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Supreme Court Rules Corporate Silence on Impactful Trends Not Securities Fraud



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Shareholders cannot sue companies for fraud if they flout a rule requiring disclosure of trends expected to affect their bottom line unless the omission makes another statement misleading, the U.S. Supreme Court ruled on Friday.

The 9-0 ruling authored by liberal Justice Sonia Sotomayor handed a victory to Macquarie Infrastructure in a proposed shareholder class action accusing the company of failing to disclose that its revenues were vulnerable to an international phase-out of high-sulfur fuel oil between 2016 and 2018.


The justices reversed a decision by the New York-based 2nd U.S. Circuit Court of Appeals to allow the class action brought by Hedge fund Moab Partners to proceed. A federal judge earlier had dismissed the litigation.

Sotomayor wrote that while the anti-fraud provision of a federal law called the Securities Act of 1933 clearly prohibits companies from telling misleading half truths, it does not automatically apply when a company remains silent.


Linda Coberly, an attorney who represents Macquarie, said the ruling “provides guidance to companies, litigants, and judges, for our case and beyond.”

Attorneys for Moab declined to comment.


U.S. publicly traded companies are required to make various disclosures under federal rules that are enforced by the Securities and Exchange Commission.

Moab sued Macquarie in 2018, accusing it of hiding the fact that a subsidiary’s revenues relied on demand for storage of a freighter fuel that international regulators sought to eliminate by 2020. Both companies are based in New York.


According to the lawsuit, Macquarie violated an SEC rule requiring companies to disclose known trends and uncertainties likely to significantly affect their financial position.

The Supreme Court decided that a violation of the rule does not by itself amount to a misleading omission under the anti-fraud law, which bars companies from omitting facts in a way that would make a statement misleading.


The court rejected Moab’s argument that such a ruling would give companies immunity for violating disclosure laws, saying the SEC can take enforcement action.

Macquarie had argued that the ruling that had let the claim proceed conflicted with another decision blocking a similar lawsuit. Business groups said fear of such lawsuits had led to bloated corporate disclosures.


(Reporting by Jody Godoy in New York; Editing by Will Dunham and Deepa Babington)

New York


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