Earlier this month, SCOTUS unanimously decided Macquarie Infrastructure Corp v. Moab Partners, holding that a pure omission of information required to be disclosed—in this case required in MD&A under Item 303—cannot form the basis of a private securities fraud action under Rule 10b-5(b). The Court was clear: “Pure omissions are not actionable under Rule 10b–5(b).” To be actionable under Rule 10b-5(b), the Court said, the omission must render an affirmative statement materially misleading. According to the Court, a “pure omission occurs when a speaker says nothing, in circumstances that do not give any particular meaning to that silence.” Actionable “[h]alf-truths, on the other hand, are ‘representations that state the truth only so far as it goes, while omitting critical qualifying information’…….In other words, the difference between a pure omission and a half-truth is the difference between a child not telling his parents he ate a whole cake and telling them he had dessert.” As discussed in this new Cooley Alert, US Supreme Court: Pure Omissions Not Actionable Under Rule 10b-5(b), from our Securities Litigation + Enforcement and Public Companies groups, the “decision emphasizes the importance of assessing whether statements could be construed as being misleading by omission.”
As the Alert explains, in reaching its decision, SCOTUS focused its analysis on the statutory language of Rule 10b-5. The Court emphasized that “§10(b) and Rule 10b–5(b) do not create an affirmative duty to disclose any and all material information. Disclosure is required under these provisions only when necessary ‘to make . . . statements made, in the light of the circumstances under which they were made, not misleading.’” In contrast, the Court pointed out, “Section 11(a) [of the Securities Act] prohibits any registration statement that ‘contain[s] an untrue statement of a material fact or omit[s] to state a material fact required to be stated therein or necessary to make the statements therein not misleading.’…By its terms, in addition to proscribing lies and half-truths, this section also creates liability for failure to speak on a subject at all.” As the Alert observes, “pure omissions can still trigger liability under Section 11…, so companies should keep in mind that a failure to include disclosure required by Item 303 in one or more reports that are incorporated by reference into a registration statement can still trigger liability under Section 11 with respect to a securities offering under that registration statement. Additionally, the SEC can bring enforcement actions for violations of Item 303.” Be sure to check out the Alert.
