In its opinion in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, released yesterday, the U.S. Supreme Court held that a securities issuer’s statement of opinion in a registration statement, even though sincerely believed, may still give rise to liability under Section 11 of the Securities Act of 1933 if it omits material conflicting facts about the issuer’s basis for the opinion that render it misleading: “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.” The decision marks a significant departure from previous decisions by the U.S. Courts of Appeals for the Second and Ninth Circuits, which held that to maintain a Section 11 claim concerning a statement of opinion, a plaintiff must plead and prove that the issuer did not believe the statement of opinion at the time it was made. But it does not go so far as the Sixth Circuit's underlying Omnicare opinion in the same case, which held that under Section 11 a plaintiff need only allege that a statement of opinion ultimately proved to be incorrect, regardless of the issuer's knowledge at the time it was made. In the wake of the Supreme Court's Omnicare decision, issuers and their counsel will have to pay close attention to statements of opinion in registration statements and carefully consider whether they have provided sufficient factual disclosure relating to any such statements.
Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k, creates a remedy for purchasers of securities in a public offering where the registration statement “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.” In the underlying case, plaintiff shareholders sued Omnicare, the nation’s largest pharmacy service provider for nursing home residents, for alleged false statements and misleading omissions in the registration statement for its 2005 public offering. The registration statement included two statements in which the company opined that its contracts were legally valid and in compliance with applicable laws:
- “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.”
- “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.”
Citing related federal lawsuits against Omnicare, the plaintiffs alleged that these statements were materially false and misleading because the company was violating anti-kickback laws. A federal district court dismissed the plaintiffs’ Section 11 claim on the ground that these statements of opinion were actionable only if the plaintiffs showed that the speakers knew they were untrue at the time, which the plaintiffs had failed to allege. The U.S. Court of Appeals for the Sixth Circuit reversed, holding that the plaintiffs did not need to show that anyone at Omnicare disbelieved the opinion at the time it was expressed, because Section 11 is a strict liability statute that does not require a plaintiff to plead or prove the defendant's knowledge of falsity. See Indiana State District Council of Laborers and Hod Carriers Pension and Welfare Fund v. Omnicare, Inc., 719 F.3d 498 (6th Cir. 2013).
In her opinion for the Supreme Court, Justice Kagan analyzed in detail the two parts of the Section 11 liability standard as applied to a statement of opinion. A statement of opinion does not constitute “an untrue statement of a material fact” simply because the speaker’s opinion turns out to be wrong. But a statement of opinion may constitute an untrue statement of material fact if the speaker does not in fact hold the stated opinion, or if the statement incorporates a material false statement of fact. These theories were not available to the plaintiffs in Omnicare, however, because the statements at issue were purely opinions, and the plaintiffs did not allege that these opinions were not sincerely held. Under the second part of the Section 11 liability standard, pertaining to omissions, a statement of opinion can be misleading where the speaker omits material facts about his knowledge or inquiry that conflict with the stated opinion. “[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.” For example, Justice Kagan suggested, an investor would have cause to complain if a company says it believes that its conduct is lawful without having consulted a lawyer, or in the face of contrary legal advice, or with knowledge that the federal government takes a different view, and the company fails to disclose these facts.
Because the courts below did not consider or apply these criteria, the Supreme Court vacated the judgment and remanded the case for a further determination of whether the plaintiffs had stated a viable omissions claim under Section 11. To state such a claim, the Court said, it is not enough for the plaintiffs to repeat the statutory language or to assert conclusory allegations that Omnicare lacked reasonable grounds for its belief. Rather, the Court indicated that the plaintiffs must present more specific facts, such as an allegation that an attorney had warned the company that a particular contract carried a heightened risk of legal exposure under the anti-kickback laws. “The investor 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 the 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.”
Justice Kagan’s opinion for the Court in Omnicare was joined by Chief Justice Roberts and Justices Kennedy, Ginsburg, Breyer, Alito, and Sotomayor. Justice Scalia filed a separate opinion concurring in part and concurring in the judgment, while Justice Thomas filed a separate opinion concurring in the judgment. Notably, Justice Scalia took issue with the majority’s view that a statement of opinion in a registration statement necessarily entails an implied statement of fact that the speaker has undertaken a meaningful investigation. In Scalia’s opinion, this interpretation produces “a far broader field of misrepresentation” than under the common law, which requires a reasonable basis for a statement of opinion only where it is reasonable for a listener to place special confidence in the speaker’s opinion, such as where the speaker has particular expertise. Justice Kagan responded that issuers indeed have special knowledge of their businesses that is not available to the ordinary investor.
As we predicted after the oral argument in this case last November, the Supreme Court has charted a middle path between the two divergent directions previously taken by the federal Courts of Appeal in applying Section 11 to statements of opinion. On the one hand, the Court rejected the Sixth Circuit’s ruling, in the proceedings below, that it is sufficient for the plaintiff to plead that a statement of opinion was objectively false. But on the other hand, the Supreme Court also implicitly rejected the view taken by other Courts of Appeal that a statement of opinion can give rise to Section 11 liability only if it is subjectively false, i.e., not believed by the issuer. See Fait v. Regions Financial Corp., 655 F.3d 105, 110 (2d Cir. 2011); Rubke v. Capitol Bancorp Ltd., 551 F.3d 1156, 1162 (9th Cir. 2009). Instead, the Supreme Court reasoned that an investor reading a registration statement would expect “not just that the issuer believes the opinion (however irrationally), but that it fairly aligns with the information in the issuer’s possession.” Thus an issuer may be potentially liable under Section 11 for a statement of opinion that, although sincerely held, omits conflicting material facts known to the issuer. The Court cautioned that this does not mean that every known contradictory fact must be disclosed. And it also made clear that the opinion must be considered in the context of the registration statement as a whole, including all hedges, disclaimers, and disclosures, as well as the customs and practices of the relevant industry. Section 11 “creates liability only for the omission of material facts that cannot be squared with such a fair reading.” Nevertheless, this standard creates potential practical difficulties for issuers who will have to make difficult judgment calls as to how much factual disclosure they must provide to avoid being sued by shareholders and second-guessed by the courts when they venture a statement of opinion in a registration statement.