An opinion on opinions
on Mar 26, 2015 at 10:55 am
When the curtain rose for oral argument in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, on November 3, everyone thought the issue was whether a statement of opinion that turns out to be false gives rise to liability when it is included in a registration statement in connection with a stock offering under the Securities Act of 1933. The defendant Omnicare argued that liability could attach only if the opinion was not genuinely held by the speaker at the time. The plaintiff pension fund argued that falsity was enough because the 1933 Act creates a scheme of absolute liability that does not require any showing of scienter on the part of the registrant.
When the curtain came down following the argument, I predicted that the court would find a way to affirm the holding by the Sixth Circuit that an opinion can be a fact for 33 Act purposes, and that scienter is not required, but that the Court would find some way to hold that the particular statements at issue in Omnicare were voluntary statements of opinion that should be viewed as outside the ambit of strict liability.
In its decision issued on Tuesday, March 24, the Court appears to have decided another case entirely, holding (1) that opinions themselves are not facts and cannot provide the basis for 33 Act liability as such (unless not genuinely held by the speaker at the time), but (2) that a statement of opinion is actionable as an omission if it implies that the speaker had a reasonable factual basis for the opinion when the speaker had no such grounds for the statement. (Then again, it is not up to the parties to define the legal issues.) The Court’s opinion was delivered by Justice Elena Kagan, and concurrences were filed by Justice Antonin Scalia and Justice Clarence Thomas. In short, the decision was virtually unanimous.
To set the stage, Omnicare is the largest provider of pharmacy-related services for the elderly and other residents of long-term care facilities in the United States. In December 2005, Omnicare sold 12.8 million shares of common stock in a registered public offering. Since Omnicare was already publicly traded, the registration statement was filed on the SEC Form S-3, a streamlined form that permits publicly traded companies to offer additional stock to the public by relying on disclosures in its periodic filings with the SEC (such as Form 10-K).
In describing its business as required by SEC rules, Omnicare expressed its belief that its practices complied with the law. For example, in its 2004 Form 10-K, Omnicare stated:
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. These laws may, however, be interpreted in the future in a manner inconsistent with our interpretation and application.
It turned out that Omnicare was not in compliance with the law (assuming the truth of the complaint). It was involved in a scheme under which Johnson & Johnson paid kickbacks in exchange for Omnicare agents persuading doctors to prescribe Risperdal and other J&J drugs to nursing home patients. Following a whistleblower action (a qui tam action), Omnicare agreed to settlements with government agencies totaling almost $200 million but without admitting or denying guilt.
Predictably, investors filed various securities fraud class actions based on the false statements relating to legal compliance. When the smoke cleared after numerous motions and appeals, what remained was a Section 11 claim based on the 2005 offering. Omnicare moved to dismiss the complaint for failure to state a claim, and the district court granted the motion, holding that plaintiffs had failed to plead a Section 11 claim because they had not alleged that Omnicare did not believe that it was in legal compliance. The Sixth Circuit reversed.
The Sixth Circuit acknowledged that its decision created a conflict with decisions in the Second and Ninth Circuits holding that liability for a statement of opinion or belief under Section 11 lies “only to the extent that the statement was both objectively false and disbelieved by the defendant at the time it was expressed.” But the court noted that those decisions had relied on Virginia Bankshares, Inc. v. Sandberg, a case arising under Section 14(a) of the 1934 Act (addressing proxy fraud) in which the Court held that a statement of opinion may be actionable as one of fact when the opinion is one that should be based on facts known to the speaker and when the evidence indicates that the speaker did not believe the opinion expressed. In essence, the Sixth Circuit reasoned that scienter is not required under Section 11 of the 1933 Act and thus is not required for an opinion of the sort that should be based on fact when included in a registration statement.
In its March 24 decision reversing and remanding, the Court focused on the language of Section 11, which provides for liability if the registration statement “ contains an untrue statement of material fact or  omits to state a material fact . . . necessary to make the statements therein not misleading.” Most legal scholars have read these two clauses as if they are one, making no real distinction between misrepresentations and omissions, although the Court has found reason before to strike such a distinction.
By treating the operative language of Section 11 as two separate clauses, the Court effectively isolates its decision in Virginia Bankshares to the first clause (as one dealing with a non-good-faith opinion) and treats the question of reasonable basis as one of first impression. Thus, the opinion cleverly avoids any engagement with the issue of scienter. Indeed, the word scienter does not appear anywhere in any of the three opinions, although Justice Scalia discusses mens rea at some length in arguing that intent to deceive should be required as under the common law – a position somewhat at odds with the accepted definition of scienter. But there is no mention of the circuit split on the issue of scienter that was thought to have prompted the grant of certiorari in the first place.
The bottom line is that Omnicare resolves an issue that most thought settled already, while ignoring the standard(s) of care that remain applicable under the 1933 Act. But there may be unintended consequences. Other antifraud provisions –Rule 10b-5 and Rule 14a-9 — include similar (almost identical) language that presumably must be construed consistent with Omnicare going forward even though liability under the former requires scienter while the latter probably requires at least negligence. In this sense, the Court’s opinion is probably broader than it needed to be – which is what prompted Justice Thomas to dissent, although he objected primarily to the Court’s reliance on omissions as a separable basis for liability.
In Justice Kagan’s decision, the Court is emphatic that an opinion does not imply the absence of countervailing considerations. There may be facts that cut the other way. Indeed, it may have been statements during oral argument to the effect that some Omnicare lawyers had expressed concern that certain contracts could be construed as involving kickbacks that prompted the Court to take the tack it did in deciding the case. Moreover, the Court recognizes that investors view some opinions as more equal than others. An opinion expressed in a registration statement has more weight that one expressed in a blog or even on NPR. In any event, the principle is clear that liability extends only to underlying facts that cannot be squared with the opinion expressed.
Although the Court does not use the phrase reasonable basis anywhere in its opinion, the phrase appears six times in Justice Scalia’s concurring opinion. And it is almost a term of art in securities law. One possibly intentional subtlety – noted by Justice Scalia – is that the Court focuses mostly on the reasonable belief of investors rather than on the adequacy of investigation by the speaker, as seems more common in proceedings against securities professionals.
Finally, as for style points, the Court resorted to the dictionary to distinguish the words fact and opinion, admitting that to do so is “a mite silly.” It also found that the Section 11 extension of liability to omissions made the provision less cut-and-dry than it might have been — a first use of that phrase for the Court (except for once in 1986 imbedded in a quote). The preferred construction is cut-and-dried. And in discussing the practical and policy implications of the decision, she finds that “Omnicare way overstates” the dangers. I cannot prove it, but I believe this is the first time for the Court to use the word way as an adverb. And I think I have a reasonable basis for saying so.
[Disclosure: Goldstein & Russell, P.C., whose attorneys contribute to this blog in various capacities, is among the counsel to the respondents in this case. However, the author of this post is not affiliated with the firm.]