Jodi Godoy
(Reuters) – Shareholders cannot sue companies for fraud if they ignore a rule requiring them to disclose trends that are expected to affect their profits unless the omission results in another misleading statement, the Supreme Court ruled. US court on Friday.
The 9-0 decision by liberal Justice Sonia Sotomayor gave Macquarie Infrastructure a victory in a proposed shareholder class action that accused the company of concealing information that its earnings were vulnerable due to the international phase-out of high-sulphur fuel oil between 2016 and 2016 2018.
Judges overturned a ruling by the 2nd U.S. Circuit Court of Appeals in New York, allowing a class action lawsuit brought by hedge fund Moab Partners to continue. A federal judge previously dismissed the lawsuit.
Sotomayor wrote that while the anti-fraud provision of the federal securities act of 1933 clearly prohibits companies from communicating misleading half-truths, it does not automatically apply when a company remains silent.
US publicly traded companies are required to disclose various information under federal regulations enforced by the Securities and Exchange Commission.
Moab sued Macquarie in 2018, accusing the company of hiding the fact that the subsidiary’s revenues depended on cargo ship fuel storage demand, which international regulators had sought to eliminate by 2020. Both companies are based in New York.
According to the suit, Macquarie violated an SEC rule requiring companies to disclose known trends and uncertainties that could materially affect their financial condition.
The Supreme Court ruled that a violation of a rule does not itself constitute a misleading omission under the anti-fraud law, which prohibits companies from omitting facts in a way that makes a statement misleading.
The court rejected Moab’s argument that such a ruling would grant companies immunity for violating disclosure laws, saying the SEC could take enforcement action.
Macquarie argued that the decision allowing the claim to proceed was inconsistent with another decision blocking a similar claim. Business groups said fear of such lawsuits has led to inflated corporate disclosures.