Supreme Court rules companies cannot be sued for withholding bad news 

WASHINGTON (CN) — The Supreme Court on Friday said shareholders cannot sue companies for fraud if they fail to disclose negative trends about the companies’ bottom line. 

Justice Sonia Sotomayor, an Obama appointee, wrote the opinion for the unanimous court. She said a hedge fund could not sue the company it invested in for not including certain information on investor disclosures.

Federal law prevents the use of manipulative practices in the purchase or sale of securities. This includes using untrue statements or omissions of material facts to deceive investors. If shareholders suspect a company is engaging in these practices, they can sue under a private right of action, but the investor must show a material misrepresentation or omission to win the suit. 

The hedge fund, Moab Partners, sued Macquarie Infrastructure Corporation. The infrastructure-related businesses own a company that provides third-party bulk-liquid storage for refined petroleum products like No. 6 oil. Sometimes called black oil, the high-sulfur fuel is a byproduct of the refining process. 

In 2008, a United Nations agency regulating global shipping issued a rule capping the sulfur content of fuel oil by the beginning of 2020. No. 6 oil has a much higher sulfur content than the rule allows, creating concerns that demand for black oil would tank. 

As the rule was implemented, the storage company experienced a steep decline in demand for No. 6 oil. 

Macquarie did not include information about the declining demand for oil storage in its 2017 financial report. However, the CEO did note other factors that led to the board’s decision to lower the anticipated dividend. 

Moab sued, claiming Macquarie had breached its disclosure obligations by not telling investors that the new oil sulfur content rule would impact its businesses. Moab said that omission was enough to sue the company for fraud, even though it did not cite any specific statement in Macquarie’s public filings that was misleading. 

Sotomayor said the case turned on if the law prohibited only half-truths or pure omissions. She describes pure omissions as a speaker saying nothing when that silence has no particular meaning. 

“If a company fails entirely to file an MD&A, then the omission of particular information required in the MD&A has no special significance because no information was disclosed,” Sotomayor wrote, referring to a management discussion and analysis, part of a report that discusses a company's performance.

In contrast, Sotomayor said half-truths omit critical information. 

“In other words, the difference between a pure omission and a half-truth is the difference between a child not telling his parents he ate a whole cake and telling them he had dessert,” Sotomayor said. 

She said the rule requires the disclosure of information necessary to ensure that statements already made are clear and complete. This requires clarifying previous statements before determining if other facts are needed to make sure those statements are not misleading. 

Follow @KelseyReichmann

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