Does Section 11 of the Securities Act of 1933 require a showing that an opinion contained in a registration statement was objectively wrong and subjectively false?
The Supreme Court will decide whether, in a Section 11 claim, an opinion itself can be a misleading or untrue material fact if objectively wrong, or if a plaintiff must also show that the speaker did not subjectively believe the stated opinion. While Omnicare argues that an opinion is actionable only when subjectively wrong, Laborers District Counsel Construction Industry Pension Fund contends that an objectively wrong statement qualifies as misleading under Section 11 of the Securities Act of 1933. This decision will affect the liability stock issuers have in connection with public offerings and could potentially affect underwriters’ willingness to finance securities.
Questions as Framed for the Court by the Parties
Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k, provides a private remedy for a purchaser of securities issued under a registration statement filed with the Securities and Exchange Commission if the registration statement “contained an untrue statement of material fact or omitted to state a material fact required to be stated therein or necessary to make the statement therein not misleading.” Against that statutory backdrop, this case presents the following question:
For purposes of a Section 11 claim, may a plaintiff plead that a statement of opinion was “untrue” merely by alleging that the opinion itself was objectively wrong, as the Sixth Circuit has concluded, or must the plaintiff also allege that the statement was subjectively false—requiring allegations that the speaker’s actual opinion was different from the one expressed—as the Second, Third, and Ninth Circuits have held?
Petitioner Omnicare is a large pharmaceutical care services provider operating in Canada and the United States. Omnicare engaged in a public offering of securities on December 15, 2005 where it offered 12.8 million shares of common stock. In conjunction with its public offering, Omnicare filed a registration statement, incorporating filings related to the public offering, with the Securities and Exchange Commission (“SEC”).
Respondents Laborers District Council Construction Industry Pension Fund and Cement Masons Local 526 Combined Funds (collectively “Laborers”) are investors who purchased shares of Omnicare stock in the December 2005 public offering. Laborers believe that Omnicare was engaged in illegal activities when it filed the registration statement with the SEC, and, therefore, the representations made in the registration statement were “material, untrue, and misleading” and thus in violation of Section 11 of the Securities Act of 1933. Section 11 imposes liability on issuers and related parties (e.g. underwriters) for untrue statements of material fact or omissions of true statements of material facts in the registration statement. Certain parties involved in the creation of the registration statement, such as underwriters, are exempt from liability under Section 11 upon an adequate showing of due diligence.
Laborers filed a securities class action suit against Omnicare in the District Court for the Eastern District of Kentucky in 2006 and later amended their complaint to encompass the Section 11 claim. Omnicare moved to dismiss the amended complaint and succeeded in 2007 when the district court granted the motion to dismiss, reasoning that Laborers failed to show a causal connection between Omnicare’s misconduct and Laborers’ losses (“loss causation”). The Court of Appeals for the Sixth Circuit (“Sixth Circuit”) affirmed the district court decision with the exception of the Section 11 claim, finding loss causation to be an affirmative defense, and remanded the case to the district court. Laborers amended their complaint to re-plead the Section 11 claim, alleging “material misstatements and omissions [were] made with reference to the statements ‘legal compliance’ and . . . in reference to GAAP [(Generally Accepted Accounting Principles)].” The district court granted Omnicare’s motion to dismiss the amended complaint citing Laborers’ failure to show that Omnicare knew the statements made in the registration statement were incorrect. Laborers again appealed to the Sixth Circuit where the court held that a plaintiff need only allege that the underlying opinion in a registration statement is incorrect without alleging that the statement is also subjectively false. Omnicare appealed to the Supreme Court of the United States (“Court”), and the Court granted cert.
This case will likely determine what a plaintiff must prove when making a claim involving false opinions under Section 11 of the Securities Act of 1933 (“Securities Act”). Omnicare argues that under a Section 11 claim, the plaintiff must prove that the defendant’s opinion was both objectively and subjectively wrong. Omnicare states that this would require a plaintiff to prove that the issuer did not hold the stated belief. Contrastingly, Laborers claim that an opinion need only be objectively wrong in order to be a misleading material fact under Section 11.
In addition, the Court will address whether their decision in Virginia Bankshares extends beyond Section 14(a) of the Securities Exchange Act of 1934 to Section 11 claims. Omnicare contends that the analysis in Virginia Bankshares is applicable to Section 11 claims because the text in Section 14(a) similarly prohibits misleading and untrue statements. In opposition, Laborers contend that Virginia Bankshares is inapplicable in Section 11 claims primarily because Section 11 does not have a scienter requirement like Section 14(a) does.
