Macquarie Infrastructure Corp. v. Moab Partners, L.P. - Post-Decision SCOTUScast

On April 12, 2024, the Supreme Court issued its ruling in Macquarie Infrastructure Corp. v. Moab Partners, L.P. At issue was whether U.S. Court of Appeals for the 2nd Circuit erred in holding that a failure to make a disclosure required under Item 303 of SEC Regulation S-K can support a private claim under Section 10(b) of the Securities Exchange Act of 1934, even in the absence of an otherwise misleading statement.

Join us to hear Prof. Adam Pritchard break down the decision and its potential ramifications.

Featuring:
Prof. Adam Pritchard, Frances and George Skestos Professor of Law, University of Michigan Law School

Episode Transcript

(00:02):
Welcome to scot Discast, a projectof the Federalist Society for Law and Public
Policy Studies. Our contributors joined usfrom around the country to bring you expert
commentary on US Supreme Court cases asthey are argued and the decisions are issued.
The Federalist Society takes no position onparticular legal or public policy issues.
All expressions are those of the speaker. Hello, and welcome to scot Discast.

(00:29):
I'm your host, Kyle hammernis Onbehalf of the Faculty division of the
Federalist Society. We are here todayto discuss Macquarie Infrastructure Corporation versus Moab Partners
LP, in which is Supreme Courtissued a nine zero decision on April twelfth,
twenty twenty four. It is myhonor to introduce our guests today,
Professor Adam Pritchard. Professor Pritchard isthe Francis and George Sgustos Professor of Law

(00:54):
at the University of Michigan. ProfessorPritchard teaches corporate and securities law and recently
publish book titled A History of SecuritiesLaw in the Supreme Court. And with
that, I like to turn thingsover to our guests to discuss the overview
of the case and the court's decision. So I think there is nothing surprising
about this opinion. So this isa nine to zero decision from the Supreme

(01:19):
Court written by Justice Soda Mayor forthe Court, and she dispatches the question
presented in an eight page opinion.So the Court gets points for being concise
in this case. From the court'sperspective, it didn't need to spend a

(01:41):
lot of pages because the question wasvery straightforward. So this is a securities
fraud class action. And McCary Infrastructureis in, among other things, the
business of storing liquid bulk chemicals invarious terminals. So they have storage tanks

(02:05):
and they store various large items,and one of the items they stored was
fuel oil for container ships that hada high sulfur content. And the UN
agency that's responsible for regulating the useof oil on the high seas had threatened

(02:37):
to prohibit the use of a certainkind of oil, the high sulfur oil,
and eventually it did, and whenit did, that had a dramatic
effect on shareholders expectations about mccary's futureprofitability, and the stock price took a
big hit. And as is customaryafter the stock price took a big hit.

(03:00):
Securities class action was brought alleging thatMcCary had deceived investors by not disclosing
the impact that a change in theregulations by the un would have on its
business. So, in the usualsecurities fraud class action, the plaintiffs alleged

(03:23):
that the company has made a misstatement, a material misstatement that has affected the
price of the security. The plaintiffsdid that here. But what makes the
case noteworthy or attracted the attention ofthe Supreme Court was that, in addition
to making claims about misstatements by McCary, the plaintiffs alleged that McCary had failed

(03:50):
to disclose the information about the probabilityof the fuel oil being banned viihilation of
a disclosure obligation They had under Itemthree to three of Regulation SK which mandates

(04:11):
that companies disclose known trends or uncertaintiesthat have had or that are reasonably likely
to have a material favorable or unfavorableimpact on net sales or income from continuing
operations. So the argument here wasthis was going to have a negative effect

(04:32):
non revenue and income and they failedto disclose it. Under three to three
and that investors were deceived. Thisis what we call in the securities class
action space a pure omission. Theyfailed to disclose when there was a legal
obligation imposed by the sec for publiccompanies to disclose. In this context,

