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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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