Supreme Court Clarifies Scope of Liability for "Omissions" under SEA Rule 10b-5(b)
Commentary by Kevin Harnisch
In a unanimous decision, the U.S. Supreme Court ruled that a "pure omission" cannot give rise to a private action for securities fraud under Securities Exchange Act Rule 10b-5(b) ("Employment of manipulative and deceptive devices").
Writing for the Court, Justice Sotomayor clarified the distinction between a "pure omission" (not disclosing information at all) and a "half-truth" (providing misleading partial information). The Court concluded that Rule 10b-5(b) only covers the latter, reinforcing that the rule does not create a blanket obligation to disclose all material information but rather aims to prevent misleading statements. The Court stated: "the failure to disclose information required by Item 303 [Regulation S–K "Management's discussion and analysis of financial condition"] can support a Rule 10b–5(b) claim only if the omission renders affirmative statements made misleading." [Emphasis added.]
In a Memorandum, Norton Rose Fulbright lawyers stated that the Opinion represents an important development, given the Court’s repeated emphasis on the limits on the duty to disclose.
The lawyers noted, however, the potential grounds for securities-fraud liability that the Court did not disturb, stating:
- The SEC still can enforce Item 303, so companies should ensure that their filings include a Management Discussion and Analysis ("MD&A") that adequately describes any known trends or uncertainties that have had or that are reasonably likely to have a material impact on operations..
- Companies' statements (e.g. in an SEC filing), must be truthful and non-misleading in context, or else it may be targeted as a "half-truth" that remains actionable under Rule 10b-5(b).
- Plaintiffs can continue to press claims under Rule 10b-5(a) and (c) (i.e. scheme liability), as the Court also declined to decide "whether Rules 10b-5(a) and 10b-5(c) support liability for pure omissions."
The lawyers concluded that "this is far from the end of litigation surrounding Item 303 and Rule 10b-5."
Commentary
Companies are now protected from private civil liability under Rule 10b-5(b) for “pure omissions.” This represents an important development, particularly given the Court’s repeated emphasis on the limits of the duty to disclose in Section 10(b) and Rule 10b-5(b). (See the linked article for a full discussion of the case.)