Yesterday, the United States Supreme Court issued a unanimous decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund.
Yesterday, the United States Supreme Court unanimously decided that public companies and their officers cannot be held liable under Section 11 of the Securities Act of 1933 for false statements of opinion in SEC registration statements unless the company and its officers did not genuinely hold the opinions, supported them with false assertions of fact or failed to disclose facts that would have demonstrated that the opinions had no basis in fact.
In Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, the Court resolved a sharp split among federal circuit courts of appeal. In the Second and Ninth Circuits, a statement of opinion in an SEC filing was actionable under Section 11 only if the company or its officers knew the statement was made with knowledge of its falsity.1 In Omnicare, however, the Sixth Circuit held that an opinion statement was actionable where the statement was “objectively false” when it was made, whether or not the speaker believed it to be true.2 The Supreme Court rejected both approaches, crafting a new standard, which effectively struck a middle ground between the two tests announced by the circuit courts. Under the standard announced by the Supreme Court, companies, their officers and directors, and the companies’ underwriters can be held liable for inaccurate statements of opinion in registration statements filed with the SEC where:
- the speaker knew the opinion expressed was false when the statement was made;
- the opinion itself was genuinely held by the speaker, but was supported by false assertions of fact, whether or not the speaker knew them to be false; and/or
- in stating an opinion, the speaker omitted material facts that would have shown that the speaker lacked a basis for forming the opinion.
While the standard established by the Supreme Court could be viewed as more favorable to plaintiffs than the standard previously in place in the Second and Ninth Circuits, where the majority of securities class actions are brought, it is not likely to open the door to a myriad of opinion-based Section 11 claims. As the Supreme Court noted, pleading allegations sufficient to withstand dismissal under the new standard “is no small task for an investor.”
Omnicare concerned opinion statements made by Omnicare, Inc. (“Omnicare”), the largest provider of pharmaceutical drugs for residents of long-term care facilities in North America, in a registration statement filed in connection with a public offering of its common stock. Specifically, Omnicare stated in the registration statement that “[w]e 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 “[w]e 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.” Plaintiffs alleged that these statements violated Section 11 because, among other things, the federal government later brought lawsuits against Omnicare for alleged violations of anti-kickback laws, and one of Omnicare’s own attorneys had warned that a particular contract carried a heightened risk of liability under anti-kickback laws.
The District Court dismissed the complaint, holding that a statement of opinion was actionable only when the person making the statement knew it to be false at the time it was made. The Sixth Circuit Court of Appeals reversed, finding an opinion statement to be actionable under Section 11 whenever the statement was “objectively false,” whether or not the person making the statement believed it when it was made. Omnicare appealed.
The Supreme Court decision
The Supreme Court reversed. It found that the challenged statements did not contain an untrue assertion of material fact but that Ominicare’s failure to disclose the basis of its opinions might have been a material omission. The Court remanded the case for further proceedings in which the District Court could consider whether Omnicare’s failure to disclose the basis of its opinions was actionable.
Noting that a defendant may be liable under Section 11 because the registration statement either (1) “contained an untrue statement of a material fact” or (2) “omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading,” the Supreme Court held that the standard governing liability for statements of opinion is different for untrue affirmative statements, as opposed to omission.
With respect to affirmative statements, the Supreme Court accepted the core of Omnicare’s argument – finding that there is a difference understood by reasonable investors between:
- a statement of fact (“X is true”) and
- a statement of opinion (“we believe X is true”).
This difference, the Court held, means that a “statement of opinion is not misleading just because external facts show the opinion to be incorrect.” As a result, in a claim based on an affirmative statement, a statement of opinion is actionable only when it is made with the knowledge that it is false, or accompanied by a statement of fact the speaker knows to be false.
With respect to omission, the Supreme Court considered whether an “omission of a fact can make a statement of opinion . . . even if literally accurate, misleading to an ordinary investor” and therefore actionable. The Court explained that Omnicare’s apparent position – that including the words “we believe,” when the belief is sincerely held, immunizes the statement from liability – went too far. Rather, “Section 11’s omissions clause” requires “considering the foundation [a reasonable person] would expect an issuer to have before making [an opinion] statement.” However, the Supreme Court stressed, an “investor cannot state a claim by alleging only that an opinion was wrong; the complaint must as well call into question the issuer’s basis for offering the opinion.” To do so, the Court continued, the investor “must 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.” This, the Court observed, “is no small task.”
By requiring plaintiffs to identify particular and material facts about the issuer’s inquiry and/or knowledge when it makes opinion statements, Omnicare sets a high bar for winning Section 11 claims based on statements of opinion. Only time will tell how many of these claims will ultimately succeed or even survive the pleading stage, given the height of the bar imposed by the Supreme Court for such claims.
Meanwhile, issuers, underwriters and other draftspersons of registration statements should continue to be mindful of the critical distinction courts make between statements of fact (“we comply with the law”) and statements of opinion or belief (“we believe we comply with the law”). Statements of opinion may be more protective from the perspective of liability, but they are not a free pass. A company should have a basis for making an opinion statement that comports with what a reasonable investor would expect. Stating an opinion (“we believe we comply with the law”) while being aware of relevant facts which are contrary to it (“six senior internal lawyers believe we do not comply with the law”) may be contrary to the expectations of a reasonable investor. Similarly, making a very specific opinion statement (“we believe we sell a broader variety of product than any other company in the United States”) without having conducted any inquiry into the statement’s validity (in this case, not investigating competitors’ product variety) would not necessarily be what a reasonable investor would expect. At the end of the day, we would not expect practitioners to significantly change their use of “we believe” statements in registration statements, but there may be a heightened awareness and/or review of these statements in light of the Omnicare analysis.