On April 12, a unanimous Supreme Court held that issuers are not liable under Rule 10b-5(b) for “pure omissions.” The Court’s decision ends a long-standing circuit split and, most importantly for public companies, narrows the grounds for Section 10(b) and Rule 10b-5 liability.

The ‘Pure Omissions’ Theory of Rule 10b-5 Liability

Under Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder, it is unlawful for securities issuers “[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 the light of the circumstances under which they were made, not misleading.” Securities plaintiffs have, in some cases, alleged Rule 10b-5(b) claims based on omissions that are not tied to affirmative statements, proceeding under a so-called “pure omissions” theory of liability. For an omission to be actionable, though, an issuer must have had a duty to speak in the first place. Because neither Section 10(b) nor Rule 10b-5 creates an independent duty of disclosure, securities plaintiffs have turned to Item 303 of Regulation S-K, which mandates disclosure of “any known trends or uncertainties that have had” or that are “reasonably likely to have a material favorable or unfavorable impact” on the company’s net revenues or income. Plaintiffs pursuing this avenue sometimes claim that an issuer’s failure to disclose the “known trends or uncertainties” required under Item 303 results in Rule 10b-5(b) liability, even in the absence of an affirmatively misleading statement.

This pleading tactic has yielded mixed results. A majority of courts — including the Ninth, Eleventh, and Third Circuits — have rejected pure omissions claims. Others, including the Second Circuit, have upheld pure omission claims. The Supreme Court’s decision in Macquarie Infrastructure Corporation et al. v. Moab Partners LP et al., No. 22-1165, firmly resolves this circuit split. 

Macquarie Infrastructure Corporation v. Moab Partners LP.

Moab Partners sued Macquarie Infrastructure Corporation, alleging that Macquarie violated its obligations under Item 303 — and, by extension, Section 10(b) and Rule 10b-5(b) — by not disclosing the potential impact of a cap of sulfur content for fuel oil used in shipping on its oil storage business. The District Court dismissed the case, holding that the plaintiff had failed to allege any actionably false statements or omissions. On appeal, the Second Circuit reinstated the plaintiff’s Section 10(b) and Rule 10b-5 claim, reasoning that Macquarie’s purported Item 303 omission, standing alone, supported the plaintiff’s theory of fraud.

The Supreme Court disagreed with the Second Circuit, holding that Rule 10b-5(b) “does not proscribe pure omissions.” The Court observed that Rule 10b-5(b), by its plain language, “prohibits omitting material facts necessary to make the ‘statements made . . . not misleading.'” Therefore, “[l]ogically and by its plain text, the Rule requires identifying affirmative assertions (i.e., ‘statements made’) before determining if other facts are needed to make those statements ‘not misleading.’” The Court contrasted Rule 10b-5(b) with Section 11(a) of the Securities Act of 1933, which imposes liability for registration statements that “contain[] an untrue statement of material fact or omit[] to state a material fact required to be stated therein or necessary to make the statements therein not misleading.” It noted that Section 11(a) by its terms is broader than Rule 10b-5(b) because the language in Section 11(a) mandates disclosures (i.e., those “required to be stated”), triggering potential liability for failure to speak on a subject at all. The Court found the absence of “similar language in §10(b) [and] Rule 10b-5” a “telling” indicator of legislative intent, and, in all events, a rejection of pure omissions liability under Rule 10b-5(b). Accordingly, the Court unanimously held that “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.” (emphasis added).

The Court’s ruling undoubtedly forecloses one pathway for securities plaintiffs to plead a Rule 10b-5(b) violation, as such alleged violations can no longer be based on just a pure Item 303 omission. However, it is unlikely to drastically affect the number of securities class actions filed because few complaints are based solely on Item 303 omissions. Instead, the more likely impact of the decision is one to which the Court itself alluded — that is, a change in how Rule 10b-5 omission cases are pled. In lieu of pleading pure omissions, plaintiffs wishing to bring securities fraud claims based on Item 303 violations must now focus their allegations on “misleading half-truths.” In that regard, and as the Justices themselves pointed out during oral argument, the line between “pure omissions” and “misleading half-truths” can be elusive and will likely be a battleground for litigants going forward. Thus, while the Court’s ruling serves as an important reminder that Rule 10b-5(b) governs fraudulent statements, not corporate disclosure obligations, it leaves unanswered the critical question of how to distinguish between “pure omissions” and purported “half-truths.” It will now be up to lower courts to parse through what promises to be the thorny, if at times semantic, question of whether a plaintiff’s allegations are grounded in affirmative misstatements or are pure omissions masquerading as “half-truths.”