Issuer Liability for Opinions in Registration Statements
Client Alerts | March 27, 2015
On March 24, 2015, the Supreme Court of the United States issued a decision setting standards for opinions in issuers’ registration statements. In Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, the Court held that an issuer of securities must ensure that representations of opinion in registration statements are (1) sincerely held and (2) “fairly align” with the information in the issuer’s possession. An issuer may need to vet its opinions-it may not include baseless or off-the-cuff opinions in a registration statement. However, issuers’ opinions may be based on conflicting information, and an issuer will not be held liable simply because its sincere and reasonable opinion later proves to have been incorrect.
The Supreme Court’s Decision
Concerning Opinions in Registration Statements
Section 11 of the Securities Act of 1933 permits purchasers of securities to sue for damages resulting from registration statements that “contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading . . . .” Unlike Section 10(b) of the Securities Exchange Act of 1934, Section 11 of the Securities Act is a “strict liability” statute, and the purchaser in a Section 11 action therefore need not allege or prove that the issuer acted with intent to deceive or defraud.
In Omnicare, plaintiffs took issue with the following two statements that Omnicare, a provider of pharmacy services for residents of nursing homes, made in its registration statement for a public offering of common stock:
- “We believe our contract arrangements with other healthcare providers, our pharmaceutical suppliers and our pharmacy practices are in compliance with applicable federal and state laws.”
- We believe that our contracts with pharmaceutical manufacturers are legally and economically valid arrangements that bring value to the healthcare system and the patients that we serve.”
The Court noted that, “[o]n the same page as the first statement above, Omnicare mentioned several state-initiated ‘enforcement actions against pharmaceutical manufacturers’ for offering payments to pharmacies that dispensed their products; it then cautioned that the laws relating to that practice might ‘be interpreted in the future in a manner inconsistent with our interpretation and application.'” In addition, “adjacent to the second statement, Omnicare stated that the Federal Government had expressed ‘significant concerns’ about some manufacturers’ rebates to pharmacies and warned that business might suffer ‘if these price concessions were no longer provided.'”
Certain pension funds that purchased Omnicare stock in the public offering alleged on the basis of the above statements of opinion that Omnicare made “‘materially false'” representations about legal compliance and “‘omitted to state [material] facts necessary’ to make its representations not misleading.” However, “in light of §11’s strict liability standard, [plaintiffs] chose to ‘exclude and disclaim any allegation that could be construed as alleging fraud or intentional or reckless misconduct.'”
The District Court granted Omnicare’s motion to dismiss, finding that the plaintiffs had failed to state a claim under Section 11 because they did not allege that Omnicare’s officers knew that Omnicare’s contract arrangements were not in compliance with the law. The Court of Appeals for the Sixth Circuit reversed, holding that plaintiffs were not required to allege and prove that Omnicare’s opinion was insincere, and that the plaintiffs’ allegations that the opinions were objectively false were sufficient.
The Supreme Court held that the fact that a stated opinion ultimately is incorrect does not render the opinion an “untrue statement of fact.” However, a statement of opinion can be deemed an “untrue statement of fact” if (1) the opinion was not sincerely held or (2) the statement of opinion contained “embedded statements of facts” that are untrue. The Court ruled that the statements of opinion at issue did not contain any statements of fact, and plaintiffs did not contest that Omnicare’s opinion was sincere. Therefore, the Court concluded, plaintiffs failed to allege an untrue statement of fact under Section 11.
The Court remanded the case with instructions to the lower court to consider whether plaintiffs had stated a Section 11 claim on the basis of Omnicare’s alleged omissions of material fact. Noting that the rational investor reviewing a statement of opinion in a registration statement “expects not just that the issuer believes the opinion (however irrationally), but that it fairly aligns with the information in the issuer’s possession at the time,” the Court advised that, in order to survive Omnicare’s motion to dismiss, the plaintiffs would need to identify a specific fact or facts omitted from Omnicare’s registration statement. Conclusory allegations would not suffice.
Next, the lower court would need to assess “whether ‘there is a substantial likelihood that a reasonable [investor] would consider [the allegedly omitted fact] important.'” If there was such a likelihood, the court would need to determine whether the allegedly omitted fact “show[ed] that Omnicare lacked the basis for making those statements that a reasonable investor would expect.”
The plaintiffs had alleged that Omnicare omitted the fact that an Omnicare attorney had warned that “a particular contract ‘carrie[d] a heightened risk’ of legal exposure under anti-kickback laws.” The Court ordered the lower court to consider such factors as the attorney’s status and expertise, in addition to relevant disclaimers in the registration statement, in considering whether plaintiffs had stated a claim for omission of a material fact.
The Court noted that an opinion statement “is not necessarily misleading when an issuer knows, but fails to disclose, some fact cutting the other way. Reasonable investors understand opinions sometimes rest on a weighing of competing facts; indeed, the presence of such facts is one reason why an issuer may frame a statement as an opinion, thus conveying uncertainty.”
Implications of the Omnicare Decision
Although the Supreme Court’s holding concerns registration statements under Section 11 of the Securities Act, it is possible that statements of opinion in press releases, merger proxy statements, and other formal and carefully-drafted documents will be subjected to the same standards under Section 10(b) of the Exchange Act (although scienter would have to be pleaded and proven in those cases).
In the wake of Omnicare, investors should read opinions in the context of the larger document, carefully considering any disclaimers. Opinions may be based on “competing facts” and might remain uncertain. Even if the opinion proves wrong, that fact alone cannot subject an issuer to liability. Investors should rely less on general statements of opinion than specific statements.
Ultimately, investors who rely on statements of opinion by issuers that prove to have been insincere, unreasonable or unfounded will be able to sue for damages arising from their investments, as long as other statutory requirements are met.