Securities Fraud Claims Resolved By Supreme Court

In Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, the U.S. Supreme Court addressed when statements of opinion are actionable under Section 11 of the Securities Act of 1933 (Section 11).

The Court’s decision resolves the existing Circuit split and creates a new legal standard for future securities lawsuits.

Facts of the Case

The plaintiffs alleged that Omnicare, Inc. (“Omnicare”) violated Section 11 when it filed a registration statement that contained two statements expressing the company’s opinion that it was in compliance with federal and state laws. The federal government later sued Omnicare for allegedly receiving kickbacks from pharmaceutical manufacturers and pension funds that purchased the company’s stock. Section 11 creates a cause of action for investors who have acquired securities under a registration statement that either “contain[s] an untrue statement of a material fact” or “omit[s] to state a material fact . . . necessary to make the statements therein not misleading.”

The District Court granted Omnicare’s motion to dismiss after finding that the plaintiff failed to allege that Omnicare’s officers knew they were violating the law. The Sixth Circuit reversed, holding that Section 11 provides for strict liability and, therefore, the defendant’s state of mind is irrelevant. According to the appeals court, “Once a false statement has been made, a defendant’s knowledge is not relevant to a strict liability claim.”

The Supreme Court’s Decision

The Supreme Court vacated the Sixth Circuit’s decision, holding that the court’s holding “wrongly conflates facts and opinions.” Given that the lower court applied the incorrect legal standard, the Supreme Court remanded the case for further proceedings consistent with its opinion.

In reaching its decision, the Supreme Court analyzed Section 11’s two clauses independently. With regard to statements of opinion, the Court clarified that a statement of opinion does not constitute an “untrue statement of . . . fact” simply because the stated opinion ultimately proves incorrect. Rather, the Court held that “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.”

As for the omissions clause, the Court held that Section 11 liability may arise if 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.

“A reasonable investor may, depending on the circumstances, understand an opinion statement to convey facts about how the speaker has formed the opinion — or, otherwise put, about the speaker’s basis for holding that view,” Justice Elena Kagan explained. “And if the real facts are otherwise, but not provided, the opinion statement will mislead its audience.”

Because the lower courts failed to apply the correct legal standard to the plaintiff’s omissions claim, the Supreme Court remanded the case with the following instructions: “The court 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.”