Last week, the Supreme Court heard oral argument in Omnicare, Inc. v. The Laborers District Council Construction, No. 13-435 on whether securities class action plaintiffs must merely show that an opinion in a registration statement was false or whether they must show that defendants knew it was false when they said it. The Supreme Court appears poised to take the middle ground, whereby the issuer must have some reasonable basis for any opinion provided in the registration statement. See Transcript.
The Omnicare case involved a pharmacy operator who was alleged to be giving improper kickbacks to nursing homes who used its services. See background here and here. Plaintiffs sued Omnicare, arguing that its statement of opinion that it believed its operations complied with state and federal laws was false and thus actionable under Section 11. The Defendants responded that plaintiffs’ complaint fails because defendants subjectively believed that their opinion was true at the time, so even if their opinion was wrong in hindsight, they could not be held liable. The 6th Circuit sided with plaintiffs and held that if an opinion is proven to be false—even in hindsight—it is actionable under Section 11.
At oral argument, none of the parties appeared to agree with the 6th Circuit’s broad holding. The government set forth a middle ground: there must be a reasonable basis for a statement of opinion. See Amicus Curiae Brief of the United States. First, the Court appeared hesitant to issue an opinion that adopts fraud by hindsight. The justices used a hypothetical opinion where an issuer states it believes it has one million units in inventory.
—Assume the factory burns down after the registration statement. Your inventory opinion is no longer correct, but according to Justice Sotomayor, you cannot be held liable because it happened after the registration statement was issued. This makes sense because issuers must be judged by the facts and circumstances as they existed at the time the statement was made.
—Assume the factory burns down the day before the registration statement was issued, but the factory was in rural India and none of the executives knew about it. Justices Breyer and Ginsburg appeared to believe there would be no liability under this scenario, arguing that plaintiffs are essentially “saying there is no such thing as an opinion versus a fact.”
The justices seemed loathe to hold that only subjective opinion matters however, noting that registrants could simply qualify every statement with “in our opinion” and thus face no liability. Justice Breyer gave a humorous example of an archeologist who says, “It is my opinion that those bones in that mountain are of a Diplodocus, not a Trisopterus.” Breyer noted, “Now, wouldn’t you have thought that at least he’d looked into it, that at least he’d seen the bones? You see, it’s absolutely open—it is a matter of opinion—but there are some things implied. If you had learned later that he’d been in the bar all night and had never even seen or heard one word about what the bones were like, wouldn’t you think he had issued a misrepresentation?”
But the Court gave very little indication of what a reasonableness standard would look like. When Justice Alito probed counsel for the plaintiffs and the government, both responded that it was a circumstantial inquiry informed by case law, a response that did not satisfy Justice Alito. Defendants reminded the Court that imposing a reasonableness standard on opinions goes directly against the text of the statute, which directly includes a reasonableness standard in the due diligence defense for outside directors and underwriters.
The Court appears unlikely to adopt the polar standards of either plaintiffs or defendants. Yet it remains unclear how the Court will define the middle ground and whether it will reverse and remand for the 6th Circuit to make additional findings based on the newly articulated standard. The Court will likely issue its opinion in the coming months, but in the meantime, issuers should carefully consider any statements of opinion in a registration statement because plaintiffs will be looking over their shoulder if their opinion ends up being incorrect.