The U.S. Supreme is considering the pleading standard for securities fraud allegations based on statements of opinions. AARP filed a brief cautioning against erecting hurdles between investors and courtroom doors.
Section 11 claimants under the federal Securities Act have a private right of action against the issuer of a security whose Registration Statement or Prospectus contains a materially false statement of fact or an omission necessary to make statements not misleading. Materiality for securities fraud purposes depends on whether there is a substantial likelihood that a reasonable shareholder or prospective shareholder would consider the information important in deciding whether to invest.
The issue here concerns whether a statement, simply because it is an opinion, should be evaluated at a lower standard. A statement of fact is evaluated as to its objective truth to determine the statement’s materiality to a prospective shareholder, and the court questions whether liability for statements of opinion should be restricted to those that are also subjectively false, meaning claimants additionally must allege the opinion or belief stated was in fact held by the corporation when stated. Under Section 11, a company is liable for misleading the public, regardless of the form of the statement.
In 2005, Omnicare made a public offering and filed the appropriate Registration Statement and Prospectus with the SEC. The materials expressed Omnicare’s belief that its practices complied with the law, but they allegedly contained various misrepresentations as to ethical and legal matters. Specifically, Omnicare’s comments in the 2005 registration materials represented that Omnicare “believed” that its contracts with pharmaceutical companies were both legally and economically valid and brought value to the health care system and Omnicare patients.
Omnicare subsequently was accused of many illegal activities during that period, including violating anti-kickback agreements with pharmaceutical firms and making false Medicare and Medicaid claims.
Investors claim that the misleading statements caused them to invest in Omnicare stock and they lost money when the stock prices dropped after Omnicare had to pay to settle litigation related to these events. The U.S. Court of Appeals for the Sixth Circuit held that once an objectively false statement — opinion or otherwise — has been made, a defendant’s knowledge is not relevant to a strict liability claim and a complainant may survive a motion to dismiss without pleading knowledge of falsity or subjective falsity. Omnicare appealed to the Supreme Court.
AARP’s friend-of-the-court brief, filed by attorneys with AARP Foundation Litigation, argues that materiality is judged based on the statement’s actual or likely effect on the reader, and companies are legally responsible for stating their opinions in ways that may deceive potential investors. Moreover, the brief notes that Section 11 is a strict liability statute, meaning that misleading statements are to be evaluated without reference to the intent of the speaker. Requiring plaintiffs to prove corporate intent to make materially false statements of opinion goes against the purpose of the Securities Act of 1933 and places an unreasonably high burden on private litigants
What’s at Stake
Registration materials have the potential to influence the investing public, especially pension funds. When it comes to the sale of securities, government regulators must assure that reliable information is filed and disseminated. A heightened pleading and proof standard in this context would deprive litigants of the opportunity to pursue legitimate claims in the face of a company’s unreasonable and potentially deceptive actions.
Omnicare v. Laborers Dist. Council Constr. Indus. Pension Fund is before the U.S. Supreme Court.