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.

A Story About Coleridge

This is a quote from a memoir by Dorothy Wordsworth, reflecting on a trip she took with two famous poets, her brother, William Wordsworth, and their similarly gifted companion, Samuel Taylor Coleridge. We sat upon a bench, placed for the sake of one of these views, whence we looked down upon the waterfall, and over the open country ... A lady and gentleman, more expeditious tourists than ourselves, came to the spot; they left us at the seat, and we found them again at another station above the Falls. Coleridge, who is always good-natured enough to enter into conversation with anybody whom he meets in his way, began to talk with the gentleman, who observed that it was a majestic waterfall. Coleridge was delighted with the accuracy of the epithet, particularly as he had been settling in his own mind the precise meaning of the words grand, majestic, sublime, etc., and had discussed the subject with William at some length the day before. “Yes, sir,” says Coleridge, “it is a maj...

Searle: The Chinese Room

John Searle has become the object of accusations of improper conduct. These accusations even have some people in the world of academic philosophy saying that instructors in that world should try to avoid teaching Searle's views. That is an odd contention, and has given rise to heated exchanges in certain corners of the blogosphere. At Leiter Reports, I encountered a comment from someone describing himself as "grad student drop out." GSDO said: " This is a side question (and not at all an attempt to answer the question BL posed): How important is John Searle's work? Are people still working on speech act theory or is that just another dead end in the history of 20th century philosophy? My impression is that his reputation is somewhat inflated from all of his speaking engagements and NYRoB reviews. The Chinese room argument is a classic, but is there much more to his work than that?" I took it upon myself to answer that on LR. But here I'll tak...

Recent Controversies Involving Nassim Taleb, Part I

I've written about Nassim Taleb on earlier occasions in this blog. I'll let you do the search yourself, dear reader, for the full background. The short answer to the question "who is Taleb?" is this: he is a 57 year old man born in Lebanon, educated in France, who has been both a hedge fund manager and a derivatives trader. He retired from active participation from the financial world sometime between 2004 and 2006, and has been a full-time writer and provocateur ever since. Taleb's writings for the general public began where one might expect -- in the field where he had made his money -- and he explained certain financial issues to a broad audiences in a very dramatic non-technical way. Since then, he has widened has fields of study, writing about just about everything, applying the intellectual tools he honed in that earlier work. As you might have gather from the above, I respect Taleb, though I have sometimes been critical of him when my own writing ab...

Jamesian Philosophy Refreshed

Search This Blog