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Welcome to scot Discust, a project
of the Federalist Society for Law and Public

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Policy Studies. Our contributors joined us
from around the country to bring you expert

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commentary on US Supreme Court cases as
they are argued and the decisions are issued.

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The Federalist Society takes no position on
particular legal or public policy issues.

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All expressions are those of the speaker. Hello, and welcome to scot Discust.

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I'm your host, Kyle hammernis On
behalf of the Faculty division of the

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Federalist Society. We are here today
to discuss Macquarie Infrastructure Corporation versus Moab Partners

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LP, which is argued before the
Supreme Court on January sixteenth, twenty twenty

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four. It is my honor to
introduce our guest today, Professor Adam Pritchard.

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Professor Pritchard is the Francis and George
Gustas Professor of Law at the University

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of Michigan. He teaches corporate and
securities law and recently published a book titled

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A History of Securities Law in the
Supreme Court. And with that hand things

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over to our guests to discuss how
the case got to the Supreme Court.

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And what the question before the court
was. So, the defendant in this

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case, Macari Infrastructure, has a
number of subsidiaries, and one of their

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subsidiaries operates storage facilities for commodities including
fuel oil. And the fuel oil that

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is at the center of the dispute
in this case is number six oil,

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which is very high in sulfur and
not surprisingly bad for the environment. So

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it's not very widely used, but
it is an inevitable byproduct of the petroleum

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distillation process. So oil companies are
going to generate number six oil, whether

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or not anyone wants to use it. So the fuel oil has been used

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for a very long time in international
shipping, so ships going from continent to

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continent use this. The International Maritime
Organization, which is a UN chartered body

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that regulates global shipping, in two
thousand and eight announced that they would be

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limiting sulfur to less than zero point
five percent in fuel oil for ships starting

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in twenty twenty. The question was
would the regulation actually go into effect or

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maybe it would it be delayed.
In twenty and sixteen, the IMO announced

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that the regulation was going to go
into effect in twenty twenty as planned.

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Shortly thereafter, the defendant here had
a big decline in storage facility usage in

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two thousand and seventeen. After the
company announced that it was going to cut

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its dividend. There was a sheep
a steep stock price drop, and the

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stock price decline provoked a lawsuit.
Right, so, securities fraud lawsuits are

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inevitably triggered whenever a company announces some
adverse development and then the plaintiffs lawyers go

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off to find some misleading statement that
if the company had told the truth,

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the stock price would have adjusted earlier. So in this case, the plaintiffs

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lawyers identified a few missstatements, but
were they weren't very strong. The case

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comes to the Supreme Court based on
and a pure omission that the company was

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required to disclose under Item threeh three
of Regulation SK that this regulation IMO twenty

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twenty was going to have a material
unfavorable impact on the company's business if it

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ultimately went into effect, and because
the disclosure was not made, according to

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the plaintiffs, that was securities fraud. So Item threeh three is the provision

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at issue here. It requires that
a company describe any known trends or uncertainties

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that have had or that the registaurant
reasonably expects will have a material favorable or

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unfavorable impact on net sales or revenues
or income from continuing operations. So if

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the company knows of a trend in
its market that is going to have a

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future effect on its revenues or profits, the sec requires that be disclosed in

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the company's ten K annual report or
in one of its ten q's quarterly report,

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depending on when it arises. So
the Second Circuit in this case held

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that violation of the Item three zero
three disclosure requirement, regardless of whether it

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makes other statements in the ten K
or ten Q misleading, would be actionable

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under Rule ten B five of the
Securities Exchange Act, which is the general

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catch all anti fraud provision that is
most commonly used in private securities fraud class

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actions. It is also enforceable by
the sec That decision by the Second Circuit

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created a split with an earlier decision
from the Ninth Circuit, and that is

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presumably what caused the Supreme Court to
grant sercierrarii in this case. I'm going

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to pause to take a breath of
their Kyle, and then I'm going to

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jump into the defendant's arguments and the
plaintiff's arguments. So this case is brought

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under Rule ten B five, which
applies to required disclosures made pursuant to the

