The Supreme Court is on a holiday today, but it returns to the bench Tuesday to examine a dispute over investors’ right to know corporate information that might influence the value of their investments. That is the issue in the Court’s first hearing of the day. (A discussion of the second hearing will appear in this space tomorrow.)
Tuesday’s first hearing: Macquarie Infrastructure Corp. v. Moab Partners LP The hearing begins at 10 a.m. and is scheduled for one hour.
Background: Investors are a naturally curious sort, eager for facts or trends that influence how and where they will put their money. Federal laws governing the buying and selling of securities provides strong protection for that curiosity. On the one hand, the law forbids companies from issuing misleading data – information that will steer investors wrongly.
On the other hand, a separate federal rule requires companies to disclose data that takes investors deeper inside corporations to share more of what management thinks about economic trends or uncertainties, so stockholders get a fuller look.
This case is a test of whether those two federal approaches can work together, compelling public release of internal information that is not misleading by itself, but has the capacity to influence investors’ portfolios. This case is about enforcement of that approach by private investor lawsuits; the government’s Securities and Exchange Commission could separately enforce that approach, so it is joining in this case to defend its own powers.
Background on federal law: Federal securities law provides broad protection for the investing public, especially to police corporate fraud. Since the Great Depression, securities dealings in the markets and in private transactions have been heavily regulated, and one of the principal enforcement mechanisms is required public disclosure. The policy theory is that “sunlight” is the best way to “disinfect” corporate misdeeds that affect investors.
The main anti-fraud securities law is known as Section 10b(5), enacted by Congress in 1934. Both the SEC and private investors can go to court to enforce that provision. It bans “any manipulative device or deception” in securities dealings. A rule by the SEC adds a ban on fraud in those transactions.
Another part of securities law, Section 13, which is enforced only by the SEC, requires companies whose stock is listed on national markets to file periodic financial reports. In 1989, the SEC adopted a provision to further enforce that mandate: Rule 303. That requires those periodic reports to “describe any known trends or uncertainties” that could have either a favorable or unfavorable impact on the company’s financial condition or business operations. The SEC has argued that disclosure of only financial numbers would not give investors the chance “to look at the company through the eyes of management.”
The facts of this case: A firm that must obey both 10b-5 and Rule 303, Macquarie Infrastructure Corp., operates a subsidiary that stores fuel oils in its tanks. One kind of fuel it stores is known as “6-oil.” It is a refined oil product that is widely used as the energy source for ships, including cruise ship and freight-carrying ships.
That product is highly toxic, and can cause serious health damage if its fumes are inhaled. If that kind of oil is spilled in open waters, it can cause severe environmental damage. The U.S. Coast Guard has said that fuel oil 6 is the oil most often spilled in open waters.
This case grew out of a ruling in 2009 by the International Maritime Organization, an agency within the United Nations that regulates shipping around the globe. Scheduled to take effect in early 2020, the ruling suggested major reductions in the amount of 6-oil that could be used in shipping.
Although company officials at Macquarie announced that they would reduce the storage of that kind of fuel, the company was later accused by investors of continued heavy involvement with the product.
Moab Partners LP, an investment firm joined by others, sued Macquarie and its storage subsidiary under both the anti-fraud securities law and the trends-reporting rule. This was a lawsuit filed on behalf of a class of investors in Macquarie stock.
The lawsuit claimed that the company misled investors, artificially inflating its stock price, by filing financial reports that said it was reducing the length of storage of fuels that could affect future contracts, but predicted continued strong demand for products stored by its subsidiary.
Those reports did not mention the coming enforcement of the UN group’s ruling against 6-oil in shipping. After the UN ruling came to light, the price of Macquarie’s stock dropped by 41 percent, affecting investors’ holdings.
A federal trial judge dismissed the lawsuit, concluding that the investor firms had not shown that any statements the company made were misleading, as required by 10b-5, the anti-fraud law. However, a federal appeals court revived the lawsuit, ruling that a failure to make a disclosure required by the trends-reporting mandate (Rule 303) could support a lawsuit to enforce 10b-5.
Macquarie and its affiliates appealed the case to the Supreme Court, arguing that the federal appeals courts are split on whether an omission on a periodic statement filed under Rule 303 can be the basis of a lawsuit under the anti-fraud provisions of 10b-5. (The case still uses the name Macquarie even though the company has since changed its name to Atlantic Aviation Infrastructure Corp. The name change does not affect the legal issues.)
The questions before the Court: What, if any, legal link is there between a company’s duty not to mislead or deceive investors about its stock and its duty, under a separate federal rule, to discuss trends in the industry that may affect company performance? Are private investors barred from enforcing the Rule 303 disclosure requirement about industry trends?
Significance: This dispute among lower courts on the twin obligations of disclosure by publicly owned companies has persisted for years. The Supreme Court agreed to straighten it out by agreeing to rule on an earlier case, in 2017, but that case was settled out of court before the Justices could rule.
The fuel storage company’s appeal argues that the ruling against it in this case will “open the floodgates to potentially crippling private action liability.” The appeal also seeks to take advantage of a ruling against such lawsuits, issued by a federal appeals court when Justice Samuel A. Alito, Jr., sat on that lower court. (Justice Alito is taking part in the Supreme Court’s review of this case; ethics standards do not require a judge to step aside because they had taken a prior position on a case not involving the same parties.)
The case will give the Justices an opportunity to clarify how open publicly held companies must be, when they fulfill their reporting duties with the federal government. Securities law and rules are heavily centered on avoiding misleading the investing public, but have not been generally understood to mean that investors have a right to know everything that they would like revealed to them.
The Court will broadcast “live” the audio (no video) of this hearing on its homepage, supremecourt.gov To listen, click on “Live Audio” and follow the prompt when the courtroom scene appears lower on the page. The audio also will be available, under the title of the case, on C-Span TV at this link: cspan.org/supremecourt
(NOTE: Tomorrow morning, a discussion of the second Court hearing that day will appear in this space. That case is a new test of the right of property owners to be paid when the government takes some of their property for a public use.)