Omnicare’s early impact: mixed and muted

July 22, 2015

On Tuesday, the 2nd U.S. Circuit Court of Appeals sent a securities class action against Deutsche Bank and several underwriters back to U.S. District Judge Deborah Batts of Manhattan for reconsideration in light of the U.S. Supreme Court’s March 2015 decision in Omnicare v. Laborers District Council. Judge Batts had tossed the case in 2013, ruling that under 2nd Circuit precedent in Fait v. Regions Financial, Deutsche Bank’s estimation of its exposure to mortgage-backed securities in offering materials for a stock issue was an opinion that could not give rise to securities fraud liability. After Omnicare, in which the Supreme Court set new rules for when opinions are actionable, the Supreme Court remanded the Deutsche Bank case to the 2nd Circuit, which, in turn, passed it to Judge Batts.

The appeals court was apparently unpersuaded by the banks’ argument that it should just reaffirm the case’s dismissal because Omnicare is consistent with Fait. (As you may recall, the Supreme Court took the Omnicare case to resolve a split between the 6th Circuit, which had said opinions can be actionable if they contain factual statements that turn out to have been false, and the 2nd Circuit, which said in Fait that defendants can only be liable if they didn’t actually believe the opinion when they expressed it.) The 2nd Circuit seems to want to hear from trial judges before it weighs in on Omnicare and Fait; in May, it sent a class action against ING Group to U.S. District Judge Lewis Kaplan of Manhattan after the ING case, like the Deutsche Bank case, was remanded to the 2nd Circuit by the Supreme Court.

The 2nd Circuit’s remands made me curious about how much impact Omnicare has had so far in the lower courts. Obviously, these are early days: The Supreme Court decision is just four months old, and according to Westlaw, it has been cited in only about 15 decisions. That said, it appears Omnicare has benefited both securities plaintiffs and defendants — but only a little bit.

For plaintiffs, the good news is that trial judges are applying Omnicare not just in Securities Act cases but also in class actions asserting fraud under the Exchange Act. In Omnicare, the Supreme Court opened the door to investor claims based on corporate statements of opinion that neglect to mention key contrary facts. Two trial judges in federal court, one in a New Jersey case against Merck and the other in Richmond, Virginia, in a class action against Genworth Financial, used the same framework to analyze defendants’ fraudulent intent under Section 10(b) of the Exchange Act – and both found scienter under the Omnicare standard.

In another boon to plaintiffs, a Colorado federal judge ruled that the FDIC can go ahead with a mortgage-backed securities case against Morgan Stanley, holding that the agency had shown factual underpinnings of the bank’s “opinions” were false, so, under Omnicare, “the general rule that statements of opinion are not actionable does not bar the FDIC’s claims.”

But as the Supreme Court anticipated in the Omnicare opinion, investors still face “no small task” to show defendants’ opinions are actionable. In a case against the Southeastern Pennsylvania Transportation Authority, for instance, a federal judge in Harrisburg said Omnicare couldn’t transform corporate puffery into falsely stated opinions. A Massachusetts federal judge ruled investors suing Sarepta Therapeutics couldn’t meet the Omnicare standard, as did the 10th Circuit in affirming the dismissal of a claim against an executive of Delta Petroleum.

In Manhattan, U.S. District Judge Paul Crotty reconsidered his dismissal of a securities class action against Tremor Video after Omnicare came out but said the Supreme Court opinion just “reaffirmed” his original conclusion that the defendants’ statements of opinion were not actionable.

The most thorough examination of Omnicare’s impact came from U.S. District Judge Alison Nathan in In re Bioscrip. After supplemental briefing from both sides, Judge Nathan agreed that Omnicare seemed to call the 2nd Circuit’s Fait standard into question, “to the extent Fait has been construed to mean that there is liability for legal compliance opinions only in the context of statements subjectively disbelieved when made, but not in instances where a speaker’s statement, although sincerely believed, failed to make clear the factual basis for that statement.”

She analyzed the Bioscrip defendants’ allegedly false opinions under the Omnicare framework and found them to fit the hypothetical the Supreme Court posited, in which a company states an “opinion” but fails to disclose important contrary information. Judge Nathan said investors could sue over the misstatement under Omnicare – but she also held they could have sued even under the 2nd Circuit’s old Fait standard.

I said when the Omnicare decision came out that the Supreme Court seemed to be tinkering at the margins of securities law, not making big changes. I’ve seen some commentary to the contrary, but so far, in these early cases, judges haven’t given me much reason to reassess my initial reaction.

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