U.S. Supreme Court Distinguishes Half-Truths From Pure Omissions And Holds That Pure Omissions Are Not Actionable Under Rule 10b–5(b) – Shareholders

Answering a precise question increasingly raised by securities
fraud plaintiffs, the United States Supreme Court held in
Macquarie Infrastructure Corp. v. Moab Partners that a
failure to disclose information cannot support a private action
under Rule 10b–5(b) if the failure did not render any
statements made misleading. Though the Court framed the case around
the narrow issue of whether the failure to make required
disclosures under SEC Regulation S–K Item 303 is actionable,
it also resolved two separate circuit splits, holding that: (i)
pure omissions are not actionable under Rule 10b–5(b); (ii)
shareholders can bring claims based on Item 303 violations that
create misleading half-truths; and (iii) a duty to disclose does
not automatically render silence misleading under Rule
10b–5(b).

This decision closes the door on a pure-omissions theory of
liability in Rule 10b–5. Although future securities
plaintiffs are likely to attempt to reframe omissions claims as
half-truths to try to state a valid cause of action, the Supreme
Court, speaking unanimously, has issued a strong statement that
courts should not countenance such tactics. Instead, plaintiffs
must identify a statement made misleading by an alleged
omission.

Background: Legal Framework

Section 10(b) of the Securities Exchange Act of 1934 and
Securities and Exchange Commission (“SEC”) Rule
10b–5(b) operate together to, among other things, make it
unlawful to omit material facts in connection with the purchase or
sale of a security when that omission renders “statements
made” misleading.¹ Although the words of the
statute and its implementing regulation do not expressly provide
for a private right of action, the Supreme Court has held there to
be a right by implication.² Given that damages in such
actions are typically measured against a defendant issuer’s
outstanding shares, the potential recovery is often substantial. It
is therefore little surprise that approximately 230 such class
actions on average have been filed every year since passage of the
Private Securities Litigation Reform Act of 1995.³

Courts have long grappled with the first required element in a
claim brought under Section 10(b) and Rule
10b–5—”a material misrepresentation or omission by
the defendant.”⁴ For omissions, in particular,
courts have disagreed about when a company is obligated to
speak.

Courts have generally distinguished between half-truths and pure
omissions. Half-truths are “representations that state the
truth only so far as it goes, while omitting critical qualifying
information.”⁵ In other words, such statements may
be literally true, but substantively misleading.
An oft-cited example of a half-truth appears in a case decided by
Judge Cardozo: A seller of property disclosed that two new roads
might alter the property’s dimensions, but omitted the fact
that a third new road might bisect the plot and render it
useless.⁶ Courts have generally held that, in instances
such as this when a company issues a material half-truth, it is
obligated to make the half whole.⁷

By contrast, “[a] pure omission occurs when a speaker says
nothing, in circumstances that do not give any particular meaning
to that silence.”⁸ Courts have disagreed on whether
a pure omission can be actionable under Section 10(b) and Rule
10b–5. The Second Circuit, for example, has held that “a
pure omission [may be] actionable under the securities
laws”—particularly pointing to instances in which
“statutes or regulations [ ] obligate a party to
speak.”⁹ Part of this theory traces to a footnote
in a 1988 Supreme Court case, Basic Inc. v. Levinson,
which notes that “[s]ilence, absent a duty to disclose, is not
misleading under Rule 10b–5.”¹⁰ If this were
true, the theory went, then the converse was true as
well—silence in the face of a duty to disclose could be
misleading.¹¹ Although the Second Circuit has recognized
a pure-omissions theory of liability, it also has conceded that
such a theory is “relatively uncommon in securities
litigation” and “not strictly within the letter of Rule
10b–5.”¹² Other courts, such as the Fifth
Circuit, have held that “pure-omission claims are not
actionable.”¹³

Recognizing that some courts, like those within the Second
Circuit, may allow omission claims under Section 10(b) and Rule
10b–5 where a particular statute or regulation creates a duty
to speak, plaintiffs have pointed to SEC Regulation S–K as a
basis for the duty. As relevant here, Item 303 of Regulation
S–K requires issuers to “[d]escribe 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.”¹⁴ This
question of whether an Item 303 violation could constitute an
actionable omission under Section 10(b) and Rule 10b–5
created yet another circuit split. In the Ninth Circuit, for
example, “Item 303 does not create a duty to disclose for
purposes of Section 10(b) and Rule 10b–5.”¹⁵
The Third, Fifth, and Eleventh Circuits have suggested
similarly.¹⁶ According to the Second Circuit, however,
“Item 303 imposes the type of duty to speak that can, in
appropriate cases, give rise to liability under Section
10(b).”¹⁷

In 2016, the Supreme Court granted certiorari on the question of
whether Item 303 “creates a duty to disclose that is
actionable” under Section 10(b) and Rule
10b–5.¹⁸ That case settled shortly before
argument, however, leaving the disagreement unresolved.¹⁹ The Court found its next
opportunity to address this issue in Macquarie.

