The Supreme Court has a long history of rejecting expansive interpretations of implied private rights of action under Section 10(b) of the Securities Exchange Act. Most notably, since 1975, it rejected the argument that mere holders, rather than only purchasers and sellers, may bring private damage actions under Section 10(b),[1] rejected the argument that Section 10(b) liability may be imposed based on negligence rather than scienter,[2] rejected the argument that Section 10(b) may be applied to “unfair” as opposed to fraudulent conduct,[3] rejected the argument that purchase price inflation is enough to show damages under Section 10(b),[4] rejected the argument that Section 10(b) reaches aiders and abettors rather than only primary violators,[5] and rejected efforts to muddy the distinction between primary and secondary liability under Section 10(b).[6]

The Court, however, has barely even mentioned Section 11 of the Securities Act in its opinions, much less interpreted it.[7] Section 11, unlike Section 10(b), 1) provides an express private right of action, 2) is limited to misrepresentations and omissions in a registration statement, and 3) requires no proof of culpability although defendants other than an issuer have due diligence affirmative defenses. The Supreme Court’s March 24, 2015 decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, No. 13-435, is the Court’s first meaningful foray into Section 11. Unfortunately, the decision, which addresses opinion liability under Section 11, provides an amorphous standard that is likely to lead to unpredictable results. It should provide little comfort to plaintiffs or defendants and should make defendants more cautious about including unnecessary opinions in registration statements and, where appropriate, should lead them to carefully qualify opinions that they do include.

I. The State of the Law Prior to the Supreme Court’s Decision
Omnicare involved a motion to dismiss a Section 11 claim based on an allegedly false opinion.  The statement of opinion in the registration statement was equivalent to the following, “We believe our contractual arrangements are in compliance with applicable federal and state laws.” The district court dismissed the Section 11 claim on the ground that because the statement was only an opinion, plaintiffs had to plead that defendants knew that the statement of opinion was false and had failed to do so. The Sixth Circuit reversed on the ground that because Section 11 is a strict liability statute, a plaintiff alleging Section 11 liability need not plead a defendant’s state of mind. Contrasting Sections 11 and 10(b), the Sixth Circuit stated,

Section 10(b) and Rule 10b-5 require a plaintiff to prove scienter, § 11 is a strict liability statute. It makes sense that a defendant cannot be liable for a fraudulent misstatement or omission under § 10(b) and Rule 10b-5 if he did not know a statement was false at the time it was made. The statement cannot be fraudulent if the defendant did not know it was false. Section 11, however, provides for strict liability when a registration statement contains an untrue statement of a material fact [internal citation omitted]. No matter the framing, once a false statement has been made, a defendant’s knowledge is not relevant to a strict liability claim.[8]

We will call the Sixth Circuit standard an “objective falsity” standard. Essentially, it equates an opinion with a statement of fact and subjects the speaker to potential liability if the opinion turns out to be wrong.

Three other circuits also considered pleading standards under Section 11 for a statement of opinion—two before the Sixth Circuit’s decision and one after. None agreed with the Sixth Circuit’s objective falsity standard.

In MHC Mutual Conversion Fund, L.P. v. Sandler O’Neill & Partners, L.P.,[9] which has the most thorough discussion of the issue, a company opined that it expected the level of delinquencies and defaults on its mortgage-backed securities to level off and the market for its securities to rebound. The district court dismissed the action on the ground that opinions are false under Section 11 only when the speaker does not sincerely hold the opinion she expresses at the time, and plaintiffs had not alleged that. The Tenth Circuit considered three possibilities: 1) that only facts, not opinions, give rise to liability under Section 11; or 2) that opinions give rise to liability under Section 11 but only when they are not sincerely believed andthey are objectively false; or 3) that opinions give rise to liability when they lack an objectively reasonable basis. It rejected out of hand the argument that an opinion about a future event could be actionable simply because it failed to pan out, and it expressed skepticism about the third alternative. The Tenth Circuit then held that the plaintiffs’ claims failed under all three tests and, therefore, found it unnecessary to pick one. With respect to the Sixth Circuit’s opinion in Omnicare, the Tenth Circuit stated, “Omnicare’s result stands in a good deal of tension with the common law, securities law authorities, and experience suggesting that the failure of an opinion about future events to materialize, without more, doesn’t establish that the opinion was a false or misleading statement of fact at the time it was made.”[10]

