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.