In a case argued Jan. 16 before the Supreme Court, hedge fund Moab Partners sued Macquarie Infrastructure Corp., a former publicly traded company that owned and operated a portfolio of infrastructure-related businesses, including one involving the storage of a high-sulfur fuel oil, No. 6 oil. In its class-action lawsuit, Moab alleged that from 2016 to 2018 Macquarie and its management defrauded investors by failing to predict — and disclose — that a proposed cap on sulfur in fuel oil would have a material negative impact on Macquarie's financial performance.
Historically, private securities plaintiffs have argued that a failure to make a required disclosure under Item 303 is an omission that can give rise to a securities fraud claim under Section 10(b) of the Securities Exchange Act even in the absence of an otherwise misleading statement or an independent duty to disclose the allegedly omitted information.
But in her argument on behalf of Macquarie, Linda Coberly, a partner and chair of the appellate and critical motions practice at law firm Winston & Strawn, said the SEC has "extensive powers to penalize an omission that violates Item 303. But, without the element of a misleading statement, an omission can't be the subject of a private class action."
She urged that Supreme Court justices to vacate a decision made in 2022 by 2nd U.S. Circuit Court of Appeals in New York that concluded that Moab had adequately alleged a "known trend or uncertainty" that gave rise to a duty to disclose under Item 303.
In response, David Frederick, a partner at law firm Kellogg, Hansen, Todd, Figel & Frederick who represented Moab, said if accepted, Macquarie's argument would "create a road map for fraud."
He added that just as "disclosing two roads near a property when a third one actually bisects it is a classic fraudulent half-truth, so is a partial Item 303 disclosure that omits required material information. A reasonable investor would expect the description of known trends to be complete and would be misled by such a material omission."
Frederick later said the SEC's enforcement staff is "meager compared to the resources and opportunities for institutional investors like the ones that I represent to be able to bring private actions."
Anne Sherry, a content management consultant in the securities group of Wolters Kluwer Legal & Regulatory U.S., said after the arguments that the Supreme Court's decision could have major implications, including added litigation risk for companies."If you just say that you have to disclose everything that the SEC requires you to disclose and if you don't you can be a defendant in a private class action, that opens up the territory enormously," she explained.