More molehill than mountain on the securities litigation landscape

The Supreme Court’s recent unanimous ruling in Macquarie brought some welcome doctrinal clarity to Section 10(b) and Rule 10b-5, central antifraud provisions of the U.S. securities laws. But while billions of dollars have changed hands litigating these provisions, Macquarie’s ruling is unlikely to cause any seismic shifts in securities litigation. SEC enforcement, private securities actions, and issuer disclosures will likely remain unchanged. The true test of Macquarie’s impact may lie in the SEC’s recent rulemaking, which expands the scope of corporate disclosures beyond their customary roots in financial performance.

Macquarie is a New York-based company that owns infrastructure businesses, including a subsidiary that operates bulk storage terminals for high-sulfur fuel oils. In 2016, the U.N. International Maritime Organization adopted IMO 2020, a regulation that limited the sulfur content of fuel oils used in shipping. At issue in Macquarie was the company’s alleged failure to disclose IMO 2020’s expected effect on company earnings. Macquarie Infrastructure Corp. v. Moab Partners, L.P., No. 22-1165 (U.S. Apr. 12, 2024). The Supreme Court ruled that Macquarie’s omission of information about IMO 2020—even if required by Item 303—was not actionable under Rule 10b-5 unless the omission rendered some affirmative statement by Macquarie misleading. The Supreme Court thus closed the door on most Rule 10b-5 fraud claims premised on “pure omissions.”

Even so, Macquarie gives public companies and their lawyers little reason to rest easy, for at least three reasons. First, private parties may still bring Rule 10b-5 claims based on misleading “half-truths,” and it remains trivially easy for private plaintiffs to reframe material omissions as affirmatively misleading statements. The public domain abounds in corporate statements—both voluntary and mandated—that an omission might render a misleading “half-truth.” Modern firms’ market discourse will continue to make it simple for plaintiffs to recast omissions as misleading statements. To be sure, there will be cases at the periphery in which the alleged omissions are too attenuated from an affirmative statement to support a Rule 10b-5 claim after Macquarie. But experience in the Ninth Circuit—where Macquarie’s holding has essentially been the law since 1994—suggests such cases will be few.

Second, even after Macquarie, companies will still face liability for pure omissions in registration statements under Section 11(a) of the Securities Act. Unlike Section 10(b), Section 11(a) explicitly provides for private liability when a registration statement omits “a material fact required to be stated therein.” 15 U.S.C. §77k(a). A plaintiff can plead an actionable omission under Section 11 by pointing to a missing “required” disclosure in a registration statement, regardless of whether the omission renders some affirmative statement misleading.

Of course, not all federal securities laws contain Section 11(a)’s explicit language providing liability for pure omissions. Among them are laws combating fraud in proxy statements (Exchange Act Section 14(a) and Rule 14a-9); tender offers (Exchange Act Section 14(e)); and prospectuses (Securities Act Section 12(a)(2)). Claims premised on pure omissions under these statutes are likely foreclosed by Macquarie. But because of the relative ease with which plaintiffs may reframe omissions as half-truths, the ultimate effect on private securities litigation will likely be negligible.

Macquarie is also unlikely to slow the SEC’s enforcement program. It’s true that the SEC has long viewed pure omissions as actionable under Section 10(b) and has asserted Rule 10-5 claims based on the omission of information required by Item 303. Macquarie should put an end to these actions. But the SEC has an alternative weapon in its arsenal to prosecute pure omissions: Section 13(a) of the Exchange Act. As Macquarie itself recognized, the SEC retains power to prosecute pure omissions of information required by Item 303 under Section 13(a), which governs periodic reporting requirements. Section 13(a) enforcement actions provide the Commission with nearly all the relief available to it under Rule 10b-5, and, as a strict liability provision, Section 13(a) violations against issuers are easier to prove. At the same time, because Section 13(a)’s text focuses on the issuer’s conduct, the SEC can only pursue secondary theories of liability against individuals for either aiding and abetting or causing the issuer’s violation. The former requires the SEC to establish scienter by showing the individual’s actual knowledge or recklessness—which Rule 10b-5 would require in any event— but the latter can be based on mere negligence.

Issuer behavior will also likely remain unchanged in Macquarie’s wake. One area where Macquarie’s holding is theorized to have a salutary effect is in the Management Discussion & Analysis (“MD&A”) sections of issuers’ periodic disclosures. The SEC’s intentionally “flexible” guidance on MD&As—combined with the ever-present threat of shareholder lawsuits—have caused MD&A disclosures to become lengthy and complex in the decades since the SEC amended Item 303 to require MD&As in 1977. According to an Ernst & Young study, MD&A disclosures tripled in size from 1972 to 1992. An update to the same study predicts that, by 2032, MD&A disclosures will swell to 214 pages.

That has left some, including the Securities Industry and Financial Markets Association, to speculate that Macquarie’s ban on Rule 10b-5 liability for “pure omissions” will shrink the MD&A and help it serve its intended purpose: to give investors a “look at the company through the eyes of management,” rather than through the eyes of its lawyers. Brief for Securities Industry and Financial Markets Association, et al. as Amici Curiae Supporting Petitioners at 17-21, Macquarie Infrastructure Corp, et al. v Moab Partners L.P., et al., 601 U. S. ____ (2024). But that is almost certainly wishful thinking. As a practical matter, Macquarie does little to disarm the SEC or private plaintiffs for the reasons explained. As for issuers, litigation risk will still justify prophylactic—and regrettably long—MD&A sections.

Still, there are instances when material omissions cannot so easily be framed as “half-truths,” making private litigation less likely. It’s here Macquarie should have a tangible impact on both litigation and issuer disclosures. Conventional wisdom holds that omissions that cannot be pleaded as material misstatements are rare. But two recent SEC rules that expand firms’ disclosure requirements may challenge that thinking.

The first is the SEC’s new climate-disclosure rule, adopted in March 2024. The rule has stumbled out of the gate. After plaintiffs challenged the rule in six federal circuits, the SEC voluntarily stayed the rule’s effectiveness on April 4. Some form of the SEC’s climate-disclosure rule is still expected to take effect at some point. When it does, firms will need to issue annual reports addressing, among other things, their climate-related goals and targets, and activities they have taken to mitigate or adapt to climate-related risks. These are topics that—outside the energy industry and a few others—companies seldom address in affirmative public statements. Macquarie may encourage these companies to remain reticent except where necessary to comply with the SEC rule. This is especially so where the climate-related “goals” do not influence share prices. Without a stock drop that can be attributed to a climate-related omission, private plaintiffs are certain to look elsewhere.

Another example is the SEC’s cybersecurity disclosure rule, adopted in July 2023. One component of the rule requires firms to disclose material cybersecurity incidents; failure to report such incidents would undoubtedly render some prior affirmative statement misleading. But the rule goes further: it also requires firms to disclose their cybersecurity governance, risk management, and strategy—topics less likely to relate to prior affirmative statements. Here as well, Macquarie could motivate issuers to remain tight-lipped except as necessary to achieve compliance with the SEC rule. Of course, some firms—such as IT software companies—may have little choice but to tout the strength of their cybersecurity programs, even at the risk of increased securities fraud liability. After Macquarie, however, firms with a choice may instead choose to bite their tongues.