On November 3, 2014, the U.S. Supreme Court held oral argument in Omnicare v. Laborers District Council Construction Industry Pension Fund. As discussed in earlier posts, from March 18, 2014 and July 22, 2014, the Supreme Court in Omnicare has been asked to resolve a circuit split regarding the scope of liability under Section 11 of the Securities Act: does an issuer violate Section 11 if it makes a statement of opinion that is objectively false, or must the issuer also have known that the statement was false when made?
In the Sixth Circuit opinion that gave rise to the writ, the court refused “to impose a knowledge of falsity requirement upon Section 11 claims” and emphasized that because Section 11 provides for strict liability, “once a false statement has been made, a defendant’s knowledge is not relevant.” By contrast, the Second, Third, and Ninth Circuits have required plaintiffs to establish subjective knowledge of falsity where a Section 11 claim is based on a statement of opinion or belief. For example, in Fait v. Regions Financial Corp., 655 F.3d 105 (2d Cir. 2011) the Second Circuit held that for Section 11 claims “based upon a belief or opinion alleged to have been communicated by a defendant, liability lies only to the extent that the statement was both objectively false and disbelieved by the defendant at the time it was expressed.”
During oral argument, the justices’ questioning suggested that the Supreme Court is leaning toward an answer somewhere between the two approaches adopted by the circuit courts: that Section 11 liability may be imposed for a statement of opinion or belief where the statement is objectively false and where the speaker either (1) did not believe the truth of the statement when made, or (2) did not have a “reasonable basis” for making such a statement. This position was supported by the federal government, which submitted an amicus brief arguing that a statement of opinion should be actionable under Section 11 where “it lacked a reasonable basis under the circumstances, even if the opinion was genuinely held.” At argument, the Assistant to the Solicitor General argued on behalf of the United States and posited that the parties had offered “two extreme positions, and we think that the answer lies in the middle.”
Even before hearing the government’s position at oral argument, the focus of the justices’ questioning was on this concept of “reasonable basis.” Justice Ginsburg suggested that it is “implicit” that the “issuer has acted with diligence in making [a] statement” in a registration statement, and that the failure to have conducted such diligence would constitute an implicit omission. Justice Breyer similarly noted that even for statements of opinion, the issuer “ought to have looked into it” and that there was an “implied statement” that the speaker has “done some work to figure this out.” The justices appeared concerned with any rule that would allow, as Chief Justice Roberts put it, an issuer to make a statement that is “wildly off” and insulate itself from Section 11 liability “by simply saying ‘We believe.’” Justice Kagan also offered that Section 11 was written as a strict liability provision in part because “it is awfully hard to show subjective intent” and requiring proof of subjective disbelief would set a very high bar to imposing liability.
Justice Kagan is correct that discerning subjective intent is difficult, though it seems likely that the Supreme Court is inclined to strike a middle ground between the two circuit court approaches by adopting the government’s position. But that’s just our opinion, for which we think there is a reasonable basis.