Background: Macquarie Infrastructure Corp. v. Moab
Partners, L.P.

In Macquarie, the defendant company owned a business
that operated storage tanks for a variety of liquids, including
“No. 6 fuel oil,” which typically has a sulfur content
around 3%.²⁰ In 2016, the United Nations’
International Maritime Organization (“IMO”) implemented a
rule capping the sulfur content of fuel oil used in shipping at
0.5%.²¹ Macquarie’s Item 303 disclosures did not
discuss the extent to which the subsidiary’s tanks were used to
store No. 6 fuel oil.²² In 2018, the company’s stock
dropped 41% after it announced that the No. 6 fuel oil market had
declined, and, along with it, the subsidiary’s storage
contracts.²³

Prospective plaintiffs wasted little time in finding a theory of
securities fraud. Within two months of Macquarie’s
announcement, two complaints, later consolidated and amended, were
filed in the United States District Court for the Southern District
of New York.²⁴ The complaints claimed that the
defendants had “‘a duty to disclose’ the extent to
which [the subsidiary]’s storage capacity was devoted to No. 6
fuel oil.”²⁵ The argument, as relevant here, was
premised on Item 303.²⁶ The plaintiff claimed that the
IMO rule presented an “increasing uncertainty,” and that
Item 303 required the company to “disclose that its profits,
revenues, and dividends were at risk.”²⁷

The district court’s opinion on the defendants’ motion
to dismiss began its analysis by noting that “Section 10 [and
Rule 10b–5] ‘do not create an affirmative duty to
disclose any and all material information.”²⁸ In
keeping with Second Circuit precedent, the court further described
“two relevant situations where a company will be bound to
disclose facts.”²⁹ First, when a company issues a
“half-truth”—a specific statement that is
“literally true” but “creates a materially
misleading impression” due to omitted information—it may
need to “speak more fully.”³⁰ Second, a
company must disclose facts when required by statute or
regulation.³¹

Discussing the second situation, the district court cited
Stratte-McClure v. Morgan Stanley. That 2015 case is part
of the Second Circuit’s body of law holding that Item 303
omissions could “serve as the basis for a securities fraud
claim under Section 10(b).”³² On the facts
presented, however, the district court held that the alleged
omission was insufficient to violate Item 303.³³ For
this and other reasons, the district court dismissed the
complaint.³⁴

After the shareholder plaintiff appealed, the Second Circuit
first repeated the same standard for actionable omissions that the
district court applied: A company need speak only when necessary to
complete a half-truth, or to comply with a statute or
regulation.³⁵ But the Second Circuit ultimately
disagreed with the district court, holding that “Plaintiff has
adequately alleged a ‘known trend or uncertainty’ that gave
rise to a duty to disclose under Item 303.”³⁶ And
then—holding that such an omission could be actionable—
the Second Circuit held that “[t]he failure to make a material
disclosure required by Item 303 can serve as the basis . . . for a
claim under Section 10(b) if the other elements have been
sufficiently pleaded.”³⁷ This latter holding rested
on two prior Second Circuit cases, including
Stratte-McClure.³⁸ The Second Circuit therefore
vacated the district court’s dismissal of the complaint, and
remanded the case for further proceedings.³⁹

The Supreme Court Decision

Macquarie sought Supreme Court review and, on September 29,
2023, the Court granted certiorari.⁴⁰ On April 12, 2024,
the Supreme Court issued an eight-page decision.⁴¹
Authoring the opinion for a unanimous Court, Justice Sotomayor
framed the question presented as “whether the failure to
disclose information required by Item 303 can support a private
action under Rule 10b–5(b), even if the failure does not
render any ‘statements made’
misleading.”⁴²

As a starting point, the Court reasoned that the crux of the
case was whether the language of Rule 10b–5(b) bars only
half-truths or instead extends to pure omissions.⁴³ The
Court then determined that “Rule 10b–5(b) does not
proscribe pure omissions.”⁴⁴ Rather, the Rule
prohibits the omission of material facts necessary to make
“the statements made . . . not misleading.”⁴⁵
The Court thus concluded that actionable omissions cannot exist in
a vacuum, and must therefore be pegged to already-made
“affirmative assertions.”⁴⁶

