2nd Circuit to issuers: Don’t worry about Omnicare

March 7, 2016

(Reuters) – It’s been just about a year since the U.S. Supreme Court said in Omnicare v. Laborers District Council Construction Industry that securities issuers can be liable to investors even if their misstatements are couched as opinions. But in a ruling Friday in In re Sanofi, the 2nd U.S. Circuit Court of Appeals held that despite Omnicare, issuers don’t have to tell investors about important information that may contradict the opinions they are expressing.

If the Supreme Court opened the door in Omnicare to class actions based on issuers’ dubious opinions, the 2nd Circuit -the busiest appellate court for securities class actions – mostly closed it again in the Sanofi decision. “The circuit has clearly stated that things aren’t going to change much under Omnicare,” said Robert Fumerton of Skadden Arps Slate Meagher & Flom, who was not directly involved in the case. (Weil Gotshal & Manges won it for Sanofi.) “It’s going to be very difficult for plaintiffs in this circuit to establish liability,” Fumerton said.

The Sanofi case involved the company’s representations about the multiple sclerosis drug Lemtrada, which Sanofi picked up when it acquired Genzyme in 2011. At the time, Lemtrada was considered a potential blockbuster but had not been approved by the Food and Drug Administration. To account for the uncertainty, Genzyme shareholders received specialized financial instruments called “contingent value rights” as part of the Sanofi deal. The CVRs, as the securities are known, entitled Genzyme shareholders to cash payments of up to $2 per share if Lemtrada met target dates for FDA approval and global sales. After the merger between Genzyme and Sanofi, the CVRs traded independently as securities.

In a class action and separate multiplaintiff case against Sanofi, CVR purchasers claimed the company deceived them by repeatedly expressing optimism about Lemtrada’s FDA approval without acknowledging the FDA’s longstanding concern that the drug was only being tested in single-blind clinical studies, not double-blind tests. When the FDA issued its initial rejection of Lemtrada in December 2013, the value of the CVRs fell to 32 cents per share. By the time the drug was ultimately approved the following November, CVR holders had already missed out on their first cash payment because the approval came after the agreed-upon target date.

The trial judge, U.S. District Judge Paul Engelmayer, had dismissed CVR holders’ claims in January 2015, citing the 2nd Circuit’s 2011 decision in Fait v. Regions Financial, which held that issuers are not liable for opinions unless they did not actually believe what they said at the time they made the statement. Two months, later, the Supreme Court issued its Omnicare decision, implicitly rejecting the 2nd Circuit’s Fait precedent.

So the key question for the 2nd Circuit panel in the Sanofi case was whether Omnicare created potential liability for Sanofi because the company did not warn CVR investors about the FDA’s objections to its testing protocols. The class, represented by the Weiser Law Firm, and individual plaintiffs represented by Ross Orenstein & Baudry argued that Sanofi’s opinions were actionable because the omitted information conflicted with what “reasonable investors” would assume from Sanofi’s stated opinions.

The 2nd Circuit panel – Judges Barrington Parker, Raymond Lohier and Susan Carney – said in an opinion by Judge Parker that reasonable investors would have been interested in what the FDA was telling the company and might even have changed their mind about buying CVRs based on that information. Nevertheless, the court said, “Omnicare does not impose liability merely because an issuer failed to disclose information that ran counter to an opinion expressed.”

The Supreme Court itself cautioned against an expansive reading of Omnicare the 2nd Circuit said, acknowledging that “reasonable investors” should not expect issuers to disclose every fact conflicting with the opinion it is expressing. Context counts, according to the appellate panel, and in this case, reasonable investors in these complex securities should have realized the FDA and Sanofi were engaged in give-and-take over the testing regimen for Lemtrada.

“Plaintiffs’ case essentially boils down to an allegation that the statements were misleading for failure to include a fact that would have potentially undermined defendants’ optimistic projections,” the 2nd Circuit said. “But Omnicare imposes no such disclosure requirements on issuers  Defendants need not have disclosed the FDA feedback merely because it tended to cut against their projections.”

John Neuwirth of Weil, who argued for Sanofi at the 2nd Circuit, said in an email statement that the company believes the appeals court made “the right decision.”

If there’s any salvation for investors in the 2nd Circuit’s opinion, it is in the panel’s repeated references to the sophistication of CVR investors, who trade in highly specialized securities. Though the plaintiffs’ lawyers who argued the case, Christopher Nelson of Weiser and John Orenstein of Ross Orenstein, did not respond to my email requests for comment, I can certainly see ordinary shareholders arguing that Sanofi doesn’t apply to their claims because they’re presumably not as sophisticated as CVR investors.

One final word about the Sanofi ruling: The claims at issue in the 2nd Circuit appeals involved both Section 11 allegations under the Securities Act of 1933 and 10b-5 allegations under the Securities and Exchange Act of 1934. The Supreme Court’s Omnicare decision addressed just ’33 Act claims and there has been some question whether Omnicare applies also to ’34 Act allegations. The 2nd Circuit suggested, albeit without specifically discussing Omnicare’s breadth, that the Supreme Court decision extends to 10b-5 claims as well as claims under Section 11.

(This post has been corrected to replace the word “material” in the first paragraph with “important.”)

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