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securities laws, but also applies to
voluntary disclosures. So if a company is

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putting out a press release or discussing
its business in a conference call with investors,

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ten B five applies, and the
language of ten feet ten B five

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that is in dispute here. It
is under subsection B, which imposes liability

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if a speaker makes any untrue statement
of a material fact or omits to state

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a material fact necessary in order to
make the statements made in light of the

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circumstances under which they were made not
misleading. So that second clause is referred

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to as the half truth, that
if you have said something, the securities

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laws require you to tell the whole
truth about what you have said, if

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what you've left out would make what
you said misleading. So that's longstanding that

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applies under the common law of fraud, as it does under Rule ten B

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five, and nothing unusual, all
right, now, the defendants point two

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a provision under the Securities Act of
nineteen thirty three adopted a year before the

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Securities Exchange Act in nineteen thirty four. Section eleven of the Securities Act,

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which imposes liability on registration registration statements
that companies are required to file with the

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SEC when they are making a public
offering. That provision imposes liability if a

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registration statement, in addition to materially
misleading statements, if a registration statement omits

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a material fact required to be stated, and in addition imposes liability if there

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is a material fact that's omitted if
it's necessary to make the statements therein may

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not misleading. So the defendants argument
is Section eleven is broader. When Congress

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wanted to impose liability for pure breaches
of a disclosure requirement imposed by the SEC

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they knew how to do that when
they wrote section eleven. If they had

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meant Section ten B to be as
broad as that, they would have included

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the language omits to state of the
omits a material fact required to be stated.

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And then there's not much dispute that
if you left out this item three

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zero three in your registration statement,
that it would be actionable as a violation

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under section eleven. But that only
applies to plaintiffs who have purchased the securities

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pursuant to registration statement. It doesn't
apply in other allegations of fraud where ten

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B five applies, including statements made
that influenced the secondary market price for the

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company. So the defendants argument is, you look at section eleven, it's

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got this clause. You look at
Section ten it doesn't have this clause.

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Pure omissions are not actionable under Section
ten B. So it is an argument

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that's pretty closely tied to these two
statutory provisions. The plaintiffs lawyers in the

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oral argument focused on the MDNA being
misleading as a whole. So when asked

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by the justices whether the plaintiffs were
defending the second circuit theory, which it

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was that a pure omission, a
violation of Item three zero three standing alone,

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would be actionable under section ten B, the plaintiffs declined to defend that.

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Instead, they argument that the plaintiffs
were pushing is quite similar to the

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argument that was advanced by the government
in this case as amarchus, which is

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the MDNA section, the Management Discussion
and Analysis section was rendered misleading as a

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whole. The statement in the MDA
was misleading because you did not include all

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of the known trends or uncertainties that
were likely to have an impact on the

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company's revenues or profits. And the
argument is from the plaintiffs that this was

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an omission that made the MDNA misleading. And one kind of limiting principle that

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the plaintiffs were promoting was this was
a really big omission, right, that

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this caused a very substantial drop in
the stock price, and therefore it was

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an emission that made the MDNA misleading. So those are the arguments from the

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defendants and the plaintiffs. Let me
turn to some of the justices questions that

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we heard at the oral argument on
Tuesday, and so the justices questions showed

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it seemed to me a good deal
of skepticism of the holding from the Second

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Circuit. And what did surprise me
a little bit was that Justice Jackson in

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particular, was very focused on this
textual distinction between Section eleven, which is

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everyone agrees broader than Rule ten B
five. Justice Gorsic was also skeptical of

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the Second Circuit holding and pushed a
series of questions about whether the omitted statement

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had to be related to the same
subject matter as something that was stated in

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the disclosure that is alleged to have
been misleading. So that was some of

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the pushback from the Justices when the
government lawyer argued from the Solicster General's office.

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The Justices inquired about whether the SEC
needed this enforcement authority under Rule ten

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B five, given that for the
SEC, if a company has not included

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one of the required disclosures under Item
three to three, the SEC can enforce

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that as a violation of Section thirteen
of the Exchange Act, which authorizes the

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SEC to impose disclosure requirements and says
that public companies have to comply with the

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disclosure requirements that the SEC promulgates.
The government says need private enforcement, that

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the SEC's enforcement resources are insufficient to
police all of the public company filings.