In Fait v. Regions Financial Corp.,[11]a regional bank holding company made certain statements concerning goodwill and loan loss reserves that the district court and Second Circuit concluded were statements of opinion. The Second Circuit affirmed the dismissal of the Section 11 claim because plaintiffs had failed to allege that the statements “falsely represented the speakers’ beliefs at the time they were made.”[12] The Second Circuit held that for a statement of opinion to be actionable under Section 11, the statement had to be “both objectively false and disbelieved by the defendant at the time it was expressed.”[13]

In Rubke v. Capitol Bancorp Ltd.,[14]plaintiffs alleged that defendants violated Section 11 in connection with the issuance of fairness opinions. The Ninth Circuit affirmed the dismissal under a standard that, like the Second Circuit’s standard in Fait, required the plaintiffs to plead that the opinions “were both objectively and subjectively false or misleading,”[15] i.e.,that the defendants did not believe the opinions that they expressed and that they did not materialize. 

Both the Second Circuit and the Ninth Circuit relied, in part, on the Supreme Court’s decision in Virginia Bankshares, Inc. v. Sandberg.[16]In that case, a jury found the defendants violated Section 14(a) of the Securities Exchange Act, involving proxy solicitations, in connection with their allegedly false statements of opinion. The Supreme Court addressed the issue of whether statements of opinion were potentially actionable under Section 14. In dicta it stated, “Because such a statement [of opinion] by definition purports to express what is consciously on the speaker’s mind, we interpret the jury verdict as finding that the directors’ statements of belief and opinion were made with knowledge that the directors did not hold the beliefs or opinions expressed, and we confine our discussion to statements so made.”[17] It then stated, “A statement of belief may be open to objection… solely as a misstatement of the psychological fact of the speaker’s belief in what he says.”[18] It added, disbelief of the opinion expressed was not enough to create liability. There must also be “objective evidence” that the subject matter of the statement was false or misleading.[19] Both the Second and Ninth Circuits read this passage as requiring proof that statements of opinion be “both objectively and subjectively false or misleading.” [20]

Thus, prior to the Supreme Court’s decision, the Sixth Circuit’s decision in Omnicare was a clear outlier.  Three other circuit courts had considered the same issue, and all three had taken a completely different approach than the Sixth Circuit. Two (the Second and Ninth Circuits) had held that under Section 11 a plaintiff had to plead that the speaker did not believe the opinion expressed and that the opinion was objectively false. The Tenth Circuit, without deciding the issue, issued an opinion that leaned in that direction and rejected the Sixth Circuit’s approach.

II. The Grant of Certiorari and the Positions Taken by the Parties and the Government
The petition for a writ of certiorari that the Supreme Court granted in Omnicare phrased the issue as follows:

Whether, for purposes of a claim under Section 11 of the Securities Act of 1993, a plaintiff may plead that a statement of opinion was “untrue” merely by alleging that the opinion itself was objectively wrong, as the Sixth Circuit has concluded, or must the plaintiff also allege that the statement was subjectively false—requiring allegations that the speaker’s actual opinion was different from the one expressed—as the Second, Third, and Ninth Circuits have held.

