Securities Exchange Act Claim
Data from a National Economic Research Associates, Inc. study, Recent Trends in Securities Class Action Litigation: 2014 Full-Year Review, demonstrates that filings alleging securities fraud increased by 14 percent after the Supreme Court decided Halliburton v. Erica P. John Fund (Halliburton II). In Halliburton II, the Supreme Court decided to preserve the presumption of reliance in securities fraud cases when the affected shares were traded in an efficient market. Shareholder class actions alleging violations of Section 10(b) of the 1934 Securities Exchange Act were particularly slow while Halliburton II was pending, presumably because potential litigants and attorneys were waiting to see how the Court’s ruling would impact their claims. While the 2014 data also shows filings post-Halliburton II also remained somewhat higher than historical averages, this likely is a short-term increase resulting from filings that were delayed while Halliburton II was pending.
Securities Act Claims
On March 24, 2015, the Supreme Court decided another significant securities litigation matter, Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund. Instead of focusing on liability for securities fraud under the 1934 Securities Exchange Act, Omnicare involved alleged violations of Section 11 of the 1933 Securities Act. Generally, claims under Section 11 are based on strict liability, meaning liability attaches for any false statement of fact in a registration statement regardless of the speaker’s intent. In Omnicare, the Supreme Court tackled whether statements of opinion should be treated differently from statements of fact. Specifically, is a claim sufficient under Section 11 anytime the opinion turns out to be wrong or must the plaintiff also allege the speaker did not sincerely believe the opinion to be accurate?
At issue in Omnicare were statements of opinion by the defendant that it believed certain of its practices were in compliance with the law. The plaintiff claimed that the statements of opinion turned out to be false, based on state and federal agencies subsequently alleging the defendant’s practices violated anti-kickback laws. The Sixth Circuit ruled the plaintiff’s claims could proceed, holding an opinion can form the basis for a Section 11 claim when the opinion turns out to be wrong even if the speaker believed it to be accurate at the time it was made. The Sixth Circuit’s decision was in conflict with other federal appellate courts that have addressed this issue. Those courts ruled a Section 11 claim is adequate only if the speaker subjectively did not believe the opinion to be true.
The Supreme Court reversed the Sixth Circuit’s decision, siding with the majority of the circuits. The Court held a statement of fact (such as “the light was green”) expresses certainty about an issue, whereas a statement of opinion (such as “I believe the light was green”) does not. What a statement of opinion does assert, however, is that the speaker believes the opinion to be true. Thus, the Court held, if the speaker did not in fact sincerely believe the opinion, then that could form the basis for a Section 11 claim.
This portion of the Court’s opinion is not likely to have a significant impact on securities litigation trends. The Sixth Circuit was the only jurisdiction where subjective falsity was not required to create liability under Section 11, and historically, the Sixth Circuit has not seen a large number of Section 11 filings. See Recent Trends, page 8. Instead, the Court adopted the view of the Second, Third and Ninth Circuits, where most Section 11 claims are filed. Thus, in most instances, this portion of the Court’s opinion will not change the existing standard and should not impact the trend of securities filings.
Caveat on Omissions
However, a longer-term impact on filing trends likely will be felt from the second portion of the Court’s opinion. After ruling on this subjective falsity standard, the Court also ruled that the omission of a material fact can create liability under Section 11 if that omission makes an opinion misleading, even if the speaker believed the opinion when it was made. For example, the Court said a defendant’s statement that it believes its conduct is lawful would be misleading if the defendant never conducted a meaningful inquiry to support that opinion, or if the defendant knew its own lawyer or the federal government took the opposite view. The Court reasoned that investors are entitled to expect that opinions contained in a registration statement “fairly align with the information in the issuer’s possession at the time.” Thus, if a registration statement fails to provide material facts about the defendant’s investigation into or knowledge concerning the expressed opinion, and if those facts “conflict with what a reasonable investor would take away from the statement itself,” then the opinion creates liability under Section 11.
While it might appear that this caveat to the Court’s ruling could open the door to considerable litigation, the Court attempted to limit the reach of its decision. The Court held that a plaintiff must do more than make conclusory allegations in support of an omission claim. The Court held that a plaintiff must identify particular material facts that relate either to the company’s inquiry leading to the opinion or the company’s knowledge about the subject that cause the opinion statement of the company to be misleading to a reasonable investor. And the Court noted that an opinion statement is not misleading merely because a company is aware of but fails to disclose some fact that is contrary to its opinion.
The likely long-term impact of the Court’s ruling is that it will increase litigation over whether a company’s omission of certain information caused an opinion to be misleading. Because the plaintiff must be able to point to some particular fact that it claims was not disclosed, the Court’s ruling is unlikely to unleash a flood of new Section 11 claims. But following the Court’s decision, if a plaintiff can point to some particular fact known by the company that cuts the other way from the company’s opinion, the plaintiff’s claim likely will survive a motion to dismiss. Once the claim survives a motion to dismiss and gets into expensive discovery, the plaintiff’s chance of obtaining a valuable settlement increases. This scenario puts more pressure on companies to ensure disclosures surrounding any opinions are thorough.
In fact, the impact of the Court’s ruling is already being felt in pending Section 11 cases. Just recently, the Supreme Court remanded another case to the Second Circuit for reconsideration in light of Omnicare. In Freidus v. ING Groep NV, the Second Circuit had stricken a claim by one of the plaintiffs that the company’s stated opinion was misleading because it failed to disclose key information relevant to that opinion. The Second Circuit had held the plaintiff’s claim was inadequate because the plaintiff failed to allege the company did not believe the opinion at the time it was made.
Based on Omnicare, the Second Circuit now must consider whether the alleged omitted information included material facts that conflict with what a reasonable investor would take away from the opinion. If the Second Circuit concludes that the omitted information satisfies this standard, then the plaintiff’s claim, which prior to Omnicare had been dismissed, will be allowed to continue. What the Second Circuit does with this case is just the beginning, as the federal appellate and district courts begin to determine when an undisclosed fact that is contrary to an expressed opinion is sufficient to create liability.