On March 24, 2015, the U.S. Supreme Court issued a landmark decision under the Securities Act of 1933 in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund. Section 11 of the Act provides a right of action against an issuer if the registration statement filed in connection with a securities public offering “contained an untrue statement of a material fact” or “omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.” 15 U.S.C. § 77k(a). As the Court put it, “Section 11 thus creates two ways to hold issuers liable for the contents of a registration statement—one focusing on what the statement says and the other on what it leaves out.” (Slip Op. at 2)
The case arose out of a registered public offering in December 2005 by Omnicare, the largest provider of pharmacy services for nursing home residents in the United States. In the registration statement, Omnicare stated that it believed its contract arrangements with healthcare providers, pharmaceutical suppliers and its pharmacy practices were “in compliance with applicable federal and state laws,” and that its contracts with pharmaceutical manufacturers were “legally and economically valid arrangements.” (Slip Op. at 3.) Subsequently, Omnicare settled claims by the government and a qui tam whistleblower that its receipt of payments from pharmaceutical manufacturers violated the Anti-Kickback statute.
Pension Funds that had purchased Omnicare stock in the 2005 offering filed suit alleging that the company’s two opinion statements regarding its compliance gave rise to liability under Section 11. The District Court granted Omnicare’s motion to dismiss on the ground that the plaintiff Funds had failed to claim that the company’s officers knew they were violating the law when the statements were made. The U.S. Court of Appeals for the U.S. Court of Appeals for the Sixth Circuit reversed. The Court of Appeals found that, under Section 11, plaintiffs had merely to allege that the stated belief was “objectively false,” to state a valid claim, not that the issuer disbelieved the opinion when it was expressed.
The Sixth Circuit’s Omnicare ruling conflicted with previous decisions by the Second and Ninth Circuits that Section 11 liability required both that the statement of opinion was objectively false and that it was disbelieved by the issuer at the time it was expressed. The Supreme Court granted certiorari to consider how Section 11 pertains to statements of opinion.
Unlike the lower courts, the Supreme Court saw two distinct issues: (1) whether/when an opinion constitutes a factual misstatement (i.e., an “untrue statement of material fact”), and (2) when an opinion may be rendered misleading by the omission of discrete factual representations. (Slip Op. at 5) While the Court distinguished between facts and opinions at some length, the decision ultimately rests on the extent to which an opinion either includes supporting facts, or fails to account for facts that a reasonable investor would expect to have been considered.
With respect to Section 11’s false statement provision, the Court focused on the distinction between facts and opinions, noting that, while a statement of fact “expresses a certainty about a thing,” a statement of opinion does not. (Slip Op. at 6.) The Court found that “Congress effectively incorporated just that distinction in §11’s first part by exposing issuers to liability not for “untrue statement[s]” full stop (which would have included ones of opinion), but only for “untrue statement[s] of . . . fact.” (Slip Op. at 6.) (emphasis added). Having found that the provision covers statements of fact, not opinion, however, the Court also noted that statements of opinion may affirm or incorporate some statement of fact. In such cases, the Court found, the statements could be within the scope of Section 11.(Slip Op. at 7.) Thus, liability under Section 11’s false-statement provision attaches when the speaker did not hold the belief professed in the statement, and if the incorporated supporting facts were untrue. (Slip Op. at 9.)
With regard to Section 11’s liability for omission of a material fact, the Court clarified the circumstances under which an omission of fact could make a statement of opinion misleading under the statute. A statement of opinion is not misleading simply because omitted facts render it correct, because whether it is misleading depends on the “perspective of a reasonable investor.” (Slip Op. at 10.) Since a reasonable investor might “understand an opinion statement to convey facts about how the speaker has formed the opinion,” liability attaches when the omitted facts “conflict with what a reasonable investor would take from the statement itself.” (Slip Op. at 11, 12.) the investor “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.” (Slip Op. at 18).
Since the lower courts had not considered the plaintiffs’ omissions theory under the proper standard, the Court remanded the case for a determination of whether the Funds had stated a viable omissions claim. The Court provided explicit instructions to the lower courts to review (1) whether the complaint adequately alleged that Omnicare had omitted the fact from the registration statement, and (2) whether the omitted fact would have been material to a reasonable investor. If the complaint satisfies these conditions, the court must then ask whether the omission rendered the opinion “misleading,” – and must consider that consider that question in “context,” i.e., in light of whatever facts related to compliance were included in the statement.
In addition to its consequences under the Securities Act of 1933, Omnicare has implications for the false statements provisions in the Securities Exchange Act of 1934. Rule 10b-5 and Rule 14a-9 contain similar language, and despite the scienter requirement in Rule 10b-5, providers and issuers should assume that these provisions, too, will be construed in light of Omnicare.