After the Supreme Court granted certiorari, the petitioners urged, consistent with the decisions of courts other than the Sixth Circuit, “A statement of opinion or belief is actionable as an ‘untrue statement of material fact’ under Section 11 only when the speaker did not hold the stated belief.”[21] The respondents did not wholeheartedly embrace the Sixth Circuit’s decision that all that is required to plead a false opinion claim under Section 11 is objective falsity. Instead, they restated the question presented as, “Whether an objectively incorrect statement of opinion is actionable under Section 11 of the Securities Act only if it was subjectively disbelieved by the defendant.”[22] They urged that a statement of opinion could be actionable under Section 11 in three different scenarios.  First, if it was not genuinely believed.  Second, if it misled the listener “to a false conclusion about the subject matter of the opinion,” for which they gave the following example: “Saying ‘we believe we have a working prototype’ naturally induces investors to think that the company has a working prototype. If it does not, then investors will be misled, even if the speaker genuinely believed what he said.” Suffice it to say that the example given is very different than the “We believe we comply with the law” statement in Omnicare. Third, it argued that a statement of opinion could be misleading by “imply[ing] that the speaker had a reasonable basis for the opinion…which implication would be false if the speaker has no such basis for his opinion.”[23] The Solicitor General, in a brief the SEC joined, did not defend the Sixth Circuit’s view, but it also rejected the petitioners’ view. It argued, “A statement of opinion is actionable under Section 11 if it either misrepresents the speaker’s actual belief or conveys a false impression as to the nature or extent of the inquiry on which the statement was based.”[24] At oral argument, counsel for the respondents said that he also endorsed the government’s proposed standard, which he called “the reasonable basis standard.”[25]

Thus, as the case reached the Supreme Court, it was unlikely that the Court would embrace the Sixth Circuit’s approach, which no one vigorously defended. The principal issue was what alternative approach it would take, and, in particular, whether it would apply the subjective disbelief standard that the Second and Ninth Circuit had adopted, and that also would have been consistent with the Tenth Circuit’s analysis and with language in the Supreme Court’s opinion in Virginia Bankshares. Or whether the Court would, instead, impose a less demanding standard—something that resembled a reasonable basis standard urged by the government and, in part, by the respondents.

III. The Court’s Decision
In remanding the case to the Sixth Circuit, the Supreme Court rejected the Sixth Circuit’s analysis (as expected), but also rejected a subjective disbelief standard. The Court divided its analysis into two parts: 1) whether plaintiffs had adequately alleged that the opinion was a misrepresentation of fact (it agreed with petitioners there was no misrepresentation of fact), and 2) whether plaintiffs had adequately alleged an omission of fact “necessary to make the statements therein not misleading” (it breathed life into the omission standard and remanded for the Sixth Circuit to decide whether plaintiffs had alleged enough).

A. Misrepresentation
The Supreme Court quickly disposed of the argument that a statement of opinion that is ultimately found incorrect, even if believed at the time, may count as an “untrue statement of a material fact” under Section 11. The Court stated that the Sixth Circuit’s view on this issue “wrongly conflates facts and opinions.”[26] A statement of fact “expresses certainty about a thing”[27] whereas a statement of opinion conveys “some lack of certainty as to the statement’s content.”[28] The Court said that the first part of Section 11, addressing misrepresentations, recognized the distinction between facts and opinions by subjecting issuers to liability only for “untrue statement[s] of … fact” (emphasis added) rather than “untrue statements.”[29] Contrary to the Sixth Circuit, it held that “a sincere statement of pure opinion is not an ‘untrue statement of material fact,’ regardless whether an investor can ultimately prove the belief wrong.”[30]

The Court, however, did find that there is one statement in every opinion. “As even Omnicare acknowledges,” said the Court, “every such statement [of opinion] explicitly affirms one fact: that the speaker actually holds the stated belief.”[31] Also, it found that some statements of opinion have “embedded” statements of fact. For example, the statement that “I believe our TVs have the highest resolution available because we use a patented technology” embeds a statement of fact that the company uses a patented technology.[32] It found that the plaintiffs could not avail themselves of either of these factual representations, however, because they did not contest that the opinions were honestly held, and because the statements were pure opinions rather than opinions with embedded facts.[33]

