The United States Supreme Court announced new and important guidance regarding when opinions in registration statements may be actionable misrepresentations or omissions under §11 of the Securities Act of 1933 in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 575 U.S. ____ (2015). In sum, while simply alleging that an opinion later proves to be incorrect is insufficient, opinions may give rise to liability in certain situations.
In this putative securities fraud class action, a pension fund alleged that Omnicare made false or misleading statements in its registration statement as part of a securities offering. Omnicare stated that “[w]e believe” that (1) contracts complied with federal and state law and (2) its contracts with pharmaceutical manufacturers are valid. The registration statement included some caveats that state enforcement actions regarding similar contracts existed and may result in legal interpretations inconsistent with Omnicare’s interpretation. Omnicare also noted that the federal government had expressed “significant concerns” about pharmaceutical manufacturers’ rebates to pharmacies. Omnicare is the nation’s largest provider of pharmacy services for nursing home residents, so those legal developments could affect its business significantly.
The plaintiff pension fund maintained that these statements were false and actionable. Pointing to subsequent federal government lawsuits against Omnicare, the pension fund argued that Omnicare’s contracts violated anti-kickback laws. Thus, the pension fund alleged that Omnicare’s earlier statements about believed legal compliance were materially false and that Omnicare omitted material facts that were necessary so its statements would not be misleading. The district court dismissed the pension fund’s complaint, reasoning that Omnicare’s statements of belief were not actionable. The Sixth Circuit disagreed, and held that the pension fund need only allege that the stated belief was objectively false. The Supreme Court reversed, remanded to the Sixth Circuit, and established a new standard for such claims relating to opinions or beliefs, which address a topic largely undeveloped in prior Supreme Court securities laws decisions.
The Court deemed it self-evident that an opinion may be an “untrue material fact” if (1) the issuer does not believe that opinion or (2) the issuer points to supporting facts that are not true. But the pension fund did not make any such allegations. Thus, the Court turned to whether omitting information could be actionable under §11 when stating opinions in a registration statement. To answer that question, the Court went beyond the issues presented in the parties’ briefs.
Writing for six other justices, Justice Kagan explained that omitting the factual basis for an opinion may be actionable if the true facts conflict with what a reasonable investor would infer from the opinion. “[I]f 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.” For example, opining that conduct is lawful implies that a meaningful legal inquiry occurred. In that instance, the issuer failing to mention that it never obtained any legal advice could be an actionable omission.
But the issuer need not disclose all facts that may be contrary to its opinion. The Court used the example of a single junior lawyer expressing doubts about the legality of actions by the firm, when six of his more senior colleagues approved of it. It would not be misleading to omit that junior lawyer’s opinion even if it later proves to be correct. By the same token, however, the reasonable investor expects that opinions in registration statements are not baseless, off-the-cuff judgments. These are meaningful documents with important purposes. The test announced is what a reasonable investor would understand a statement of opinion to convey in the overall context of the registration statement as a whole. This is not a simple test for investor-plaintiffs to meet. The investor “must identify particular (and material) facts . . . whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.” It is not enough simply to allege that the issuer failed to identify the basis for its opinion.
Justice Scalia concurred in part. He would rely on common law principles regarding when statements of opinion may be actionable. Under that approach, a vague statement of opinion should only be actionable if the issuer both knew the statement was ambiguous and intended that others rely on it. Justice Thomas concurred in the judgment because the statements of opinion at issue did not contain any untrue statements of material fact. He would not have gone beyond that issue to address under what circumstances an omission may make an opinion misleading and actionable under the Securities Act of 1933.
With this guidance, issuers will want to take precautions when preparing registration statements and similar documents. Obviously, an issuer must never include opinions that the issuer does not believe are true or that are based on “facts” the issuer knows are not true. But the crucial point of Omnicare is to address when omissions in offering documents may be actionable. Omnicare tells us that the reasonable investor standard governs. If an issuer includes an opinion, consider whether explaining the basis for that opinion is necessary to meet that standard. Does the opinion imply to a reasonable person that certain predicate facts exist? If so, do those facts exist or do you need to explain that you hold the belief even though it is not clear that those facts exist? Also make sure to review the document for accuracy as a whole. It is important that the issuer disclose known material facts that may be contrary to the issuer’s opinions. Under Omnicare, a plaintiff should not be able to select statements of opinion in isolation to cobble together the claim while simultaneously ignoring other aspects of the securities filing.