This week the Supreme Court resolved a split among federal appellate courts over whether a statement of opinion in a company’s registration statement can be actionable under Section 11 of the Securities Act of 1933 if the speaker actually holds the stated opinion. The high court ruled that such opinions are not actionable as an “untrue statement of material fact” simply because they turn out to be wrong. But, taking another “midway position” on a divisive issue of securities class action litigation, the court left the door open for liability based on an omission theory—that is, if plaintiffs allege that an issuer or its executives “omitted to state facts necessary” to make the expressed opinion “not misleading.” The court, however, articulated exacting pleading requirements for stating such a claim, setting a high bar for plaintiffs to survive early dismissal.
The dispute arose as a result of the Sixth Circuit’s holding that plaintiffs in a class action against Omnicare, Inc. and its executives could maintain a valid claim under Section 11 by alleging only that the defendants’ stated beliefs were “objectively false”—that they turned out to be wrong. This holding diverged from the Second Circuit’s rule that plaintiffs cannot maintain a Section 11 claim based on a statement of opinion unless they allege that the speaker’s opinions were “subjectively false”—that the speaker did not actually believe the opinions at the time they were expressed. At issue inOmnicare were statements by the pharmacy services company that it believed its contracts with healthcare providers, suppliers and drug manufacturers were in compliance with federal and state laws, when Omnicare later became the target of government complaints that those contracts violated anti-kickback laws.
The Supreme Court first eliminated the potential for liability under Section 11’s false-statement provision when plaintiffs only claim that an opinion turned out to be wrong. The court reasoned 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. . . . In other words, [Section 11’s false-statement] provision is not . . . an invitation to Monday morning quarterback an issuer’s opinions.”
However, the Supreme Court declined to jettison similar claims based on Section 11’s omission provision—that is, claims alleging that the issuer “omitted to state facts necessary” to make its opinion “not misleading.” The court explained that a reasonable investor may understand an opinion statement to convey facts about the speaker’s basis for holding the expressed belief. It 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 §11’s omissions clause creates liability.” Under such an omission theory, the court explained that Omnicare could be liable for its expressed opinion about legal compliance if, for example, it made the statement in the face of its lawyers’ contrary advice or with knowledge that the government was taking the view that its contracts violated anti-kickback laws.
The court declined to foreclose liability for sincerely-held opinions that ultimately prove wrong in part out of concern that issuers might resort to prefacing all statements with the magic words “we believe” or “we think” to shield them from liability under Section 11. In carving out potential liability, however, the court did not give plaintiffs much breathing room. To press such a claim, an investor must allege not only that the opinion was wrong, but also that the issuer failed to disclose material facts that call into question the basis for its opinion. And, the court held, a plaintiff cannot do so “merely by means of conclusory assertions.” Rather, the plaintiff “must identify particular (and material) facts going to the basis for the issuer’s opinion—facts about the inquiry the issuer did or did not conduct or knowledge it did or did not have—whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.” The court then declared: “That is no small task for an investor.”
Although the Supreme Court left the door open for plaintiffs who assert omission claims, the court’s holding set a high bar for such claims to survive early dismissal at the pleading stage. Defendants can use Omnicare as another tool to put an end to Section 11 claims that do not satisfy the Supreme Court’s exacting pleading requirements.
Another takeaway from Omnicare is that the high court has again declined to take a discernable stance on class action securities litigation—specifically, whether it will further Congress’ policy of doing away with lawsuits of questionable merit, as articulated in the Private Securities Litigation Reform Act of 1995. The Court’s middle-ground approach inOmnicare is reminiscent of its decision last year in Halliburton. There, the Court likewise took a “midway position” by upholding the plaintiff-friendly presumption of reliance, a key element of a securities fraud claim, but at the same time allowing defendants to defeat class certification by rebutting that presumption. It appears this Court will not block the avenues for shareholder class actions, but it will provide companies with an effective arsenal of defenses.