Why it matters: In an important decision involving subjective statements of opinion under the “omissions” clause of Section 11 of the Securities Act of 1933, the Supreme Court made clear that even an opinion can form the basis of a charge of making a “false and misleading” statement. Will this open the floodgates to alleged false opinion cases being brought under other securities fraud statutes or even under the certification provisions of the False Claims Act?

Detailed discussion: On March 24, 2015, the U.S. Supreme Court issued its decision in the long-running case of Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund (Omnicare). At issue was whether Section 11 of the ’33 Act applies to statements of opinion contained in a registration statement. In a two-pronged analysis, the Court found that a sincerely held statement of opinion will not create liability as an “untrue statement of material fact” under the first part of Section 11, even if the opinion later proves to be wrong. However, the statement of opinion can create liability under the second part of Section 11 if it omits facts that, if included, would demonstrate to a reasonable investor that the issuer lacked the basis for making that statement of opinion. The Court vacated the Sixth Circuit opinion in the case, determining that court “applied the wrong standard” in its deliberations, and remanded the case so that the proper standard, as articulated by the Court, could be applied. This newly articulated standard could affect not only SEC enforcement cases involving allegedly false statements of opinion by issuers, but also, by analogy, cases involving false certification of legal compliance under the False Claims Act.

First, a brief statement of the underlying facts: Omnicare, a large North American pharmaceutical care services provider, filed a registration statement in December 2005 in connection with a $12.8 million public offering of its common stock. The registration statement contained two statements, detailed below, expressing Omnicare’s opinion that it was operating in compliance with federal and state laws.

In 2006, after the DOJ charged Omnicare in an FCA illegal kickback scheme (settled in 2009), certain pension funds (Funds) that had purchased the company’s stock filed suit against Omnicare claiming, among other things, that Omnicare’s statements of legal compliance were false and misleading in violation of Section 11 of the ’33 Act. The case never got beyond the pleading stage. In 2007, the district court granted Omnicare’s motion to dismiss due to the Funds’ failure to plead a causal connection between Omnicare’s alleged misconduct and the Funds’ losses. In 2009, the Sixth Circuit affirmed the district court opinion except with respect to the Section 11 claim—finding that loss causation is not an element of Section 11 but instead an affirmative defense—and remanded the case back to the district court. The Funds filed an amended complaint re-pleading the Section 11 claim, again citing Omnicare’s “material misstatements and omissions” relating to legal compliance and claiming that Omnicare’s officers and directors did not possess “reasonable grounds” for believing the opinions to be true and complete. In 2012, the district court again granted Omnicare’s motion to dismiss, this time due to the Funds’ failure to plead that Omnicare knew that the opinions stated in the registration statement were false. The Funds again appealed to the Sixth Circuit, which in 2013 reversed and remanded the case back to the district court. Acknowledging that the legal compliance statements at issue expressed Omnicare’s “soft information” opinions, the Sixth Circuit found that under Section 11 a plaintiff need only claim that a statement in a registration statement is objectively false without also having to plead subjective knowledge of falsity.

The U.S. Supreme Court granted certiorari in 2014 to consider how Section 11 pertains to statements of opinion. The Court began its analyses by setting forth the two statements of opinion at issue, including the related caveats to those opinions that Omnicare included in the registration statement:

1. “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.” In a caveat to this statement of opinion, Omnicare referred to several state-initiated enforcement actions against pharmaceutical manufacturers for kick-back schemes, and said that its practices might “be interpreted in the future in a manner inconsistent with our interpretation and application.”

2. “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.” In a caveat to this statement of opinion, Omnicare noted that the federal government had expressed “significant concerns” about some manufacturers’ rebates to pharmacies and warned that Omnicare’s business might suffer “if these price concessions were no longer provided.”

Writing for the majority in the decision handed down on March 24, Justice Kagan stated that the Court’s consideration of whether Section 11 applies to statements of opinion would be in “two steps, corresponding to the two parts in Section 11 and the two theories in the Funds’ complaint.”

With respect to the Funds’ first theory, that Omnicare’s opinions on legal compliance constituted “untrue statement[s] of . . . material fact” under Section 11, the Court analyzed whether an opinion in and of itself can constitute a factual misstatement. Noting that the Funds did not allege that Omnicare’s opinions were dishonestly held, only that they were wrong, the Court found that “that allegation alone will not give rise to liability under Section 11’s first clause because, as we have shown, a sincere statement of pure opinion is not an ‘untrue statement of material fact,’ regardless of whether an investor can ultimately prove the belief wrong.” Finding otherwise would allow investors to “second-guess” and “Monday morning quarterback” an issuer’s subjective opinions. Thus Omnicare’s statements of opinion did not violate the first part of Section 11 even though they ultimately turned out to be wrong.

