Securities Snapshot
May 9, 2020

Ninth Circuit Adopts New Standard for Pleading Falsity of Opinions After Omnicare

Ninth Circuit adopts higher standard for pleading falsity under U.S. Supreme Court’s Omnicare decision; Fifth Circuit affirms dismissal of shareholder class action for failure adequately to plead scienter; New York federal court allows class action fraud suit against Investment Technology Group to move forward; class action suit against Valeant proceeds in New Jersey federal court; California federal court denies dismissal of class action suit against pharmaceuticals company following reversal and remand from Ninth Circuit; Ex-RMBS trader Jesse Litvak given two-year sentence after retrial.

In City of Dearborn Heights Act 345 Police & Fire Retirement System v. Align Technology, Inc., the Ninth Circuit Court of Appeals recently affirmed the dismissal of a securities class action lawsuit, holding that the alleged misstatements concerning Align Technology’s $187.6 million acquisition of Cadent Holdings, Inc. did not meet the high standard for pleading falsity of opinions under the Supreme Court’s 2015 decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund. The plaintiffs, asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, alleged that Align knew but did not disclose that Cadent had artificially inflated its value by offering substantial discounts to its customers in an attempt to make itself appear more valuable. Align later reported multiple goodwill impairment charges related to the Cadent acquisition. The district court had previously dismissed the case in its entirety on grounds that the plaintiffs failed adequately to plead falsity or scienter, holding that goodwill valuations are opinion statements because they “are inherently subjective and involve management’s opinion regarding fair value.” On appeal, the Ninth Circuit first held that although Omnicare concerned Section 11 claims, its reasoning applied equally to Section 10(b) claims, joining the Second Circuit in that result. The court then held that while some of the alleged misstatements contained “embedded facts,” ultimately they were statements of opinion. The court went on to conclude that plaintiffs had not sufficiently pled that Align believed Cadent’s goodwill was impaired in 2011 and 2012 or that it believed Cadent’s fair value was “significantly in excess of the carrying value,” which specific allegations were required to establish falsity under Omnicare. In reaching this conclusion, the court observed that pleading falsity by alleging “there is no reasonable basis for the belief” is permissible only under an omission theory of liability, and not under a material misrepresentation theory of liability, which the Ninth Circuit had previously allowed in its 2014 Reese v. Malone decision. Two members of the panel held that the Reese decision was “clearly irreconcilable” with Omnicare and therefore overruled. Thus in the Ninth Circuit, a Section 10(b) plaintiff can now plead falsity under Omnicare only by alleging: (1) on a material misrepresentation theory, that the speaker did not hold the belief she professed and that the belief is objectively untrue; (2) on an omission theory, that the supporting fact the speaker supplied is untrue; or (3) on an omission theory, that there are facts going to the basis for the issuer’s opinion whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.


In Neiman v. Bulmahn, the Fifth Circuit recently affirmed dismissal of a shareholder class action against former officers and directors of ATP Oil & Gas Corporation, a now-bankrupt company that developed oil and gas properties. The plaintiffs alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by misrepresenting both the production capacity of a new oil well and ATP’s financial health, and withholding the true reason for the CEO’s resignation. The district court dismissed the complaint in its entirety and with prejudice. On appeal, the Fifth Circuit affirmed on the grounds that the plaintiffs failed adequately to plead the required strong inference of scienter. First, the court rejected allegations that CFO Albert Reese made misstatements regarding the production capacity of a new oil well in September 2011, finding that Reese lacked a motive to mislead the public because he had disclosed accurate information on the same subject just two months later. Second, the court rejected the allegation that Reese misrepresented the company’s financial health, concluding that because “ATP continuously disclosed its worsening cash position . . . [i]t would have made little sense for Defendants to simultaneously disclose to, and mislead, the public about ATP’s liquidity position.” Finally, the court rejected the allegation that Reese and a director failed to disclose that the CEO resigned upon learning of ATP’s poor financial condition, noting that there is no basis for the court to conclude that they knew or were reckless in not knowing the CEO’s “true” reasons for leaving. In sum, the Fifth Circuit declined to “strain to find inferences favorable to the plaintiffs” in rejecting the plaintiffs’ scienter allegations.


