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Supreme Court Decides MD&A Case

It is not often that the U.S. Supreme Court weighs in on the specific disclosure requirements under the federal securities laws, but in the case of Macquarie Infrastructure Corp. v. Moab Partners, L.P., they had occasion to do so in the context of a Rule 10b-5 fraud claim.

Macquarie owned a subsidiary that operates terminals to store bulk liquid commodities including No. 6 fuel oil.  In 2016 the United Nations’ International Maritime Organization formally adopted IMO 2020, a regulation capping the sulfur content of fuel oil used in shipping.  In the ensuing years, Macquarie did not discuss IMO 2020 in its public offering documents or SEC periodic reports.  In February 2018, however, Macquarie announced a drop in the amount of storage contracted for use by its subsidiary due in part to the decline in the No. 6 fuel oil market. Macquarie’s stock price fell 41%.

Plaintiff Moab Partners sued Macquarie and various officers alleging, among other things, that Macquarie violated Exchange Act 10b-5 because it had a duty to disclose the IMO 2020 information under Item 303 of Regulation S–K.  In deciding in favor of Macquarie, the Supreme Court found that the omission could not support a fraud claim.

Rule 10b-5

Exchange Act Rule 10b-5, known as the anti-fraud provision, provides:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To 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, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

Regulation S-K Item 303 Management’s Discussion & Analysis of Financial Conditions and Operations (MD&A)

Item 303 MD&A requires a company to explain the financial condition of a company through the eyes of management (for more on MD&A see HERE).  The rule contains both an overall principals-based objective and also certain topics that must be covered.  Among the required disclosure topics, Item 303 requires a company to “[D]escribe any known trends or uncertainties that have had or that are reasonably likely to have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations. If the registrant knows of events that are reasonably likely to cause a material change in the relationship between costs and revenues (such as known or reasonably likely future increases in costs of labor or materials or price increases or inventory adjustments), the change in the relationship must be disclosed.”

Macquarie Infrastructure Corp. v. Moab Partners, L.P.

Plaintiff Moab Partners claimed that by failing to discuss IMO 2020 in its MD&A, Macquarie violated Rule 10b-5(b) by omitting to state a material fact. In particular, Moab argued that the failure to discuss IMO 2020 as a known trend or uncertainty that has had or that is reasonably likely to have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations resulted in a violation of Rule 10b-5.

The Supreme Court disagreed ruling that “pure omissions” are not actionable under rule 10b-5.  As noted above Rule 10b-5(b) provides “To 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.”  The Supreme Court found that an omission is only actionable if it results in making statements made misleading.

The Court stated “[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.”  The Court continued: “[R]ule 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.”

The court did note however, that other provisions in the securities laws can give rise to liability for pure omissions including Securities Act Section 11 which prohibits any registration statement from omitting to state a material fact required to be stated therein.

The Author

Laura Anthony, Esq.

Founding Partner

Anthony, Linder & Cacomanolis

A Corporate and Securities Law Firm


Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony, Linder & Cacomanolis, PLLC has served clients providing fast, personalized, cutting-edge legal service.  The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALC legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including the American Red Cross for Palm Beach and Martin Counties, Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others.

Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.

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Anthony, Linder & Cacomanolis, PLLC makes this general information available for educational purposes only. The information is general in nature and does not constitute legal advice. Furthermore, the use of this information, and the sending or receipt of this information, does not create or constitute an attorney-client relationship between us. Therefore, your communication with us via this information in any form will not be considered as privileged or confidential.

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