Omnicare stresses that by using the word “fact,” the Securities Act limits which types of statements “can give rise to liability under Section 11.” Omnicare argues that by definition an opinion is not a fact because an opinion conveys uncertainty and a fact does not. Omnicare further argues that the plain language of the statute implies that Section 11 only applies to misleading statements of fact and not misleading statements of opinion. Omnicare contends, however, that an opinion is a fact only in the sense that it conveys what the issuer believed at the moment the opinion was made. It follows, Omnicare argues, that if the issuer did not hold the stated belief at the time the statement was made, then the opinion is an untrue statement of fact and can be subject to Section 11 if it is a material fact.
Laborers argue that Omnicare is entirely wrong in its statutory interpretation of Section 11. Laborers state that Omnicare fails to acknowledge that opinions themselves can be “misleading” statements under the statutory language of Section 11. Laborers state that if an opinion “lead[s] listeners to a counterfactual understanding . . . the statement of opinion was misleading.” Laborers argue that because opinions can mislead the listener to a wrongful understanding about the facts in the registration, opinions can be untrue statements. Under this argument, Laborers claim that a false opinion can be misleading even if the speaker genuinely believes it to be true. Laborers argue that potential investors would be misled by the stated opinion regardless of whether or not the speaker subjectively believed his opinion. Laborers also contend that an opinion conveys the speaker’s beliefs and that that these beliefs are based on justifiable facts. In other words, Laborers contend that an opinion serves as a brief summary of the facts that the speaker forms an opinion on and should therefore be treated as a misleading fact regardless of the speaker’s beliefs.
APPLICABILITY OF VIRGINIA BANKSHARES AND STATUTORY INTERPRETATION
Omnicare argues that the Court’s interpretation of Section 14(a) in Virginia Bankshares should be applied equally to the terms in Section 11. Omnicare contends that in Virginia Bankshares, the Court held that “statements of reasons, opinions, or beliefs can be actionable . . . as statements that are false to a material fact” but only if the speaker did not hold the opinions expressed.Omnicare maintains that Virginia Bankshares also held that in addition to proving that a speaker did not hold the expressed opinions, a plaintiff must prove that the statement itself was objectively wrong. Omnicare further argues that lower courts routinely apply the analysis in Virginia Bankshares to other provisions of the securities laws when interpreting what qualifies as “an untrue statement of a material fact.” Omnicare contends that the terms can be consistently interpreted despite Section 11 not having a scienter element—even though Section 14(a) did—since both statutes involve language about misleading or false statements of material fact.
Laborers counter that scienter was necessary for the decision in Virginia Bankshares because it involved interpretation of Section 14(a), which contains a scienter requirement.Laborers claim that the Virginia Bankshares decision is inapplicable because the court did not decide “whether liability will lie under a statute that does not require scienter . . .” Laborers thus assert that Omnicare is wrongfully applying the decision to Section 11 claims.
Omnicare argues that by not following the decision in Virginia Bankshares the Sixth Circuit is defying the basic principles of statutory interpretation. Omnicare states that statutory interpretation requires consistent application of terms across the provisions of federal securities laws. Further, Omnicare contends that because it is Congress’ intent to increase consistency between securities laws, statutory phrases should be interpreted consistently across statutes. Omnicare states that numerous provisions of the federal securities laws contain identical language and many seek to regulate issuers’ false and untrue statements of material fact.
Laborers argue that Omnicare is wrong to assume that the same statutory interpretation applies across all statutes that “prohibit false or misleading statements of fact.” Laborers assert that to apply Omnicare’s interpretation to Section 11 uniformly across federal securities laws would conflict with the purposes of the statutes. According to Laborers, Omnicare’s inaccurate interpretation would first shift the burden on the investor instead of on the issuer. Laborers contend that such an interpretation conflicts with Congress’ intent of having Section 11 serve as a safeguard against misinformation.
STRICT LIABILITY AND CONGRESSIONAL INTENT
Omnicare explains that requiring a plaintiff to prove the speaker’s subjective belief of an opinion is consistent with Congress’ intent for Section 11 to be a strict liability offense. Omnicare contends that the Court held that strict liability provisions should provide investors with some certainty and predictive value for their investments. Omnicare argues that because the Sixth Circuit’s approach requires a “hindsight determination of objective correctness,” it is in conflict with the predictive character of strict liability provisions. Omnicare contends that under the Sixth Circuit’s approach, the speaker will be held liable for making an opinion on a future event and being wrong in hindsight. Because of the strict liability nature of Section 11, Omnicare argues that the due diligence affirmative defense is still available as Congress intended. Under this affirmative defense, Omnicare explains, the non-speaker defendants can “avoid liability by showing that they believed the speaker held the stated belief.”
