SECURITIES CORNER

A shareholder of a company that operated storage facilities for bulk liquids filed a 10(b)(5) securities fraud class action. The Shareholder alleged that the company failed to disclose vital information about “known trends or uncertainties” that were likely to materially impact future financial performance.  Specifically, the shareholder alleged the company was required to include, in its SEC filings, that new pending United Nations energy regulations posed a significant risk to customer demand and that failure to advise shareholders of the potential impact was misleading to investors and tantamount to fraud.

In support of their Motion to Dismiss, the company argued that the mere omission of a statement, without some form of an accompanying “misstatement” or “misleading statement” is insufficient to satisfy the heightened pleading requirements for a 10(b)(5) securities fraud action.  The U.S. District Court agreed and dismissed the complaint because the shareholder “had not actually plead an uncertainty that should have been disclosed”.  On appeal, the Second Circuit reversed and held that “an omission of information required [to be disclosed], standing alone.....could be actionable.”  In light of a split between the federal appellate circuits, the U.S. Supreme Court agreed to hear the case to resolve the disagreement between the appellate circuits.

In a unanimous opinion, the Supreme Court reversed the Second Circuit and sided with the Third, Ninth and Eleventh Circuits that previously held that “pure omissions cases” are not actionable.  The Court reasoned that “silence, absent a duty to disclose, is not misleading under Rule 10(b)(5)” and more importantly, that “even a duty to disclose...does not automatically render silence misleading”.