(04:56):
the plaintiffs brought their claim under Ruleten B five B of the Exchange Act
of nineteen thirty four, and thatprovision makes it illegal to make any untrue
statement of a material fact, orto omit to state a material fact necessary

(05:21):
in order to make the statements madein light of the circumstances under which they
were made not misleading. That secondclause, omitting to state a material fact
in light of the circumstances made makingother statements misleading was what was a issue

(05:42):
here. So that's called the halftruth provision. That if you tell part
of the truth, but you leaveout some of the important context around that,
and you make what you said misleadingdue to the omission, that's clearly
actionable under rule time ten B fiveB. But here the plaintiffs hadn't pointed

(06:03):
to any statements that were made misleadingby the failure to disclose. The prospect
this kind of fuel oil would bebanned. This mattered because a pure omission
based on language under Rule ten Bfive B, it looks questionable whether that's

(06:26):
actionable under ten B five B,and for the Court it seemed to matter
a good deal that there is aparallel provision of the Securities Act, which
Congress passed in nineteen thirty three,the year before the Exchange Act was passed,
which makes it illegal to include materialmisstatements and a registration registration statement file

(06:51):
in connection with a public offering.But Section eleven of the Securities Act also
makes it illegal to omit to statea material fact required to be stated therein
or necessary to make the statements thereinnot misleading. So Section eleven prohibits not

(07:14):
only misleading half truths, but alsoprohibits omitting to satisfy a disclosure requirement that
the sec has specified has to beincluded in your registration statement. So if
Maccari had been selling securities to thepublic pursuant to a registration statement, their

(07:36):
failure to include this disclosure of thefuel oil regulations clearly would have been actionable
under section eleven. But for thecourt, the absence of this language from
section eleven omitted to state a materialfact required to be stated. Therein was

(07:59):
dispositive of whether or not it wasactionable under rule ten be FI, and
so that was the holding, wasthat the failure to include this clause meant
that it wasn't actionable under rule tenB five B. So this was not

(08:20):
surprising. It is a very textualopinion from the Supreme Court. It turns
in part on what it means tomake a statement. The failure to make
a statement is not a statement underrule ten B five B, according to
Justice Sodomyor, and she has eightother votes for that. So that's a

(08:41):
very clear holding. There's no ambiguity. So if I was surprised by anything,
and maybe I'm not surprised anymore,it was the narrowness of the holding.
So at the end of the opinion, Justice Sotomayor includes a footnote talking

(09:03):
about the things that the Court isnot deciding in the context of this case.
And the Court says in this footnote, we are not deciding what constitutes
a statement is made, when astatement is misleading, is a half truth,

(09:24):
or whether rules ten BE five Aand ten B five C support liability
for pure omissions. And that's thecritical narrowing clause is that last provision ten
five A and C prohibit deceptive devicesor things that would act as a fraud

(09:48):
upon an investor, so they havea different formulation from ten B five B,
and the Court specifically disclaimed whether failureto satisfy a required disclosure item could
be actionable as a scheme to defraud. So what that means for securities litigation

(10:13):
going forward is that claims that mighthave been framed as a pure omission under
ten B five B that avenue isforeclosed, but alleging that it's a deceptive
device or contrivance under ten B fiveA or ten B five C is still

(10:33):
available to the plaintiffs. So wehave eliminated one potential question, but we
have not eliminated the substantive issue goingforward for the lower courts. So this
narrowness in securities cases coming from theSupreme Court is I think a conspicuous trend

(10:58):
over the last ten years or so. This careful case by case development of
the law presumably helps the Court tonot make mistakes by making overarching statements.
But if you're only going to decidesixty cases a year and a maximum of

(11:24):
two are going to be securities cases. These very narrow pronouncements from the Supreme
Court are going to leave lower courtsgrappling with a lot of questions and plaintiffs
and defendants spending a lot of timeand money squabbling over these questions that don't
get resolved by the Supreme Court.Thank you for listening to this episode of

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