Supreme Court Holding: Pure omissions are not actionable under Rule 10b–5(b)

I was going to summarize, but I think that the words of Justice Sotomayor are quite clear, pure omissions are not actionable under Rule 10b–5(b), but what is not clear is how the SEC will pursue future claims that involve disclosures.

Supreme Court Justice Sotomayor delivered the following opinion for a unanimous Court, in MACQUARIE INFRASTRUCTURE CORP. ET AL. v. MOAB PARTNERS, L. P., ET AL. CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

Supreme Court Holding: Pure omissions are not actionable under Rule 10b–5(b). Rule 10b– 5(b) 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.” 17 CFR §240.10b–5(b). In addition to prohibiting “any untrue statement of a material fact”—i.e., false statements or lies—the Rule also prohibits omitting a material fact necessary “to make the statements made . . . not misleading.” Ibid. This case turns on whether this second prohibition bars only half-truths or instead extends to pure omissions.

A pure omission occurs when a speaker says nothing, in circumstances that do not give any special significance to that silence. Half-truths, on the other hand, are “representations that state the truth only so far as it goes, while omitting critical qualifying information.” Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U. S. 176, 188. Rule 10b–5(b) requires disclosure of information necessary to ensure that statements already made are clear and complete. Logically and by its plain text, Rule 10b–5(b) therefore covers half-truths, not pure omissions, because it requires identifying affirmative assertions (i.e., “statements made”) before determining if other facts are needed to make those statements “not misleading.” Statutory context confirms what the text plainly provides.

Section 11(a) of the Securities Act of 1933 prohibits any registration statement that “omit[s] to state a material fact required to be stated therein.” 15 U. S. C. §77k(a). By its terms, §11(a) creates liability for failure to speak. Neither §10(b) nor Rule 10b–5(b) contains language similar to §11(a), and that omission is telling. “Silence, absent a duty to disclose, is not misleading under Rule 10b–5.” Basic Inc. v. Levinson, 485 U. S. 224, 239, n. 17. A duty to disclose, however, does not automatically render silence misleading under Rule 10b–5(b).

The failure to disclose information required by Item 303 can support a Rule 10b–5(b) claim only if the omission renders affirmative statements made misleading. Moab and the United States suggest that a plaintiff does not need to plead any statements rendered misleading by a pure omission because reasonable investors know that the Exchange Act requires issuers to file periodic informational statements in which companies must furnish the information required by Item 303. But that argument reads the words “statements made” out of Rule 10b–5(b) and shifts the focus of that Rule and §10(b) from fraud to disclosure. See Chiarella v. United States, 445 U. S. 222, 234–235 (“Section 10(b) is aptly described as a catchall provision, but what it catches must be fraud”).

Moab also contends that without private liability for pure omissions under Rule 10b–5(b), there will be “broad immunity any time an issuer fraudulently omits information Congress and the SEC require it to disclose.” Brief for Respondent Moab Partners 1. But private parties remain free to bring claims based on Item 303 violations that create misleading half-truths, and the SEC retains authority to prosecute violations of its own rules and regulations, including Item 303.