B. Omissions
The Court came to an entirely different conclusion with respect to the “omission” component of a Section 11 claim. An omission is actionable if the facts omitted are necessary to make the statements made (regardless of whether those statements are facts or opinions) “not misleading.” It rejected the view that a statement of opinion only conveys the speaker’s mindset.[34] Rather, “a reasonable investor may, depending on the circumstances, understand an opinion statement to convey facts about how the speaker has formed the opinion—or, otherwise put, about the speaker’s basis for holding that view.”[35] With respect to registration statements, “Investors do not, and are right not to, expect opinions contained in those statements to reflect baseless, off-the-cuff judgments, of the kind that an individual might communicate in daily life.”[36] It quoted Prosser and Keeton for the proposition that “the expression of an opinion may carry with it an implied assertion, not only that the speaker knows of no facts which would preclude such an opinion, but that he does know facts which justify it.”[37] Similarly, it cited the Restatement of Contracts for the proposition that a recipient of an assertion of a person’s opinion may sometimes interpret it as an assertion “(a) that the facts known to that person are not incompatible with his opinion, or (b) that he knows facts sufficient to justify him in forming it.”[38] The Court explained that “literal accuracy is not enough: An issuer must as well desist from misleading investors by saying one thing and holding back another.”[39]

The Court invited lower courts to ask what a reasonable investor would understand a statement of opinion to convey, but it eliminated from consideration that a reasonable investor would understand a statement of opinion to be just that—only a statement of opinion, or even a statement of opinion supported by whatever inquiry the speaker felt was necessary (whether or not that inquiry was objectively reasonable). The Court gave examples that some defendants may find troubling. It said that if an issuer makes a statement “We believe our conduct is lawful” without having consulted a lawyer, the statement could be misleadingly incomplete.[40] Similarly, if it made the statement “with knowledge that the Federal Government was taking the opposite view, the investor again has cause to complain: He expects not just that the issuer believes the opinion (however irrationally) but that it fairly aligns with the information in the issuer’s possession at the time.”[41]

The Court justified its decision primarily by relying on the language of Section 11 and common law precedents, but it relied on policy as well. It stated, “Were Omnicare right, companies would have virtual carte blanche to assert opinions in registration statements free from worry about § 11.”[42] Phrases like “we believe” or “we think” “can preface nearly any conclusion” and “would punch a hole in the statute for half-truths in the form of opinion statements.”[43] It rejected the argument that liability for misleading opinions would chill disclosures useful to investors because sellers “have strong economic incentives to… well, sell (i.e., hawk or peddle)” and those forces to sell “push back against any inclination to underdisclose.”[44]

On the other hand, the Court stated that the standard it articulated would be “no small task for an investor” to satisfy.[45] “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 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.”[46] It is not enough to say the opinion was wrong,[47] or to say that the issuer failed to reveal its basis,[48] or to make other conclusory assertions.[49] Moreover, and this is important for those drafting registration statements, the Court stated, “[T]o avoid exposure for omissions under § 11, an issuer need only divulge an opinion’s basis, or else make clear the real tentativeness of its belief.”[50]

C. Justice Scalia’s Concurring Opinion
Justice Scalia concurred in the decision to remand the case to the Sixth Circuit and in the Court’s misrepresentation analysis, but disagreed with the Court’s analysis of what a reasonable person would understand a statement of opinion to convey and, therefore, with what might constitute a material omission. At common law, he said, for an opinion to be actionable it “had to vary so far from the truth that no reasonable man in his position could have such an opinion.”[51] He disagreed with what he characterized as the majority’s holding that “a reasonable investor is right to expect a reasonable basis for all opinions in registration statements—for example, the conduct of a ‘meaningful… inquiry,’ unless that is sufficiently disclaimed.”[52] When an expert expresses an opinion, it implies only “(1) that he genuinely believes the opinion, (2) that he believes his basis for the opinion is sufficient, and (most important) (3) that he is not certain of this result.  Nothing more.”[53]

