The Supreme Court last week issued its opinion in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund1 in which the Court provided a comprehensive analysis of an issuer’s potential liability for its statements of opinion expressed in registration statements.  As expected, the Court reversed the Sixth Circuit’s holding that Section 11 of the Securities Act of 1933 (“Securities Act”) imposes liability for opinions, no matter how genuinely held, that turn out to be inaccurate.  However, the Court’s decision did not end the inquiry for Omnicare because the case was remanded for consideration as to whether Omnicare’s statements of opinion omitted facts that made the opinions misleading.

Background 

Omnicare provided pharmacy services to nursing home residents.  In its registration statement filed with the Securities and Exchange Commission, Omnicare expressed two opinions regarding its compliance with legal requirements: “We believe our contract arrangements … 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 ….” Id. at 3.  But Omnicare also mentioned several state enforcement actions, as well as expressions of “significant concern” by the Federal government about certain rebate and pricing practices in the pharmacy business that could be problematic for Omnicare.

After Omnicare was sued by the Federal government for violation of anti-kickback laws, the pension fund plaintiffs (who acquired stock pursuant to the registration statement that included these opinions) sued on the basis that Omnicare’s statements about legal compliance were materially false and omitted to state material facts necessary to make Omnicare’s statements not misleading, in violation of Section 11 of the Securities Act.

Misstatements of Material Fact 

The Court held that Section 11 pertains to misstatements of omissions of “facts” and that opinions — because they “express a view, not a certainty” — by their nature are not facts, except the fact of the speaker’s belief.  Id. at 7.  So long as the speaker of the opinion actually holds the stated belief, there can be no misstatement of a fact and no cause of action under Section 11.  Id. at 7.

However, the Court indicated that some statements of opinion could have embedded facts.  The Court distinguished between a CEO’s hypothetical statement that “I believe our TVs have the highest resolution available on the market” (which is a statement of the CEO’s own belief and would not subject the CEO’s company to Section 11 liability if it turned out that other TVs had better resolution), and a second hypothetical statement from the CEO that “I believe our TVs have the highest resolution available because we use patented technology to which our competitors do not have access” (which expresses both the CEO’s stated belief but also an underlying fact about the use of patented technology; and which could expose the CEO’s company to Section 11 liability for false statements if the CEO did not in fact hold that belief or if the supporting facts were not true).

In this case, although Omnicare’s opinions about its legal compliance turned out to be incorrect, Section 11’s prohibition against misstatements of material fact “does not allow investors to second-guess inherently subjective and uncertain assessments. In other words, the provision is not … an invitation to Monday morning quarterback an issuer’s opinions.”  Id. at 9.

Omissions of Material Fact

The Court then turned to the question of whether the issuer’s opinion could involve an omission of a material fact necessary to make the stated opinions not misleading.  With respect to omitted facts, the Court was more sympathetic to the plaintiffs:  “because 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.”  Id. at 11.

The Court again contrasted two statements from the hypothetical CEO:  “I believe we have 1.3 million TVs in our warehouse” versus “I believe we have enough supply on hand to meet demand.”  A reasonable person would think a more detailed investigation supported the first statement, and an issuer’s failure to disclose that in fact no investigation had taken place could be the basis for a Section 11 claim for omitting to state a material fact necessary to make the disclosed opinion not misleading.  Id. at 13, note 8.

The Court cited the Restatement of Contracts for the principle that the recipient of an opinion may justifiably conclude that the speaker of the opinion knows of no facts incompatible with the opinion and that the speaker knows of facts sufficient to justify the speaker holding the opinion.  Id. at 15, note 10.  The Court then specifically considered a “hypothetical” statement of opinion about legal compliance: “We believe our conduct is lawful.”  The Court held that if “the issuer makes that statement without having consulted a lawyer, it could be misleadingly incomplete.  In the context of the securities markets, 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.”  Id. at 12.  Similarly, opinions about complex accounting issues would be expected to be vetted by accountants, and opinions about a drug’s efficacy, would be expected to be vetted by competent medical professionals.

With respect to Omnicare’s stated opinion that “[w]e believe our contract arrangements … and our pharmacy practices are in compliance with applicable federal and state laws,” the Court rejected Omnicare’s argument that prefacing any statement with “we believe” or “we think” always insulates the statement that follows from liability.  Still, the Court held that the plaintiffs must allege specific facts that were omitted from Omnicare’s statements that made them misleading.  The Court observed that the plaintiffs had alleged at least one fact — that an attorney had warned Omnicare that a contract “'carrie[d] a heightened risk’ of legal exposure under the anti-kickback laws" — as an example of what the trial court should consider on remand, together with the all of the other hedges, disclaimers or qualifications in the registration statement on the subject. 

Key Observations

The Court’s opinion in Omnicare has many important things to say about the preparation of securities offering documents and the litigation of investor claims:

  • Omnicare makes it clear that merely couching a statement as an opinion does not insulate issuers from liability for false or misleading statements (Id. at 16).  Such statements still must be carefully vetted for the words used to express them, the degree of diligence supporting the opinion, and the significance of the opinion to a reasonable investor in light of its context (including other disclaimers urging caution or non-reliance).
  • The Court did not make reference to Item 10(b) of Regulation S-K (Commission Policy on Projections), but the Omnicare opinion is generally consistent with the Securities and Exchange Commission’s views on projections and opinions of future performance.  The many hypotheticals the Court used in Omnicare provide further guidance to issuers in formulating disclosure materials.
  • While Omnicare specifically addresses Section 11 claims for registration statements, the “misstatement or omission of material facts” rubric of Section 11 carries through a number of other anti-fraud provisions of the securities laws and the reasoning should be generally applicable in those situations, including the general anti-fraud provisions of the Securities Exchange Act of 1934, including Section 10(b) and SEC Rule 10b-5 that cover both public and private sales of securities, and Section 14(a) that covers proxy solicitations.
  • Omnicare sets a high pleading bar for plaintiffs asserting Section 11 claims.  Plaintiffs must allege either that the speaker did not actually hold or believe the opinion stated, or that the speaker had no basis to make the opinion.  The Court noted that an opinion might not be actionable even if there was some fact contrary to the stated opinion because the presence of conflicting facts is one reason why an issuer might frame a statement as an opinion, “thus conveying uncertainty.”  Id. at 13.