Court partially reinstates advisor’s securities fraud claims against Macquarie Infrastructure

The United States Court of Appeals for the Second Circuit has partially reinstated a securities fraud lawsuit brought by Michael Rothenberg’s NY-based Moab Partners, L.P. against Macquarie Infrastructure Corporation (MIC) and several of its executives. The case, which has seen multiple rounds of appeals, was remanded back to the district court for further proceedings after a ruling from the Supreme Court.

In the original SEC-backed complaint, Moab Partners alleged that Macquarie Infrastructure and its executives engaged in fraudulent activities by making misleading statements and omitting critical information regarding one of its subsidiaries, International-Matex Tank Terminals (IMTT). The allegations were primarily based on violations of Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934, along with related rules and provisions of the Securities Act of 1933. The issue at hand was whether US Securities laws allows investors (and regulators) to sue over the failure to disclose negative business trends. One of Moab’s bones of contention is that it claims the Macquarie subsidiary paid $500 million in management fees over three years to Macquarie, despite a falling share price and an EBITDA of $221 million.

The district court had previously dismissed Moab's claims, leading to an appeal to the Second Circuit. The appellate court initially sided with Moab, finding that the complaint adequately alleged material omissions and scienter, which are crucial elements in securities fraud claims. However, the case took a significant turn when the Supreme Court agreed to review the matter, specifically addressing whether “pure omissions” could be actionable under Rule 10b-5(b) of the Securities Exchange Act.

In its recent ruling, the Supreme Court clarified that pure omissions—failures to disclose material information in the absence of an otherwise misleading statement—are not actionable under Rule 10b-5(b). This decision required the Second Circuit to reassess its previous judgment.

On remand, the Second Circuit affirmed the dismissal of Moab’s claims based solely on pure omissions. However, the court vacated the district court’s dismissal of Moab’s claims related to so-called “half-truths”—statements that, while technically true, are misleading due to the omission of critical facts. The court also reinstated Moab’s claims under other provisions of the Securities Exchange Act and the Securities Act, which the Supreme Court’s ruling did not affect.

The case now returns to the district court for further proceedings on the surviving claims, which include allegations that Macquarie Infrastructure misled investors by failing to disclose significant issues at IMTT, potentially impacting the company’s financial performance.

This ruling represents an important development in securities litigation, particularly regarding the interpretation and scope of Rule 10b-5. The outcome of the remanded proceedings could have substantial implications for both the parties involved and future securities fraud cases.