On March 3, 2014, the United States Supreme Court granted certiorari to review the Sixth Circuit’s decision in Indiana State District Council of Laborers v. Omnicare, 719 F.3d 498 (6th Cir. 2013), to determine whether an issuer of securities, its directors, and signatories of a registration statement can be held liable under Section 11 of the Securities Act for a false or misleading statement of opinion or belief, irrespective of whether the defendants actually believed the statement was true at the time it was made.
Section 11 of the Securities Act provides a remedy for investors who purchased securities pursuant to a registration statement that contains an untrue statement of material fact or omits a material fact that renders the registration statement misleading. Section 11 imposes liability for false or misleading registration statements upon the issuer and signatories of the registration statements, as well as directors of the issuer.
The Supreme Court’s decision will resolve a split between the circuit courts interpreting Section 11. Indeed, the Second Circuit, in Fait v. Regions Financial Corp., 655 F.3d 105, 110 (2d Cir. 2011), and the Ninth Circuit, in Rubke v. Capitol Bancorp Ltd., 551 F.3d 1156, 1162 (9th Cir. 2009), have recently held that a defendant may be liable under Section 11 only to the extent that the statement was both objectively false (i.e., untrue) and subjectively false (i.e., the defendant knew it was untrue) at the time it was expressed.
In Omnicare, however, the Sixth Circuit held that issuers, directors, and signatories of a registration statement may be liable for false opinions or beliefs expressed in registration statements regardless of whether the defendants knew that the statement was false at the time it was made. The Sixth Circuit reasoned that Section 11 imposes “strict liability” upon the issuers, signers, and directors when a registration statement contains an untrue statement of material fact. Based on this reasoning, the court concluded that whether the defendants knew that the registration statement was false or misleading is irrelevant under Section 11, and that plaintiffs need not show knowledge of falsity in order to recover.
The securities laws encourage opinion-based disclosures in registration statements because they can be useful to investors when deciding whether to purchase securities. Thus, the Supreme Court’s decision in this case will have significant implications for investors’ ability to recover under Section 11 in cases involving alleged false or misleading statements of opinion or belief. If the Court were to affirm the Sixth Circuit’s decision in Omnicare, companies and their directors will be held liable for statements of opinion or belief made in registration statements that turn out to have been incorrect when made, regardless of whether the defendants believed the truth of the statements at the time they were made. Yet, if the Court were to adopt the Second and Ninth Circuit’s interpretation of Section 11, plaintiffs will have a more difficult time pleading and recovering for false statements of opinion or belief in registration statements, rendering Section 11 a less attractive remedy for investors.
The Supreme Court will consider and decide the Omnicare case in the court term beginning October 2014.