Welcome to scot Discast, a project of the Federalist Society for Law and Public
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All expressions are those of the speaker. Hello, and welcome to scot Discast.
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, in which is Supreme Court issued a nine zero decision on April twelfth,
twenty twenty four. It is my honor to introduce our guests today,
Professor Adam Pritchard. Professor Pritchard is the Francis and George Sgustos Professor of Law
at the University of Michigan. Professor Pritchard teaches corporate and securities law and recently
publish book titled A History of Securities Law in the Supreme Court. And with
that, I like to turn things over to our guests to discuss the overview
of the case and the court's decision. So I think there is nothing surprising
about this opinion. So this is a nine to zero decision from the Supreme
Court written by Justice Soda Mayor for the Court, and she dispatches the question
presented in an eight page opinion. So the Court gets points for being concise
in this case. From the court's perspective, it didn't need to spend a
lot of pages because the question was very straightforward. So this is a securities
fraud class action. And McCary Infrastructure is in, among other things, the
business of storing liquid bulk chemicals in various terminals. So they have storage tanks
and they store various large items, and one of the items they stored was
fuel oil for container ships that had a high sulfur content. And the UN
agency that's responsible for regulating the use of oil on the high seas had threatened
to prohibit the use of a certain kind of oil, the high sulfur oil,
and eventually it did, and when it did, that had a dramatic
effect on shareholders expectations about mccary's future profitability, and the stock price took a
big hit. And as is customary after the stock price took a big hit.
Securities class action was brought alleging that McCary had deceived investors by not disclosing
the impact that a change in the regulations by the un would have on its
business. So, in the usual securities fraud class action, the plaintiffs alleged
that the company has made a misstatement, a material misstatement that has affected the
price of the security. The plaintiffs did that here. But what makes the
case noteworthy or attracted the attention of the Supreme Court was that, in addition
to making claims about misstatements by McCary, the plaintiffs alleged that McCary had failed
to disclose the information about the probability of the fuel oil being banned viihilation of
a disclosure obligation They had under Item three to three of Regulation SK which mandates
that companies disclose known trends or uncertainties that have had or that are reasonably likely
to have a material favorable or unfavorable impact on net sales or income from continuing
operations. So the argument here was this was going to have a negative effect
non revenue and income and they failed to disclose it. Under three to three
and that investors were deceived. This is what we call in the securities class
action space a pure omission. They failed to disclose when there was a legal
obligation imposed by the sec for public companies to disclose. In this context,
the plaintiffs brought their claim under Rule ten B five B of the Exchange Act
of nineteen thirty four, and that provision makes it illegal 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 light of the circumstances under which they
were made not misleading. That second clause, omitting to state a material fact
in light of the circumstances made making other statements misleading was what was a issue
here. So that's called the half truth provision. That if you tell part
of the truth, but you leave out some of the important context around that,
and you make what you said misleading due to the omission, that's clearly
actionable under rule time ten B five B. But here the plaintiffs hadn't pointed
to any statements that were made misleading by the failure to disclose. The prospect
this kind of fuel oil would be banned. This mattered because a pure omission
based on language under Rule ten B five B, it looks questionable whether that's
actionable under ten B five B, and for the Court it seemed to matter
a good deal that there is a parallel provision of the Securities Act, which
Congress passed in nineteen thirty three, the year before the Exchange Act was passed,
which makes it illegal to include material misstatements and a registration registration statement file
in connection with a public offering. But Section eleven of the Securities Act also
makes it illegal to omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading. So Section eleven prohibits not
only misleading half truths, but also prohibits omitting to satisfy a disclosure requirement that
the sec has specified has to be included in your registration statement. So if
Maccari had been selling securities to the public pursuant to a registration statement, their
failure to include this disclosure of the fuel oil regulations clearly would have been actionable
under section eleven. But for the court, the absence of this language from
section eleven omitted to state a material fact required to be stated. Therein was
dispositive of whether or not it was actionable under rule ten be FI, and
so that was the holding, was that the failure to include this clause meant
that it wasn't actionable under rule ten B five B. So this was not
surprising. It is a very textual opinion from the Supreme Court. It turns
in part on what it means to make a statement. The failure to make
a statement is not a statement under rule ten B five B, according to
Justice Sodomyor, and she has eight other votes for that. So that's a
very clear holding. There's no ambiguity. So if I was surprised by anything,
and maybe I'm not surprised anymore, it was the narrowness of the holding.
So at the end of the opinion, Justice Sotomayor includes a footnote talking
about the things that the Court is not deciding in the context of this case.
And the Court says in this footnote, we are not deciding what constitutes
a statement is made, when a statement is misleading, is a half truth,
or whether rules ten BE five A and ten B five C support liability
for pure omissions. And that's the critical narrowing clause is that last provision ten
five A and C prohibit deceptive devices or things that would act as a fraud
upon an investor, so they have a different formulation from ten B five B,
and the Court specifically disclaimed whether failure to satisfy a required disclosure item could
be actionable as a scheme to defraud. So what that means for securities litigation
going forward is that claims that might have been framed as a pure omission under
ten B five B that avenue is foreclosed, but alleging that it's a deceptive
device or contrivance under ten B five A or ten B five C is still
available to the plaintiffs. So we have eliminated one potential question, but we
have not eliminated the substantive issue going forward for the lower courts. So this
narrowness in securities cases coming from the Supreme Court is I think a conspicuous trend
over the last ten years or so. This careful case by case development of
the law presumably helps the Court to not make mistakes by making overarching statements.
But if you're only going to decide sixty cases a year and a maximum of
two are going to be securities cases. These very narrow pronouncements from the Supreme
Court are going to leave lower courts grappling with a lot of questions and plaintiffs
and defendants spending a lot of time and money squabbling over these questions that don't
get resolved by the Supreme Court. Thank you for listening to this episode of
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