You Were Wrong, But Did You Know You Were Wrong? The Supreme Court to Resolve the Circuit Split On the Pleading Standard for Opinion-Based Allegations Under Section 11

Can a securities plaintiff satisfy Section 11 of the Securities Act simply by alleging that a statement of opinion was objectively false, or must the plaintiff also allege that the speaker subjectively knew the statement was false when it was made?  That is the question taken up by the Supreme Court earlier this month when it granted certiorari in Omnicare, Inc. v. The Laborers District Council Construction Industry Pension Fund and the Cement Masons Local 526 Combined Funds.  As we previously discussed, the Sixth Circuit decision on appeal runs contrary to decisions in the Second and Ninth Circuits, so all eyes are on the Court to settle the debate.

According to Omnicare’s petition for cert, plaintiffs allege that Omnicare made a misrepresentation in its registration statement for a December 2005 offering.  As alleged, the registration statement disclosed that Omnicare was in “material compliance with all applicable laws,” despite the fact that the Company was sued and investigated for a variety of illegal activities, including kickback arrangements with pharmaceutical manufacturers and submission of false claims to Medicare and Medicaid.  Omnicare responded that whether there were investigations or lawsuits was irrelevant, because (i) no court found Omnicare liable for the misconduct alleged in the complaint and (ii) Omnicare never admitted to wrongdoing in a settlement or otherwise.  According to Omnicare, plaintiffs never pled allegations about subjective falsity, and specifically disclaimed any such allegations.  The question, then, is whether Omnicare is nevertheless liable for misstatements pursuant to Section 11.

That question is an important one.  The line between demonstrating intent and falsity is blurry with respect to statements of opinion.  As Omnicare put it, drawing from the Supreme Court’s opinion in Virginia Bankshares v. Sandberg, to show an opinion is false “necessarily requires allegations about falsity in the ‘psychological fact’—that is, allegations that the speaker did not believe what he was saying.”

The Sixth Circuit noted that statements of opinion are “soft information” under the law, and “there is no duty to disclose soft information unless it is ‘virtually as certain as hard facts.’”  Omnicare argues that if the Sixth Circuit is right, substantial risks may arise for market participants.  Speakers might find themselves vulnerable to hindsight claims based on opinions that, as time passes, turn out to be wrong, and issuers might be chilled from giving their opinions at all, even if investors might otherwise consider those opinions to be of value.

The Supreme Court will hear oral arguments and issue a ruling in the case during its next term, starting in October.