Munger, Tolles & Olson Attorneys John Gildersleeve and Henry Shreffler Co-Author Article on Supreme Court Ruling Clarifying the Scope of Liability for Omissions in Securities Disclosures
Munger, Tolles & Olson partner John Gildersleeve and associate Henry Shreffler co-authored an article titled “Supreme Court cabins scope of Rule 10b-5(b) liability for omissions,” published in Reuters and Westlaw Today.
The article details some of the major implications of the U.S. Supreme Court’s April 2024 ruling in Macquarie Infrastructure Corporation v. Moab Partners, L.P—a case that clarified the scope of companies’ potential liability to plaintiffs alleging securities fraud under SEC Rule 10b-5(b).
As Mr. Gildersleeve and Mr. Shreffler explain in the article, Rule 10b-5(b) implements Section 10(b) of the Securities Exchange Act of 1934 and makes it unlawful for an issuer to make
false statements or omit material facts necessary to make statements not misleading. The question raised in Macquarie was whether a failure to disclose information required by Item 303 of SEC Regulation S-K—which requires a company to describe certain risks and trends potentially affecting its performance—could support a private claim under 10b-5(b).
The defendant Macquarie operated storage facilities that handled No. 6 fuel oil, which was affected by a U.N. regulation that limited sulfur amounts in maritime shipping. The U.S. Court of Appeals for the Second Circuit held that omitting to disclose the regulation or its impact could support a private lawsuit, while other circuits had rejected such claims based on so-called “pure omissions.” The Supreme Court resolved the circuit split by rejecting the Second Circuit’s holding and finding that even if a securities issuer was required by Regulation S-K to disclose certain information, omitting that information could give rise to liability in a private fraud action under Rule 10b-5(b) only if “the omission renders affirmative statements made misleading.”
“Macquarie confirms that Rule 10b-5 addresses fraud—not disclosure—and that issuers can control their exposure to private liability under Rule 10b-5(b) by controlling what they say to the market,” wrote Mr. Gildersleeve and Mr. Shreffler. “The decision promotes predictability relating to the scope of potential liability in actions alleging securities fraud. Overturning the contrary holding of the 2nd Circuit, a hub for private securities litigation, brings useful clarity.”
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