Item 303 Circuit Split to be Heard in the Next SCOTUS Term

Item 303 is a Securities and Exchange Commission (“SEC”) regulation requiring companies to make a disclosure “where a trend, demand, commitment, event or uncertainty is both presently known to management and reasonably likely to have material effects on the registrant’s financial conditions or results of operations.”¹ Private securities plaintiffs have long taken the position 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 of 1934 (“Section 10(b)”) even in the absence of an otherwise misleading statement or an independent duty to disclose the allegedly omitted information.²

While the Second Circuit has held that a failure to disclose under Item 303 can amount to an actionable omission for a Section 10(b) claim, the Third, Ninth, and Eleventh Circuits have held plaintiffs to a higher standard, requiring them to show, for example, that the issuer had an independent duty to disclose the information allegedly withheld. In a petition for certiorari filed May 30, 2023, the Macquarie defendants asked the Supreme Court to resolve the issue once and for all.³

Background

Plaintiffs in Macquarie originally filed suit in the United States District Court for the Southern District of New York in 2018, alleging defendants Macquarie Infrastructure Corporation (“MIC”) and certain of its officers violated Section 10(b), among other claims.⁴

At the time the lawsuit was filed, MIC owned and operated various infrastructure and infrastructure-related businesses, including International-Matex Tank Terminals, Inc. (“IMTT”). Plaintiffs alleged IMTT was MIC’s “most important operating division.” IMTT was a “service provider to those who have title to various liquid products and need those products stored and handled.” IMTT stored a category of refined petroleum known as No. 6 fuel oil, which was allegedly threatened by a pending United Nations agency’s regulation known as “IMO 2020.” As relevant here, plaintiffs alleged that “Item 303 required MIC to disclose that its profits, revenues, and dividends were at risk due to the implementation of IMO 2020.”

The District Court Decision

Defendants moved to dismiss, and the district court granted their motions in full. In relevant part, the district court held that there was no duty to disclose because it was widely known (even to plaintiff) that IMO 2020 would threaten the business of each entity in the supply chain for No. 6 fuel oil.⁵ Further, the court found that, considering the alleged probability and magnitude of the risk, the omission was not sufficiently material under governing Second Circuit standards. Finally, the court found that plaintiffs had not alleged when defendants actually knew of the alleged uncertainty, saying “at minimum, [p]laintiff must plead facts supporting an inference that [d]efendants had actual knowledge of a material trend or uncertainty facing MIC’s No. 6 fuel oil storage business, and that it had this knowledge early enough to require disclosure in some pre-February 2018 securities filing.”

The Second Circuit Decision

On appeal, the Second Circuit vacated and remanded the District Court’s dismissal in a summary order, holding plaintiffs had adequately alleged that defendants made material omissions and false or misleading statements with the requisite scienter.⁶ As to the Item 303 issue, the court found that plaintiffs had pled a “known trend or uncertainty” giving rise to a duty to disclose under Item 303. The court said the “failure to make a material disclosure required by Item 303 can serve as the basis for . . . a claim under Section 10(b) if the other elements have been sufficiently pleaded.”

Defendants asked the Second Circuit to rehear the case en banc, but the court denied rehearing.⁷ The Supreme Court granted certiorari on September 29, 2023.⁸

Other Circuit Decisions

In urging the Supreme Court to grant certiorari, the Macquarie defendants argued that the Second Circuit’s holding conflicts with decisions from several other circuits. Petitioners cited the Third Circuit’s holding that due to the differing materiality standards for a Section 10(b) violation and the duty to disclose under Item 303, a violation of Item 303 will give rise to a material omission under Section 10(b) only if the plaintiff has independently alleged a duty to disclose the information allegedly withheld.⁹ Similarly, the Ninth Circuit has held “Item 303 does not create a duty to disclose for purposes of Section 10(b) and Rule 10b–5. Such a duty to disclose must be separately shown according to the principles set forth by the Supreme Court in [Basic v. Levinson, 485 U.S. 224 (1988)] and [Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011)].”¹⁰ The Eleventh Circuit has also weighed in, saying “Item 303 imposes a more sweeping disclosure obligation than Rule 10b-5, such that a violation of the former does not ipso facto indicate a violation of the latter.”¹¹ The Fifth Circuit has also recently acknowledged the circuit split without deciding the issue, but said it “ha[s] never held that Item 303 creates a duty to disclose” under the Exchange Act.¹²

