SCOTUS Will Review Investor’s Fraud Case Over Trend Omission (1)

The US Supreme Court agreed Friday to review a securities fraud case alleging Macquarie Infrastructure Corp. failed to disclose its assessment of the impact of a new oil regulation.

The Second Circuit had reinstated Moab Partners LP’s lawsuit, holding that the investor had adequately alleged circumstances where Macquarie was obliged to disclose its assessment of the regulation’s consequences.

Macquarie petitioned for Supreme Court review in May, arguing the opinion deepened a circuit split. A securities fraud claim shouldn’t be built on a failure to disclose under Item 303 of Regulation S-K, the infrastructure conglomerate said. The company is now known as Atlantic Aviation Infrastructure Corp.

“By its nature, Item 303 does not create a hard-and-fast rule about what facts must be disclosed; it depends on management’s judgment about what is reasonably likely to occur in the future,” the company said. “Under some circumstances, disclosure is mandatory; under others, optional.”

Investment firm Moab opposed review, arguing the circuit split had proven superficial and the issue had grown less important.

Moab, as lead plaintiff for a proposed class of shareholders, sued over a February 2018 drop in Macquarie’s stock price after the company announced disappointing earnings tied to declining demand for a heavy fuel oil it stored and handled for customers in the shipping industry. Macquarie, known for its high dividends, also announced a 31% dividend cut, according to the complaint.

Macquarie had concealed important information from investors when the rules for heavy oils were changing, Moab said.

Macquarie and several of its executives would have known that the International Maritime Organization’s impending regulation restricting No. 6 fuel oil would affect Macquarie, because its customers would need to shift their fuel and because it owned numerous No. 6 fuel tanks that would have to be repurposed at considerable expense, the investment firm said.

But Macquarie allegedly didn’t disclose the extent of its No. 6 tank holdings, the anticipated repurposing expense, and other factors.

After the district court dismissed the case, the US Court of Appeals for the Second Circuit revived it.

“Item 303 requires that a company disclose certain information ‘where a trend, demand, commitment, event or uncertainty is both presently known to management and reasonably likely to have material effects on the registrant’s financial conditions or results of operations,’” the panel said in December 2022 in an unpublished, unsigned opinion. Moab adequately alleged such a trend or uncertainty, it said.

Macquarie asked the Supreme Court to review the case in May. “At least three circuits have now held that a Section 10(b) claim cannot be based solely on an alleged violation of Item 303,” it said, referring to a key fraud provision in the Securities Exchange Act.

Kellogg, Hansen, Todd, Figel & Frederick PLLC and Bernstein Litowitz Berger & Grossmann LLP represent Moab. Winston & Strawn LLP and Steptoe & Johnson LLP represent Macquarie.

The case is Macquarie Infrastructure Corp. v. Moab Partners LP, U.S., No. 22-1165, petition granted 9/29/23.