On March 24, 2015, the United States Supreme Court issued a new opinion that provides guidance on how courts are to interpret issuer liability under Section 11 of the Securities Act of 1933. Section 11 gives purchasers of securities a right of action against an issuer when a registration statement “contain[s] an untrue statement of material fact or omit[s] to state a material fact required to be stated therein or necessary to make the statement . . . not misleading[.]” 15 U.S.C. § 77k(a). Neither intent to defraud nor reliance are required elements for liability under Section 11.
In Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, the Court considered whether and under what circumstances a statement of opinion gives grounds for a purchaser of securities to sue for damages under 15 U.S.C. § 77k(a). Omnicare had expressed its view of its legal compliance in two sentences in its registration statement:
- “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.”
- “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.” (Slip Op. at 3.)
As Justice Kagan summarized the statements, Omnicare essentially stated that it believed it was obeying the law. Omnicare, however, was later found not to be in compliance with federal anti-kickback laws. The Respondents, pension funds that had purchased Omnicare stock in the initial public offering, brought suit against Omnicare arguing that its statements on legal compliance were “materially false” and that Omnicare should be liable under Section 11.
The Sixth Circuit had issued a ruling that might have led to a flood of new litigation in this area. The Sixth Circuit held that a statement of opinion could lead to liability under Section 11 whether or not anyone at the issuer believed the opinion was false at the time it was expressed. While the Supreme Court’s opinion does not eliminate all liability for opinion statements, it sharply curtails the liability that the Sixth Circuit would have permitted.
The Court, with Justice Kagan writing for a majority of seven justices, explained that a statement of opinion is not necessarily an “untrue statement of material fact.” (Slip Op. at 5.) Whereas a statement of fact “expresses a certainty about a thing,” a statement of opinion does not. (Slip Op. at 6.) The Court noted that Congress adopted the distinction by exposing issuers to liability for untrue statements of fact, not untrue opinions. Id. The Court recognized that a statement of opinion does acknowledge one explicit fact: “that the speaker actually holds the stated belief.” (Slip Op. at 7.) But assuming that the speaker holds the belief, the Court concluded that “a sincere statement of pure opinion is not an ‘untrue statement of material fact,’ regardless whether an investor can ultimately prove the belief wrong.” (Slip Op. at 9.)
The Court then moved on to define the contours under which a statement of opinion could be misleading by omission. First, the Court noted that whether a statement is misleading depends on the “perspective of a reasonable investor.” (Slip Op. at 10.) The Court posited that a reasonable investor might “understand an opinion statement to convey facts about how the speaker has formed the opinion.” (Slip Op. at 11.) Thus, the Court concluded that if an issuer were to omit material facts relevant to an opinion which “conflict with what a reasonable investor would take from the statement itself,” then those omissions could create liability. (Slip Op. at 12.) According to the Court, the analysis will “always depend on context.” (Slip Op. at 14.) As the Court summarized, under Section 11 a purchaser “must 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, the Court noted, “is no small task for an investor.”1 (Slip Op. at 18.)
The Omnicare opinion thus gives guidance on what issuers may say in registration statements, and it sets out clearer standards for liability under Section 11.