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And on top of that, the
violations of Section five are kind of administrative

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their strict liability for violations of Section
five. The penalties attached to violations of

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Section thirteen, I should say,
are much less draconian than the penalties for

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violating Rule ten B five, which
is an anti fraud provision. So that's

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my summary of the main thrust of
the arguments. Do you have some follow

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up questions. Kyle, Yeah,
So I think when we look at before

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the Court, a lot of people
are apt to predict the outcome. And

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you already mentioned a couple justices who, especially Justice Jackson, who you're surprised

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with her question. Why were you
surprised with her question? So, I

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mean I would classify her as among
the more liberal justices on the Court.

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But in this case, all of
her questions were very textualist and did not

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focus at all on enforcement policy or
what would make for the best securities laws

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if we interpreted it this way,
the thrust of her questions was very narrow

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and tied to the text. So
if we're in the business of counting to

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five, which I assume that your
podcast is all about trying to make a

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prediction on how we will count to
five, I think there were probably five

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votes to reverse the second circuit.
One of the interesting dynamics here is that

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this private right of action under Rule
ten B five that the Court recognized it

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was recognized by the lower courts starting
in the nineteen forties and nineteen fifties.

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The Supreme Court eventually came around and
said that there was a private right of

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action in the nineteen seventies. But
then subsequently the Supreme Court's jurisprudence on private

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rights of action, specifically implied private
rights of action, has dramatically shifted,

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and now there is a hard and
fast rule that the Supreme Court is not

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going to create a private right of
action if it is not specifically provided for

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by Congress, and that affects the
interpretation of Rule ten. So the Court

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has not gone back and said it
was a mistake to create this implied right

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of action. They have continued to
recognize it. And because it's an implied

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right of action, they have had
to basically construct the elements out of whole

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cloth. There's not a statutory basis
that allows them to interpret the elements of

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a ten to B five cause of
action because Congress didn't create it. The

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Court created it. And so they
have borrowed elements from the common law of

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fraud and incorporated them into this implied
private right of action under Rule ten B

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five. But there is also there's
also been a series of cases that has

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looked to other provisions where Congress did
create a private right of action under the

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securities laws and look at the elements
of those private rights of action and the

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Court has held that Rule ten be
five should not be construed to be broader

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than the rights of action that Congress
specifically created. This is a little awkward

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because Congress didn't create the rule ten
be five cause of action, and you've

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got to define the elements. So
the Court has made a distinction between defining

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existing elements and expanding the scope.
The Chief Justice in this case asked whether

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they would be expanding the scope of
Rule ten B five by recognizing a cause

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of action in this context. The
plaintiff's lawyer's response was, no, We'd

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simply be construing one of the elements
of a Rule ten B five private cause

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of action, which is the half
truth doctrine, which is long standing,

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and pointed to how the Supreme Court
treated the reliance requirement in the Basic and

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Haliburton two cases, where they effectively
undid the reliance requirement by adopting a fraud

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on the market presumption of reliance.
But the Court said in both cases,

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no, we're simply applying the reliance
requirement. We're not changing the scope of

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Rule ten B five in any way, which personally I thought was misleading for

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the Court to say it. But
Chief Justice Roberts wrote the Haliburton two case,

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so that our answer might have been
persuasive to him at least, and

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that's probably all the plaintiff's lawyer needed
to persuade there. Ahi, We thank

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you so much for joining us today. I think this was a really great

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episode. And then thank you so
much for coming on. Happy to join

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you, Thank you for your interest, Thank you for listening to this episode

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of SCO Discusted. SCO Discussed is
a project of the Federalist Society for profit

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educational organization of conservative and libertarian law
students, law professors, and lawyers,

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founded upon the principles that the state
exists to preserve freedom, that the separation

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of governmental power is essential to our
constitution, and that it is emphatically the

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province and duty of the judiciary to
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