IV. Implications
Who Won? Early commentary has 1) plaintiffs declaring Omnicare a victory for investors because it rejects a subjective belief standard, and 2) defendants declaring victory because it rejects the Sixth Circuit objective falsity standard. The reality is that it is not a resounding victory for either side. From the plaintiffs’ perspective, it is true that the Court rejects a subjective belief standard, but it makes clear that plaintiffs’ pleading burden will not be easy and cannot be satisfied with conclusory allegations. From the defense perspective, it is true that it rejects the Sixth Circuit’s objective falsity standard, but it does not adopt the more defendant-friendly standards that the Second and Ninth Circuit adopted and that the Tenth Circuit leaned toward and that the Supreme Court’s own Virginia Bankshares decision supported in dicta

What Is the Standard? This is a somewhat more difficult question to answer than an initial reading of the opinion might suggest. Justice Scalia’s concurring opinion describes the Court’s opinion as holding that “a reasonable investor is right to expect a reasonable basis for all opinions in registration statements” unless that is disclaimed.[54] That may be how lower courts eventually interpret the Court’s opinion. But the Court nowhere states that a defendant must have a reasonable basis for every opinion; instead, it frames the issue as what a reasonable investor would infer from the statement of opinion regarding the foundation for the opinion. In fleshing out what amounts to an inference-of-a-reasonable-investor standard, the Court makes a number of statements about its hypothetical “reasonable investor”—“depending on the circumstances” a reasonable investor may understand an opinion to convey facts about how the speaker has formed the opinion,[55] she expects that the opinion “fairly aligns with the information in the issuer’s possession at the time,”[56]she does not expect that every fact known to an issuer supports its opinion statement,[57]she does expect opinions in a registration statement are not “baseless, off-the-cuff judgments,”[58]and, all else being equal, she expects that the more specific the subject of the opinion, the more detailed the investigation supporting the statement will have been.[59] The reasonable investor also considers “all its [the opinion’s] surrounding text, including hedges, disclaimers, and apparently conflicting information,” and takes into account “the customs and practices of the relevant industry.”[60]

Limitations. Two limitations deserve emphasis. First, the analysis is limited to Section 11, which is a strict liability statute focused on misepresentations and omissions in a registration statement. Section 10(b) is easily distinguished on the ground that it requires proof of scienter, and a scienter standard is inconsistent with the reasonable basis standard articulated in Omnicare. The Sixth Circuit itself recognized that distinction in its Omnicare opinion.[61] Second, subject to limited exceptions, opinions that are forward-looking (which many opinions are) have the protection of broad safe harbors under the securities laws if the opinions are honestly believed or if the forward-looking statements are accompanied by meaningful cautionary statements.[62] Thus, forward-looking, rather than backward-looking, opinions have more protection for reasons not addressed in Omnicare

Absence of Predictability. The majority opinion rejects the argument that by focusing on the reasonable investor’s expectations regarding the speaker’s basis for holding an opinion, the Court is creating a “hopelessly amorphous” standard that threatens “unpredictable” results.[63] As the exchange between the majority and Justice Scalia shows, however, courts may have very different views about what a reasonable investor would infer from the expression of a particular opinion and any related caveats. Justice Scalia is clearly right that his understanding of the three things implied by a statement of opinion “would have given lower courts and investors far more guidance”[64] and, thus, more predictability. Section 11 liability can be draconian, and the lack of predictability in an area with potentially draconian liability suggests revisiting certain drafting practices.