Conversely, Laborers believe that strict liability based on an objectively wrong statement is consistent with what Congress intended for Section 11. Laborers contend that, because registration statements are intended to benefit investors and provide them with the information they need to make educated investments, Congress wanted issuers to use particular care when drafting their registration statements. Laborers further believe that an opinion suggests to potential investors that the issuer made a reasonable investigation to determine that the underlying facts were true. Because of this, Laborers argue that the issuers should bear the risk for misleading or untrue statements “even when the error is unintentional.” Furthermore, Laborers maintain that because there is no scienter requirement, Section 11 “imposes strict prima facie liability.” Laborers also assert that allowing the issuer to mask its misleading statement as an opinion would undermine the strict liability nature of section 11, since the issuer would avoid liability if he or she genuinely believed the stated opinion.
In this case, the Supreme Court of the United States will likely determine whether a statement of opinion can be considered untrue—and therefore actionable—under Section 11 of the Securities Act of 1933 by an allegation that the statement was objectively incorrect or whether the statement must also be subjectively false. Omnicare argues that the Court’s holding in Virginia Bankshares, Inc. v. Sandberg controls, finding such statements actionable only when the speaker did not hold the belief made in the statement. Laborers hope to make it easier to prove a claim under Section 11 and argue that a statement of opinion can be considered untrue and is misleading where the speaker does not hold the stated belief or where the statement is wrong or lacks a reasonable basis.
U.S. CAPITAL MARKETS
The United States Chamber of Commerce (“Chamber of Commerce”), supporting Omnicare, argues that it is important to the U.S. securities market that Section 11 apply only to beliefs and opinions not held by the speaker. To hold otherwise, it claims, would mean absolute liability for defendants’ beliefs and opinions that are later proven incorrect. The Chamber of Commerce claims that such a result would deter public offerings in the U.S. and diminish the competitiveness of American capital markets. The Securities Industry and Financial Markets Association (“SIFMA”), also supporting Omnicare, warns that the Sixth Circuit’s decision will result in harm to U.S. capital markets because of the additional costs taken on by underwriters to account for the increased risk. SIFMA asserts that issuers will be encouraged to remain silent about their opinions in offering documents. If issuers were to include their opinions, SIFMA claims, underwriting fees would necessarily increase to compensate for increased risk.
SIFMA and the Chamber of Commerce also argue that upholding the Sixth Circuit’s interpretation would increase the number of offerings made overseas and deter companies from making offerings in the U.S. Specifically, SIFMA claims that decreased domestic offerings would harm U.S. economic growth and increase the cost of raising capital, adversely impacting growth for new companies and industries.
Conversely, several institutional investors support Laborers and the Sixth Circuit’s ruling, arguing that strong regulation and offering requirements actually encourage investment in the U.S. These investors claim that stricter regulation is linked to increased market liquidity. The investors argue that globalization is the main factor affecting companies’ willingness to perform offerings in the U.S. and that stricter regulation and strengthening of foreign markets and companies is the reason for more overseas public offerings. Additionally, the investors cite companies’ desire to take advantage of “cross-listing premiums” where companies list on both U.S. stock exchanges and foreign exchanges as part of portfolio diversification efforts.
The Chamber of Commerce warns that upholding the Sixth Circuit’s decision will lead to Section 11 being used as a weapon in securities litigation. The Chamber of Commerce argues that the use of securities litigation would deter disclosure of useful information and frustrate the purpose of the federal securities laws. Similarly, SIFMA argues that the Sixth Circuit’s ruling would encourage securities litigation by increasing risks for underwriters. SIFMA acknowledges the due diligence defense available to underwriters under Section 11 but suggests that expansion of liability should be left to Congress.
Amici supporting Laborers argue that adopting Omnicare’s view would adversely impact consumers and commercial investors by failing to protect against misrepresentations hidden by a speaker’s beliefs or opinions. Specifically, the institutional investors argue that litigation serves to provide a “streamlined and efficient” remedy to injured investors. The investors remind the Court of past cases that described litigation as an “indispensable tool” for injured investors and claim that Congress, by enacting Section 11, ensured that an “enforcement mechanism” would be available for injured investors.
In this case, the Supreme Court will address whether a plaintiff, making a claim under Section 11 of the Securities Act, must show not only that substantive claims made in a registration statement were incorrect, but also that the speaker making the claims held a different opinion from those made in the registration statement. The Court’s decision will contribute to further outlining the scope of remedies available to investors and, thus, liability for stock issuers under the Securities Act, and could potentially impact companies’ willingness to make public offerings in the U.S. and foreign capital markets.
The authors would like to thank Professor Charles K. Whitehead for his advice and assistance with this preview.
Kevin LaCroix: U.S. Supreme Court Takes Up Yet Another Securities Case: To Support a Section 11 Claim, Must an Opinion Be Subjectively False?, The D&O Diary (Mar. 4, 2014).