Omnicare, Inc. is asking the U.S. Supreme Court to rule that investors who bring lawsuits to challenge untrue opinions contained in offering materials must allege that the opinions were not only objectively false (i.e., incorrect), but subjectively false as well (i.e., known by the speaker to be incorrect). The pharmaceutical company urged that the Sixth Circuit had wrongly determined that only the first measure–objective falsity–was required for a claim filed under Section 11 of the Securities Act of 1933.
Section 11 provides a remedy to investors who purchase securities in a public offering sold via a registration statement that contains material, untrue information. Section 11 claims are typically brought against issuers, directors and underwriters, and are generally considered to have less-burdensome pleading standards than Section 10(b) claims under the Securities Exchange Act of 1934. The latter requires investors to plead and prove that the speaker intended to defraud investors. Should the Supreme Court side with Omnicare, it could raise the bar for Section 11 pleading by requiring allegations and proof of subjective falsity, and in the process hamper access to an oft-used tool at plaintiffs’ disposal to hold corporate wrongdoers responsible for misconduct.
In Omnicare, the investors alleged that the Company violated the statute by concealing the existence of a kick-back scheme with pharmaceutical manufacturers and that its executives made false statements about the Company’s purported compliance with laws.
Critically, the investors had not alleged that the executives knew that the opinions were false, but only that the opinions were in fact false. In other words, they pled the statutory violation as arising under a strict liability theory, where defendants’ actual knowledge of the falsity was immaterial.
The district court, however, dismissed the case, holding that the plaintiffs failed to plead knowledge of the falsity of the statements. On appeal, the Sixth Circuit disagreed and held that–with respect to alleged false opinions or beliefs–Section 11 was a strict liability statute requiring only a showing of objective falsity. That holding solidified a split between circuits, however, as the Second and Ninth Circuits have held that a subjective understanding of falsity must be established by investors.
This split resulted from differing interpretations of a 1991 Supreme Court decision, Virginia Bankshares, Inc. v. Sandberg. In that case, the Supreme Court addressed a claim under Section 14(a) of the Securities Exchange Act, a negligence-based statute that prohibits the solicitations of shareholder votes in proxy statements and requires plaintiffs to allege the speaker’s state of mind. The Virginia Bankshares court held that an opinion can be an untrue statement of material fact only insofar as it misstates “the psychological fact” of the speaker’s belief in what was said. The Second and Ninth Circuits have applied this decision to Section 11 claims, requiring investors plead both subjective and objective falsity. The Sixth Circuit, on the other hand, maintained the distinction between Section 14(a) and Section 11, finding that because Section 11 is a strict liability statute, its reasoning did not apply to the investors’ Section 11 claims.
Having agreed to review this decision, the Supreme Court is poised to resolve whether claims stemming from opinions and beliefs in initial offerings materials are “strict liability” claims. As noted above, Section 11 has been interpreted as a negligence-based statute that requires corporations to speak truthfully when they disclose information in a registration statement. But if the Supreme Court accepts Omnicare’s arguments, it would thrust the pleading requirements for Section 11 claims more into the realm of Section 10(b)’s heightened standards and reduce companies’ obligations to ensure that they are speaking truthfully to investors.
Conversely, should the Supreme Court affirm the Sixth Circuit’s approach, Section 11 would continue to be enforced as the strict liability standard that Congress intended. Moreover, courts could see a marked increase in Section 11 filings in the Second and Ninth Circuits, which have very active securities litigation dockets. And faced with potential liability, companies and officers may take greater care in ensuring that statements in offering materials are truthful.
The Supreme Court’s decision is expected to be issued by June 2015.