Can an alleged failure to meet the disclosure requirements under Item 303 of Regulation S-K constitute a claim for securities fraud under Section 10(b)? That’s the key question the U.S. Supreme Court will consider in Macquarie Infrastructure Corporation v. Moab Partners, L.P., No. 22-1165, which will be argued and decided this year. One way or the other, the Court’s decision will resolve a circuit court split, and either expand or restrict the scope for Rule 10(b) to be used as a tool for private securities plaintiffs.
Case Background
The controversy in Macquarie centers on Item 303 of Regulation S-K. Item 303 requires publicly traded companies to provide a Management’s Discussion and Analysis (MD&A) of their financial condition and results of operations. The MD&A is a critical section in a company’s annual report (Form 10-K) and other periodic reports. It offers investors a narrative, through the eyes of management, about the company’s financial performance, including its liquidity, capital resources, and operating results.
A central requirement of Item 303 is that companies must disclose any known trends, demands, commitments, events, or uncertainties that are reasonably likely to have a material effect on the company’s financial condition or operating performance. This is not just a backward-looking requirement; companies must also assess and disclose expected future events or conditions that could have a significant impact.
In this case, Moab Partners LP filed suit under Section 10(b) of the Securities Exchange Act, alleging that Macquarie Infrastructure Corporation had failed to disclose its analysis, as required by Item 303, of the potentially negative impact that new international oil regulations were anticipated to have on the company. The district court dismissed the plaintiff’s complaint, but the U.S. Court of Appeals for the Second Circuit disagreed and held that the alleged omission could constitute a violation of Item 303 and serve as the basis for a claim under Section 10(b).
The Second Circuit decision is at odds with rulings of the Third, Ninth, and Eleventh Circuits, which have previously rejected the contention that a failure to comply with Item 303 can underpin a Section 10(b) claim. The Supreme Court’s ruling, therefore, will resolve this circuit split.
Implications of the Court’s Ruling
A decision by the Supreme Court to affirm the Second Circuit’s ruling would likely result in increased scrutiny of the Management Discussion and Analysis section in corporate filings, and open the door to more Rule 10(b) lawsuits alleging violations of Item 303. If that happens, companies might adopt more cautious and detailed approaches to their disclosures, including becoming more proactive in identifying and disclosing material risks and uncertainties, to mitigate the risk of litigation.
However, this increased scrutiny could lead to a dilemma between achieving clarity and avoiding information overload in SEC reporting. The SEC has generally encouraged clarity and materiality in disclosures, and including more information doesn’t necessarily serve this purpose. It’s easy to envision a scenario where, due to fear of litigation, companies might opt to pack reports with excessive details. This could increase transparency—or, on the other hand, it could make it challenging for investors to discern critical information, potentially diluting the effectiveness of these disclosures.
Conclusion
The Supreme Court’s decision in Macquarie is poised to have broad implications in securities law and corporate disclosures. It will likely influence how companies approach their disclosure obligations and could expand the scope of securities litigation to the extent the Court adopts the Second Circuit’s approach. We will watch this case closely and report back once the Court has issued its ruling.
For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.
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