Supreme Court Update: Omnicare and IndyMac
On March 3, 2014, the United States Supreme Court granted certiorari in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund (“Omnicare”), which was on appeal from the Sixth Circuit. By agreeing to hear this appeal, the Roberts Court again demonstrated its keen interest in securities fraud class actions, having decided over a dozen such cases since Chief Justice Robert’s confirmation in 2005.
The issue for the Court to decide in Omnicare is whether, in a case proceeding under §11 of the Securities Act of 1933, a plaintiff must simply show that a statement of opinion was untrue or that a statement was subjectively false. The former is the current state of the law in the Sixth Circuit, where proof that the opinion was objectively false is sufficient; the latter is the current state of the law in the Second, Third and Ninth Circuits, where plaintiffs must prove that the speaker’s actual opinion differed from the one expressed.
The reason this issue arises is that §11 provides an express remedy for investors who purchase securities pursuant to a registration statement that contained an “untrue statement of material fact” (or omitted a material fact that would render the statement not misleading).
The Sixth Circuit held that the speaker’s state of mind when making the statement is irrelevant, rendering §11 a statute of strict liability. This is consistent with prior rulings from the Supreme Court: “Liability against the issuer of a security is virtually absolute, even for innocent misstatements.” Herman & MacLean v. Huddleston, 459 U.S. 375, 382 (1983); “[T]he issuer of the securities is held absolutely liable.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 208 (1976).
Accordingly, the Omnicare case will have a direct impact on how courts evaluate statements of opinion in registration statements.
Just one week later, on March 10, 2014, the Supreme Court granted certiorari in yet another securities fraud class action, Public Employees’ Retirement System of Mississippi v. IndyMac MBS, Inc. (“IndyMac”), on appeal from the Second Circuit.
In securities cases, a statute of limitation generally begins to run at the point a plaintiff’s cause of action accrues (typically when an investor discovers the loss is due to fraud), and can be tolled for equitable reasons. See American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974). However, a statute of repose under §11 generally begins to run at the time the securities were offered to the public. The issue in IndyMac is whether the filing of a securities fraud class action tolls the applicable statute of repose (3 years) for individual class members under §13 of the Securities Act of 1933. The Second Circuit held that it does not and cannot, because of the difference between a statute of repose and a statute of limitation. Specifically, the Second Circuit found that a statute of repose creates a substantive right to be free from the threat of litigation, and thus any tolling is illegal, as it would modify that right.
If, however, a statute of repose that begins to run at the time the investment was made cannot be tolled, plaintiffs face the danger that particularly skilled fraudsters could act with impunity, simply by concealing their fraud past the running of the statute of repose.
Of additional concern in IndyMac is the potential impact on investors who may wish to pursue individual litigation by opting out of a securities class action. If investors wish to preserve their rights to opt out of a potential class action, they would have to file their individual complaints much earlier, or risk having their claims barred by the statute of repose.
Accordingly, the IndyMac case could have a direct impact on how investors pursue securities fraud claims.
Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, __ U.S. __, 134 S. Ct. 1490 (2014).
Public Employees’ Retirement System of Mississippi v. IndyMac MBS, Inc., __ U.S. __, 134 S. Ct. 1515 (2014).
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