Welcome to scot Discust, a project of the Federalist Society for Law and Public Policy Studies. Our contributors joined us from around the country to bring you expert commentary on US Supreme Court cases as they are argued and the decisions are issued. The Federalist Society takes no position on particular legal or public policy issues. All expressions are those of the speaker. Hello, and welcome to scot Discust. I'm your host, Kyle hammernis On behalf of the Faculty division of the
Federalist Society. We are here today to discuss Macquarie Infrastructure Corporation versus Moab Partners LP, which is argued before the Supreme Court on January sixteenth, twenty twenty four. It is my honor to introduce our guest today, Professor Adam Pritchard. Professor Pritchard is the Francis and George Gustas Professor of Law at the University of Michigan. He teaches corporate and securities law and recently published a book titled
A History of Securities Law in the Supreme Court. And with that hand things over to our guests to discuss how the case got to the Supreme Court. And what the question before the court was. So, the defendant in this case, Macari Infrastructure, has a number of subsidiaries, and one of their subsidiaries operates storage facilities for commodities including fuel oil. And the fuel oil that is at the center of the dispute in this case is number six oil,
which is very high in sulfur and not surprisingly bad for the environment. So it's not very widely used, but it is an inevitable byproduct of the petroleum distillation process. So oil companies are going to generate number six oil, whether or not anyone wants to use it. So the fuel oil has been used for a very long time in international shipping, so ships going from continent to
continent use this. The International Maritime Organization, which is a UN chartered body that regulates global shipping, in two thousand and eight announced that they would be limiting sulfur to less than zero point five percent in fuel oil for ships starting in twenty twenty. The question was would the regulation actually go into effect or maybe it would it be delayed. In twenty and sixteen, the IMO announced that the regulation was going to go into effect in twenty twenty as planned.
Shortly thereafter, the defendant here had a big decline in storage facility usage in two thousand and seventeen. After the company announced that it was going to cut its dividend. There was a sheep a steep stock price drop, and the
stock price decline provoked a lawsuit. Right, so, securities fraud lawsuits are inevitably triggered whenever a company announces some adverse development and then the plaintiffs lawyers go off to find some misleading statement that if the company had told the truth, the stock price would have adjusted earlier. So in this case, the plaintiffs
lawyers identified a few missstatements, but were they weren't very strong. The case comes to the Supreme Court based on and a pure omission that the company was required to disclose under Item threeh three of Regulation SK that this regulation IMO twenty twenty was going to have a material unfavorable impact on the company's business if it ultimately went into effect, and because the disclosure was not made, according to
the plaintiffs, that was securities fraud. So Item threeh three is the provision at issue here. It requires that a company describe any known trends or uncertainties that have had or that the registaurant reasonably expects will have a material favorable or
unfavorable impact on net sales or revenues or income from continuing operations. So if the company knows of a trend in its market that is going to have a future effect on its revenues or profits, the sec requires that be disclosed in the company's ten K annual report or in one of its ten q's quarterly report,
depending on when it arises. So the Second Circuit in this case held that violation of the Item three zero three disclosure requirement, regardless of whether it makes other statements in the ten K or ten Q misleading, would be actionable under Rule ten B five of the Securities Exchange Act, which is the general catch all anti fraud provision that is most commonly used in private securities fraud class
actions. It is also enforceable by the sec That decision by the Second Circuit created a split with an earlier decision from the Ninth Circuit, and that is presumably what caused the Supreme Court to grant sercierrarii in this case. I'm going to pause to take a breath of their Kyle, and then I'm going to jump into the defendant's arguments and the plaintiff's arguments. So this case is brought under Rule ten B five, which applies to required disclosures made pursuant to the
securities laws, but also applies to voluntary disclosures. So if a company is putting out a press release or discussing its business in a conference call with investors, ten B five applies, and the language of ten feet ten B five that is in dispute here. It is under subsection B, which imposes liability if a speaker makes any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made in light of the
circumstances under which they were made not misleading. So that second clause is referred to as the half truth, that if you have said something, the securities laws require you to tell the whole truth about what you have said, if
what you've left out would make what you said misleading. So that's longstanding that applies under the common law of fraud, as it does under Rule ten B five, and nothing unusual, all right, now, the defendants point two a provision under the Securities Act of nineteen thirty three adopted a year before the
Securities Exchange Act in nineteen thirty four. Section eleven of the Securities Act, which imposes liability on registration registration statements that companies are required to file with the
SEC when they are making a public offering. That provision imposes liability if a registration statement, in addition to materially misleading statements, if a registration statement omits a material fact required to be stated, and in addition imposes liability if there is a material fact that's omitted if it's necessary to make the statements therein may
not misleading. So the defendants argument is Section eleven is broader. When Congress wanted to impose liability for pure breaches of a disclosure requirement imposed by the SEC they knew how to do that when they wrote section eleven. If they had meant Section ten B to be as broad as that, they would have included the language omits to state of the omits a material fact required to be stated.
