By: Cassy Sulzer

On September 29, 2023, the U.S. Supreme Court granted certiorari to hear the Securities and Exchange Commission (“SEC”) disclosure liability case of Moab Partners, L.P. v. Macquarie Infrastructure Corp.[1] The Supreme Court will consider whether a failure to make a disclosure required under Item 303 of Regulations S-K of the Securities Act of 1933 (“Securities Act”) can support a private claim under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), even in the absence of an otherwise misleading statement. In asking the Supreme Court to take up the case, Macquarie argues that the ruling by the Second Circuit conflicts with earlier rulings by the Third,[2] Ninth,[3] and Eleventh Circuits[4] that said shareholders may not sue over violations of the rule.

The Management Discussion and Analysis (MD&A) under Item 303 requires the disclosure of information that is relevant to assessing a public company’s financial condition, changes in financial condition, and operational results.[5] It necessitates that a company discloses whether any ongoing trends, demands, commitments, events, or uncertainties are presently known to the management and likely to have a significant impact on the company’s financial conditions or operational results.[6] An MD&A that meets the requirements of Item 303 is expected to better allow investors to view the company from management’s perspective. [7]

Shareholder lawsuits for violation of Section 10(b) of the Exchange Act are common sources of liability for public companies.[8] These cases are often triggered by a drop in stock price, after which shareholder plaintiffs allege that the change in price reflects newly public information that the company previously and improperly concealed.[9] The SEC’s implementing regulation, Rule 10b-5, further defines the scope of the statutory language.[10] The rule renders it unlawful to either make false statements regarding material facts or to omit necessary material information that would otherwise prevent the statements from being deceptive. To establish liability under Section 10(b), a plaintiff must, among other things, show that the misstatement or omission was made with an intent to deceive, manipulate, or defraud (i.e., with scienter).[11] Although the statute does not provide for an express private right of action to enforce Section 10(b), Rule 10b-5 has implied one since the mid-1940s.[12] So far, the Supreme Court has declined to imply a private cause of action for aiding and abetting liability under the statute.[13]

In 2018, investor Moab filed a class action lawsuit against Macquarie in the U.S. District Court for the Southern District of New York.[14] The suit alleged that Macquarie violated Item 303 of Regulation S-K and Section 10(b) by failing to disclose that its revenues were vulnerable to an international phase-out of high sulfur fuel oil, one of the fuels Macquarie stores (No. 6 fuel oil), due to new United Nations regulatory laws (known as IMO 2020).[15] After the new law came into effect, Macquarie’s stock price declined.[16] The Southern District of New York dismissed Moab’s claims, holding that they had not proven material misrepresentation and omissions or scienter.[17] In particular, the court held that there was no duty to disclose because it was widely known that IMO 2020 would threaten businesses across the supply chain for No. 6 fuel oil.[18] Additionally, the court found that plaintiffs must, at the very least, plead facts supporting an inference that defendants had actual knowledge of a material trend or uncertainty and that they had this knowledge early enough to require disclosure.[19]

On appeal, the Second Circuit unanimously held that Moab sufficiently demonstrated that from Macquarie’s material omissions and facts presented, the court rationally concluded Macquarie’s scienter.[20] On May 30, 2023, Macquarie’s filed a petition for a writ of certiorari with the U.S Supreme Court.[21]

Should the Supreme Court uphold the Second Circuit’s interpretation of the requirements under Item 303 and establish a valid claim for securities fraud under 10(b), such ruling would significantly expand the application of Section 10(b) as an avenue for private plaintiffs seeking legal action in cases of securities fraud.[22] Such ruling would place increased importance on the statements within a company’s MD&A section, making them a focal point for both legal and business communities. Consequently, companies could experience heightened pressure to disclose information to avoid potential legal challenges.[23] While this may intend to safeguard against legal challenges, it could lead to the disclosure of unnecessary information, potentially overwhelming investors. The potential of over-disclosure in the MD&A section would not only contradict Item 303’s purpose of providing investors with concise and meaningful insights into management’s views about a company’s business, but also run against SEC’s efforts to limit the disclosure of risk factors in item 105 of Regulation S-K to relevant risk factors.[24] The Supreme Court’s decision will provide important guidance as to where to draw the line between necessary transparency and information overload in the realm of securities regulations.

[1] No. 21-2524, 2022 WL 17815767, at *1 (2d Cir. Dec. 20, 2022), cert. granted sub nom Macquarie Infrastructure Corp. v. Moab Partners, L.P., No. 22-1165, 2023 WL 6319659 (U.S. Sept. 29, 2023).

[2] Oran v. Stafford, 226 F.3d 275 (3d Cir. 2000).

[3] In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046 (9th Cir. 2014),

[4] Carvelli v. Ocwen Fin. Corp., 934 F.3d 1307 (11th Cir. 2019).

[5] 17 C.F.R. § 229.303.

[6] Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 101 (2d Cir. 2015); see also 17 C.F.R. § 229.303.

[7] See generally Regulation S-K Item 306, 17 CFR § 229.306.

[8] Jay B Kasner and Mollie Melissa Kornreich, Section 10(b) Litigation: The Current Landscape, ABA (Oct. 14, 2014), https://www.americanbar.org/groups/business_law/resources/business-law-today/2014-october/section-10-b-litigation-the-current-landscape/.

[9] Id. (stating that Section 10(b) makes it unlawful to “use or employ, in connection with the purchase or sale of any security” any “manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe”); 15 U.S.C. § 78j(b).

[10] See Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005).

[11] See Cent. Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 176-77, 179-80, 191 (1994).

[12] Id.

[13] See 511 U.S. 164, 176-77, 179-80, 191 (1994).

[14] Riviera Beach Gen. Employees Ret. System v. Macquarie Infrastructure Corp., No. 18-CV-3608 (VSB), 2021 WL 4084572, at *1 (S.D.N.Y. Sept. 7, 2021).

[15] Id.

[16] Id., at *2.

[17] Id., at *6.

[18] Id.

[19] Id., at *10.

[20] Moab Partners, L.P. v. Macquarie Infrastructure Corp., No. 21-2524, 2022 WL 17815767, at *2 (2d Cir. Dec. 20, 2022).

[21] Macquarie Infrastructure v. Moab Partners, L.P., No. 22-1165, 2023 WL 6319659 (U.S. Sept. 29, 2023).

[22] Jordan Eth and Nicole K. Serfoss, SCOTUS to Resolve Circuit Split on 10(b) Claims Based on Violations of Item 303, Marrison Foerster (Oct. 6, 2023), https://www.mofo.com/resources/insights/231006-scotus-to-resolve-circuit-split-on-10b-claims.

[23] See James J. Beha II, U.S. Supreme Court to Decide Whether Shareholders Can Sue for Alleged Failure to Comply with Item 303’s Disclosure Requirement, NY L. J., (Oct. 18, 2023, at 10:00 AM), https://www.law.com/newyorklawjournal/2023/10/18/u-s-supreme-court-to-decide-whether-shareholders-can-sue-for-alleged-failures-to-comply-with-item-303s-disclosure-requirements/.

[24] See Basic v. Levinson, 485 U.S. 224, 231 (1988).