On Tuesday, the Supreme Court clarified whether opinion statements violated Section 11 of the Securities Act. In Omnicare v. Laborers District Council Construction Industry Pension Fund the Supreme Court reviewed two related issues. First, whether an opinion statement in a registration document, that turns out to be incorrect, violates Section 11. Second, whether an omission of a fact can make an opinion statement misleading in violation of Section 11.
At issue in the case were two sentences in Omnicare’s registration statements which, as the Court noted, essentially stated “we believe we are obeying the law.” Subsequently, the Federal Government sued Omnicare for allegedly violating anti-kickback laws. Investors who owned Omnicare stock (“Funds”) sued arguing that Omnicare’s statement that it believed it was obeying the law violated Section 11. The district court dismissed the claims; however, the Sixth Circuit reversed that decision.
The Supreme Court first held that an opinion statement generally does not violate Section 11. Statements such as “I believe xyz to be true,” are generally true statements because they reflect the belief of the speaker. However, the speaker can violate Section 11 if he said “I believe xyz to be true,” when in fact he does not believe it to be true. Based on this reasoning, the Court held that Omnicare’s statements were opinion statements and that the Funds could not “Monday morning quarterback an issuer’s opinions,” when those opinions turned out to be false.
On the second issue, the Court addressed whether the omission of a fact can make an opinion statement misleading. Omnicare argued that an opinion statement could never be misleading. The Court disagreed and distinguished between the thrust of an opinion statement and how the speaker formed her opinion. For example, “I believe our policies are legal” conveys to a reasonable investor that there is a reasonable basis for believing that those policies are legal. However, if the speaker based that statement on mere hope or intuition, and does not disclose that fact, then a reasonable investor could be misled regarding the basis for the opinion. Therefore, the court held 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 lower courts had not addressed the omission part of Section 11 liability and the Court remanded the case for further proceedings with helpful guidance points. The court explained that opinion statements that do not disclose “facts cutting the other way” are not necessarily misleading. Further, the court noted that context matters in Section 11 cases. Investors know to take into account the “broader frame” of the registration document. Finally, the specificity of an opinion statement must be taken into account. Specific statements inform an investor of the basis of the speaker’s opinion. The more specific a statement is, the more likely an investor is to believe that a reasonable basis for that opinion exists.