On March 24, 2015, the U.S. Supreme Court (the “Court”), in a unanimous 9-0 vote, decided on the parameters of an issuer’s potential liability for its statements of opinion expressed in Securities and Exchange Commission (“SEC”) registration statements. Instead of focusing on liability for securities fraud under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund (“Omnicare”) involved alleged violations of Section 11 of the U.S. Securities Act of 1933, as amended (the “Securities Act”).
In the context of a SEC registration statement by a public company, claims under Section 11 of the Securities Act are based on strict liability, meaning liability attaches for any false statement of fact in a SEC registration statement regardless of the speaker’s intent. In Omnicare, the Supreme Court tackled whether statements of opinion should be treated differently from statements of fact and reasoned that: (i) a statement of opinion does not constitute an “untrue statement . . . of fact” in violation of Section 11 merely because it is ultimately proven incorrect; and (ii) a statement of opinion which omits material facts about the issuer’s knowledge may be misleading if the omitted facts conflict with what a reasonable investor would infer from reading the statement in context.
The Court’s decision resolved a split in certain circuit courts (the “Circuits”) and reversed the Sixth Circuit’s decision, siding with the majority of the Circuits and adopting the view of the Second, Third and Ninth Circuits, where most Section 11 claims are filed.
In its SEC registration statement, Omnicare, which provided pharmacy services to nursing home residents, expressed two opinions regarding its compliance with legal requirements: “We believe our contract arrangements … and our pharmacy practices are in compliance with applicable federal and state laws” and “[w]e believe that our contracts with pharmaceutical manufacturers are legally and economically valid arrangements ….” But Omnicare also mentioned several state enforcement actions, as well as expressions of “significant concern” by the U.S. federal government about certain pricing and rebate practices that could prove difficult for them.
Based on state and federal agencies subsequently alleging the defendant’s practices violated anti-kickback laws, the plaintiffs claimed that the statements of opinion turned out to be materially false and omitted to state material facts necessary to make Omnicare’s statements not misleading, in violation of Section 11 of the Securities Act.
Statements of Opinion
The Sixth Circuit ruled that the plaintiff’s claims could proceed, holding that a statement of opinion can form the basis for a Section 11 claim when the opinion turns out to be wrong even if the speaker believed it to be accurate at the time it was made. The Sixth Circuit was the only jurisdiction where subjective falsity was not required to create liability under Section 11. The Court, overturning the Sixth Circuit, confirmed that a sincere statement of pure opinion is not an “untrue statement” even if the opinion is ultimately proven to be wrong.
The Court held that a statement of opinion gives rise to Section 11 liability as an “untrue statement of a material fact” only if the issuer does not actually hold the opinion at the time the statement is made or if the statement of opinion embeds an underlying fact that is untrue. On the latter, the court used the hypothetical statement to illustrate its holding: “I believe our TVs have the highest resolution available because we use a patented technology to which our competitors do not have access”, explaining that liability may attach were the company not to use patented technology.
The Court went on to observe that Section 11’s omission provision may be relevant to determining whether a statement of opinion is misleading. The Court acknowledged that an opinion statement need not disclose all facts that lean against the stated opinion and that rather the standard was whether a reasonable investor could understand an opinion statement to convey facts about the speaker’s basis for holding the stated view. However, if an omission conflicts with a reasonable investor’s fair reading of the opinion, in context, then the statement is misleading under Section 11.
The Court remanded the case for application of this standard, noting that: (i) plaintiffs cannot proceed without identifying omissions in the SEC registration statement; (ii) those omitted facts must be material to a reasonable investor; and (iii) the lower court must determine whether any alleged omissions render the statement misleading because the excluded fact shows that Omnicare lacked the bases that a reasonable investor would expect to support the statements.
The normal principles of materiality under the Exchange Act Rule 10b-5 still apply, as a reasonable investor clearly would not expect that every fact known to an issuer supports its opinion statement. However, issuers should be on notice to provide appropriate qualifiers, as well as any industry reports, expert opinions and/or related third party verified parties (to the extent necessary and proper in a materiality context).
The Court attempted to limit the reach of its decision with respect to omissions and established a high bar for a plaintiff to succeed on such a claim. The Court stated that a plaintiff “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.”
Omnicare has several key take-aways regarding the preparation of securities offering documents, including:
- While Omnicare specifically addresses Section 11 claims for SEC registration statements, the “misstatement or omission of material facts” rubric of Section 11 carries through with it a number of other anti-fraud provisions of U.S. securities laws, including the general anti-fraud provisions of the Exchange Act, including Section 10(b) and Rule 10b-5 that cover both public and private sales of securities.
- The Court’s opinion that Section 11 pertains to misstatements of omissions of “facts” and that opinions, because they “express a view, not a certainty”, by their nature are not facts, except the fact of the speaker’s belief, does not merely mean couching a statement as an opinion insulates the issuer from liability. Such statements must still be carefully considered for the words used to express them, the degree of diligence supporting the opinion, and the significance of the opinion to a reasonable investor in light of its context (including other disclaimers urging caution or non-reliance).
- Omnicare sets a high pleading bar for plaintiffs. The Court noted that an opinion might not be actionable even if there was some fact contrary to the opinion because the presence of conflicting facts is one reason why an issuer might make a statement of opinion instead of a statement of fact, “thus conveying uncertainty.”