US Supreme Court Rules on Corporate Silence in Shareholder Fraud Cases

The U.S. Supreme Court delivered a significant ruling on April 12, 2024, regarding shareholder lawsuits and corporate silence in cases of alleged fraud. In a unanimous decision authored by Justice Sonia Sotomayor, the court clarified that shareholders cannot sue companies for fraud solely based on the omission of information unless the omission renders another statement misleading.

The case, brought by hedge fund Moab Partners against Macquarie Infrastructure, centered on allegations that Macquarie failed to disclose the vulnerability of its revenues to an international phase-out of high-sulfur fuel oil between 2016 and 2018. The 9-0 ruling handed a victory to Macquarie, overturning a decision by the 2nd U.S. Circuit Court of Appeals to allow the class action lawsuit to proceed.

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Sotomayor's opinion emphasized that while federal securities laws prohibit companies from making misleading statements, mere silence does not automatically constitute fraud. The ruling clarified that a violation of SEC disclosure rules, such as the requirement to disclose known trends likely to affect financial position, does not in itself amount to a misleading omission under anti-fraud laws.

The decision provides important guidance for companies, litigants, and judges, according to Linda Coberly, an attorney representing Macquarie. It underscores the distinction between actionable misstatements and omissions, potentially limiting the scope of shareholder lawsuits based solely on corporate silence.

Under federal securities rules enforced by the Securities and Exchange Commission (SEC), publicly traded companies are mandated to make various disclosures to ensure transparency and protect investors' interests. However, the ruling highlights the specificity required for shareholder claims of fraud based on alleged omissions.

Moab Partners' lawsuit against Macquarie alleged that the company violated SEC rules by failing to disclose significant trends and uncertainties affecting its financial position, particularly regarding a subsidiary's reliance on demand for fuel storage. The Supreme Court's decision, while acknowledging the importance of disclosure, clarified that violations of disclosure rules do not automatically establish fraud.

The court rejected Moab's argument that the ruling would grant companies immunity for violating disclosure laws, emphasizing that the SEC retains authority for enforcement actions. This decision aligns with previous rulings and addresses concerns raised by business groups regarding the potential for frivolous lawsuits based on alleged corporate omissions.

Macquarie's argument, supported by business groups, highlighted the potential for excessive corporate disclosures driven by fear of litigation. The ruling aims to strike a balance between transparency and accountability, providing clarity on the legal standards for shareholder fraud claims based on corporate silence.

The Supreme Court's ruling clarifies the legal landscape surrounding shareholder lawsuits and corporate disclosures, emphasizing the need for specificity and materiality in alleging fraud based on corporate silence.