Silence, securities fraud, sulfur

 

Macquarie Infrastructure v. Moab Partners -- a unanimous decision came down from our Supreme Court last week. 

The opinion, written by Justice Sotomayor, says in essence that securities fraud, regarded as an actionable private tort, is a tort of malfeasance, not of nonfeasance.  

Let us abstract from the particular facts a bit. Consider any case in which a plaintiff believes that he was sold stock by the issuing corporation at an unrealistically high price. He has sued. Asked why he bought it at such a price, the plaintiff might say, "They didn't tell me about X, a fact known to them and one that soon thereafter eliminated the value of the securities at issue."

This decision tells that plaintiff: that isn't enough.  You're going to have to plead, and in due course prove, that they made materially false statements, not simply that they failed to make certain true ones.

The decision is a matter of interpreting the text of an SEC rule, 10b–5(b), which makes it unlawful “[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.” For years (since 2008) the courts have recognized that enforcement of this rule in not limited to the SEC or, in extreme cases, the Department of Justice. Rather, private parties who purchased stock on false pretenses have an action. 

Aha! the plaintiff said in the courts below.  "It says 'omit to state' right there!"  So, yes, certain omissions seem actionable under this rule on a par with untrue statements that the issuer actually made. 

But, SCOTUS has now made it clear, the omissions that are actionable are carefully restricted: only omitted statements that, by virtue of their omission, render the statements that were made misleading.   

Classic example of a seller's half truth (Sotomayor cites it from a 2016 case) -- consider a conversation between a real estate developer and prospective buyer, "This home looks great, and I like the large plot, but it is out in the boondocks. Can't you show me something nearer the city?" Developer, "The state is building road 123 and road 234, both of which will come right near here and make you effectively part of the metropolitan area." 

In that context, though, the developer somehow neglects to tell the buyer, "The state is also building road 345, and by eminent domain if all goes according to plan 345 will result in the taking of a part of this nice big plot I'm trying to sell you, and the road will end up bisecting your land." Oops. 

The hopeful talk about the first two roads is rendered misleading by silence over the third. It is THAT kind of situation, transferred to the world of securities, that the SEC had in mind with its "omit to state" language, Sotomayor says.     

But rule 10b-5(b) does not thereby render a seller (an issuer) liable for "pure omissions."

There is a regime of minimal disclosure under our securities laws, too, but liability for failure to make the minimal disclosures (pure omissions) are a different matter from 10b-5 fraud, to be treated under a different rule.  The SEC itself is to be the enforcer of the minimal disclosure regime, not private parties such as Moab Partners here. 

It strikes me as an unobjectionable decision.  

The reason I bring it up, though, is that it is very possible that we have not heard the end of it.  The matter was remanded, and on remand the plaintiffs may very well manage to recast their arguments in the terms Sotomayor suggests.  [That third road they didn't warn you about makes the statements about the other two roads misleading enough to be actionable.] Perhaps I will say more about the underlying dispute here next week, and issues that may be litigated on that remand. 

In the meantime to justify my headline I will say that those issues involve the international phase out of high-sulfur fuel oil. Stay tuned.