If Monday’s oral argument in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund is a reliable indicator, it seems likely that the Court will adopt the “reasonable basis” standard advocated by the Solicitor General’s Office and the SEC for claims concerning statements of opinion in registration statements under Section 11 of the Securities Act of 1933. Most of the justices’ questions and comments focused on the idea that when an issuer states an opinion in a registration statement, it implies that it has a reasonable basis for the opinion. And therefore, the argument goes, a shareholder plaintiff who purchased stock from the issuer should be able to maintain a Section 11 claim by pleading that the issuer either did not believe the opinion at the time it was expressed or lacked a reasonable basis for the opinion.
Justice Breyer summed up the argument colorfully in what is probably the first Supreme Court hypothetical to reference the diplodocus (see below):
Suppose … a museum expert on an archaeological mission says, it is my opinion that those bones in that mountain are of a diplodocus and not a trisopterus. Now wouldn’t you have thought that at least he’d looked into it, that at least he’d seen the bones? You see, it’s absolutely open – it is a matter of opinion – but there are some things implied. If you had learned later that he’d been in a bar all night and had never even seen or heard one word about what the bones were like, wouldn’t you think he has issued a misrepresentation?
In the proceedings below, the U.S. Court of Appeals for the Sixth Circuit held that in order to state a claim under Section 11 concerning a statement of opinion, it was sufficient for the plaintiffs to plead that the statement was objectively false; the defendants’ state of mind was irrelevant, the court held, because Section 11 is a strict liability statute. But other federal courts have taken a different view, holding that “when a plaintiff asserts a claim under section 11 or 12 based upon a belief or opinion alleged to have been communicated by a defendant, liability lies only to the extent that the statement was both objectively false and disbelieved by the defendant at the time it was expressed,” i.e., that it was subjectively false. Fait v. Regions Financial Corp., 655 F.3d 105, 110 (2d Cir. 2011).
In its amicus brief and again at oral argument, the Solicitor General’s Office took a middle position. On the one hand, the government argued that, contrary to the Sixth Circuit’s view, it is not enough merely to allege that a statement of opinion turned out to be objectively false; but on the other hand, the government contended that stock issuers should be liable under Section 11 not only for statements of opinion that are not genuinely held, but also for statements of opinion that lack a reasonable basis. Like Justice Breyer, a number of the justices posed questions or made comments during oral argument that seemed to support this middle position, and even counsel for the plaintiff-respondents endorsed it.
But what constitutes a reasonable basis for an opinion? How much investigation must the issuer undertake? And what if the issuer possesses conflicting information? Justice Alito in particular posed some of these questions. The potential danger of the reasonable basis standard for a Section 11 claim, as Omnicare’s counsel warned, is that it leaves issuers open to second guessing by shareholders, judges, and juries on these questions.