The 6th Circuit splits with 2nd and 9th, lowers bar for securities claims
Federal courts in Kentucky, Ohio, Tennessee and Michigan may soon be seeing an influx of securities class actions claiming strict liability under Section 11 of the Securities Act of 1933, thanks to a ruling Thursday by the 6th Circuit Court of Appeals in Indiana State District Council of Laborers v. Omnicare. Judge Guy Cole, writing for a panel that also included Judge Richard Griffin and U.S. District Judge James Gwin of Cleveland, found that shareholders asserting Section 11 claims for misrepresentations in offering documents need not show that defendants knew the statements to be false.
“Under Section 11,” Cole wrote, “if the defendant discloses information that includes a material misstatement, that is sufficient and a complaint may survive a motion to dismiss without pleading knowledge of falsity.” The panel explicitly noted that its reasoning is at odds with the 9th Circuit’s ruling in the 2009 case Rubke v. Capitol Bancorp and the 2nd Circuit’s oft-cited 2011 decision in Fait v. Regions Financial.
But the court said it is bound only by the U.S. Supreme Court and insisted that high court precedent in the 1991 case Virginia Bankshares v. Sandberg is consistent with its Omnicare holding. “In the instant case, the plaintiffs have pleaded objective falsity,” Cole wrote. “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. It therefore does not impact our decision today.”
The Omnicare class action has quite a convoluted history. The case began in federal court in Kentucky as a securities fraud class action claiming that the pharmaceutical distributor deceived investors when it concealed its supposedly illegal kickback and false billing deals with pharma manufacturers. Shareholders later amended the complaint to include Section 11 claims based on disclosures in a 2005 public offering. The entire case was dismissed in 2007, but in 2009 the 6th Circuit revived and remanded the Section 11 claims, instructing the district court to determine whether they “sound in fraud” and must meet a heightened pleading standard.
Plaintiffs’ lawyers at Robbins Geller Rudman & Dowd considered asking the U.S. Supreme Court to review the issue of scienter for Section 11 claims that sound in fraud, but instead amended their Omnicare complaint in an attempt to strip out hints of fraud, focusing only on the falsity of so-called “soft statements” about Omnicare’s legal compliance in the offering documents. The district court nevertheless said shareholders failed to meet the requisite standard of establishing that defendants knew the statements were false.
In Thursday’s ruling, the appeals court said such a showing is not necessary for Section 11 claims, which entail strict liability for offering documents that contain material misstatements. “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 said.
Omnicare counsel Richard Reinthaler of Winston & Strawn told me he believes the 6th Circuit is flat wrong. The Supreme Court’s precedent in Virginia Bankshares, he said, holds that shareholders must establish “objective falsity and subjective falsity…. The knowledge requirement is imbedded in the materiality element for soft statements.” According to Reinthaler, “If every statement of opinion or belief is actionable without knowledge of falsity, it will open the floodgates” for Section 11 securities class actions.
He said that Omnicare hasn’t made a final decision about its next step but is leaning toward asking the entire 6th Circuit to review the panel’s ruling en banc. Ultimately, of course, the Supreme Court may have to take up the issue to resolve the circuit split.
I left a message for Eric Isaacson of Robbins Geller, who argued for shareholders at the 6th Circuit, but didn’t immediately hear back.
(Reporting by Alison Frankel)
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