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Hedge funds are expected to ask the U.S. Supreme Court next week to approve an interpretation of securities laws that would allow investors to sue companies for failing to disclose known trends, a role typically played by regulators.
Fund Moab Partners LP has sued Macquarie Infrastructure Corporation for failing to notify it of its exposure to changes in bunker regulations in the shipping industry. Energy supply conglomerate Macquarie is challenging the influential Court of Appeal ruling in arguments before judges on January 16. The ruling allows shareholders to bring securities fraud lawsuits citing Securities and Exchange Commission regulations that require disclosure of “known trends and uncertainties.” ”
“This is really a simmering circuit split,” said Elizabeth Gingold Clark, a securities attorney at Alston & Bird LLP in Atlanta and New York.
The Moab decision could change private securities litigation and change the way lawyers think about SEC Rule SK Section 303, she said. Because the report is from a management perspective, “it would be strange for retail investors to take it at face value,” she says. The purpose of regulation, she said, is to improve investors’ understanding of how management views their businesses. And that’s subjective, she said. “It’s not uniform across companies.”
There is no liability for a “pure lack” of information, Mr McCauley said in his opening report on the merits. And the analysis required from a management perspective is too subjective to form the basis of a fraud claim, the conglomerate says.
However, Mr. Moab, the lead plaintiff in the proposed investor class action, claims that fraud liability is misleading under Section 303 under Section 10(b) of the Exchange Act and Rule 10b-5 of the Code. It states that it also includes a description. The report stated that the requirement to report material information is in situations where the omission of the information could cause other statements to be misleading. The investment fund said Macquarie did not remain silent when it produced the report and certified the completeness of its annual returns.
The U.S. government will participate in arguments before the high court. In a friend-of-the-court brief supporting Moab, the SEC and the Department of Justice have long held that securities fraud liability may apply to omissions in the “Management’s Discussion and Analysis” section of the Item 303 report. He said he has taken the position that there is. And plainclothes are an “essential supplement” to the SEC’s work, the paper said.
“The question ultimately comes down to how broad Section 10(b) is as a means of private enforcement,” said Jill Fish, a professor at the University of Pennsylvania’s Carey Law School.
fuel oil tank
Mr Moab said Macquarie had a large number of fuel tanks to store No. 6 fuel oil (tanks that had to be reused at considerable expense), so Macquarie restricted No. 6 fuel oil. It alleges that it knew that the impending International Maritime Organization regulation would have a material impact on the company.
However, Mr Moab said Macquarie did not disclose the extent of its No. 6 tank holdings, the expected conversion costs or other factors.
The U.S. Court of Appeals for the Second Circuit reopened the case following the district court’s dismissal, deeming the McCauley Report an actionable “half-truth.”
However, Richard Bodnar of the New York law firm Rolnick Kramer Sadighi, who co-authored the court brief on behalf of institutional investors, said, “The lack of disclosure under Section 303 leaves investors uninformed.” ”
“It’s similar to ‘The Dog That Didn’t Bark in the Night,'” Bodnar said, repeating a reference to Sherlock Holmes clues sometimes cited in court in briefs. “The lack of disclosure tells investors they don’t need to worry about the issue.”
Although Clark dismissed comparisons between companies, Bodnar said pension funds and other institutional investors are doing just that. “Failing to disclose Item 303 can be particularly harmful to sophisticated investors who compare long-term disclosure trends across companies in a particular sector or industry, or for a particular issuer,” he said. Stated.
Policy questions also come before the court. “Even if you don’t agree with the regulatory requirements, it is better to rely on Rule 10b-5 than on many specific rules,” Fish said. This allows for more flexibility, she said.
But Clark said a ruling confirming the Second Circuit’s decision would cause significant harm to businesses. “Securities litigation is very expensive and very lengthy,” she says. That makes it expensive for investors, she says.
The case is Macquarie Infrastructure Corp. v. Moab Partners, LP, US, No. 22-1165, oral argument 1/16/24.
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