Macquarie Infrastructure Corp v. Moab Partners
This case is about whether injured investors can hold a publicly traded company accountable for securities fraud when it deliberately violates its duty to disclose material information in securities filings. Macquarie Infrastructure Corp (MIC) allegedly failed to disclose the long-term financial consequences it faced due to pending regulatory changes. The regulatory changes were designed to reduce reliance on a certain blend of oil, but storing that type of oil represented most of MIC’s revenue and 40% of its storage volume. When the regulations went into effect, demand for storage plummeted and MIC’s investors suffered.
One group of investors, Moab Partners (Moab), filed a class action lawsuit under Section 10(b) of the Securities Exchange Act of 1934, which broadly prohibits “deceptive devices,” and Securities and Exchange Commission (SEC) Rule 10b-5, which implements Section 10(b). The SEC requires publicly traded companies like MIC to file annual reports that, among other things, identify “any known trends or uncertainties” that have had or reasonably will have a material impact on the company. This disclosure requirement is known as Item 303. Moab alleged that MIC’s failure to disclose its looming financial exposure under Item 303 was a material misrepresentation under Section 10(b) and Rule 10b-5. MIC moved to dismiss the lawsuit, arguing that its failure to disclose how much it would be affected by the pending regulations was a “pure omission,” which it said are not misrepresentations or actionable offenses under Section 10(b) or Rule 10b-5). Instead, MIC argued that it could be liable only for statements it actually made, not for statements it didn’t make but should have. In other words, MIC said it couldn’t be sued for its silence, no matter how misleading that silence may have been.
The district court sided with MIC. Moab appealed to the United States Court of Appeals for the Second Circuit, which agreed with Moab that MIC’s failure to disclose its imminent financial exposure under Item 303 could support a private securities class action under Section 10(b). MIC then petitioned the U.S. Supreme Court, which accepted the case.
With our allies at American Association for Justice, Consumer Federation of America, and Better Markets, we filed an amicus brief to support Moab and to underscore the importance of the implied private right of action under Section 10(b). Our brief explained that, as the Supreme Court has recognized since the 1960s, private enforcement of the securities laws is a “necessary supplement” to the SEC’s enforcement authorities. The threat of civil damages—which are often much larger than the sanctions obtained by the SEC—is a better deterrent against fraud, and the government only has so many resources to detect and prosecute fraud. And when Congress created the Securities Exchange Act in 1934, it deliberately chose a policy of full disclosure to police the securities industry.
Additionally, we argued that omitting information can in fact constitute a misstatement when there was a duty to disclose that information. Item 303 creates a duty to disclose that can support a private claim under Section 10(b). When MIC failed to disclose its extensive reliance on storing a soon-to-be prohibited formulation of oil, it rendered the entirety of its disclosures misleading, thereby materially misleading investors within the meaning of the law, because a collapse of the market for that oil would crush the company’s revenue and force it to spend money repurposing its specialized storage tanks.
Allowing Moab’s claim to proceed is consistent with the Supreme Court’s prior decisions and serves the purpose of America’s securities laws to promote honest and stable capital markets. We’re committed to protecting the implied right of action to bring a securities class action because American investors, big and small, deserve their day in court.
