AN UNCERTAIN BASIS: SUPREME COURT CLARIFIES LIABILITY FOR OMITTED BASES OF OPINION IN REGISTRATION STATEMENTS

Lance Currie

It’s not what you say. It’s what you don’t say. At least, according to the Supreme Court’s opinion issued today in Omnicare, Inc. v. Laborers District Council  Construction Industry Pension Fund, 575 U.S. --- (U.S. 2015), which clarifies potential liability under the Securities Act of 1933 for directors’ opinions stated in their companies’ public filings. Directors may be liable under § 11 of the Act for their opinions “if a registration statement omits material facts about the issuer’s inquiry into or knowledge concerning a statement of opinion . . . if those facts conflict with what a reasonable investor would take from the statement itself.” Id. at 12. Said another way, liability for a director’s opinions under § 11 hinges not on whether the director honestly held the opinions but on a whether omitted facts cannot be squared with an reasonable investor’s “fair reading.” See id. at 14. Focusing on a statement from the perspective of its recipient, rather than its speaker, creates an objective measure for liability based on directors’ stated opinions.

The majority opinion in Omnicare, written by Justice Kagan, clarifies what § 11 of the Act means when a purchaser can sue for damages because a document “contain[s] an untrue statement of a material fact” or “omit[s] to state a material fact . . . necessary to make the statements therein not misleading.” Id. at 1 (quoting 15. U.S.C. § 77k(a)). The plaintiff pension fund alleged that the directors’ opinion in Omnicare’s registration statement that they believed the company’s contracts complied with federal and state law was false and misleading after the government later sued Omnicare for violating anti-kickback laws. The majority first noted that under § 11 an investor need not prove that the defendant acted with any intent to deceive or defraud. Id. at 2. Addressing the first provision—“untrue statement[s] of a material fact”—Justice Kagan explained that liability would only follow if the speaker did not hold the belief he professed or if a supporting fact he supplied were untrue. Id. at 9. The plaintiff did not contest that the opinions were honestly held. And because the statements at issue did not include support, they were pure statements of opinion not containing “untrue statement[s] of a material fact.” See id. at 9.

But the majority did find that the opinion on legal compliance could have omitted material facts necessary to make it not misleading. The majority explained that the question of whether a statement is misleading because of omitted facts is objective. The majority explained that “a reasonable investor may, depending on the circumstances, understand an opinion statement to convey facts about how the speaker has formed the opinion—[i.e.,] . . .the speaker’s basis for holding that view.” Id. at 11. If registration statements omit key facts about the issuer’s inquiry into or knowledge prior to an opinion and those facts conflict with what a reasonable investor would take from the stated opinion, then § 11 creates liability. Id. at 12. The majority tried to limit its holding by explaining that investors read statements in the context of surrounding text, disclaimers, industry custom and practice, etc. and that omitted statements only create liability when they cannot be squared with a “fair reading.” Id. at 13.  To meet this new standard, investors must “identify particular (and material) facts going to the basis of 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.” Id. at 18. Conclusory assertions of a lack of basis or failure to include a material fact, without more, are insufficient. Id. Because neither lower court applied the correct standard, the Supreme Court remanded. See id. at 20.

Directors must be careful when stating opinions in registration statements. To avoid liability, directors need to consider explaining the process for arriving at the opinion, outlining the facts supporting the opinion, or clearly articulating the tentativeness of the opinion. It is also unclear how Omnicare will impact claims brought under SEC Rule 10b-5 (based on § 10(b) of the Securities Exchange Act of 1934). Rule 10b-5 makes unlawful the making of “any untrue statement of a material fact” or omission of “a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading”—language identical to § 11 of the Securities Act. But 10b-5 claims require proof of scienter—i.e., intent to “deceive, manipulate, or defraud.” Thus despite the identical language between 10b-5 and § 11, the impact of Omnicare on 10b-5 claims (or other securities law claims) is not yet known.