Supreme Court Considers Whether An Item 303 Violation, Standing Alone, Can Support An Exchange Act Claim
Securities Litigation
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  • Supreme Court Considers Whether An Item 303 Violation, Standing Alone, Can Support An Exchange Act Claim

    On January 16, 2024, the Supreme Court of the United States heard oral argument in Macquarie Infrastructure Corp. v. Moab Partners, No. 22-1165, a case considering whether a private plaintiff may plead a claim under Section 10(b) of the Securities Exchange Act based on an issuer’s failure to disclose a known trend or uncertainty required to be disclosed under Item 303 of Regulation S-K even without identifying a particular statement rendered misleading by the alleged omission.

    The underlying lawsuit is a putative class action brought against a company that operates a portfolio of infrastructure-related businesses, including a provider of bulk liquid storage services used to store refined petroleum products.  Plaintiff alleged that the company failed to disclose that a proposed regulation by a United Nations agency regarding fuel oil would negatively impact its subsidiary’s petroleum storage business.  The district court granted defendants’ motion to dismiss, holding that plaintiff failed to adequately allege an Item 303 violation because plaintiff failed to allege “an uncertainty that should have been disclosed.”  The district court therefore reasoned that it was unnecessary to reach the question of whether the alleged Item 303 violation could serve as the basis for a Section 10(b) claim.  The Second Circuit reversed, holding that plaintiff had adequately alleged an Item 303 violation and that, based on prior Second Circuit decisions, that alleged omission could serve as the basis for a Section 10(b) claim if the other elements of such a claim were sufficiently pleaded.  Moab Partners, L.P. v. Macquarie Infrastructure Corp., 2022 WL 17815767, at *2 (2d Cir. Dec. 20, 2022) (citing Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 101–04 (2d Cir. 2015)).

    The Supreme Court had previously granted certiorari to resolve this issue in 2017, but that case settled before the Court could answer it.  The issue continues to divide the Courts of Appeals.  The Third Circuit, in an opinion authored by then-Judge Alito, as well as the Ninth and Eleventh Circuits, has held that Item 303 does not impose a duty to make disclosures for purposes of Section 10(b) and an Item 303 violation therefore cannot constitute an “omission” actionable under the Exchange Act in the absence of an affirmative statement rendered misleading by the claimed omission.  The Second Circuit, however, as re-affirmed in Moab, has held that an Item 303 violation may be the basis for an Exchange Act claim, regardless of whether plaintiff has identified a particular statement rendered misleading by the allegedly omitted trend or uncertainty.

    The specific question on which review was granted was whether an alleged failure to make a disclosure required under Item 303 can support a private claim under Section 10(b), “even in the absence of an otherwise misleading statement.”  Defendants argue that the answer must be “no,” because the plain text of the Exchange Act and Rule 10(b)(5) mandates that an omission can be actionable only if the omission renders “the statements made” misleading.

    The Justices noted that the parties did not appear to disagree on the question on which review was granted.  Indeed, at oral argument, plaintiff and the United States government (which filed a brief in support of plaintiff’s position) appeared to agree that there must be a statement that is rendered misleading in order for the failure to make an Item 303 disclosure actionable under Section 10(b).  Instead, the dispute centered on how such a statement must be identified and pleaded.

    Plaintiff and the government argued that the statement that could be rendered misleading by an Item 303 omission could be the entire Management’s Discussion and Analysis (“MD&A”) section of a Form 10-K.  Specifically, plaintiff argued for a rule that only required a complaint to identify where a defendant discussed “the subject covered by the Item 303 requirement.”  The government appeared to go even further, arguing that a failure to disclose a trend or uncertainty could make the entire MD&A section misleading even if no particular statement within the discussion was misleading.

    Given this, some justices appeared potentially open to issuing a narrow ruling reversing the Second Circuit and remanding the matter for further consideration under a standard requiring that an Item 303 violation can serve as the basis for an Exchange Act claim only if the alleged omission can be tied to (thus rendering misleading) a specific statement made by the defendant.  A decision is expected by this summer, which may provide clarity on whether, or the circumstances in which, an Item 303 violation may serve as the basis for an Exchange Act claim.

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