The Court then went on to consider the Funds’ second theory under Section 11, that in its opinions Omnicare “omitted to state a material fact . . . necessary to make the statements not misleading.” Under this theory, the Court analyzed when an opinion may be rendered misleading by the omission of facts. Noting that “whether a statement is ‘misleading’ depends on the perspective of a reasonable investor,” the Court’s analysis focused on “when, if ever, the omission of a fact can make a statement of opinion like Omnicare’s, even if literally accurate, misleading to an ordinary investor.” The Court noted as “having a kernel of truth” Omnicare’s claim that “no reasonable person, in any context, can understand a pure statement of opinion to convey anything more than the speaker’s own mindset” and that so long as the opinion is sincerely held, it can’t be misleading no matter how many related facts are omitted. In short, “[r]easonable investors do not understand such statements [of opinions] as guarantees, and Section 11’s omissions clause therefore does not treat them that way.”

However, the Court states that “Omnicare takes its point too far, because a reasonable investor may, depending on the circumstances, understand an opinion statement to convey facts about how the speaker has formed the opinion—or, otherwise put, about the speaker’s basis for holding that view. And if the real facts are otherwise, but not provided, the opinion statement will mislead its audience.”

The Court used as an example the statement that “We believe our conduct is lawful.” If the speaker makes that statement without consulting a lawyer, it could be “misleadingly incomplete” even if sincerely made, in that a reasonable investor would expect such an assertion to be based on meaningful legal inquiry. The same is true if the speaker were to make that statement contrary to legal advice or with the knowledge that the government takes the opposite view. The Court went on to hold 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 Section 11’s omissions clause creates liability.”

The Court qualified that, in stating an opinion, the speaker is allowed to weigh competing facts and will not be liable for omitting a “minority position” fact that later proves to be true: “A reasonable investor does not expect that every fact known to an issuer supports its opinion statement.” Moreover, the context in which the opinion is made must be considered when analyzing whether the omission is relevant. A reasonable investor, for example, would expect an opinion in a registration statement to not be made “off-the-cuff.” The statement of opinion also can’t be looked at in a vacuum and must take into account the customs and practices of the relevant industry: “The reasonable investor understands a statement of opinion in its full context, and Section 11 creates liability only for the omission of material facts that cannot be squared with such a fair reading.”

The Court said that, in order to gain insight into how a reasonable person understands a statement of opinion, including factual omissions from that opinion, the common law regarding the tort of misrepresentation is relevant. It quoted the Restatement of Torts as recognizing “‘[a] statement of opinion as to facts not disclosed and not otherwise known to the recipient may’ in some circumstances reasonably ‘be interpreted by him as an implied statement’ that the speaker ‘knows facts sufficient to justify him in forming’ the opinion or that he at least knows no facts ‘incompatible with [the] opinion.’” The Court also quoted Prosser and Keaton’s “leading treatise” in this area, which provides that “the expression of an opinion may carry with it an implied assertion, not only that the speaker knows no facts which would preclude such an opinion, but that he does know facts which justify it.” The Court goes on to quote the treatise that this is especially true in situations where—as in a registration statement—a speaker “holds himself out or is understood as having special knowledge of the matter which is not available to the plaintiff.”

The Court also looked to the congressional intent behind the adoption of Section 11, that issuers “tell the whole truth” to investors, stating “[f]or that reason, literal accuracy is not enough: An issuer must as well desist from misleading investors by saying one thing and holding back another. Omnicare would nullify that statutory requirement for all sentences starting with the phrases ‘we believe’ or ‘we think.’ But those magic words can preface nearly any conclusion, and the resulting statements, as we have shown, remain perfectly capable of misleading investors.”

The Court concluded by remanding the case back to the lower courts. In the Court’s view, “[n]either court below considered the Funds’ omissions theory with the right standard in mind – or indeed, even recognized the distinct statutory questions that theory raises . . . . We therefore follow our ordinary practice of remanding for a determination of whether the Funds have stated a viable omissions claim (or, if not, whether they should have a chance to replead).” In remanding the case, however, the Court emphasized that the Funds must identify the specific facts left out of Omnicare’s registration statement. Mere recitation of the statutory omissions language would not be sufficient, nor would the Funds’ conclusory allegation that Omnicare lacked “reasonable grounds for the belief” it stated in its opinion statements regarding legal compliance.

Furthermore, the Court stated that any analysis of whether Omnicare’s opinions were misleading must look at the context in which they were made: “The court must take account of whatever facts Omnicare didprovide about legal compliance, as well as other hedges, disclaimers or qualifications it included in the registration statement.” This specifically includes the “caveats” to the legal compliance opinions that Omnicare included about states initiating enforcement actions against drug manufacturers for giving rebates to pharmacies, that the federal government had expressed concerns about the practice, and that the relevant laws “could” be interpreted in the future in a manner that would harm Omnicare’s business.

It is possible that courts wrestling with false certification cases under the False Claims Act—where a certification of legal compliance with the law is either an express or implied condition of payment of a claim for federal funds—might look to the Omnicare opinion in deciding whether a false certification has taken place and is actionable.

See here for the U.S. Supreme Court decision in Omnicare, Inc., et al, Petitioners v. Laborers District Council Construction Industry Pension Fund et al. (No. 13-435) (3/24/15).