Sixth Circuit Lowers Bar for Securities Claims and Creates Circuit Split

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The US Court of Appeals for the Sixth Circuit recently held that pleading a claim under Section 11 of the Securities Act of 1933 does not require a showing of defendant’s knowledge of false statements in offering documents, thereby significantly relaxing the pleading requirements in that circuit. The Sixth Circuit declined to following the reasoning of the Second and Ninth Circuits on Section 11 pleading requirements and, in doing so, set up a split in the circuits.

The case was brought by investors in securities of Omnicare, Inc., a provider of pharmaceutical care services for residents of long-term care facilities, who alleged that Omnicare and several senior executives deceived them by engaging in a variety of illegal activities, including kickback arrangements with pharmaceutical companies and submissions of false claims to Medicare and Medicaid. Plaintiffs argued that they were misled because Omnicare failed to disclose these illegal activities in a Registration Statement issued in connection with a December 2005 public offering, which attested to Omnicare’s claimed “legal compliance.” The district court dismissed the case, finding that, among other things, plaintiffs had not sufficiently alleged that Omnicare’s top executives knowingly signed the false financial statements at issue.

In overturning the district court’s dismissal, a three-judge appellate panel of the Sixth Circuit stated that, for purposes of a claim under Section 11, “No matter the framing, once a false statement has been made, a defendant’s knowledge is not relevant to a strict liability claim.”  The panel declined to impose a mens rea state of mind requirement onto Section 11, which by its terms does not include any such requirement. The Sixth Circuit acknowledged that its ruling departed from decisions of the Second and Ninth Circuits, which both rely on the Supreme Court’s decision in Virginia Bankshares Inc. v. Sandberg, 501 U.S. 1083 (1991). The Sixth Circuit reasoned that the Supreme Court’s ruling was inapplicable because it concerned Section 14(a) of the Securities Act and therefore, “The Virginia Bankshares court was not faced with and did not address whether a plaintiff must additionally plead knowledge of falsity in order to state a claim.” Accordingly, the Sixth Circuit refused to extend Virginia Bankshares to impose a knowledge of falsity requirement upon Section 11 claims, reasoning that “it would be unwise for this court to add an element to [Section] 11 claims based on little more than a tea-leaf reading in a [Section] 14(a) case.” 

Indiana State District Council et al. v. Omnicare Inc. et al., No. 12-5287 (6th Cir. May 23, 2013).