The United States Supreme Court in Omnicare, Inc., et al. v. Laborers District Council Construction Industry Pension Fund, et al., clarified standards for liability that a company issuing securities may face through statements it makes in its registration statement filed with the Securities and Exchange Commission (SEC). If the registration statement contains an “untrue statement of a material fact” or “omits to state a material fact … necessary to make the statements therein not misleading” a purchaser of the stock may sue for damages under Section 11 of The Securities Act of 1933.
In this case, Omnicare made two statements in its registration statement that were at issue: “We believe our contract arrangements with other healthcare providers, our pharmaceutical suppliers and our pharmacy practices are in compliance with applicable federal and state laws.” Additionally, Omnicare stated that “we 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.” Pension funds that purchased Omnicare stock in a public offering later sued Omnicare, alleging that the company’s two opinion statements about legal compliance gave rise to liability under Section 11. The pension fund cited lawsuits that the federal government filed against Omnicare, alleging that the receipt of payments from drug manufacturers violated anti-kickback laws. On that basis, the pension funds asserted that Omnicare made “materially false” representations about legal compliance. They also noted that the company “omitted to state material facts necessary” to make its representation not misleading.
The issue before the Supreme Court was whether the provisions of Section 11 pertained to statements of opinion. The Supreme Court held that a statement of opinion contained in the registration statement that turns out to be wrong “will not give rise to liability under § 11’s first clause because … a sincere statement of pure opinion is not an ‘untrue statement of material fact’ regardless whether an investor can ultimately prove the belief wrong.” However, this only solves part of the issuing company’s problem. The analysis then turns to whether Omnicare “omitted to state facts necessary” to make its opinion on legal compliance “not misleading.” The court noted that whether a statement is misleading depends on the perspective of a reasonable investor. Merely couching the statement in the form of an opinion—“we believe”—does not necessarily save an issuer from potential liability under Section 11’s omission clause. The Court noted that “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 omission clause creates liability.”
What does this decision mean for a company issuing securities? Being mindful of the potential for liability under Section 11, a company must be careful when drafting statements contained in its registration statement. A statement of opinion will not automatically act as a shield from liability. However, the Court did note that proving liability under the “omission” clause of Section 11 is an uphill battle for the investor—the plaintiff “must identify particular (and material) facts going to the basis for the issuer’s opinion and whose omission makes the statement at issue misleading to a reasonable person reading the statement fairly and in context.” Nonetheless, a company should take into consideration competing facts and guidance from attorneys or advisors that may run counter to the opinions expressed in the registration statement. In fact, a Massachusetts-based life sciences company was recently ordered to pay $17.9 million to the SEC in a lawsuit accusing the company of selling investors’ stock on the basis of misleading statements regarding the status of regulatory approval of its products. The lesson is clear: Tread carefully before making a statement of opinion to potential investors.