On March 24, 2015, the U.S. Supreme Court unanimously decided the closely followed case of Omnicare v. Laborers District Council Construction Industry Pension Fundconcerning liability for false statements of opinion made in registration statements under Section 11 of the Securities Act of 1933 (Section 11).[1]

The Supreme Court’s majority opinion, authored by Justice Kagan with Justices Scalia and Thomas concurring in two separate opinions, is significant because it:

  • Holds that issuers are not liable for a statement of opinion in a registration statement so long as (i) the opinion in fact was believed by the issuer at the time it was disclosed, (ii) the issuer had a reasonable basis for the opinion at the time it was disclosed, and (iii) the registration statement did not omit other material facts that are inconsistent with the opinion;
  • Clarifies the facts and circumstances in which a statement of opinion may be actionable under Section 11, which prohibits a securities issuer from filing a registration statement that “contain[s] an untrue statement of a material fact” or “omit[s] to state a material fact … necessary to make the statement therein not misleading”;[2] and
  • Explains how a “reasonable investor” generally understands statements of opinion.

Nevertheless, as the concurring opinions point out, the majority opinion may broaden the applicability of Section 11 liability with respect to statements of opinion by requiring that issuers have an objectively reasonable basis for the opinion. Indeed, nearly a week after this decision, the Supreme Court vacated the U.S. Court of Appeals for the Second Circuit’s dismissal of Section 11 claims in Freidus v. ING Groep, N.V.[3] and remanded the case to the Second Circuit for further consideration in light of Omnicare.

Background

As we outlined in our 2014 Year-End Report, the U.S. Court of Appeals for the Sixth Circuit previously held that the pension fund plaintiffs in Omnicare properly stated a claim by alleging that Omnicare’s registration statement contained false statements of material fact regarding its compliance with the law, specifically:

  • “We believe our contract arrangements with other healthcare providers, our pharmaceutical suppliers and our pharmacy practices are in compliance with applicable federal and state laws”; and
  • “We believe that our contracts with pharmaceutical manufacturers are legally and economically valid arrangements that bring value to the healthcare system and the patients that we serve.”[4]

The pension funds claimed that these statements were materially false in light of lawsuits the federal government later brought against Omnicare for its receipt of payments from drug manufacturers in alleged violation of federal anti-kickback laws. The pension funds also claimed that Omnicare’s officers and directors did not have “reasonable grounds” for believing that these statements were truthful and complete.

While the Sixth Circuit recognized that these statements were opinions and not facts, it held that the pension funds had to allege only that Omnicare’s stated belief was “objectively false” to properly state a Section 11 claim. Because the Sixth Circuit found that the pension funds had fulfilled this pleading standard, it reversed the district court’s grant of Omnicare’s motion to dismiss.

The Majority Opinion

The Supreme Court held that the Sixth Circuit improperly conflated facts and opinions because “[a] fact is ‘a thing done or existing’ or ‘[a]n actual happening’” whereas “[a]n opinion is ‘a belief[,] a view,’ or a ‘sentiment which the mind forms of persons or things.’” Due to this conflation, the Supreme Court vacated the Sixth Circuit’s decision and remanded the case to the district court to determine whether a reasonable investor could have been misled about the factual basis of Omnicare’s statements of opinion based on an omission of a material fact.

When an Opinion Constitutes a Factual Misstatement

The majority opinion explained that Congress limited Section 11 liability to “untrue statements of fact.” As such, the majority opinion reasoned that liability for a misstatement of opinion may apply only if Omnicare did not actually believe either of the opinions stated in its registration statement. Because the pension funds did not contest the sincerity of Omnicare’s opinion, the majority opinion held that Omnicare’s opinion was not a misstatement.

When an Opinion Is Misleading Because It Omits a Discrete Factual Representation

The majority opinion further explained that “[i]f a registration statement omits material facts about the issuer’s inquiry into or knowledge concerning a statement of opinion, and if those facts conflict with what a reasonable investor would take from the statement itself, then §11’s omissions clause creates liability.”

Because neither the district court nor the Sixth Circuit applied this standard below, the majority opinion instructed the district court to review the pension funds’ complaint to determine:

  • First, whether they adequately alleged that Omnicare excluded from its registration statement that “an attorney had warned Omnicare that a particular contract ‘carrie[d] a heightened risk’ of legal exposure under anti-kickback laws” or a similar fact; and
  • Second, if so, whether the omitted fact is material and its omission was misleading to a reasonable investor.

In this respect, the majority opinion notably applied the heightened pleading standard ofAshcroft v. Iqbal[5] to Section 11 claims by requiring that an investor “identify particular (and material) facts going to the basis for the issuer’s opinion—facts about the inquiry the issuer did or did not conduct or the knowledge it did or did not have—whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.”

The Concurring Opinions

Justice Scalia’s opinion, in which he concurred in part and concurred in the judgment, questioned the majority opinion’s formulation of how reasonable investors understand opinions, stating: “The objective test proposed by the Court—inconsistent with the common law and common intuitions about statements of opinion—invites roundabout attacks upon expressions of opinion. Litigants seeking recompense for a corporation’s expression of belief that turned out, after the fact, to be incorrect can always charge that even though the belief rested upon an investigation the corporation thought adequate, the investigation was not ‘objectively adequate.’”

Similarly, Justice Thomas’s opinion, in which he concurred in the judgment, noted: “[T]he scope of this theory of liability is far from certain. And the highly fact-intensive nature of the omissions theory provides an additional reason not to address it at this time.”

Applying Omnicare Going Forward

The majority opinion provides valuable guidance on how issuers may avoid Section 11 liability when they include statements of opinion in registration statements. In particular, an issuer:

  • Must sincerely believe in the opinion at the time of its disclosure;
  • Should include appropriate language in its registration statement identifying the statement as one of opinion and not of fact; and
  • Should consider whether it is appropriate, given the facts and circumstances surrounding a statement of opinion and the balance of disclosures in its registration statement, to include facts related to the basis for the opinion.

Issuers should also appreciate the majority opinion’s guidance that “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.” The majority opinion elaborated on this guidance with the following pointers.

  • “In the context of the securities market, an investor, though recognizing that legal opinions can prove wrong in the end, still likely expects such an assertion to rest on some meaningful legal inquiry—rather than, say, on mere intuition, however sincere. Similarly, if the issuer made the statement in the face of its lawyers’ contrary advice, or with knowledge that the Federal Government was taking the opposite view, the investor again has cause to complain: he expects not just that the issuer believes the opinion (however irrationally), but that it fairly aligns with the information in the issuer’s possession at the time.”
  • “Reasonable investors understand that opinions sometimes rest on a weighing of competing facts; indeed, the presence of such facts is one reason why an issuer may frame a statement as an opinion, thus conveying uncertainty.”
  • “Investors do not, and are right not to, expect opinions contained in those statements to reflect baseless, off-the-cuff judgments, of the kind that an individual might communicate in daily life. At the same time, an investor reads each statement within such a document, whether of fact or of opinion, in light of all its surrounding text, including hedges, disclaimers, and apparently conflicting information. And the investor takes into account the customs and practices of the relevant industry."

A final takeaway from the Omnicare decision is that lower courts will now have to engage in a detailed analysis of pleadings on motions to dismiss arguments that omissions in opinions were material, which will likely lead to fewer dismissals.