In Omnicare, Inc. v. The Laborers District Council Construction Industry Pension Fund, the U.S. Supreme Court clarified the extent to which Section 11 of the Securities Act of 1933 imposes liability on securities issuers for making incorrect statements of opinion in their registration statements. No. 13-435 (U.S. March 24, 2015).
In 2005, Omnicare, Inc., a large pharmacy-related services provider, filed a registration statement expressing the company’s opinion that certain of its business practices, including its contractual arrangements with pharmaceutical manufacturers, complied with state and federal laws. After the federal government challenged those arrangements as constituting illegal kickback payments, investors sued Omnicare under Section 11 in federal district court, alleging that the opinion statements were “untrue statement[s] … of material fact” and that Omnicare “omitted to state [material] facts necessary” to make those statements not misleading.
The district court dismissed the investors’ claims for failing to allege that Omnicare knew its practices were unlawful. On appeal, the Sixth Circuit reversed, holding that knowledge of falsity was not necessary to establish a Section 11 violation and, instead, that the plaintiffs could support their claim simply by showing that Omnicare’s opinions about legal compliance were objectively false.
The Supreme Court reversed once more, rejecting the Sixth Circuit’s view that an opinion constitutes an untrue statement of fact merely because it turns out to be erroneous. However, the Court did not immunize all statements of opinion in registration statements. Instead, it set forth two scenarios in which a statement of opinion might nonetheless give rise to liability under Section 11.
First, a statement of opinion is an “untrue statement” of fact if the speaker did not, in actuality, hold the stated belief. The Court reasoned that every statement of opinion carries an implied factual claim that the speaker subjectively believes the statement to be correct. Thus, if an investor can demonstrate that an issuer was not sincerely in agreement with an opinion expressed in its registration statement, the issuer may be liable under Section 11 provided that other requirements, such as materiality of the misstatement, are satisfied.
Second, a statement of opinion can give rise to liability under the “omission” prong of Section 11 if the opinion is not accompanied by a disclosure of any material facts necessary to ensure that the opinion is not misleading. The Court explained that a reasonable investor might interpret an opinion in a registration statement as conveying facts about the issuer’s basis for holding the opinion. For example, a reasonable investor might understand Omnicare’s statement that its payments to pharmaceutical manufacturers were lawful as implying that the company consulted a lawyer to investigate the legality of the payments. If Omnicare did not, in fact, consult a lawyer about the issue, omitting that fact could render the opinion misleading by omission.
In light of the Omnicare decision, issuers should feel more confident expressing sincerely-held opinions in registration statements without fear that they will be held strictly liable for expressing their honest, but mistaken, beliefs. Nonetheless, issuers should ensure that such opinions accurately reflect the company’s beliefs — and that they disclose any material facts necessary to ensure that the opinion is not misleading.