Companies That Withhold Bad News Face New Rules Penned by SCOTUS

Companies, attorneys, and courts are expected to receive useful guidance on liability for failing to disclose troublesome trends from even a limited ruling by the US Supreme Court after oral argument on the theme this week, attorneys said.

Such a ruling “would give direction” to the lower courts in the context of a circuit split on the securities fraud issue, said Laura Posner of Cohen Milstein Sellers & Toll PLLC in New York. The split has led companies like Nvidia Corp. and Morgan Stanley to follow conflicting federal appeals court rulings.

Several justices at Tuesday’s high court argument focused on apparently aligned viewpoints among attorneys for Macquarie Infrastructure Corp., a hedge fund suing it, and the US government on the question presented to the court.

The precise question the justices accepted for decision is whether a failure to make a required disclosure “even in the absence of an otherwise-misleading statement"—a so-called pure omission—in a particular filing can give rise to a securities class action under Securities and Exchange Commission Rule 10b-5, or whether there must be some statement that plaintiffs can point to that’s misleading.

All the parties appeared to agree during oral argument there must be some statement in order for a class action to move forward. Justice Elena Kagan said the debate now focused on “how narrow or how capacious we should understand the requirement that there needs to be another statement.”

Some attorneys are now exploring the implications if the Supreme Court simply sticks to the question presented and says a “pure omission” won’t cut it.

‘Necessary Clarity’

“There’s some necessary clarity” that would come from a narrow ruling, Alston & Bird LLP’s Elizabeth Gingold Clark said in an interview Tuesday. The US Court of Appeals for the Second Circuit has been handling the issue differently from other circuits that have addressed the question, bringing the potential for forum-shopping by investors, said Clark, a securities defense attorney who works in Atlanta and New York.

Even a narrow holding that investors must plead “an alleged omission and a statement that would make it misleading” would help, she said. “That’s where the discrepancies are coming up,” she said. “You would have that consistency.”

But Posner, an attorney for investors, said that most of the time, plaintiffs are identifying specific statements in their complaints—and that the investor suing Macquarie, Moab Partners LP, did so in this case. Posner, who’s also president of the Institute for Law and Economic Policy in Jenkintown, Pa., co-authored an amicus brief on behalf of former SEC officials in Macquarie.

There may be an unusual case where a company lists no known trends in its Item 303 filing of the SEC’s Regulation S-K, she said. “What do you do when there’s no specific statement?” she said.

Assuming a false and misleading “management discussion and analysis” statement in an Item 303 filing can give rise to liability, a Supreme Court ruling that an investor would need to plead a statement would provide guidance to the Ninth Circuit, which has held that nothing in the MD&A can support liability, she said. A narrow ruling by the top court would be “agnostic as to the Second Circuit,” she said.

“Where the rubber will meet the road is whether a statement is specific enough to be actionable,” she said.

The high court’s ruling could have significant implications, said Gregory Baker of Patterson Belknap Webb & Tyler LLP in New York. “There are a lot of requirements under Regulation S-K,” he said. And proposed rules include mandated disclosures of security incidents and certain environmental, social, and governance practices, he said.

“I’d be surprised if it’s a complete win for the plaintiffs’ bar,” he said.

The court could go further than a narrow opinions and say there’s no private right of action for Item 303 filings, Gingold said. Macquarie isn’t asking for immunity, she said, but the question is rather “what’s the appropriate purview for the SEC and for the private bar?”

Macquarie Infrastructure Corp. is now Macquarie Infrastructure Holdings LLP.

The case is Macquarie Infrastructure Corp. v. Moab Partners, LP, U.S., No. 22-1165, oral argument 1/16/24.

—With assistance from Kimberly Strawbridge Robinson.