Drafting. First, after Omnicare, issuers should be far more cautious about expressing opinions in registration statements. While the Court’s opinion states that the pressure to “hawk or peddle” will always create strong incentives to set forth opinions, that is not necessarily true in the context of a registration statement. Most issuers recognize that a registration statement is a disclosure document, not a sales document. No one believes that Omnicare would have sold fewer shares or sold at lower prices if it had simply expressed no opinions at all in its registration statement regarding whether its contracts complied with the law. Safe harbors came into existence because companies were too concerned about potential liability to express forward-looking opinions. In those situations in which the safe harbors do not apply (primarily opinions not focused on the future), the Supreme Court’s decision changes the cost/benefit equation applicable to expressing opinions in a registration statement Second, if opinions are expressed, attention should be given to adding language that negates any implication that the issuer has done more than it has done in forming that opinion. As noted, the Court stated that disclosure that divulges an opinion’s basis or else makes clear the real tentativeness of its belief will avoid exposure for omissions.

Supreme Court Jurisprudence. Finally, while it is easy to read too much into one decision analyzing Section 11, Omnicare suggests a less restrictive view of Section 11 than of Section 10(b). The Court has recognized, “When we deal with private actions under Rule 10b-5, we deal with a judicial oak which has grown from little more than a legislative acorn.”[65] Section 11 is an altogether different creature than Section 10(b), and Omnicare suggests that the Court views it less skeptically than it views class actions under Section 10(b).

Notes:
[1] Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975).

[2] Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976).

[3] Santa Fe Industries v. Green, 430 U.S. 462 (1977).

[4] Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005).

[5] Central Bank of Denver, NA v. First Interstate Bank of Denver, NA, 511 U.S. 164 (1994).

[6] Stoneridge Inv. Partners v. Scientific-Atl., 552 U.S. 148 (2008); Janus Capital Group v. First Derivative Traders, 131 S. Ct. 2296 (2011).

[7] Section 11 provides in relevant part:

In case any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring such security… may… sue….

[8] 719 F.3d 498, 505 (6th Cir. 2013). 

[9] 761 F.3d 1109 (10th Cir. 2014).

[10] Id. at 1114 n.2. 

[11] 655 F.3d 105 (2d Cir. 2011).

[12] Id. at 107.

[13] Id. at 110.

[14] 551 F.3d 1156 (9th Cir. 2009).

[15] Id. at 1162.

[16] 501 U.S. 1083 (1991).

[17] Id. at 1090.  

[18] Id. at 1095.

[19] Id. at 1095-96.

[20] Fait, 655 F.3d at 111; Rubke, 551 F.3d at 1162.

[21] Brief for Petitioners at 14 (June 5, 2014). 

[22] Brief for the Respondents (Aug. 25, 2014). 

[23] Id. at 16-17. 

[24] Brief for the United States as Amicus Curiae in Support of Vacatur and Remand at 10 (June 12, 2014). 

[25] Transcript of Oral Argument at 28 (Nov. 3, 2014).

[26] Slip op. at 6. 

[27] Id. 

[28] Id. at 11.

[29] Id. at 6.

[30] Id. at 9.

[31] Id. at 7. 

[32] Id. at 7-8.

[33] Id. at 9.

[34] Id. at 10. 

[35] Id. at 11.

[36] Id. at 14. 

[37] Id. at 15 (internal citations omitted).

[38] Id.

[39] Id. at 16. 

[40] Id. at 12.

[41] Id.

[42] Id. at 16-17.

[43] Id. at 16.

[44] Id. at 19. 

[45] Id. at 18.

[46] Id.

[47] Id. at 17. 

[48] Id. at 18. 

[49] Id.

[50] Id. at 19.

[51] Concurring Op. at 2. 

[52] Id. at 3. 

[53] Id. at 7. 

[54] Id. at 3.

[55] Slip op. at 11. 

[56] Id. at 12.

[57] Id. at 13.

[58] Id. at 14.

[59] Id. at 13-14 n.8.

[60] Id. at 14.

[61] 719 F.3d at 505.

[62] 15 U.S.C. 77z-2(c)(1).

[63] Slip op. at 17.

[64] Concurring Op. at 7.

[65] Blue Chip Stamps, 421 U.S. at 727.

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