The U.S. Supreme Court recently granted certiorari to review the Sixth Circuit’s decision in Omnicare, Inc. v. Laborers District Council, a case brought under section 11 of the Securities Act. In granting the petition on March 3, the Court agreed to review the following question:
For purposes of a Section 11 claim, may a plaintiff plead that a statement of opinion was “untrue” merely by alleging that the opinion itself was objectively wrong, as the Sixth Circuit has concluded, or must the plaintiff also allege that the statement was subjectively false—requiring allegations that the speaker’s actual opinion was different from the one expressed—as the Second, Third, and Ninth Circuits have held?
Omnicare gives the Supreme Court a vehicle to decide whether its 1991 holding in Virginia Bankshares, Inc. v. Sandbergapplies to section 11 of the Securities Act. In Virginia Bankshares, the Court held that a statement of opinion must be both objectively false (i.e., wrong) and subjectively false (i.e., express an opinion that the speaker does not actually hold) to violate section 14(a) of the Exchange Act. The Sixth Circuit has taken the view that forcing a section 11 plaintiff to plead and prove subjective falsity impermissibly imports a scienter requirement into section 11. Other courts, notably the Second Circuit in Fait v. Regions Financial Corporation, have held that requiring the plaintiff to show subjective falsity of an opinion statement has nothing to do with scienter, but instead satisfies an essential element of a section 11 claim because a statement of opinion cannot be a “false statement” unless the speaker actually does not hold that opinion.
The allegations that the Sixth Circuit upheld in Omnicare concern classic “soft” information. Specifically, the plaintiffs claim that the company engaged in a variety of illegal activities, including kickback arrangements with pharmaceutical manufacturers and submission of false claims to Medicare and Medicaid, but nevertheless filed a registration statement claiming “that [Omnicare's] therapeutic interchanges were meant to provide [patients with] . . . more efficacious and/or safer drugs than those presently being prescribed” and that its contracts with drug companies were “legally and economically valid arrangements that bring value to the healthcare system and patients” that the company served. The plaintiffs allege that these and other statements indicating compliance with the law were materially false and misleading in violation of section 11.
The disclosures at issue in Omnicare are textual statements. Thus, it is unlikely that the Supreme Court will reach the Second Circuit’s true innovation in Fait—the holding that certain kinds of financial statement numbers, such as goodwill (and any other account that has been reviewed for impairment under applicable accounting guidance), are “numerical opinions” that can only be found to be false statements if the plaintiff can show not only that the “numerical opinion” was materially wrong but also that the speaker subjectively disbelieved it at the time the financial statements were issued. Nevertheless, by settling definitively whether a “subjective falsity” test in section 11 “opinion” cases is an appropriate extension of Virginia Bankshares, Supreme Court review in Omnicare should at least clear out some analytical underbrush and, in so doing, provide clarity to companies on the potential scope of their liability for opinion statements in their public filings.
For additional observations on the Fait holding, read the Securities Regulation & Law Report article by Linda L. Griggs, John J. Huber, and Christian J. Mixter, The SEC’s Renewed Interest in Accounting Cases — A New Beginning or a Victim of Fait?.