Moab Decision Is Securities Fraud Defendants’ Surprising Boon

Commentators initially expressed the view that the US Supreme Court’s decision last year in Macquarie Infrastructure Corp. v. Moab Partners was limited in scope and would eliminate only one type of claim under the securities laws. Moab did seem on its face to be a somewhat narrow decision—removing from plaintiffs’ quiver one of many arrows. This assessment has proven to be wrong.

Moab has instead helped defendants facing securities fraud claims on a much broader scale. Why was Moab underestimated, and how did its repetition of well-established legal principles become a significant factor in recent dismissal decisions? The answer lies in the facts of Moab and the securities law principles on which that decision was based.

Moab began with an investor claiming that the issuer had omitted material information from its Securities Exchange and Commission filings in violation of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. And while the complaint included other types of claims, the Moab appeal focused on only one: whether the investor could bring securities fraud claims based on supposed omissions in the “Management’s Discussion and Analysis,” or MD&A, section of SEC filings.

Certain regulations (Item 303 of Regulation S-K) govern what companies must affirmatively disclose in the MD&A, such as known trends or uncertainties likely to have material impact on financial conditions. The question presented in Moab was whether a private investor, as opposed to the SEC, could pursue claims for failure to comply with those requirements. The plaintiff was trying to pursue what is known as a “pure omissions” claim. Their theory was that the company stayed silent on a subject that the plaintiff—with the benefit of hindsight—thought should have been affirmatively disclosed.

As the Moab decision recognized and reaffirmed, it has long been the rule for Section 10(b) and Rule 10b-5 liability that a plaintiff must plead a “misstatement.” This is so because Rule 10b-5 makes it unlawful to “make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made . . . not misleading.” To be successful, an investor must point to a specific statement made by the defendant and explain how it was untrue when made or misleading based on something material that was purportedly concealed from investors.

It has been 37 years since the Supreme Court first explained that companies are allowed to remain silent and face no securities fraud liability—even as to material issues that investors might want to know. Liability arises when you choose to speak, and if you do so, you must tell the whole truth. Only half-truths are actionable.

Moab relied on this established rule. The failure to disclose information purportedly required by Item 303 standing alone couldn’t support a claim. Investors can only bring a securities fraud claim as to the MD&A if they successfully plead that specific statements made in that section were false or misleading. Moab reaffirmed that silence isn’t actionable under Section 10(b) or Rule 10b-5.

Initially, practitioners thought Moab’s impact would be limited because plaintiffs typically combined claims based on Item 303 with other types of claims unrelated to that provision. But recent court of appeals decisions out of the First and Second Circuits—in addition to various district court decisions—have relied on Moab to dismiss claims that have nothing to do with Item 303.

Here is how Moab is having a broader impact. A plaintiff often purports to play by the rules and identifies statements made by the defendants that are claimed to be false or misleading. But when a plaintiff’s omissions theory lacks the requisite connection to the substance of what the defendant said, the plaintiff is essentially pursuing a pure omissions claim that can’t survive Moab. In other words, plaintiffs can’t merely cite public statements on a variety of topics and claim that some undisclosed omission was lurking in the shadows and could render misleading virtually everything the company said.

This issue often arises when the statement challenged by the plaintiff was, as a technical matter, correct at the time it was made. The passage of time and subsequent revelation of negative news can’t, however, render a correct statement misleading by omission. There should be a close connection (both in the level of detail and the substance) between the allegedly omitted facts and the challenged statements. Otherwise, Moab’s admonition against pure omissions claims comes into play.

In this way, Moab has become synonymous with the notion that private liability under Section 10(b) and Rule 10b-5 is limited in nature—by purpose and design. It doesn’t allow investors to capitalize on subsequent negative disclosures through a limitless omissions theory that assumes earlier statements necessarily obscured the bad news that was coming. This is why Moab matters and will be the subject of discussion for years to come.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Susan Hurd is partner in Alston & Bird’s securities litigation group.

Noah Texter is an associate in Alston & Bird’s securities litigation group.

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