And then there's not much dispute that if you left out this item three zero three in your registration statement, that it would be actionable as a violation under section eleven. But that only applies to plaintiffs who have purchased the securities pursuant to registration statement. It doesn't apply in other allegations of fraud where ten B five applies, including statements made that influenced the secondary market price for the
company. So the defendants argument is, you look at section eleven, it's got this clause. You look at Section ten it doesn't have this clause. Pure omissions are not actionable under Section ten B. So it is an argument that's pretty closely tied to these two statutory provisions. The plaintiffs lawyers in the
oral argument focused on the MDNA being misleading as a whole. So when asked by the justices whether the plaintiffs were defending the second circuit theory, which it was that a pure omission, a violation of Item three zero three standing alone, would be actionable under section ten B, the plaintiffs declined to defend that.
Instead, they argument that the plaintiffs were pushing is quite similar to the argument that was advanced by the government in this case as amarchus, which is the MDNA section, the Management Discussion and Analysis section was rendered misleading as a whole. The statement in the MDA was misleading because you did not include all of the known trends or uncertainties that were likely to have an impact on the company's revenues or profits. And the argument is from the plaintiffs that this was
an omission that made the MDNA misleading. And one kind of limiting principle that the plaintiffs were promoting was this was a really big omission, right, that this caused a very substantial drop in the stock price, and therefore it was an emission that made the MDNA misleading. So those are the arguments from the
defendants and the plaintiffs. Let me turn to some of the justices questions that we heard at the oral argument on Tuesday, and so the justices questions showed it seemed to me a good deal of skepticism of the holding from the Second Circuit. And what did surprise me a little bit was that Justice Jackson in particular, was very focused on this textual distinction between Section eleven, which is
everyone agrees broader than Rule ten B five. Justice Gorsic was also skeptical of the Second Circuit holding and pushed a series of questions about whether the omitted statement had to be related to the same subject matter as something that was stated in the disclosure that is alleged to have been misleading. So that was some of the pushback from the Justices when the government lawyer argued from the Solicster General's office.
The Justices inquired about whether the SEC needed this enforcement authority under Rule ten B five, given that for the SEC, if a company has not included one of the required disclosures under Item three to three, the SEC can enforce that as a violation of Section thirteen of the Exchange Act, which authorizes the SEC to impose disclosure requirements and says that public companies have to comply with the
disclosure requirements that the SEC promulgates. The government says need private enforcement, that the SEC's enforcement resources are insufficient to police all of the public company filings. And on top of that, the violations of Section five are kind of administrative their strict liability for violations of Section five. The penalties attached to violations of Section thirteen, I should say, are much less draconian than the penalties for
violating Rule ten B five, which is an anti fraud provision. So that's my summary of the main thrust of the arguments. Do you have some follow up questions. Kyle, Yeah, So I think when we look at before the Court, a lot of people are apt to predict the outcome. And you already mentioned a couple justices who, especially Justice Jackson, who you're surprised
with her question. Why were you surprised with her question? So, I mean I would classify her as among the more liberal justices on the Court. But in this case, all of her questions were very textualist and did not focus at all on enforcement policy or what would make for the best securities laws if we interpreted it this way, the thrust of her questions was very narrow
and tied to the text. So if we're in the business of counting to five, which I assume that your podcast is all about trying to make a prediction on how we will count to five, I think there were probably five votes to reverse the second circuit. One of the interesting dynamics here is that this private right of action under Rule ten B five that the Court recognized it was recognized by the lower courts starting in the nineteen forties and nineteen fifties.
The Supreme Court eventually came around and said that there was a private right of action in the nineteen seventies. But then subsequently the Supreme Court's jurisprudence on private rights of action, specifically implied private rights of action, has dramatically shifted, and now there is a hard and fast rule that the Supreme Court is not going to create a private right of action if it is not specifically provided for
by Congress, and that affects the interpretation of Rule ten. So the Court has not gone back and said it was a mistake to create this implied right of action. They have continued to recognize it. And because it's an implied right of action, they have had to basically construct the elements out of whole cloth. There's not a statutory basis that allows them to interpret the elements of a ten to B five cause of action because Congress didn't create it. The
Court created it. And so they have borrowed elements from the common law of fraud and incorporated them into this implied private right of action under Rule ten B five. But there is also there's also been a series of cases that has looked to other provisions where Congress did create a private right of action under the securities laws and look at the elements of those private rights of action and the Court has held that Rule ten be five should not be construed to be broader
than the rights of action that Congress specifically created. This is a little awkward because Congress didn't create the rule ten be five cause of action, and you've got to define the elements. So the Court has made a distinction between defining existing elements and expanding the scope. The Chief Justice in this case asked whether they would be expanding the scope of Rule ten B five by recognizing a cause
of action in this context. The plaintiff's lawyer's response was, no, We'd simply be construing one of the elements of a Rule ten B five private cause of action, which is the half truth doctrine, which is long standing, and pointed to how the Supreme Court treated the reliance requirement in the Basic and Haliburton two cases, where they effectively undid the reliance requirement by adopting a fraud on the market presumption of reliance. But the Court said in both cases,
no, we're simply applying the reliance requirement. We're not changing the scope of Rule ten B five in any way, which personally I thought was misleading for the Court to say it. But Chief Justice Roberts wrote the Haliburton two case, so that our answer might have been persuasive to him at least, and that's probably all the plaintiff's lawyer needed to persuade there. Ahi, We thank you so much for joining us today. I think this was a really great
episode. And then thank you so much for coming on. Happy to join you, Thank you for your interest, Thank you for listening to this episode
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