________________________________________________ relationship between costs and revenues . . . , the change in the relationship must be disclosed.” Id. Section 10(b) of the Exchange Act prohibits issuers from using or employing, in connection with the purchase or sale of securities, “any manipulative device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe . . . for the protection of investors.” 15 U.S.C. § 78j(b). As the implementing regulation for section 10(b), SEC Rule 10b-5 makes it unlawful to “make any untrue statement of a material fact” (i.e., tell a lie) 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” (i.e., tell a half-truth) in connection with the purchase or sale of securities. 17 C.F.R. § 240.10b-5(b) (2022). Rule 10b-5 also makes it unlawful to “employ any device, scheme, or artifice to defraud” or to “engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person” in connection with the purchase or sale of securities. 17 C.F.R. § 240.10b-5(a) & (c) (2022). Section 11 of the Securities Act makes it unlawful for an initial public offering or secondary public offering registration statement to “contain[] an untrue statement of a material fact” (i.e., a lie), “omit[] to state a material fact required to be stated therein” (i.e., a pure omission), or “omit[] to state a material fact . . . necessary to make the statements therein not misleading” (i.e., a half-truth). 15 U.S.C. § 77k(a). Section 12 of the Securities Act creates parallel liability for false and misleading statements and omissions found in an initial public offering or secondary public offering prospectus. See 15 U.S.C. § 77 l (a); see also In re Morgan Stanley Info. Fund Sec. Litig. , 592 F.3d 347, 359 (2d Cir. 2010) (“Claims under sections 11 and 12(a)(2) are . . . Securities Act siblings with roughly parallel elements”). For section 10(b) of the Exchange Act, the Supreme Court has “found a [private] right of action implied in the words of the statute and its implementing regulation.” Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc. , 552 U.S. 148, 157 (2008). By contrast, Congress created express private rights of action in the text of sections 11 and 12 of the Securities Act. Blue Chip Stamps v. Manor Drug Stores , 421 U.S. 723, 728 (1975). Factual, Procedural, and Legal Background Macquarie Infrastructure Corporation owns infrastructure-related businesses, including a subsidiary, International-Matex Tank Terminals (IMTT), that operates bulk liquid storage terminals in the United States. IMTT terminals handle and store...