In the securities law arena, the focus over the last several months has been on the U.S. Supreme Court’s highly anticipated decision in the Halliburton case, which was issued last month. However, in March 2014, the high court also recently agreed to hear a case involving an important issue for Section 11 claims brought under the Securities Act of 1933. Specifically, the Supreme Court granted certiorari in Omnicare, Inc. v. Laborers District Council. At issue in Omnicare is whether a plaintiff can adequately plead a claim under Section 11 for a misleading or false opinion in a registration statement simply by alleging that the opinion was false.
Section 11 of the 1933 Act creates an express private right of action for an investor who purchases a security pursuant to a registration statement that contained either a materially misrepresentation or omission. The actionable misrepresentation or omission must be in either the registration statement or the prospectus for the offered security. In addition to the issuer, several other parties can be held liable under Section 11(a) of the Act, including the signer of the statement, any directors or partners of the issuing entity, as well as underwriters and appraisers.
The 1933 Act has easier pleading standards than the Securities and Exchange Act of 1934, as the 1933 Act does not require that the plaintiff allege scienter, loss causation or reliance. So long as the registration statement contains a material misrepresentation or omission, the defendants are strictly liable under the statute.
Applying this rule to facts is generally easy. Facts are either true or false, and if a plaintiff alleges that a fact within a registration statement is false, they will have generally met their pleading burden under Section 11. However, an interesting question is presented when one considers opinions or beliefs that are expressed in such statements — what some courts have called “soft information.” Can such “soft information” form the basis of the alleged misstatement? Is an opinion “untrue” simply because the assessment at the time (“The company believes that it has complied with all applicable regulations”) ended up being wrong? Or is an opinion “untrue” only if the speaker did not subjectively believe it to be true at the time it was given? The Supreme Court’s acceptance of the Omnicare decision for review should resolve this question.
The Supreme Court’s grant of certiorari in Omnicare
On March 3, 2014, the Supreme Court granted certiorari in Omnicare to decide a circuit court split on the following question:
For the purposes of a Section 11 claim, may a plaintiff plead that a statement of opinion was “untrue” merely by alleging that the opinion itself was objectively wrong as the Sixth Circuit concluded, or must the plaintiff also allege that the statement was subjectively false – requiring allegations that the speaker’s actual opinion was different from the one expressed – as the Second, Third, and Ninth Circuits have held.
The circuit split arose out of the decision by the U.S. Court of Appeals for the 6th Circuit in Indiana State District Council of Laborers v. Omnicare, Inc. In Omnicare, the plaintiffs were union pension funds who were investors in a December 2005 offering of 12.8 million shares of common stock offered by Omnicare. As part of the offering, Omnicare issued a registration statement attesting that the company was in “legal compliance” with all laws and regulations. Specifically, the registration statement provided that Omnicare’s contracts with pharmaceutical companies were “legally and economically valid arrangements that bring value to the healthcare system and patients that we serve.” However, the plaintiffs alleged that Omnicare had been engaged in various illegal activities, including kickback agreements with pharmaceutical firms and making false claims through Medicare and Medicaid. Thus, the primary allegation was that Omnicare’s registration statement of “legal compliance” was materially false and misleading in violation of Section 11 because it led investors to believe that the firm was complying with the law.
The district court dismissed the complaint with prejudice because the plaintiffs failed to allege that the defendants knew their statements were untrue at the time they were made. However, on appeal, the 6th Circuit reversed, holding that the plaintiffs adequately pled a claim for relief under Section 11. In arriving at this decision, the 6th Circuit homed in on the strict liability nature of Section 11 claims, noting that “[n]o matter the framing, once a false statement has been made, a defendant’s knowledge is not relevant to a strict liability claim.” The falsity of the registration statement enabled the plaintiffs to plead a viable Section 11 claim because it contained an opinion of “legal compliance” that was not true.
The 6th Circuit’s holding in Omnicare is at odds with the holdings of several other federal circuit courts of appeal, including decisions from the 2nd, 3rd, and 9th Circuits. In these cases, the courts held that a complaint must allege that an opinion is both objectively false and subjectively false before any liability can attach under Section 11.
Ultimately, the Supreme Court will decide whether a plaintiff must allege that an opinion is both objectively and subjectively false to plead liability under Section 11. If the Supreme Court upholds the 6th Circuit’s reasoning in Omnicare, there will be significant implications for financial markets for the following reasons:
- First, it will make it easier for Section 11 plaintiffs to adequately plead a claim for violations of Section 11 in connection with opinions.
- Second, a relaxed pleading standard will likely lead to more Section 11 claims being filed against corporate defendants, D&Os, and possibly their underwriters and auditors.
- Third, if the Supreme Court were to allow the imposition of Section 11 liability simply for the objective component of an opinion, then companies, directors and officers, and even auditors and underwriters may be more hesitant to offer any opinion at all for fear of liability. Such a result would frustrate the goals of the securities regulatory framework, which is one that promotes full disclosure of all material information and should encompass how a company or its management “feels” or what they “believe” about certain developments (which shareholders also want to know).
The views expressed in the article are not the views of RLI Insurance Company or Sedgwick LLP.