The Supreme Court rules on securities issuers’ liability for misleading statements of opinion
Today in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, No. 13-435, the Supreme Court ruled that investors asserting a claim under Section 11 of the Securities Act of 1933 with respect to a misleading statement of opinion do not, as Omnicare had contended, have to prove that the statement was subjectively disbelieved when made.
The decision resolves a conflict among the circuits. Decades ago in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 208 (1976), and in Herman & MacLean v. Huddleston, 459 U.S. 375, 382 (1983), the U.S. Supreme Court opined that Section 11 subjects the issuer of a security to strict liability for a false or misleading registration statement, imposing liability without proof of knowledge of falsity on the issuer’s part. More recently, some federal appellate courts adopted a different rule for misleading statements cast as expressions of “opinion.” Most prominently, the Second Circuit held in Fait v. Regions Financial Corp., 655 F.3d 105 (2d Cir. 2011), that an investor must show not only that a statement of opinion included in a registration statement was misleading when made, but that it was also subjectively “disbelieved” by the issuer.
In Omnicare, on the other hand, the Sixth Circuit held that Section 11 imposes liability for misleading statements without regard to the issuer’s state of mind. Omnicare, which provides pharmaceutical services for elderly residents of long-term care facilities, had issued securities pursuant to a registration statement expressing the belief that Omnicare operated within the law. According to the investors' complaint, Omnicare actually operated by paying and receiving illegal kickbacks, illegally promoting products such as Johnson & Johnson’s Risperdal for dangerous off-label uses, and submitting false claims to Medicaid and Medicare. To settle governmental claims against it, Omnicare eventually paid roughly $150 million (plus interest) and agreed to enter a five-year corporate-integrity rehabilitation program.
Although Omnicare’s statements were cast as opinions expressing a belief that the company operated within the law, the Sixth Circuit rejected the contention that such statements cannot give rise to liability unless the issuer actually disbelieved them. It thus expressly rejected the Second Circuit’s holding in Fait, which required investors to demonstrate that the issuer disbelieved the statements of opinion it made. It was enough, for the Sixth Circuit, that the statement of opinion ultimately turned out to be wrong.
Today, the Supreme Court’s decision in Omnicare resolves the resulting conflict between the circuit courts by holding that a statement of opinion may be actionable either because it was not believed, or because it lacked a reasonable basis in fact. The Court noted that in certain contexts, such as securities offerings, a statement of opinion may reasonably be understood as an “‘implied assertion, not only that the speaker knows no facts which would preclude such an opinion, but that he does know facts which justify it.’” The Court added that “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.” It vacated the Sixth Circuit’s decision and remanded with directions for the lower courts to consider whether Omnicare’s statements were misleading under this reasonable-basis standard.
“We look forward to pressing ahead with these claims,” said Robbins Geller partner Henry Rosen, who has worked since 2006 on behalf of the court-appointed lead plaintiff Laborers District Council Construction Industry Pension Fund and the class and who framed the complaint that produced the Supreme Court’s decision.
Robbins Geller partner Darren J. Robbins noted that “over 80 years ago, Congress passed the Securities Act of 1933 to ensure that corporate issuers tell the whole truth when they sell securities to investors. This opinion goes a long way in emphasizing both the importance and scope of that law and the important protection it provides to the integrity of our financial markets.”