The U.S. Supreme Court has issued a decision in the Omnicare case holding that opinions presented in registration statements can be subject to Section 11 liability if either (a) the opinion was not genuinely held, or (b) the registration statement omitted material facts about the issuer’s inquiry into, or knowledge concerning, the opinion. It is a 9-0 decision authored by Justice Kagan, although Justices Scalia and Thomas filed separate concurring opinions that effectively function as dissents.
The decision addresses an existing split in the circuit courts. While the Second, Third, and Ninth Circuits had held that the plaintiff must allege the opinion was both objectively and subjectively false – requiring allegations that the speaker’s actual opinion was different from the one expressed – in Omnicare, the Sixth Circuit found that if a defendant “discloses information that includes a material misstatement [even if it is an opinion], that is sufficient and a complaint may survive a motion to dismiss without pleading knowledge of falsity.” The Supreme Court rejected both positions and, as was extensively discussed at the oral argument, endorsed a middle ground approach.
In Omnicare, the relevant opinions related to the company’s compliance with applicable law. The plaintiffs failed to allege that the company did not believe it was legally compliant or that the opinions contained some false statement of underlying fact. As a result, the Court held, the first prong of its liability analysis was inapplicable.
That said, the plaintiffs also alleged that Omnicare omitted to state facts that necessary to make its opinions on legal compliance not misleading. The Court held that this was a potentially viable claim, because a reasonable investor “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.” While it is not enough that some fact cuts against the stated opinion, if the investor can “identify particular (and material) facts going to the basis for 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,” there can be Section 11 liability. In the case of a legal opinion, for example, “if the issuer made the statement in the face of its lawyers’ contrary advice, or with the knowledge that the Federal Government was taking the opposite view,” the investor has “cause to complain.”
The Omnicare plaintiffs claimed the company received some contrary advice from an attorney about the legal risks associated with a particular contract. The Court remanded the case for the lower court to determine whether (a) the excluded fact would have been material to a reasonable investor and (b) in light of the overall context, including other disclosures that Omnicare made about its legal compliance and risks, “the excluded fact shows that Omnicare lacked the basis for making those statements that a reasonable investor would expect.”
Holding: Judgment vacated and remanded for further proceedings.
Quote of note: “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. All that, however, is a feature, not a bug, of the omissions provision.”
Notes on the Decision
(1) The Court concluded that it will be “no small task for an investor” to adequately demonstrate that an omission has rendered an opinion misleading. At the same time, it also found that to avoid exposure to liability “an issuer need only divulge an opinion’s basis, or else make clear the real tentativeness of its belief.” Whether this judicial advice will change how opinions are presented in registration statements remains to be seen.
(2) As perhaps to be expected when the Court adopts a middle ground approach, both the plaintiffs and defense bars will have reason to be satisfied with the decision. While the Court struck down the Sixth Circuit’s purely objective standard, it also arguably provided a new basis for opinion liability in the Second, Third, and Ninth Circuits (and those circuits are where the majority of securities class actions are filed).
(3) Justice Scalia’s concurrence took issue with the majority’s omissions analysis, arguing that “[t]he objective test proposed by the Court – inconsistent with the common law and common intuitions about statements of opinion – invites roundabout attacks upon expressions of opinion.”
The 10b-5 Daily 