A Decision to Watch

Private plaintiffs have been bringing Section 10(b) cases based on alleged Item 303 omissions for years, resulting in conflicting decisions from district and circuit courts across the country. In fact, according to the Macquarie defendants, the current circuit split has resulted in a higher percentage of Item 303 cases being brought in New York federal court, as opposed to other districts.¹³

Despite the ubiquity of Item 303 cases and the differences in applicable case law, this will be the first time the Supreme Court will weigh in on the viability of the theory. The Supreme Court granted certiorari on this issue in Leidos, Inc. v. Indiana Public Retirement System, No. 16-581, another case on appeal from the Second Circuit, but that case settled before the Court could hear it.¹⁴ Accordingly, the Macquarie case will be closely watched as a means to provide long-awaited certainty on this significant issue.

¹Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 101 (2d Cir. 2015); see also 17 C.F.R. § 229.303.

²Section 10(b) “makes it unlawful for any person 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 Commission may prescribe’ . . . .” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 37 (2011) (citing 15 U.S.C. § 78j(b)). To plead a violation of Section 10(b), plaintiffs must allege “(1) a material misrepresentation (or omission); (2) scienter, i.e., a wrongful state of mind; (3) a connection with the purchase or sale of a security; (4) reliance[]; 5) economic loss; and (6) loss causation.” Singh v. Cigna Corp., 918 F.3d 57, 62 (2d Cir. 2019).

³Petition for Writ of Certiorari, Macquarie Infrastructure Corp. v. Moab Partners, L.P., No. 22-1165, 2023 WL 6319659 (U.S. May 30, 2023). 

⁴City of Riviera Beach Gen. Emps. Ret. Sys. v. Macquarie Infrastructure Corp., No. 18-cv-3608 (VSB), 2021 WL 4084572, at *4 (S.D.N.Y. Sept. 7, 2021), vacated and remanded sub nom. Moab Partners, L.P. v. Macquarie Infrastructure Corp., No. 21-2524, 2022 WL 17815767 (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).

⁵Id. at *10.

⁶Moab Partners, L.P. v. Macquarie Infrastructure Corp., 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).

⁷Order, Macquarie Infrastructure v. Moab Partners, L.P., No. 21-2524 (2d Cir. Jan. 27, 2023), ECF No. 133.

⁸U.S. Supreme Court Notice, Moab Partners, L.P. v. Macquarie Infrastructure Corp., No. 21-2524 (2d Cir. Sept. 29, 2023), ECF No. 152. 

⁹Oran v. Stafford, 226 F.3d 275, 288 (3rd Cir. 2000). 

¹⁰See In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046, 1056 (9th Cir. 2014).

¹¹See Carvelli v. Ocwen Fin. Corp., 934 F.3d 1307, 1331 (11th Cir. 2019).

¹²Mun. Emps.’ Ret. Sys. of Mich. v. Pier 1 Imports, Inc., 935 F.3d 424, 436 (5th Cir. 2019).

¹³See supra note 3.

¹⁴Joint Motion to Recalendar Argument and Stay Proceedings, Leidos, Inc. v. Ind. Pub. Ret. Sys., No. 16-581 (U.S. Oct. 6, 2017); Order Granting Motion to Stay, Leidos, Inc. v. Ind. Pub. Ret. Sys., No. 16-581 (U.S. Oct. 17, 2017); Order Dismissing Case, Leidos, Inc. v. Ind. Pub. Ret. Sys., No. 16-581 (U.S. June 18, 2018).