The U.S. Supreme Court’s recent ruling in Omnicare Inc. v. Laborers District Council Construction Industry Pension Fund (“Omnicare”) raises significant and important lessons for investors. The decision addressed whether untrue statements of opinion in registration statements are sufficient to establish liability of issuers of securities. For investors, the Omnicare decision reaffirms the principle that issuers must provide all important facts that investors need to make prudent investment decisions.
In this case, the Court assessed issuer liability under section 11 of the Securities Act of 1933 and its applicability to statements of opinion. The Court ruled that sincerely held opinions are not untrue statements of material fact to establish issuer liability, even if the opinion ultimately turns out to be incorrect.
However, the Court’s ruling did not extend blanket protection to statements of opinion. The law potentially imposes liability when “a registration statement omits material facts about the issuer’s inquiry into, or knowledge, concerning a statement of opinion, and if those facts conflict with what a reasonable investor, reading the statement fairly and in context, would take from the statement”. Omnicare Inc. v. Laborers District Council Construction Industry Pension Fund, 575 U.S., 2015 WL 1291916 (U.S. Mar. 24, 2015). To successfully allege that a statement of opinion is materially false, a plaintiff must plead facts showing that the defendants did not “honestly” hold the stated opinion. With regard to allegations that the defendants’ opinions omitted material facts, plaintiffs must identify “particular” material “facts about the inquiry the issuer did or did not conduct or the knowledge it did or did not have,” the omission of which makes the opinion statement misleading to a reasonable person reading the statement in context.
Subsequent cases demonstrate that the Omnicare opinion crafted the template of legal arguments applied by investors and issuers alike. For example, in the U.S. District Court for the Southern District of New York, In re: Fairway Group Holdings Corp. Securities Litigation concerns an ongoing dispute regarding issuer liability with respect to opinion statements connected with public offerings. Specifically, the District Court must decide whether the plaintiffs satisfied the reasonable investor standard set out in the Omnicare decision.
The Omnicare ruling imposes liability on issuers for baseless and ill-informed opinion statements in public registration documents. “Registration statements as a class are formal documents,” the court said, and consequently, “investors do not, and are right not to, expect opinions contained in those statements to reflect baseless, off-the-cuff judgments.”
In conclusion, opinion statements in registration documents must be carefully supported by all pertinent facts to demonstrate a basis for the opinion. Current federal securities cases post-Omnicare show that plaintiffs must carefully craft their arguments to establish issuer liability based on the truthfulness of the facts underlying opinions. What remains to be seen is whether courts will expand this interpretation to other statements thereby expanding potential liability for issuers who have misled their investors.
By Joseph Gulino and Angela Reimer