In a highly anticipated decision issued yesterday, the United States Supreme Court confirmed that an issuer’s statements of honestly held opinion or belief cannot give rise to liability under section 11 of the Securities Act of 1933 unless the registration statement containing those statements omits material conflicting facts about the issuer’s inquiry into, or knowledge about, the subject of its opinion. 

The decision, Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, No. 13-435, articulates a demanding burden for plaintiffs who challenge statements of opinion in securities offerings even under the “strict liability” regime established in the Securities Act.  Concurring opinions by Justices Antonin Scalia and Clarence Thomas expressed concern that the Court’s “reasonable investor” standard for determining whether an omission is material will lead to unnecessary, fact-intensive disputes.

Section 11 of the Securities Act provides a right of action to investors in a securities offering if the registration statement “contained an untrue statement of a material fact or omitted to state a material fact . . . necessary to make the statements therein not misleading . . . .”  15 U.S.C. § 77k(a).  Unlike claims for securities fraud, plaintiffs asserting section 11 claims “need not prove . . . that the defendant acted with any intent to deceive or defraud,” nor must they establish reliance or loss causation.  This lower burden of pleading and proof has led to an increase in the number of securities class actions asserting section 11 claims in recent years.

The appellate courts were divided as to the standard applicable to section 11 claims based on allegedly mistaken expressions of opinion contained in a registration statement.  The issue has arisen with some frequency given the conclusion reached by many courts that certain accounting estimates contained in an issuer’s financial statements are opinions for these purposes.  Several circuits concluded that a statement of opinion is not actionable under section 11 unless the plaintiffs plausibly allege both that the opinion was mistaken and that the speaker did not honestly hold the opinion when the statement was made (sometimes referred to as “subjective falsity”).  In the decision under review in Omnicare, the Sixth Circuit disagreed with these other courts, finding that requiring evidence of a statement’s subjective falsity inappropriately read a state-of-mind requirement into section 11.

The Omnicare decision resolved this circuit split, reasoning that section 11 “is not . . . an invitation to Monday morning quarterback an issuer’s opinions.”  In its first holding, therefore, the Supreme Court, through Justice Elena Kagan, concluded that Omnicare’s statements that “we believe our contracts [comply with applicable laws]” were not actionable as “untrue statement[s] of material fact” because there was no allegation that Omnicare did not honestly believe the statements at the time.  A “pure statement of opinion,” such as those at issue, would only violate the affirmative misstatement clause in section 11 if the speaker did not actually believe it.  Only in that circumstance would the statement contain an “untrue statement of . . . fact,” that is, the “fact” of the speaker’s genuine belief.  This part of the opinion therefore rejected the Sixth Circuit’s holding that section 11 allowed claims based on honestly held, but mistaken, statements of opinion.

In the Supreme Court’s view, however, this conclusion did not end the analysis because a separate clause in section 11 allows for claims when a registration statement “omitted to state a material fact . . . necessary to make the statements therein not misleading . . . .”  A statement that “we believe our conduct is lawful” could be misleadingly incomplete under the omissions clause in section 11 if it was made without consulting a lawyer, the Court reasoned, because the statement suggests to the reasonable investor that some inquiry was made before the statement was included in a formal securities filing.  A similar statement “in the face of [a] lawyer’s contrary advice, or with knowledge that the Federal Government was taking the opposite view,” also could be problematic. 

Accordingly, the Court concluded, “if 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.”  The Court explained, however, that analysis of claims under the material omissions clause in section 11 “always depends on context,” which requires that a challenged statement be read not in isolation but in light of all of the disclosures and qualifying statements provided in the registration statement as a whole.  The Court remanded for further proceedings to determine whether the investor plaintiffs had plausibly alleged a section 11 claim under this standard.

In their concurring opinions, Justices Scalia and Thomas agreed that the challenged opinions were not actionable as alleged misstatements of fact but took issue with this second part of the Court’s opinion analyzing the omissions clause in section 11.  Among other points, the concurring opinions expressed concern that the majority’s “reasonable investor” standard would “invite[] roundabout attacks upon expressions of opinion” and that “the scope of this theory of liability is far from certain.”  Justice Thomas also believed that the omissions theory had not been presented and should not have been reached. 

The majority opinion responded by asserting that an investor challenging a statement of opinion on an omissions theory would not be permitted to rely on conclusory assertions but instead would need to “identify particular (and material) facts going to the basis for the issuer’s opinion . . . whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.”  This would be “no small task for an investor,” the Court concluded, even under the more lenient pleading standard applicable to non-fraud claims in federal courts.

We expect the second half of the Omnicare opinion to be the focus of future disputes in section 11 cases challenging statements of opinion.  The Court’s emphasis on context and the need to evaluate challenged opinions not in isolation but in light of the disclosures provided in the registration statement as a whole, should provide issuers and underwriters comfort that Omnicare will be read to limit, rather than to expand, the scope of potential liability for statements of opinion or belief.