Earlier today, the Supreme Court provided much needed guidance on when statements of opinion in securities offerings are actionable under § 11 of the Securities Act of 1933. Omnicare, Inc. v. Laborers Dist. Council Constr. Industry Pension Fund, No. 13-435, 575 U.S. ___ (March 24, 2015) (opinion here). As part of a public offering of its common stock, Omnicare, a provider of pharmacy services, filed a registration statement in which it (among many other things) stated that it believed that its contracts with pharmaceutical companies complied with federal and state law. As it turned out, the contracts (allegedly) violated federal anti-kickback laws.
The Court began by stressing the difference between statements of fact and statements of opinion. Citing an old version of Webster’s, the Court noted that a fact is “a thing done or existing” or “an actual happening;” whereas an opinion is “a belief, a view or a sentiment which the mind forms of persons or things.” The distinction is that a statement of fact expresses certainty but that a statement of opinion does not. While this distinction is perhaps an obvious one, it is one that is often lost on plaintiff’s lawyers and courts.
The distinction also drives the Court’s analysis. Relying on their inherent uncertainty, the Court held that statements of opinion are false statements of fact in only very limited circumstances. A statement of opinion is a false statement of fact if the speaker does not subjectively believe it. In addition, statements of opinion often contain facts embedded within them. For example, a company might represent that its TVs have the highest resolution available because it uses a patented technology. That statement may be fairly read to affirm that the speaker actually believes it and that the company uses a patented technology. If either of these facts is untrue, then the statement of opinion would be a false statement of fact.
So far, Omnicare appears to be a big win for defendants. However, as the Court would soon stress, liability under the securities laws is not based just on false statements of fact but also on material omissions. And, omissions play a key role in determining liability for statements of opinion that later turn out to be incorrect. The Court, thus, rejected the defendant’s argument that § 11 bars only omissions that make statements of fact, but not opinion, misleading
The Court held that investors have a reasonable expectation that opinions contained in offering documents are not “baseless, off-the-cuff judgments of the kind that an individual might communicate in daily life.” Instead, investors expect statements of opinion to be based on a reasonable inquiry. Accordingly, if an issuer omits facts about the issuer’s inquiry into or knowledge concerning a statement of opinion, then the issuer has made a material omission – it has failed to include a material fact that left its statement of opinion misleading.
An issuer is liable for a statement of opinion that is based on an unreasonable inquiry if the issuer fails to disclose how it reached its opinion. It is not enough that the issuer failed to disclose the basis for its opinion. Rather, the basis must be disclosed only if the basis itself would be contrary to the investor’s reasonable expectations. For example, an issuer whose opinion about its compliance with law was based on its CEO’s subjective belief rather than the reasoned opinion of counsel, would have to disclose that fact.
When combined with the Iqbal pleading standards, the standard of liability set forth in Omnicare creates a fairly high burden for plaintiffs. The Court set out what the plaintiff must plead:
To be specific: The investor 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 that 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.
As the Court noted, “That is no small task for an investor.”
In the end, the Court satisfied neither plaintiffs nor defendants. It is not the case, as the plaintiff urged, that a statement of opinion is actionable merely because it’s wrong. Nor is it the case, as the defendant urged, that a statement of opinion is actionable only if the speaker subjectively disbelieved it. Instead, the Court held that Congress had a more nuanced analysis in mind when it wrote the 1933 Act. As Justice Kagan noted, this analysis is a “feature, not a bug” of the law.