In one of the least talked about but most watched cases this term, the Supreme Court decided when an opinion can be grounds for a § 11 claim under the Securities Act of 1933. The case arose out of a registration statement filed by Omnicare in connection with a public offering of common stock. Among other things, Omnicare’s registration statement, roughly, said it believed its programs were in compliance with state and federal law.
The Plaintiffs, citing lawsuits filed later against the Defendants by the Federal Government, argued that the registration statements were untrue because the practices violated anti-kickback laws. The trial court granted the Defendants’ motion to dismiss because “statements regarding a company’s belief as to its legal compliance are considered ‘soft’ information” and are actionable only if those who made them “knew [they] were untrue at the time.”
The Sixth Circuit reversed, acknowledging the statements were opinion instead of fact, but finding that the Plaintiffs need only allege that the opinions were “objectively false”; not that the speaker disbelieved the opinion at the time it was expressed. Based on the case’s posture, most thought the Court would focus on whether an opinion can constitute a “material fact” under the Act, and whether the speaker’s belief in the truth or falsity of the opinion mattered, but the Court took the case further than that.
The Court began its opinion in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, drafted by Justice Elena Kagan, by answering the expected question. An opinion, though not itself a “fact,” can form the basis of a § 11 claim in limited circumstances:
• when the opinion contains untrue factual statements (such as: “I believe we are the best because we have a patent that nobody else has” when the company has no such patent)
• when the speaker does not subjectively believe the opinion expressed (the fact – the speaker’s belief in the opinion – is then the false statement).
Neither of those situations existed in the Omnicare case, however, so the Court chose to address the other possibility for liability under § 11 that was pleaded in the complaint, an “omitted [statement of] a material fact required to be stated therein or necessary to make the statement therein not misleading …” 15 U.S.C. §77k(a). The Court reasoned that such liability can attach to an opinion because “a reasonable investor may, depending on the circumstances, understand an opinion statement to convey facts about how the speaker has formed the opinion – or, otherwise put, about the speaker’s basis for holding that view.”
In sum, liability arises when the speaker knows of underlying facts that refute the stated opinion and does not reveal those facts, or when the speaker makes a statement that a reasonable investor would assume is supported by facts that justify the opinion but the speaker never investigated. To limit the applicability, though, the Court rightly reasoned that a Plaintiff cannot just say the opinion was wrong. Nor can the Plaintiff just complain that “the issuer failed to reveal its basis.”
Section 11 requires a Plaintiff to “identify particular (and material) facts going to the basis for the issuer’s opinion” whose omission made the registration statement misleading to a reasonable investor. Based on the Court’s analysis, Omnicare was remanded because neither lower court considered the Plaintiffs’ omission argument with the correct legal standard in mind. On remand, the Court reminded Plaintiffs that they must point out specific facts that were omitted from Omnicare’s registration statement.
The case is a double-edged sword for investors. It limited liability for opinions in registration statements, but, essentially, opened a new area of liability for omissions. That opening is narrow, and certainly requires a higher pleading standard because of the need to point to specific omitted facts in the initial pleadings (this may be difficult prior to discovery), but it is nonetheless a route to § 11 liability that had not previously been recognized. If you need more information on this subject, contact Rebecca Gilliland, a lawyer in our firm’s Consumer Fraud and Commercial Litigation Section, at 800-898-2034 or by email at Rebecca.Gilliland@beasleyallen.com.
Sources: Opinion and http://www.scotusblog.com/2015/03/an-opinion-on-opinions/
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