During its last term, the U.S. Supreme Court dealt with an issue relating to individual reliance in securities class actions in Halliburton Co. v. Erica P. John Fund Inc. This term, the question is narrower, but could be just as important. The case, Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, presents the Court with a question regarding the falsity of material facts in a registration statement for a public offering under Section 11 of the 1933 Act. It is well understood that there is no general scienter requirement under Section 11, in contrast to a claim proceeding under Rule 10b-5. Section 11 claims are more akin to a claim for unjust enrichment rather than the losses of investors incurred in reliance upon false statements (i.e., the company unfairly profited from a false statement rather than the investor lost because of a false statement).
Section 11 of the 1933 Act allows a civil claim when a registration statement for a securities offering “contain[s] an untrue statement of a material fact or omit[s] to state a material fact required to be stated therein or necessary to make the statements therein not misleading.” 15 U.S.C. § 77k(a). Here, the question is whether a company’s statement of opinion or belief in a registration statement constitutes an “untrue statement of material fact” when it turns out that the opinion or belief is false. Bear in mind that the Court has already held that an opinion can be a fact when it is the sort of opinion that can be presumed to have a reasonable basis in fact, such as when a board of directors tells its stockholders that the price offered in a merger is high or attractive or fair. That opinion, expressed by the board of directors, should reflect the board’s investigation into the facts underlying the opinion. As for this particular case, Omnicare made the following statement in its 2004 Form 10-K:
We believe our contract arrangements with other health care providers, our pharmaceutical suppliers and our pharmacy practices are in compliance with applicable federal and state laws. These laws may, however, be interpreted in the future in a manner inconsistent with our interpretation and application.
As it turns out, and as has come to light through other lawsuits and settlements with government agencies, Omnicare was participating in an illegal kickback scheme with Johnson & Johnson involving Risperdal. Although it has neither admitted nor denied guilt, Omnicare has already agreed to pay government agencies almost $200 million to settle those claims.
The question, then, hinges on whether the Plaintiffs in this lawsuit must allege subjective knowledge that the above statement was false, or whether it is sufficient to allege that the statement was objectively false. Assuming the allegations in the complaint are true, the objective falsity of the statement is settled. The Plaintiffs did not, however, allege that Omnicare was aware that the statement was false when made. The trial court granted Omnicare’s motion to dismiss, but the Sixth Circuit reversed, finding instead that scienter is not required under Section 11 of the 1933 Act and thus is not required for an opinion of the sort that should be based on fact.
During oral argument, held Nov. 3, 2014, Omnicare did not appear to find any support among the justices for its position that allegations of subjective knowledge of falsity are required. As one example of the uphill battle faced by Omnicare, and likely the most memorable passage of the day, Chief Justice John Roberts as to whether an issuer could avoid liability simply by adding “in our opinion” at the beginning of any statement of fact. Kannon Shanmugam, representing Omnicare, tried to strike a distinction between statements of opinion intended to express uncertainty versus those intended to express a judgment. Justice Breyer followed up:
But suppose it is actually disputed. . . . A museum expert on an archaeological mission says, “It is my opinion that those bones in that mountain are of a Diplodocus and not a Trisopterus.” Now wouldn’t you have thought that at least he’d looked into it, that at least he’d seen the bones? You see, it’s absolutely open – it is a matter of opinion – but there are some things implied. If you had learned later that he’d been in a bar all night and had never even seen or heard one word about what the bones were like, wouldn’t you think he has issued a misrepresentation?
Each Justice who joined in the questioning seemed to focus on the idea that an opinion that summarizes objective facts must have a reasonable basis in fact even if believed in all good faith. If the oral argument provides any indication, the Sixth Circuit is likely to be affirmed and the Plaintiffs will be allowed to proceed. It is unlikely that the Court will create an additional pleading requirement to address subjective knowledge of falsity under Section 11 where scienter is not currently required. If you need more information, contact Rebecca Gilliland, a lawyer in our Consumer Fraud Section, at 800-898-2034 or by email at Rebecca.Gilliland@beasleyallen.com.
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