A Matter of Opinion

Are financial estimates like goodwill and loan loss reserves statements of fact or opinion? The answer is significant, especially for claims brought under Section 11 and Section 12 of the ’33 Act based on alleged misrepresentations in a registration statement. If these financial estimates are statements of fact, then a plaintiff is only required to establish that they were objectively false. If these financial estimates are statements of opinion, then a plaintiff must establish that they were objectively false and disbelieved by the defendant at the time they were made. In effect, it converts the cause of action from one based on strict liability (the company) or negligence (the individual defendants), to one based on knowing falsity.

In Fait v. Regions Financing Trust, No. 10-2311-cv (2d Cir. August 23, 2011), the plaintiffs alleged that despite adverse trends in the mortgage and housing markets, particularly in areas where the mortgage loans issued by a company previously acquired by Regions were concentrated, Regions failed to write down goodwill and to sufficiently increase its loan loss reserves. The lower court held that these financial estimates were matters of opinion and dismissed the Section 11 and Section 12 claims brought by purchasers of Region’s trust preferred securities.

On appeal, the Second Circuit affirmed the lower court’s ruling. Estimating goodwill “depend[s] on management’s determination of the ‘fair value’ of the assets acquired and liabilities assumed, which are not matters of objective fact.” Similarly, loss reserves “reflect management’s opinion or judgment about what, if any, portion of amounts due on the loans ultimately might not be collectible.” As a result, plaintiffs were required to plausibly allege that defendants did not believe their statements regarding goodwill and loan loss reserves at the time they made them. In the absence of these allegations, the plaintiffs’ claims were subject to dismissal.

Holding: Dismissal affirmed.

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