Section 11 of the Securities Act of 1933 imposes strict liability on an issuer of securities if its registration statement contains an untrue statement of material fact or omits a material fact that makes some statement misleading. A commonly recurring question under Section 11 is whether and under what circumstances an issuer’s statement of opinion or belief may give rise to liability. On Tuesday, the U.S. Supreme Court resolved that question in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 575 U.S. ___, 2015 WL 1291916 (Mar. 24, 2015), holding that a statement of opinion or belief that the speaker subjectively holds will not give rise to liability simply because it turns out to be wrong. Rather, the Court held that such a statement of opinion or belief may be an actionable omission if the issuer omits material facts about the basis for its opinion or belief that conflict with what a reasonable investor would infer from the statement, thereby rendering the statement misleading in context. The Court cautioned that this standard for liability is demanding: an investor may not rely on conclusory allegations, but must instead identify particular material facts, the omission of which makes the statement of opinion or belief misleading in context to a reasonable investor.
Section 11 affords investors a private right of action against securities issuers and others if “any part of the registration statement . . . contained an untrue statement of material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.” 15 U.S.C. § 77k(a). Unlike many other causes of action under the federal securities laws, Section 11 imposes liability regardless of whether the issuer intended to deceive or defraud investors.
In the Omnicare case, a group of pension funds alleged that Omnicare violated Section 11 when the company claimed in its registration statement that it “believe[d]” its contractual arrangements with other healthcare providers, pharmaceutical suppliers, and pharmacy practices were “in compliance with applicable federal and state laws,” and that it “believe[d]” its contracts with pharmaceutical manufacturers were “legally and economically valid arrangements that bring value to the healthcare system and the patients that we serve.” The statements were accompanied by cautionary language that governmental entities had expressed concern about and initiated enforcement actions over certain of these practices, and that the legal landscape might change in the future.
The investors alleged that these statements were false and misleading because Omnicare’s contracts in fact violated anti-kickback laws. The U.S. District Court for the Eastern District of Kentucky dismissed the investors’ claims, holding that Omnicare’s statements of belief were only actionable if the officers who made them knew they were untrue – an allegation that the investors had not made (and, indeed, had specifically disclaimed). The U.S. Court of Appeals for the Sixth Circuit reversed, concluding that it was sufficient for the investors to allege that the statements were “objectively false.” In doing so, the Sixth Circuit acknowledged it was splitting with the Courts of Appeals for the Second and Ninth Circuits, which had applied the same “subjectively disbelieved” standard adopted by the District Court.
The Supreme Court’s Omnicare Opinion
The Supreme Court rejected both approaches adopted by the District Court and the Sixth Circuit Court of Appeals. The Supreme Court explained that the rule adopted by the Sixth Circuit incorrectly conflated facts and opinions, and that a company that issues securities cannot be held liable for allegedly making an untrue statement of material fact merely because it expresses an opinion or belief that turned out to be wrong.
The Court held, however, that a statement of opinion can give rise to liability in the following ways:
- The company does not really believe its opinion. A statement of opinion is an implied representation that the company believes in its opinion. If in fact the company does not believe its opinion is accurate, then the company is making an actionable misstatement – it is making a statement that it believes something to be true when in fact it does not.
- The opinion contains an embedded fact that turns out not to be true. Some statements of opinion are based on underlying facts, and the Court said that if the facts turn out not to be true, then the opinion based on them can give rise to liability as well. So, for example, assume a company states that “because our sales have increased 200% this year, we believe that next year’s sales will increase 300%.” Even if the opinion is subjectively believed, there can be liability here if the current year’s sales increased only 50% and the embedded fact turns out to be materially wrong.
- The opinion reasonably leads the reader to conclude that there is an objective basis for the opinion that in fact does not exist. The Court held that even a subjectively believed opinion can result in liability if – due to the way the opinion is stated in the registration statement – the issuer leads the reader to conclude reasonably that there is an objective basis for the opinion that does not exist or did not occur. For example, an opinion can give rise to liability if the context in which it is stated would lead a reasonable investor to conclude that the company conducted an investigation, did fact gathering, or undertook some kind of analytics that then led it to reach the opinion it stated in the offering materials. If in fact no such basis for the opinion exists, then the opinion could give rise to liability, even if sincerely believed by the company.
Limitations on Omnicare’s Rule for “Omissions” Liability
The Supreme Court was careful to place several limits on its holding. The Court emphasized that Section 11 liability for omissions does not create “a general disclosure requirement,” and therefore does not impose liability for an opinion any time the “issuer knows, but fails to disclose, some fact cutting the other way.” According to the Court, the question is whether the registration statement omits facts about the opinion that make the opinion misleading to a reasonable investor in the context in which it was made. This inquiry must account for, among other things, the opinion’s specificity, its surrounding text (including any hedges, disclaimers, and apparently conflicting information), and the customs and practices of the relevant industry. The Supreme Court noted too that pleading an omission claim “is no small task” for an investor: “[t]he investor must identify particular (and material) facts going to the basis of 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.” Finally, the Court offered some guidance to issuers, suggesting they can avoid Section 11 liability either by providing the basis for their opinion in the registration statement or by making clear “the real tentativeness” of their belief.
Having articulated this new standard, which neither court below had applied, the Supreme Court remanded the case to the Sixth Circuit. The Court instructed the Sixth Circuit to determine whether the investors had adequately alleged a specific material fact that was omitted from the registration statement and then to assess whether the omission rendered Omnicare’s stated beliefs about its legal compliance misleading.
Likely Impact of Omnicare
The Supreme Court’s Omnicare decision makes clear that plaintiffs cannot establish Section 11 liability based solely on statements of opinion statements that later turn out to be wrong. To this extent, the opinion removes much of the uncertainty around potential liability that has long existed in regard to issuer statements of opinion. The Supreme Court’s decision also makes clear that Section 11’s false-statement prohibition is not “an invitation to Monday morning quarterback an issuer’s opinions.” The decision nonetheless permits opinion-based Section 11 liability in more circumstances than some courts had previously allowed. After the Omnicare decision, an opinion the issuer subjectively believes may still create liability if an investor can show the statement was misleading in context because the issuer omitted material facts about the basis for its opinion. This will not be an easy hurdle for plaintiffs’ lawyers to clear, especially when pleading claims prior to fact discovery.
Because the Court noted that “to avoid exposure for omissions under [Section] 11, an issuer need only divulge an opinion’s basis, or else make clear the real tentativeness of its belief,” issuers of securities should seriously consider the pros and cons of including such contextual language in the offering materials. The issuer must weigh the benefit of avoiding potential opinion-based liability against the potential for investor confusion that adding such language might cause. In any event, issuers should now be aware that qualifying statements in a registration statement as a belief or opinion will not automatically insulate the statements from Section 11 liability.
Applicability to Investment Banks That Underwrite Securities Offerings
Although the Omnicare decision addressed only potential liability for issuers of securities under Section 11 of the Securities Act of 1933, the decision also has direct implications for the potential liability of underwriters of securities offerings who are subjected to liability under both Section 11 and Section 12 of the Securities Act of 1933, which contain substantially the same prohibitions against misstatements and omissions of material fact. As a result, underwriters will need to undertake an analysis similar to that of issuers in evaluating the inclusion of statements of opinion in offering materials and what, if any, contextual language should accompany such statements. Underwriters also should consider whether their due diligence procedures are sufficient in light of the Omnicare decision or if they should be expanded to provide further reassurances regarding the basis for any statements of opinion included in offering materials.