The standards for Section 11 liability for statements of opinion in registration statements is the subject of a split between the federal circuit courts. The Tenth Circuit joined the split in the recently issued opinion, MHC Mutual Conversion Fund v. Sandler O’Neill & Partners, et al. The Supreme Court is scheduled to resolve this split next term in the Omnicare1 case, which is currently being briefed before the high court. The Tenth Circuit joins the Second and Ninth circuits in holding that a defendant cannot be liable for a false opinion, unless he or she knew it was false at the time it was made. This holding contrasts with the Sixth Circuit’s view that a defendant can be liable under Section 11 for a materially false opinion even if the opinion was honestly held and the speaker believed it to be true when it was made.
Section 11 Liability for False Opinions and the Circuit Split
Section 11 of the Securities Act of 1933 creates a cause of action for investors when a public statement contains an untrue or misleading statement of material fact. Plaintiffs generally need not show knowledge of falsity, fraudulent intent, reliance, or loss causation for liability to attach. But courts have grappled with what a plaintiff must plead and prove in order to show a statement of opinion is untrue.
Over the past few years, a circuit split has developed on whether objective falsity - that the opinion was objectively untrue when made - is enough to establish liability. This is the standard adopted by the Sixth Circuit in Omnicare. Plaintiffs in Omnicare alleged that the company’s legal compliance statements led investors to believe it was in compliance with the law, which turned out not to be true. The court had previously found that legal compliance statements are “soft information,” which include matters of opinion and prediction. The Sixth Circuit held that under Section 11, “[n]o matter what the framing, once a false statement has been made, a defendant’s knowledge is not relevant to a strict liability claim.” A plaintiff need not plead knowledge of falsity. Thus, even though the plaintiffs failed to plead that the defendants knew the legal compliance statements were false, because the statements included materially false information at the time, that was sufficient to survive a motion to dismiss.
The Tenth Circuit in the MHC Mutual decision firmly rejected this approach as inconsistent with common law, securities law authorities, and experience suggesting that a failure of an opinion about future events to materialize, without more, does not establish a false or misleading statement of fact at the time made. Instead, the Tenth Circuit held that both objective and subjective falsity is required - the standard applied by the Second and Ninth circuits. The Tenth Circuit stated that “more is required” than simply an opinion about the future that failed to prove true. A plaintiff must plead both that the opinion was false and that the speaker knew the opinion to be false when made or did not honestly hold the opinion. The court also noted that this is the standard adopted by the Supreme Court in Virginia Bankshares Inc. v. Sandberg2 for section 14 liability relating to proxy disclosures. Thus, in MHC Mutual, the Tenth Circuit affirmed the lower court’s dismissal of a securities class action alleging United Western Bancorp and certain of its officers and directors lied in company announcements about the state of the bank’s mortgage-backed securities investments in the immediate aftermath of the 2008 financial crisis. While the plaintiffs established that the defendants’ opinions about market conditions ultimately proved to be wrong, without more, it was not enough to trigger liability.
Forthcoming Supreme Court Resolution
The Supreme Court is set to resolve this issue in Omnicare during its next term, starting in October. It is likely the Court will take into account the carefully reasoned opinion of the Tenth Circuit in MHC Mutual, requiring more to be pled and proven when a carefully expressed and earnestly held opinion about the future is later proven untrue. It would also not be surprising if the Court relies on the reasoning and standards it previously set forth in Virginia Bankshares - a case relied on in the opinions of the Tenth, Second, and Ninth Circuits. Section 11 has long been thought of as a “strict liability” statute. Thus, defendants have much to gain if the Supreme Court accepts the objective and subjective falsity standard as adopted by the Tenth, Second, and Ninth Circuits. Such a ruling would allow public company officers and directors to continue to express sincere opinions without fear of liability for opinions that ultimately don’t come to fruition.