When the U.S. Supreme Court issues a securities litigation opinion, it rarely is having the last word on the subject. Lower courts still have to interpret and apply the Court’s holding. Last month, a decision from the U.S. Court of Appeals for the Third Circuit – City of Warren Police and Fire Retirement System v. Prudential Financial, Inc., 2023 WL 3961128 (3rd Cir. June 13, 2023) – addressed two questions about how to apply Court precedent in this area.
Opinion Falsity – In its Omnicare decision, the Supreme Court considered when an opinion statement may be false or misleading under Section 11 of the Securities Act (liability for misstatements in registration statements). The Court found that if the speaker actually did not hold the stated belief, or the opinion omitted material facts about the stated inquiry into, or knowledge concerning, the opinion, it can be actionable as a false statement. But does this analytical framework also apply to securities fraud claims under Section 10(b) and Rule 10b-5?
The Third Circuit held that it does. In particular, the Prudential decision noted that Section 11 and Rule 10b-5 “use almost identical language in prohibiting misrepresentations and omissions” and “share the same standard for materiality for misleading statements.” Under these circumstances, the Third Circuit joined every other federal circuit court to consider the issue (1st, 2d, 4th, 9th, 10th, and 11th) and found that the “more developed” Omincare standard applies to both Section 11 and Rule 10b-5 claims based on opinion statements.
Maker of False Statement – In its Janus decision, the Supreme Court held that for a person or entity to have “made” a false statement that can lead to Rule 10b-5 liability, that person or entity must have “ultimate authority over the statement, including its content and whether and how to communicate it.” The attribution of a statement “is strong evidence that a statement was made by – and only by – the party to whom it is attributed.” But how does this analytical framework apply to a paraphrased statement from a corporate officer contained in an analyst report?
The Third Circuit held, contrary to the district court’s decision, that the corporate officer could still be deemed a “maker” of the statement. Even though the statement was indirect (paraphrased) and contained in a non-corporate document (analyst report), the court found that “because the report attributed the statement to the [corporate officer] and the context of the statement indicates that he exercised control over its content and the decision to communicate it to the [analyst], the statement cannot, at least at the pleading stage, be considered to have been ‘made’ by [the analyst] for purposes of Rule 10b-5.” In other words, the corporate officer had “ultimate authority” to speak about the topic on behalf of the company, so he was still the “maker” of the statement even though it was republished by the analyst.
Holding: Dismissal affirmed in part and vacated in part.
The 10b-5 Daily 