The Supreme Court defined the circumstances under which liability can be imposed for opinion statements under Securities Act Section 11. Specifically, the Court held that such liability could be imposed on two theories: One focuses “on what the statement says and the other on what it leaves out. Either way, the buyer need not prove . . . that the defendant acted with any intent to deceive or defraud.” Omnicare, Inc. v. Laborers District Council Construction Pension Fund, No. 13-435 (S. Ct. March 24, 2015).
Background
The case centers on a registration statement filed by Omnicare in connection with a public offering of common stock. The firm is the largest pharmacy provider for nursing home residents in the U.S. The registration statement, in part, analyzed the impact of various federal and state laws on the business of the firm. In this section the registration statement stated “We believe . . .” our contract arrangements with other healthcare providers are in accord with the law. A second sentence stated “We believe . . .” that the contracts with pharmaceutical manufactures are legally valid. Cautionary provisions noted that enforcement actions had been brought against pharmaceutical manufactures for making payments to pharmacies and that the Federal Government had expressed “significant concerns” about such rebates.
The pension funds’ complaint alleged that the opinion statements regarding compliance were false. The claim is supported by citations to suits filed by the Federal Government against Omnicare under the anti-kickback laws for payments it received from pharmaceutical manufactures. Based on the suits filed after the offering plaintiffs allege that the firm made materially false representations about compliance and that it omitted to state material facts necessary to make the representations not misleading.
The District Court granted Omnicare’s motion to dismiss. That Court concluded that statements of opinion or belief are only actionable if the speaker knew at the time the statements were untrue. The Sixth Circuit reversed. The Circuit Court concluded plaintiffs only needed to allege that the statements were “objectively false” and that they need not establish that anyone at Omnicare disbelieved the opinions at the time expressed.
Opinion
The Supreme Court, in a unanimous decision, vacated the lower court rulings and remanded with instructions. Justice Kagan, writing for seven members of the Court, began by stating that the Sixth Circuit and the Funds “wrongly conflates facts and opinions.” A fact is a thing done or in existence. A statement of fact expresses certainty. In contrast, an opinion does not. The difference is significant and reflected in the language of Section 11 which imposes liability not just for false statements but for an untrue statement “of fact” according to its plain language.
Nevertheless, Section 11 still applies to opinions. First, an opinion implies that the speaker “actually holds the stated belief.” Thus if the speaker knew the statement was incorrect the expression of an opinion to the contrary would become an untrue statement of fact. Likewise, if the opinion contained an imbedded statement of fact which is incorrect again there would be an untrue statement of fact. “Accordingly, liability under §11’s false-statement provision would follow (once again, assuming materiality) not only if the speaker did not hold the belief she professed but also if the supporting fact she supplied were untrue,” the Court held.
Here the Funds claim that Omnicare turned out to be wrong. That allegation is not sufficient to support Section 11 liability. The Section was not designed to “allow investors to second-guess inherently subjective and uncertain assessments. In other words, the provision is not, as the Court of Appeals and the Funds would have it, an invitation to Monday morning quarterback an issuer’s opinions.”
Second, the omissions provision of Section 11 must be considered. In part the Section states that there can be liability if Omnicare “omitted to state facts necessary” to make its opinion regarding legal compliance “not misleading.” Under this part of the statute the question turns on “the perspective of a reasonable investor: The inquiry (like the one into materiality) is objective.” In considering this point the Court rejected Omnicare’s contention that an opinion statement could never be misleading on this basis. Rather, the Court concluded the investor can reasonably expect “not just that the issuer believes the opinion (however irrationally), but that it fairly aligns with the information in the issuer’s possession at the time. Thus, if the 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 test here is an objective one of what a reasonable persons would understand from the statement. As Justice Kagan wrote: Section 11’s omissions clause, as applied to statements of both opinion and fact, necessarily brings the reasonable person into the analysis and asks what she would naturally understand a statement to convey beyond its literal meaning. And for expressions of opinion, that means considering the foundation she would expect an issuer to have before making the statement.” This is consistent not just with the language of the Section but also with its common law origins and purpose of the statute.
Finally, to plead a Section 11 claim the securities law plaintiff cannot simply claim that the opinion was wrong. Rather, the complaint must call into question the basis of the claim. At the same time it is not sufficient to simply allege a failure to disclose the basis of the opinion. To the contrary, 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.” Since neither court below considered Omnicare’s omissions theory the case was vacated and remanded for further consideration. Justice Scalia concurred in part and in the judgment. Justice Thomas concurred in the judgment.
