Securities

U.S. Supreme Court Applies Reasonable Basis Standard for Statements of Opinion

 WASHINGTON, D.C. — (Mealey’s) The U.S. Supreme Court on March 24 reversed and remanded a Sixth Circuit U.S. Court of Appeals opinion in a securities class action lawsuit that determined that a company’s executive officers may be held liable for statements made to investors that later turned out to be false and ruled that, on remand, the Sixth Circuit should apply a “reasonable” basis standard for such statements of opinion (Omnicare Inc., et al. v. The Laborers District Council Construction Industry Pension Fund and The Cement Masons Local 526 Combined Funds, No. 13-435, U.S. Sup.; See November 2014, Page 4) [lexis.com subscribers may access Supreme Court briefs and an enhanced opinion for this case].

The Supreme Court held that the Sixth Circuit’s ruling that a statement of opinion constitutes an “untrue statement of . . . fact” when the statement is later determined to be false is improper because “[a] statement of fact expresses certainty about a thing, whereas a statement of opinion conveys only an uncertain view as to that thing.”

“Section 11 [of the Securities Act of 1933] incorporates that distinction in its first clause by exposing issuers to liability only for ‘untrue statement[s] of . . . fact.’  Because a statement of opinion admits the possibility of error, such a statement remains true — and thus is not  an ‘untrue statement of . . . fact’ — even if the opinion turns out to have been wrong,” the Supreme Court said.

“But opinion statements are not wholly immune from liability under §11’s first clause. Every such statement explicitly affirms one fact:  that the speaker actually holds the stated belief. A statement of opinion thus qualifies as an ‘untrue statement of . . . fact’ if that fact is untrue — i.e., if the opinion expressed was not sincerely held. In addition, opinion statements can give rise to false-statement liability under §11 if they contain embedded statements of untrue facts. Here, however, Omnicare [Inc.]’s sincerity is not contested and the state­ments at issue are pure opinion statements. The Funds thus cannot establish liability under §11’s first clause.”

Omission Clause

The Supreme Court also found that “[i]f a registration statement omits material facts about the issu­er’s inquiry into, or knowledge concerning, a statement of opinion, and if those facts conflict with what a reasonable investor, reading the statement fairly and in context, would take from the statement itself, then §11’s omissions clause creates liability.”

In particular, the Supreme Court ruled that “[f]or purposes of §11’s omissions clause, whether a statement is ‘misleading’ is an objective inquiry that depends on a reasonable investor’s perspective.”

“Omnicare goes too far by claiming that no reasonable person, in any context, can understand a statement of opinion to con­vey anything more than the speaker’s own mindset. A reasonable investor may, depending on the circumstances, understand an opinion statement to convey facts about the speaker’s basis for holding that view. Specifically, an issuer’s statement of opinion may fairly imply facts about the inquiry the issuer conducted or the knowledge it had. And if the real facts are otherwise, but not provided, the opinion statement will mislead by omission,” the Supreme Court stated.

“An opinion statement, however, is not misleading simply because the issuer knows, but fails to disclose, some fact cutting the other way. A reasonable investor does not expect that every fact known to an issuer supports its opinion statement. Moreover, whether an omission makes an expression of opinion misleading always depends on context. Reasonable investors understand opinion statements in light of the surrounding text, and §11 creates liability only for the omission of material facts that cannot be squared with a fair reading of the registration statement as a whole. Omnicare’s arguments to the contrary are unavailing.”

Reasonable Investor

Moreover, the Supreme Court ruled that on remand, the Sixth Circuit “must review the Funds’ complaint to determine whether it adequately alleges that Omnicare omitted from the regis­tration statement some specific fact that would have been material to a reasonable investor.”

“If so, the court must decide whether the al­leged omission rendered Omnicare’s opinion statements misleading in context,” the Supreme Court explained.

Justice Elena Kagan wrote the opinion for the Supreme Court, in which Chief Justice John G. Roberts and Justices Anthony M. Kennedy, Ruth Bader Ginsburg, Stephen G. Breyer, Samuel A. Alito Jr. and Sonia Sotomayor joined in the opinion.

Scalia Opinion

Justice Antonin Scalia issued an opinion concurring in part and concurring in the judgment, stating that “I agree with the Court’s discussion of what it means for an expression of opinion to state an untrue material fact. But an expression of opin­ion implies facts (beyond the fact that the speaker believes his opinion) only where a reasonable listener would un­derstand it to do so. And it is only when expressions of opinion do imply these other facts that they can be ‘mis­leading’ without the addition of other ‘material facts.’  The Court’s view would count far more expressions of opinion to convey collateral facts than I — or the common law — would, and I therefore concur only in part.”

Justice Clarence Thomas also filed an opinion concurring in the judgment.

“I agree with the Court that the statements of opinion at issue in this case do not contain an untrue statement of a material fact. I write separately because I do not think it advisable to opine, as the majority does, on an additional theory of liability that is not properly before us,” he said.

Claims Made

Investors who purchased securities of Omnicare, a provider of pharmaceutical care for the elderly, sued the company, directors Joel F. Gemunder, David W. Froesel, Cheryl D. Hodges and Sandra E. Laney and the estate of the late director Edward L. Hutton in the U.S. District Court for the Eastern District of Kentucky. They allege that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Section 11 of the Securities Act. The plaintiffs allege that the defendants engaged in a fraudulent scheme to artificially inflate Omnicare’s stock price by misrepresenting the company’s financial results and business practices.

Judge William O. Bertelsman dismissed the complaint under the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995 for failure to plead loss causation. The plaintiffs appealed to the Sixth Circuit, which reversed and remanded.

On remand, the defendants moved to dismiss, and on Feb. 13, 2012, Judge Bertelsman granted the motion. The investors again appealed to the Sixth Circuit, which affirmed in part and reversed and remanded in part.

Petition Filed

The defendants filed a petition for writ of certiorari with the Supreme Court on Oct. 4, 2013.

The question presented was:  “For purposes of a Section 11 claim, may a plaintiff plead that a statement of opinion was ‘untrue’ merely by alleging that the opinion itself was objectively wrong, as the Sixth Circuit has concluded, or must the plaintiff also allege that the statement was subjectively false — requiring allegations that the speaker’s actual opinion was different from the one expressed — as the Second, Third, and Ninth Circuits have held?”

The investors are represented by Goldstein and Eric Alan Isaacson of Robbins Geller Rudman & Dowd in San Diego.

The defendants are represented by Shanmugam and Linda T. Coberly of Winston & Strawn in Chicago.

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