Saturday, March 28, 2015
On Tuesday, the Supreme Court finally issued its decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund (.pdf), concerning the definition of “opinion falsity” in the context of a lawsuit under Section 11 of the Securities Act.
Joan described the case in more detail here, but the basic issue was, what does it mean for a statement of opinion to be false? Or, to ground it more in the facts of Omnicare, if the company files a registration statement - as Omnicare did - that claims that the company "believes" its contracts are in compliance with the law, is that statement false when the DoJ sues for Medicaid fraud?
The defendants argued that opinion statements - such as a "belief" in legal compliance - can only be false if they falsely represent the speaker’s belief, i.e., if the speaker did not really believe that Omnicare was in compliance. If the speaker did believe in such compliance, then even if that belief was unfounded or turned out to be false, the statement itself would be literally true.
The plaintiffs agreed that statements of opinion may be false if the speaker misrepresents his or her own opinion, but also argued that opinions may be false for other reasons. For example, according to the plaintiffs, an opinion statement is false if the statement has no reasonable basis, regardless of the subjective beliefs of the speaker. So in Omnicare's case, its statement about legal compliance would be false if it did not bother to investigate whether its contracts were in compliance with the law, or if it ignored information that suggested the contracts were not in compliance.
In general, the case was pitched as a dispute about the continuing viability of Section 11 as a strict liability statute. Section 11, 15 U.S.C. §77k, provides that issuers are strictly liable for false statements in registration statements, and signatories of the registration statement are liable unless they demonstrate that they conducted a reasonable investigation of those statements. So, if Omnicare prevailed in its argument that belief statements are only false if the speaker misstates his own belief, it would, as a practical matter, require the plaintiffs to demonstrate that the speaker intentionally misled investors, thus importing a scienter requirement into Section 11. The effect would be particularly pronounced because there is a great deal of slipperiness regarding what counts as an opinion statement in the first place.
Ultimately, the Supreme Court adopted a standard that fit within the framework advocated by the plaintiffs, although the Court used a narrower formulation. The Court agreed with the defendants that statements of opinion can only be false if disbelieved by the speaker – if the speaker misstates his or her own belief – but then went on to hold that such statements may be misleading if they omit material information. Such as, if they omit the fact that the speaker had no basis for the belief he or she purported to hold and failed to conduct any investigation into the matter. It depends on context and delicate inferences yadda yadda yadda, but a registration statement is a formal document and investors are likely to assume that statements of belief contained therein are the product of a reasonable investigation, etc.
But none of this is what the case was really about.
[More under the cut]
As I previously posted, the real issue in this case was pleading. Because if the defendants had prevailed, courts were likely not only to require that plaintiffs prove scienter to demonstrate that an opinion statement was false, but also to require that plaintiffs plead it in accordance with Rule 9(b). Rule 9(b) requires that claims that “sound in fraud” be pled with particularity. In the Section 11 context, courts typically find that a claim “sounds in fraud” when the plaintiffs allege that the defendants intentionally or recklessly made false statements – which, if the defendants prevailed in Omnicare, the plaintiffs would be required to do for any case alleging a false statement of opinion. The entire reason this fight was so high stakes was because it represented the difference between Rule 9(b) pleading and Rule 8 pleading.
And on that metric, the Supreme Court's ruling was a resounding loss for the plaintiffs.
Because the Supreme Court agreed that opinions may be misleading even if the defendant subjectively believed them, i.e., acted in good faith. And it even agreed that under such circumstances, Section 11 claims need only be pled in accordance with the Rule 8 standards articulated in Ashcroft v. Iqbal, 556 U. S. 662 (2009). But then it went on to describe those standards in a manner that, well, doesn’t resemble any Rule 8 pleading I’ve ever seen.
It would not be enough, the Court said, for the plaintiff to allege that the opinion lacked a reasonable basis or that defendants failed to conduct a reasonable investigation of the opinion. It would not even, apparently, be enough to allege problems significant enough to suggest that Omnicare did not conduct a reasonable investigation before speaking. Instead, plaintiffs would have to identify specific facts regarding Omnicare’s investigation of the legality of its contracts that the registration statement failed to disclose, such as, in this case, an allegation that an attorney warned Omnicare’s executives that its contracts were legally at risk. And the plaintiffs would have to allege that this was not merely a junior attorney, but someone who was relatively senior in the hierarchy, such that his or her opinion would carry significant weight. The plaintiffs might also have to identify other facts available to Omnicare regarding the legal status of its contracts, so that the court could determine – on the pleadings – whether the attorney’s opinion was significant enough to require disclosure in light of all information available. As the Supreme Court put it, at the pleading stage - and prior to any discovery - “The investor must identify particular (and material) facts going to the basis for the issuer’s opinion—facts about the inquiry the issuer did or did not conduct or the knowledge it did or did not have—whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.”
This may not technically be Rule 9(b) pleading – it does not, for example, require that the facts raise a “strong inference” of scienter, as the Second Circuit has required under Rule 9(b) – but it’s so close as to make no real difference.
And the thing of it is, you can bet that even outside the securities context, defendants will be citing this case as an example of the pleading standards under Rule 8 – thus raising the bar across the board.
So Omnicare represents yet another incremental increase in the burdens placed on securities fraud plaintiffs. And, as has happened before (such as in the context of standing), it's a hurdle that's likely to metastasize to other areas of law.