A federal court in the Southern District of New York has allowed portions of a putative class action to advance in In re Investment Technology Group, Inc., Securities Litigation. A shareholder in Investment Technology Group, an agency securities broker, alleged that the company and three of its executives violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by failing to disclose the company’s proprietary trading program (which used or had access to confidential customer trading information) and the resulting investigation by the Securities and Exchange Commission (which culminated in a $20.3 million fine). The defendants moved to dismiss the complaint, arguing that their statements about the company’s brokerage business were literally true or, at worst, mere puffery. Finding that ITG omitted the “key fact” that its business practices concerned the misuse of customer information, the court held the statements were “sufficiently definite and, moreover, related to ‘the heart’ of ITG’s business,” and therefore denied dismissal as to ITG and its former CEO. However, the court did narrow the scope of the action. First, it found that certain “boilerplate” factual statements by ITG were not actionable even though they failed to disclose the SEC investigation, because the statements, “read completely and in context, are neither false nor so incomplete as to mislead a reasonable shareholder.” Second, the defendants’ purported statements of opinion were not actionable because the plaintiff failed to allege that the statements were both objectively false and disbelieved by the defendants at the time they were made. Third, the court limited the putative class period to a five-month period when ITG’s proprietary trading desk was operational, finding that statements made after the desk had closed did not refer to the defendants’ past conduct. Finally, the court dismissed the claims against ITG’s CFO and general counsel, declining to find scienter where the two defendants merely held executive positions within the company and sold shares in ITG during the relevant period.


In In re Valeant Pharmaceuticals International, Inc. Securities Litigation, a New Jersey federal court allowed a securities class action to proceed against Valeant Pharmaceuticals, several of its officers and directors, the company’s accounting firm, and investment banks that underwrote the company’s stock—but dismissed a claim related to Valeant’s debt issuances. The action, brought on behalf of purchasers of Valeant equity securities and senior notes, asserted claims under the Securities Act of 1933 and the Securities Exchange Act of 1934. The plaintiffs alleged that Valeant artificially inflated its stock value through misleading statements intended to hide the company’s deceptive business practices, which included price gouging and the creation of “a captive pharmacy network.” Most critically, the court held that the plaintiffs adequately pleaded the scienter element of Section 10(b) of the Exchange Act. In so doing, the court engaged in a “holistic review of the Complaint” despite the defendants’ attempt to divide the allegations “into discrete parts and argue[] that each part fails to give rise to sufficient scienter.” The court also found that “the Complaint sufficiently attributes purported material misstatements or omissions to all of the [Valeant] Defendants pursuant to the standard set forth in” in Janus Capital Group, Inc. v. First Derivative Traders. Moreover, the court declined to dismiss three claims brought against the defendants under Section 12 of the Securities Act, finding that allegations that the plaintiff had purchased “in” the offering were sufficient to establish statutory standing at the pleading stage, and that the plaintiffs sufficiently pleaded material omissions going to the basis of Valeant’s accounting firm’s opinions sufficient to render those opinions misleading under Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund. However, the court did grant the defendants’ motions to dismiss a separate Section 12 claim concerning Valeant’s debt issuances, holding that “Rule 144A registration requires dismissal of Securities Act Section 12 claims of liability.”


A federal court in the Southern District of California changed course in Schueneman v. Arena Pharmaceuticals, Inc. by denying dismissal of a securities class action that it had previously dismissed twice, after those earlier decisions were reversed by the Ninth Circuit and remanded for further action. Plaintiffs alleged that Arena Pharmaceuticals and its officers violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by misrepresenting regarding the likelihood that the FDA would approve the company’s anti-cancer drug. The lower court had dismissed the original complaint for failure to plead scienter, and later dismissed an amended complaint upon finding that the likelihood of FDA approval boiled down to a good-faith scientific dispute between Arena and the FDA. However, the Ninth Circuit reversed those decisions, holding that the plaintiff had adequately pleaded scienter by alleging that the defendants were aware of negative drug studies, yet continued to represent to the public that the drug would be approved. The Ninth Circuit also noted that Arena not only expressed its confidence in the drug’s future, but affirmatively represented that all drug studies supported the case for approval. On remand, the lower court relied on the Ninth Circuit’s finding of scienter when rejecting the defendants’ new contention that the plaintiffs did not adequately allege any representations that were false or misleading. The lower court echoed the Ninth Circuit in finding that “falsity and scienter in private securities fraud cases are generally strongly inferred from the same set of facts, and the two requirements may be combined into a unitary inquiry under the PLSRA.”


A Connecticut federal court handed down a new two-year sentence to Jesse Litvak, a former residential mortgage-backed securities trader at Jefferies Group, an investment banking firm. In 2014, Litvak had been convicted on a dozen counts of securities fraud after allegedly misleading customers at Alliance Bernstein and Soros Fund Management about RMBS prices from 2009 to 2011. He was sentenced to two years in prison. On appeal, however, the Second Circuit overturned the verdict and sentence. In a 2016 retrial, a jury found Litvak guilty on just one count out of ten, finding that he lied to a portfolio manager at Invesco Ltd. about how much he had paid for a bond. Despite Litvak’s acquittal on all but one count, the government sought a tougher sentence of at least 57 months behind bars. The court instead imposed the same two-year prison term that Litvak had received in 2014 before the appeal and retrial resulted in a conviction on only one count. The court also ordered Litvak to pay $2 million in fines—an increase over the $1.75 million fine he received in 2014.