Justices stick to middle of the road in Omnicare securities opinion

March 24, 2015

This is getting to be an annual rite. The U.S. Supreme Court agrees to take a case that could significantly reshape the securities class action business. Defendants get their hopes up, loading the docket with amicus briefs calling on the justices to impose new restrictions on the cases. But ultimately the justices leave the status quo more or less intact, to the relief of shareholder lawyers across the land.

So it was in 2011, when the Supreme Court in Erica P. John Fund v. Halliburton shot down a ruling by the 5th U.S. Circuit Court of Appeals that would have forced shareholders to prove loss causation to be certified as a class. And so it was again in 2013, when the court refused in Amgen v. Connecticut Retirement Plans to require investors to prove the importance of alleged corporate misstatements at the class certification stage. Last year’s model was Halliburton v. Erica P. John Fund (aka Halliburton II), in which the Supreme Court decided not to demolish its own 1988 precedent establishing that shareholders can sue as a class without proving individually that they relied on corporate misstatements.

The court’s ruling Tuesday in Omnicare v. Laborers District Council Construction Industry Pension Fund – which addresses when, if ever, opinions in offering statements can be the basis of claims under Section 11 of the Securities Act of 1933 – follows the same storyline. Omnicare and its amicus supporters in the business community saw an opportunity for defendants to evade increasingly common Section 11 class actions, pushing for precedent that would bar securities class action lawyers from filing suits over supposed omissions in statements of opinion. They didn’t get that – but nor did shareholders persuade the court that they should be permitted to sue over any opinion that proves to misstate a material fact. Instead of issuing a decision that fundamentally changes securities class actions, the Supreme Court once again chose in Omnicare just to tinker with the mechanics of the cases.

The court took the Omnicare case to resolve a distinct split between the 6th, 2nd and 9th Circuits. The latter two courts have held that opinions expressed in offering materials are not actionable unless shareholders can show corporate officials didn’t actually believe what they said. But in a 2013 decision reinstating a Section 11 case against Omnicare, a nursing home pharmacy company, the 6th Circuit said investors do not have to show the corporation knew its opinion was false in order to proceed with a class action over offering documents. As long as the statement of opinion contained a material misstatement, the 6th Circuit said, investors can proceed. (The particular opinions at issue in the Omnicare case were statements expressing the company’s belief that its contracts complied with state and federal laws. The pension fund, represented by Robbins Geller Rudman & Dowd, said Omnicare’s $124 million settlement of a False Claims Act kickback case in 2014 proved the falsity of its compliance assurances.)

Omnicare, represented at the Supreme Court by Kannon Shanmugam of Williams & Connolly, did not ask the justices to hold that every statement of opinion in an offering document is protected. Knowingly false statements, it conceded, can be actionable under Section 11 even if they’re couched as opinions. The Supreme Court’s opinion Tuesday, written by Justice Elena Kagan, agreed.

The justices also agreed with Omnicare that the 6th Circuit used an overly broad standard when it said that investors can sue over opinions that turn out to contain a misstatement. Section 11, Justice Kagan wrote, “does not allow investors to second-guess inherently subjective and uncertain assessments. In other words, the provision is not  an invitation to Monday morning quarterback an issuer’s opinions.”

That holding is good news for Omnicare and other securities class action defendants. If the Supreme Court had adopted the 6th Circuit’s loose standard, plaintiffs firms would have had a much easier time bringing Section 11 claims.

But the Supreme Court refused to give Omnicare everything it wanted. The company had asked the justices to rule that shareholders may not sue over truly held opinions even if corporate offering materials omit important information that might lead an investor to reach a different opinion. A reasonable investor, according to Omnicare, ought to know that the only “fact” expressed in an opinion is the speaker’s belief.

Justice Kagan, however, said that Omnicare’s proposed interpretation would give companies “virtual carte blanche to assert opinions in registration statements free from worry about Section 11,” she wrote. “That outcome would ill-fit Congress’s decision to establish a strict liability offense.”

A statement of opinion in a registration statement can be misleading, the Supreme Court said, if it omits key facts about how the speaker formed that view. “Congress adopted Section 11 to ensure that issuers ‘tell the whole truth’ to investors,” Justice Kagan wrote. “For that reason, literal accuracy is not enough: An issuer must as well desist from misleading investors by saying one thing and holding back another. Omnicare would nullify that statutory requirement for all sentences starting with the phrase ‘we believe’ or ‘we think.’ But those magic words can preface nearly any conclusion, and the resulting statements, as we have shown, remain perfectly capable of misleading investors.”

As Kagan noted, the court’s new holding on omissions – which Justices Antonin Scalia and Clarence Thomas said in concurring opinions that they do not support – doesn’t give investors much of an opening. “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,” the opinion said. “That is no small task for an investor.”

Nevertheless, Laborers District Council lawyer Darren Robbins of Robbins Geller claimed the opinion as “clearly favorable for investors” because it gives shareholders recourse against “unscrupulous issuers who might otherwise simply omit material information” in registration statements. (Thomas Goldstein of Goldstein & Russell, who argued for the pension fund at the Supreme Court, referred me to Robbins for comment on the ruling.)

We’ll get an early look at the new opinion’s impact in this very case. The Supreme Court remanded the class action for a determination of whether shareholders can show that Omnicare’s statements of opinion were misleading because the registration statement omitted material facts. The opinion hints that plaintiffs will have a hard time making that showing in the context of Omnicare’s disclosure of state and federal inquiries about its rebate programs.

For more of my posts, please go to WestlawNext Practitioner Insights

Follow me on Twitter

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/