The Court then addressed the respondents’ argument that a
plaintiff need not plead any statements rendered misleading by a
pure omission, because reasonable investors know that Item 303
requires a company’s periodic filings—in a section known
as the Management’s Discussion & Analysis—to disclose
all known trends and uncertainties.⁴⁷ Relying again on
the words “statements made” in Rule 10b–5(b), the
Court rejected the plaintiff’s argument, explaining that it
“shifts the focus . . . from fraud to
disclosure.”⁴⁸

In its closing passages, the Court’s opinion addressed the
potential effects of its decision. Quoting the line in
Basic with which the Second Circuit had previously
supported pure-omissions liability, the Court again noted that
“[s]ilence, absent a duty to disclose, is not misleading under
Rule 10b–5.”⁴⁹ But the Court continued:
“Even a duty to disclose, however, does not automatically
render silence misleading under Rule 10b–5(b). Today, this
Court confirms 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.”⁵⁰

Takeaways

In ruling that “[p]ure omissions are not actionable under
Rule 10b–5(b),” the decision affects all omission-based
claims brought under Rule 10b–5(b), not only those based on
Item 303 disclosures. Other common theories of liability, such as
omissions from the “Risk Factors” disclosure under Item
105 of Regulation S-K, are also likely to be barred by the
Macquarie decision.⁵¹ Additionally, given that
the main body of law that was overturned came from the Second
Circuit—in which a substantial number of omissions-based
securities actions have been filed—it is possible the
Macquarie holding may dampen plaintiffs’
jurisdictional preference for the Second Circuit in certain
cases.⁵²

Plaintiffs and defendants may disagree on the practical
implications of the Macquarie decision. Indeed, even where
plaintiffs plead a Rule 10b–5(b) cause of action based on
Item 303 (or Item 105) violations, such claims are often tacked on
as an additional, rather than primary, liability theory.
Accordingly, it is unlikely that plaintiffs will abandon many
potential matters; instead, plaintiffs will undoubtedly attempt to
reframe omissions as half-truths. Chief Justice Roberts presaged
this issue in oral argument, when he opined that “the
distinction [between] half-truths and omissions strikes me as one
that might be hard to apply in practice.”⁵³ Indeed,
this is the theory that the Macquarie plaintiff has now
promised to pursue in its case.⁵⁴

In any event, the Macquarie decision makes clear that
shareholder plaintiffs must identify one or more statements that
are made misleading by an alleged omission. Presumably, the
connection between the affirmative statement and alleged omission
need be more than illusory to avoid arguments that the claim is
simply an impermissible omission theory. In a footnote at the end
of its opinion, however, the Court expressly stated that it was not
opining on other issues not presented, including “what
constitutes ‘statements made'” and “when a
statement is misleading as a half-truth.”⁵⁵ Thus,
while the Court made clear that a Rule 10b–5(b) claim must be
tied to an affirmative statement, it did not provide express
guidance on how strong the connection between the statement made
and the alleged omission must be. But given the unambiguous
language in the unanimous opinion rejecting a pure-omissions theory
of liability, it is likely that courts will require plaintiffs to
plead a strong connection between the affirmative statement and the
alleged omission. For example, it is unlikely that a general
statement about demand or other revenue indicators would be enough
to support a claim based on omissions of “known trends or
uncertainties.” Ultimately, the answers to these questions
will be left to the lower courts to sort out: As Macquarie’s
counsel responded in answer to Chief Judge Roberts,
“that’s [the] kind of question that district courts answer
every day.”⁵⁶

Footnotes

1 15 U. S. C. § 78j(b); 17 C.F.R. §
240.10b–5(b).

2 Macquarie Infrastructure Corp. v. Moab
Partners, No. 22-1165, 601 U.S. ___, slip op. at 2 (Apr. 12,
2024) (citing Stoneridge Inv. Partners v. Sci.-Atlanta,
Inc., 552 U.S. 148, 157 (2008)).

3 Stanford Law School, Federal Securities Class Action
Litigations 1996 – YTD, https://securities.stanford.edu/charts.html
(last visited Apr. 19, 2024). Because securities class actions are
frequently followed by shareholder derivative suits, meanwhile, the
total number of related lawsuits is considerably higher.

4 Stoneridge Inv. Partners, 552 U.S. at 157. The
elements of a claim under Section 10(b) and Rule 10b–5 are:
“(1) a material misrepresentation or omission by the
defendant; (2) scienter; (3) a connection between the
misrepresentation or omission and the purchase or sale of a
security; (4) reliance upon the misrepresentation or omission; (5)
economic loss; and (6) loss causation.” Id.

5 Universal Health Servs., Inc. v. United
States, 579 U.S. 176, 188 (2016).

15In re
NVIDIA Corp. Sec. Litig., 768 F.3d 1046, 1056 (9th Cir.
2014).

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