In Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, No. 13-435 (March 24, 2015), Justice Kagan, joined by Justices Roberts, Kennedy, Ginsburg, Breyer, Alito and Sotomayor (and with concurrences from Justices Scalia and Thomas), held that Section 11 of the Securities Act of 1933 requires courts to perform a two step analysis to determine if the contents of a company’s registration statement are misleading. The case is important for companies facing securities class actions under Section 11, but also provides insight into the distinction between, and analyses of, misrepresentations and omissions.
The case stems from Omnicare’s filing of a registration statement in connection with a public offering of common stock. Omnicare provides pharmacy services to nursing homes. Pension Fund Respondents (the “Funds”) alleged that two statements concerning legal compliance in the registration statement misrepresented material fact and omitted material facts, rendering those statements misleading:
– “We believe our contract arrangements with other healthcare providers, our pharmaceutical suppliers and our pharmacy practices are in compliance with applicable federal and state laws.”
-“We believe that our contracts with pharmaceutical manufacturers are legally and economically valid arrangements that bring value to the healthcare system and the patients we serve.”
The language had various caveats, such as mention of state enforcement actions against manufacturers of pharmaceuticals regarding alleged kickbacks.
Under Section 11, liability for a registration statement exists if that statement “contain[s] an untrue statement of material fact” or “omit[s] to state a material fact necessary to make the statements therein not misleading.”
The district court held that the statements were mere opinion and therefore not actionable under Section 11 unless those making the statements knew they were untrue when made. The district court held that the Funds failed to make that allegation and dismissed the case. The Court of Appeals for the Sixth Circuit reversed. That court applied a different standard, holding that the belief of the speaker at the time made was not relevant. Rather, respondents only had to allege that the statements were objectively false.
Justice Kagan found both analyses lacking. As to material misrepresentations, the Court essentially held that pure statements of opinion that are honestly held are not actionable:
“The two sentences to which the Funds object are pure statements of opinion: To simplify their content…, Omnicare said in each that ‘we believe we are obeying the law.’ And the Funds do not contest that Omincare’s opinion was honestly held….What the Funds instead claim is that Omnicare’s belief turned out to be wrong–that whatever the company thought, it was in fact violating anti-kickback laws. But that allegation alone will not give rise to liability under Section 11’s first clause because, as we have shown, a sincere statement of pure opinion is not an ‘untrue statement of material fact,’ regardless whether an investor can ultimately prove the belief wrong.”
The Court’s analysis under the second prong of Section 11 — concerning omissions — was more nuanced, entailing an analysis from an objective “reasonable investor” viewpoint: “Thus, if 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 would take from the statement itself, then Section 11’s omissions clause creates liability.” That said, the Court cautioned: “Reasonable investors understand that opinions sometimes rest on a weighing of competing facts….”
Justice Kagan vacated and remanded, with instruction to the court to first determine whether the Funds adequately alleged an omission that would have been material to a reasonable investor. If so, the court must then analyze whether the statements were misleading given their disclaimers and qualifications.
In his concurrence (concurring in part and concurring in the judgment), Justice Scalia took issue with the Court’s “expansive application of Section 11’s omission’s clause to expressions of opinion.” Justice Scalia specifically took issue with the Court’s reading of implicit facts within an opinion based on the objective reasonable investor viewpoint. As Justice Scalia reasoned: “It seems to me strange to suggest that a statement of opinion as generic as ‘we believe our conduct is lawful’ conveys the implied assertion of fact ‘we have conducted a meaningful legal investigation before espousing this opinion.’ It is strange to ignore the reality that a director might rely on industry practice, prior experience, or advice from regulators — rather than a meaningful legal investigation — in concluding the firm’s conduct is lawful.”
There is no hard and fast rule in the omissions context. And it remains to be seen to what extent the Court’s view of the statute translates into analyses of misrepresentations and omissions in the common law context. In any event, this case adds to the Court’s recent body of case law on the meaning of materiality (Amgen) and misrepresentations (Halliburton) in the securities context.