Friday, October 6, 2023

Here we go again

On September 29, the Supreme Court granted cert in Macquarie Infrastructure Corp. v. Moab Partners, to decide:

whether the Second Circuit erred in holding—in conflict with the Third, Ninth, and Eleventh Circuits—that a failure to make a disclosure required under Item 303 can support a private claim under Section 10(b), even in the absence of an otherwise-misleading statement. 

(The question, I think, mischaracterizes the Third Circuit; you’ll get a sense of why below, the parties will argue the rest.  But leaving that point aside - )

I have no idea how the case will unfold, of course, but I tend to assume that despite the narrow framing, the real question is whether silence in the face of a regulatory duty to disclose constitutes a misleading omission.  I.e., it does not matter what the particular required disclosure is, or what the cause of action is; the question is whether, if you remain silent when a regulation requires you to speak, that is the equivalent of an affirmatively misleading statement.  The Second Circuit has repeatedly held yes, it is, usually in the context of 10b claims over Item 303 omissions.  Other circuits - well, to be honest, have been muddled.

This matters for any rule that prohibits false statements, or omissions that would render remaining statements misleading, but does not, by its terms, impose liability for omissions to state required information.

So, for example, compare Section 11 of the Securities Act of 1933:

In case any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading ... [purchasers can sue]

With Section 12 of the Securities Act, which prohibits the use of a prospectus that contains:

an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading

See?  Section 11 prohibits false statements, misleading statements, and straight omissions.  Section 12, by contrast, does not, by its terms, impose liability for failing to disclose required information (which is another reason why, by the way, that the Supreme Court got it wrong in Gustafson v. Alloyd Co., 513 U.S. 561 (1995), but that’s an argument for another time).  So, you could ask - if a prospectus fails to include required information, is there Section 12 liability?

Rule 10b-5 has similar wording to Section 12, as does Rule 14a-9 (proxy solicitations may not contain a “statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication”).  Nonetheless, in Jaroslawicz v. M&T Bank Corp., 962 F.3d 701 (3d Cir. 2020), the Third Circuit held that 14a-9 liability may be triggered by failing to disclose information required under Item 105 in the proxy statement.

So, to be very clear, the issue is whether under Section 12, or Rule 10b-5, or Rule 14a-9, failing to disclose required information is the equivalent of making a false statement.  If so, under this theory, the plaintiff would still have to separately prove the other elements of the relevant cause of action, such as materiality and, if relevant, scienter; silence, in the face of a regulatory obligation, would only satisfy the single element of falsity.  Or, as the Supreme Court put it in Basic, Inc. v. Levinson, 485 U.S. 224 (1988), “Silence, absent a duty to disclose, is not misleading.”

The Supreme Court previously granted cert to decide this issue in Leidos Inc. v. Indiana Public Retirement System, but the parties settled, and the case was dismissed.  That time around, the United States actually weighed in on the plaintiffs’ side, which makes me wonder.

Could the SEC make all, or most, of this go away just by changing the signature block on the forms – the 10-Ks, the 10-Qs, the Schedule 14As, etc – to specifically say the forms are complete, as well as accurate?  You could do that for the SOX certifications, as well – which also don’t, currently, contain language representing that the form is complete.  At that point, there may be fights over whether the signatories must harbor scienter or whether someone else in the organization could, but it would at least narrow relevant scenarios.

And speaking of omissions liability –

One area where an amendment to the form would not be sufficient is where no form is filed at all, namely, where the plaintiffs allege the defendant should have filed a 13D or 13G disclosing a stake, and did not do so.  Again, the claim is that silence in the face of a regulatory duty to disclose - here, the duty to file a 13D to disclose a 5% stake - is the equivalent of a false statement for 10b-5 purposes. 

And this, of course, is playing out right now in a putative class action against Elon Musk, for failure to disclose his Twitter stake in a timely fashion (that case also involves affirmative false statements, in that Musk not only delayed disclosing his stake at all, but additionally filed a “passive” 13G form when he already knew he was not going to be passive).  I blogged about Musk’s potential liability here, before the complaint was filed, and this week, SDNY denied Musk’s motion to dismiss.  So it seems Musk has some interest in the outcome of Macquarie Infrastructure v. Moab Partners.

But there’s more!  The SEC is the one who usually enforces the 13D/13G filing requirements, and we all assumed the SEC’s interest in this was dead, but  - wrong!  Apparently, Musk agreed to sit for a depo, didn’t show, and now is refusing any depo – which caused the SEC to file a motion to compel in the Northern District of California.  So … stay tuned!

Ann Lipton | Permalink


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