Apr 15, 2024 - Business

SCOTUS says that companies’ disclosure omissions aren’t securities fraud

Illustration of a black and white gavel with a green tint over a purple and black background.

Illustration: Brendan Lynch/Axios

The U.S. Supreme Court on Friday ruled that shareholders can't sue companies under federal fraud law for not disclosing information about future risks — unless the omission makes another statement misleading.

Why it matters: SCOTUS threw companies a big bone in an age of increasing discourse over what they should disclose beyond traditional financials.

  • A ruling the other way could have amped up the concerns of company execs about the SEC's climate disclosure rules — currently on pause — which leave it up to companies to determine what information is material, and thus should be disclosed.

Catch up quick: The court sided sided with Macquarie Infrastructure in a lawsuit filed by Moab Partners back in 2018.

  • Moab sued Macquarie for not disclosing that its revenue was vulnerable to a phase-out of high-sulfur freighter fuel between 2016 and 2018.
  • SCOTUS reversed an earlier decision by the New York-based 2nd U.S. Circuit Court of Appeals to allow Moab's class action suit to proceed.

Zoom in: The legal question at hand was whether violating Item 303 under SEC Rule S-K — which requires companies to disclose "known trends or uncertainties that have had or that are reasonably likely to have a material favorable or unfavorable impact" in their regulatory filings — can amount to violating the anti-fraud provisions of the 1934 Securities and Exchange Act.

  • Macquarie and its allies argued that a ruling against them would lead companies to overdisclose, and that it would create even more confusion for investors.
  • The other side: A group of investment funds, in an amicus brief, argued that investors not only depend on the disclosures from companies, but on the completeness of those disclosures.

Yes, but: The ruling from SCOTUS doesn't mean that the SEC can't take enforcement actions related to violations of disclosure rules.

The bottom line: Companies live another day without more liability about what they do and don't tell investors.

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