Justices May Take Middle Ground Over §11 Liability for Opinion Statements

By Phyllis Diamond

Nov. 3 — By all indications at oral argument before the U.S. Supreme Court Nov. 3, issuers won't automatically be able to avoid liability under 1933 Securities Act Section 11 for stating their sincerely held opinions or beliefs in a registration statement if those statements ultimately are shown to be false.

In a dispute over statements made by healthcare giant Omnicare Inc. regarding its compliance with legal requirements, the Justices appeared skeptical that a statement of opinion or belief is actionable only if the party offering the statement didn't believe that it was true. However, the Justices also seemed disinclined to premise liability on the ultimate falsity of an opinion stated by the issuer.

“There did not appear to be any support for the plaintiffs' categorical position that honestly held opinions that turn out to be incorrect should be considered untrue statements for purposes of Section 11,” Morrison & Foerster LLP's Joseph Palmore told Bloomberg BNA.

“A number of Justices appeared to support the Solicitor General's position that an opinion in a registration statement could lead to liability if the issuer did not have a reasonable basis for the opinion, even if the opinion is honestly held. Several other Justices, however, appeared troubled by the amorphous nature of that test,” Palmore added.

According to Jonathan Richman, Proskauer Rose LLP, the oral argument “suggests that hardly anyone is comfortable with the Sixth Circuit's ruling that a statement of opinion can be actionable under the 1933 Act simply because it was incorrect, even if the speaker believed the opinion expressed. The more difficult question is what to do next.”

State of Mind

In the controversy, the plaintiff investors contended that Omnicare stated in the registration materials for a public offering that its billing practices complied with state and federal requirements, even though it allegedly was engaged in hidden kickback arrangements with manufacturers and submitting false reimbursement claims to Medicaid and Medicare. The district court dismissed the allegations, saying the plaintiffs didn't show that the defendants knew their statements about legal compliance were false at the time they were made.

Shortly thereafter, however, the U.S. Court of Appeals for the Sixth Circuit reversed. It agreed with the plaintiffs that because Section 11 provides for strict liability, the lower court erred when it required them to plead knowledge in connection with their Section 11 claim. Section 11 “provides a remedy for investors who have acquired securities pursuant to a registration statement that was materially misleading or omitted material information.” It doesn't require a plaintiff to plead the defendant's state of mind, the appeals court held.

In March, the high court agreed to review the appeals court's decision. In June, in an amicus curiae brief, Securities and Exchange Commission and Justice Department lawyers largely threw their support behind the plaintiffs' position.

Reasonable Basis

During oral argument, several Justices wanted to know whether stating an opinion implies that the issuer had a reasonable basis for doing so. Chief Justice John Roberts, for example, posited the situation in which a company states a “very precise” fact about its business “and it's wildly off.” Do you really think the defendants are protected “simply by saying `we believe'?” he asked Omnicare counsel Kannon Shanmugam, Williams & Connolly LLP.

Arguing for the investors, Thomas Goldstein, Goldstein & Russell PC, acknowledged that sometimes opinions “are just statements of belief.” However, opinions also “frequently imply facts.”

“They didn't write the registration statement in a bar one night,” he said. “A registration statement is a very solemn document.”

Middle Ground

“While it is always difficult to predict outcomes on the basis of oral argument, it does appear that certain members of the Court were uncomfortable with Omnicare's position that a signer of a registration statement is immune from liability for any statement couched as an opinion or statement of belief unless the plaintiff can allege that the speaker subjectively did not believe the statement to be true,” said Daniel Sommers, Cohen Milstein Sellers & Toll PLLC.

For example, he told Bloomberg BNA in an e-mail, Justice Stephen Breyer and Justice Elena Kagan expressed concern that Omnicare's proposed approach would allow issuers to avoid liability for making statements that were misleading because they omitted information that would have been important to investors.

However, Sommers added, several Justices “seemed uncomfortable with the plaintiffs' initial argument that Section 11 simply requires the investor to allege that the statement of belief was false. The real battleground,” he said, “seems to be whether the Court will adopt some formulation of a `reasonable basis' test” under which an investor could state a Section 11 claim by alleging that the speaker didn't have a reasonable basis for the allegedly false or misleading statement of belief.

While Justice Samuel Alito and others questioned how such a test would work in practice, “the middle-ground approach appears to be a likely avenue for the Court to resolve this case,” Sommers stated.

To contact the reporter on this story: Phyllis Diamond at pdiamond@bna.com

To contact the editor responsible for this story: Susan Jenkins at sjenkins@bna.com