Giving a knowingly false opinion about a public company can expose the company and its insiders to liability for securities fraud under federal law.
But what about an opinion that they truly believe but for which they have a flimsy basis?
The Supreme Court held today that the lack of rigor may indeed support a claim under the Securities Act of 1933, 15 U.S.C. 77k(a), in spite of the opinion-giver's earnestness.
The case arose from a public stock offering by Omnicare, Inc., a company that provided pharmacy services for people who reside in nursing homes. Omnicare said in the registration statement that it "believe[d]" it complied with relevant law. The belief proved untrue; Omnicare's rebates to pharmacies did violate federal law against paying kickbacks.
Pension funds that bought Omnicare stock in the initial public offering sued under section 11 of the Securities Act after lawsuits by the federal government undercut Omnicare's claim of legal compliance. The district court dismissed the case, but the Sixth Circuit reversed, holding "that a statement of opinion that is ultimately found incorrect — even if believed at the time made — may count as count as an 'untrue statement of material fact.'" Omnicare, Inc. v. Laborers Dist. Council Constr. Industry Pension Fund, No. 14-435, slip op. at 6 (U.S. Mar. 24, 2015) (quoting 15 U.S.C. 77k(a)).
Facts and opinions
The Court ruled 9-0 that the court of appeals erred in concluding that Omnicare had made an "untrue statement of material fact". While "a statement of fact ('the coffee is hot') expresses certainty about a thing," "a statement of opinion ('I think the coffee is hot') does not." Id. Because Ominicare said only that it "believe[d]" its rebates didn't violate anti-kickback law and the pension funds "do not contest that Omincare's opinion was honestly held", the statement — of a false but sincere view — did not run afoul of the Securities Act, all nine justices agreed. Id. at 9. "[A] sincere statement of pure opinion is not an 'untrue statement of material fact,' regardless whether an investor can ultimately prove the belief wrong." Id.
That left the question of whether the funds had alleged a viable claim that "Omnicare 'omitted to state facts necessary' to make its opinion on legal compliance 'not misleading.'" Id. at 10 (quoting 15 U.S.C. 77k(a)). Seven of the justices concluded that the funds deserved a chance to persuade the courts below that they had stated an adequate omission claim.
The majority pointed out that "a reasonable investor may, depending on the circumstances, understand an opinion statement to convey facts about how the speaker has formed the opinion—or, otherwise put, about the speaker’s basis for holding that view." Id. at 11. Justice Kagan explained:
Section 11’s omissions clause, as applied to statements of both opinion and fact, necessarily brings the reasonable person into the analysis, and asks what she would naturally understand a statement to convey beyond its literal meaning. And for expressions of opinion, that means considering the foundation she would expect an issuer to have before making the statement.
Id. at 17. The Court sent the case back to the Sixth Circuit for analysis of whether the pension funds' complaint adequately stated an omissions claim.
Justices Antonin Scalia and Clarence Thomas concurred in separate opinions. Justice Scalia wrote that section 11 does not apply to omissions about the basis for opinions unless the opiner "intend[ed] to deceive" by failing to disclose the flimsiness of the basis. Id. at 6 (Scalia, J., concurring). Justice Thomas felt that the question of liability for an omission "is not properly before us" since the courts below had not passed on it. Id. at 1 (Thomas, J., concurring).
Omnicare offers more to plaintiffs than to defendants, for two main reasons. First, the mere fact that a public disclosure expresses or relates to an opinion will not preclude liability. Section 11 covers not only lying about an opinion — saying you believe something when you don't — but also falsely implying that an opinion rests on a reasonably rigorous basis — suggesting that adequate expertise and a sufficient investigation support it.
Second, the Court's ruling saves Securities Act claims from the challenges of pleading a claim under the onerous standards of the Private Securities Litigation Reform Act of 1995. Justice Scalia would have imported scienter into the section 11 analysis despite its absence as an element under the Securities Act, but the majority rejected that approach. Id. at 15 n.11 (stating that "we think Justice Scalia's reliance on the common law’s requirement of an intent to deceive is inconsistent with §11’s standard of liability").
The Court's decision will give new life to securities cases that target false statements about legal and other opinions. Plaintiffs may want to rejoice.
In Blawgletter's opinion.
Note: Our series on the hottest oil and gas claims will resume tomorrow.