March 25, 2015
Securities Litigation Alert
Yesterday, the U.S. Supreme Court issued a highly anticipated ruling on when strict liability attaches for statements of opinion in securities filings. Issuers and counsel should carefully consider this decision when evaluating disclosures of opinions.
Yesterday, the United States Supreme Court held that, while a pure statement of opinion made and sincerely believed by an issuer could not give rise to strict securities liability as a misstatement of material fact, such strict liability could be imposed if the statement is misleading because material information concerning the basis of even such a “pure” opinion was not disclosed. The Court’s decision in Omnicare Inc. v. Laborers District Council Construction Industry Pension Fund (Omnicare), examined challenges to two opinions made by a company in a securities registration statement. The Court drew a distinction between challenges to affirmative fact statements and claims based on omissions. The Court held first that a sincerely held opinion could not give rise to liability as a mis-stated fact. On the other hand, the Court held that liability can attach to an opinion under an omissions theory if the opinion is misleading because material information regarding the existence of a reasonable basis for the opinion is omitted.
Section 11 of the Securities Act of 1933  (“Section 11”) in essence allows buyers to sue sellers of stock, commonly called “issuers,” if documents distributed to market the securities (“registration statements”) 1) contain untrue statements of material fact, or 2) omit material facts. Under either prong, the buyer does not need to prove that the issuer acted with intent to deceive or defraud buyers—if either flaw is present in the registration statement, the defendant is strictly liable. The question before the Omnicare Court was how those two prongs of the liability test should be applied to statements of opinion.
The plaintiffs in this case, two pension funds, brought suit against a provider of pharmacy services. The plaintiffs, who had purchased shares in the defendant, asserted that two passages in the defendant’s registration statement were misleading. Both statements related to the defendant’s opinion of the legality of its practice of receiving rebates from manufacturers of pharmaceutical products.
The first statement at issue was: “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.” The second statement, contained in the same document, said “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.”
The plaintiffs asserted that, because the federal government later sued the defendant with respect to pharmaceutical rebates (taking the position that they were illegal), the defendant was liable to its stockholders pursuant to both prongs of the Section 11 test for liability—arguing that the defendant had both made untrue statements of fact and omitted material facts. The Court of Appeals for the Sixth Circuit had agreed, holding that, to survive a motion to dismiss, the plaintiffs only needed to allege that the opinions in question were “objectively false” and did not need to contend that the defendant did not believe that the opinion was true at the time it was made. This decision alarmed not only the defendant, but many other issuers, as the use of opinions in registration statements is common, and the threat of strict liability being applied to a sincerely held opinion later determined to be false could potentially have a deep impact on the securities world.
The Supreme Court, in an opinion written by Justice Kagan, began by rejecting the Sixth Circuit’s approach, holding instead 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.” The Sixth Circuit’s view, the Court explained, would conflate facts and opinions. Instead, the inquiry should focus on whether or not the speaker believed the statement to be true upon having made it. When a statement was a “pure statement of opinion,” liability could only attach under the first prong of Section 11 if the plaintiffs plausibly pleaded that the issuer did not believe that its actions were legal. As plaintiffs in Omnicare had not made such an allegation, the defendant’s statements of opinion were not actionable as false statements.
While this declaration likely caused an audible sigh of relief from issuers, the second half of the Court’s analysis signalled storm clouds. Turning to the second prong of Section 11 analysis, the Court considered whether (and when) “the omission of a fact can make a statement of opinion…even if literally accurate, misleading to an ordinary investor.”  The Court answered this question in the affirmative.
While the defendant argued that sincerely held statements of belief should be just as immune to liability under the second prong of the Section 11 test as the first, the Court disagreed. Because “a reasonable investor may, depending on the circumstances, understand an opinion statement to convey facts about how the speaker has formed the opinion… if the real facts are otherwise but not provided, the opinion statement will be misleading.”  For example, the statement “we believe our practices are legal,” without disclosing that the issuer had never consulted a lawyer on the issue, could be considered deceptive because it incorrectly implies that an appropriate legal inquiry was made.
The Court went on to acknowledge that a reasonable investor does not expect that every fact known to an issuer supports its opinion statement. For example, there is a difference between failing to tell your investors that you made no legal inquiry into a practice’s legality and failing to tell your investors that, in consulting with your legal team on the issue of legality, one junior attorney expressed doubts about a practice while six of his more senior attorneys gave a stamp of approval. That omission, the Court opined, would not make the statement of opinion misleading even if the minority position ultimately proved correct. Opinions are, by their nature, offered in a broader framework, and so the key inquiry is not whether any and all relevant information should have been included, but rather whether the opinion is misleading by virtue of an omitted fact when considered in the full context of all the information that was provided.
In addressing the defendant’s argument that evaluating alleged omissions in such a fashion would make bad policy, the Court replied that “Congress gets to make policy, not the courts. The decision Congress made…was to extend §11 liability to all statements rendered misleading by omission. In doing so, Congress no doubt made §11 less cut-and-dry than a law prohibiting only false factual statements.”  Going through several scenarios that could arise in evaluating an alleged omission, as well as hornbook law on tort claims, the Court concluded that the reasonableness standard would not “ask anything unusual of courts. Numerous legal rules hinge on what a reasonable person would think or expect.”  In response to the defendant’s urging that its position threatened too broad a liability, the Court stated “an investor cannot state a claim by alleging only that an opinion was wrong; the complaint must as well call into question the issuer’s basis for offering the opinion.”  Rather, an investor would need to identify particular material facts about the inquiry the issuer did or did not conduct, or the knowledge it did or did not have, and whose omission makes the opinion misleading to a reasonable reader.
The Omnicare decision will likely be seen as a positive one for issuers, in that it reined in the Sixth Circuit’s previous decision and precluded strict liability for a misstatement of fact with regard to statements of pure opinion that are sincerely held. On the other hand, as the Court acknowledged, some may see the application of a “reasonable person” standard to the question of an omission as having a potentially chilling effect on issuers presenting their opinions in registration statements. The decision could also be seen as providing a roadmap to plaintiffs’ attorneys on how to survive a motion to dismiss claims brought under Section 11—by asserting that some fact that impliedly underpinned an opinion was contradicted by an omitted fact that was material. There is also a risk that opinions provided in registration statements could now be accompanied by so much extra information that they become confusing and convoluted. Going forward, issuers and their counsel should carefully examine the basis for any opinion statements, and consider whether the foundation for the opinion (and potentially contradictory information) is disclosed to an appropriate extent.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.