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Article: May 2015: Securities & Structured Finance Litigation Update

Business Litigation Reports

U.S. Supreme Court Clarifies When an Opinion Is Actionable Under the Securities Act. Under Section 11 of the Securities Act of 1933, a securities purchaser may sue for damages if the securities registration statement “contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.” 15 U.S. Code § 77k. On March 24, 2015, the Supreme Court considered the application of Section 11 to statements of opinion, such as statements prefaced by “we believe,” that turn out to be incorrect. See Omnicare, Inc. v. Laborers Dist. Council Const. Industry Pension Fund, 135 S.Ct. 1318 (2015). The Court held that an opinion may be actionable under Section 11 as an untrue statement of fact if the opinion was not subjectively believed, or may be actionable as a misleading statement if facts were omitted calling into question the basis of the opinion.

Before the U.S. Supreme Court’s decision in Omnicare, there was a conflict among the federal courts regarding the application of Section 11 of the Securities Act to statements of opinion. Some courts, including courts in the Second, Third, and Ninth Circuits, interpreted liability narrowly based on the U.S. Supreme Court’s decision in Virginia Bankshares v. Sandberg, 111 S. Ct. 2749 (1991), which addressed liability for statements of opinion under Section 14(a) of the Securities Exchange Act of 1934. Those courts held that only statements of opinion that were not subjectively believed (i.e., the speaker did not, in fact, hold the beliefs or opinions expressed) were actionable under Section 11. Other courts, including courts in the Sixth Circuit, interpreted liability broadly, holding that any opinions ultimately found to be incorrect, regardless of the speaker’s belief, were actionable under Section 11 because the statute imposes liability for misrepresentations regardless of the speaker’s intent or state of mind. Finally, other courts, such as courts in the First Circuit, fell in the middle, holding that a statement of opinion was actionable if it did not represent the actual belief of the person expressing the opinion, lacked any basis, or knowingly omitted undisclosed facts tending seriously to undermine the accuracy of the statement.

In Omnicare, the U.S. Supreme Court adopted a middle ground by parsing the language of Section 11, recognizing that the statute imposes liability for both false statements of fact and omissions of facts. The Court set forth one standard for determining when a statement of opinion is as an untrue statement of fact, and another standard for determining when a statement of opinion is misleading because facts relevant to the opinion have been omitted. The Court held that because every statement of opinion explicitly affirms one fact—that the speaker actually holds the stated belief—a statement of opinion is an untrue statement of fact if the speaker did not, in fact, hold the belief. Omnicare, 135 S. Ct. at 1326. The Court also distinguished pure statements of opinion from statements of opinion with embedded facts, such as facts to justify the opinion. The Court noted that if embedded facts are untrue, they are actionable as untrue statements of fact even if included in the context of an opinion. Id. at 1327.

The Court then tackled the more complex problem of determining when a statement of opinion is misleading because of the failure to disclose certain facts. The Court recognized that “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.” Id. at 1328. The Court noted that “if the real facts are otherwise, but not provided, the opinion statement will mislead the audience.” Id. The Court therefore held that 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 would take from the statement itself, then the statement of opinion may be misleading and actionable under Section 11. Id. at 1329. In holding that a statement of opinion may be misleading based on the omission of certain facts, the Court noted that whether an omission of fact makes a statement of opinion misleading depends on the context, such as the expected level of inquiry into an opinion or the other disclosures surrounding the opinion. Id. at 1330. The Court also noted that it is not sufficient for a securities purchaser to make only the conclusory allegation that the opinion had no basis in fact; the purchaser “must 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.” Id. at 1332.

Although the standard for false or misleading statements of opinion set forth in Omnicare was decided under Section 11 of the Securities Act, the standard likely will be applied to claims under other federal and state securities laws that impose liability for untrue statements of material fact or omissions of material fact required to make the statements not misleading, including Section 12 of the Securities Act, which imposes liability for any misrepresentations (even those outside the registration statement) made in connection with a securities offering, and state securities laws similar to Section 12. In fact, the Southern District of New York recently applied the Omnicare standard to the misrepresentation element of claims under Section 10(b) and Rule 10b-5 of the Securities Exchange Act. See In re BioScrip, Inc. Sec. Litig., -- F. Supp. 3d --, 2015 WL 1501620, at *9 (S.D.N.Y. Mar. 31, 2015).