24 March 2016
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Securities
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One Year Later: Omnicare’s Effect on Opinion
Liability
By Jon Eisenberg
One year ago today, in Omnicare, Inc. v. Laborers District Council Construction Industry
Pension Fund, 135 S.Ct. 1318 (2015), the Supreme Court created a new test for opinion
liability under Section 11 of the Securities Act, a strict liability statute that applies to material
misrepresentations and omissions in a registration statement. The Court stated that under
the misrepresentation prong of Section 11, even if an opinion is objectively wrong, a
statement of opinion is misleading only if the defendant did not believe it or if it contained
other embedded factual statements that were untrue. To hold otherwise, the Court wrote, is
to ignore that a statement of opinion merely affirms “that the speaker actually holds the
stated belief,” not that the belief is correct.
The Court, however, did not stop there. Section 11 also makes it unlawful to omit material
facts necessary to prevent the statements made from being misleading. The Court held that
under the omission prong in Section 11, “depending on the circumstances,” a reasonable
investor may “understand an opinion statement to convey facts about how the speaker has
formed the opinion—or, otherwise put, about the speaker’s basis for holding that view.”
Under that standard, the Court stated, “if the real facts are otherwise, but not provided, the
opinion statement will mislead its audience.” 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
§ 11’s omissions clause creates liability.”
Omnicare was a departure from existing law. Prior to Omnicare, the Second and Ninth
Circuits, the most influential circuits for securities cases, held that opinions are only
misleading if the speakers did not believe them. The Sixth Circuit, however, in the decision
that the Supreme Court reversed in Omnicare, held that under Section 11 an opinion is
misleading if it is objectively incorrect even if the speaker believed it. 1 Thus, while Omnicare
reversed the Sixth Circuit pro-plaintiff standard, it also departed from the more influential,
defendant-friendly standards in the Second and Ninth Circuits. Below, we consider how
courts have applied Omnicare in the year since it was decided.
The Second Circuit’s Narrow Application of Omnicare
Earlier this month, the Second Circuit revisited its prior holding in Fait v. Regions Financial
Corp.2 that only subjectively-disbelieved opinions are misleading under the securities laws.
1
Compare Fait v. Regions Financial Corp., 655 F.3d 105, 110 (2d Cir. 2011) and Rubke v. Capitol Bancorp Ltd., 551
F.3d 1156 (9th Cir. 2009) (even if an opinion is incorrect, it is actionable only if was not believed) with Council of Laborers
& HOD Carriers Pension & Welfare Fund v. Omnicare, 719 F.3d 498 (6th Cir. 2013) (even if an opinion was believed, it is
misleading under Section 11 if it is incorrect), rev’d sub nom Omnicare, Inc. v. Laborers District Council Construction
Industry Pension Fund, 135 S.Ct. 1318 (2015). See also MHC Mutual Conversion Fund, L.P. v. Sandler O’Neill &
Partners, L.P., 761 F.3d 1109 (10th Cir. 2014) (considering three alternative standards for opinion liability and finding that
plaintiffs failed all three).
2
655 F.3d 105, 110 (2d Cir. 2011).
One Year Later: Omnicare’s Effect on Opinion Liability
In Tongue v. Sanofi, slip op. No 15-588-cv (2d Cir. Mar. 4, 2016), defendant and its
predecessor had conducted “single-blind” clinical drug studies (studies in which either the
researcher or the patient does not know which drug was administered) of a drug designed to
treat multiple sclerosis, but, according to the complaint, the FDA had repeatedly expressed
strong concern to the company and its predecessor that, without “double-blind” clinical
studies (studies in which both the researcher and the patient do not know which drug was
administered), the results might not support approval of the drug. 3 Plaintiffs alleged that
without disclosure of the FDA’s repeated warnings that a single-blind study might not be
adequate, various opinion statements were misleading. The opinions included defendants’
estimate that there was a 90% likelihood of achieving certain milestones within the cut-off
date for those milestones, the projection that the FDA would approve the drug in late 2012,
expressions of confidence about the anticipated launch date of the drug, a statement that the
results of the clinical trials were “unprecedented,” and that they were “nothing short of
stunning.” In November 2013, the FDA rejected the application based primarily on the failure
to use double-blind studies. One year later, however, it approved the drug without doubleblind studies.
The district court dismissed the claims based on multiple grounds: 1) they were not
misleading under the Second Circuit’s subjective-belief standard in Fait, 2) they were
protected by the securities law safe harbors for forward-looking statements, and 3) with
respect to the claims under Section 10(b) of the Securities Exchange Act (which, unlike
Section 11, requires proof of scienter), plaintiffs had failed to plead facts creating a strong
inference of scienter. 4 The Second Circuit stated that it “saw no reason to disturb the
conclusions of the district court,” but wrote to clarify the impact of Omnicare, which was
decided after the district court issued its opinion, on prior Second Circuit law addressing
whether a statement of opinion is materially misleading.
Expressions of Even Exceptional Optimism Do Not Create an Obligation to
Disclose Conflicting Facts
The Second Circuit acknowledged that Omnicare changed the standard in Fait for what
constitutes a materially misleading opinion under Section 11 because subjective disbelief is
no longer required for a statement of opinion to be misleading. It held, however, that even
under Omnicare the fact that the FDA expressed significant reservations about the
company’s methodology “did not prevent Defendants from expressing optimism, even
exceptional optimism, about the likelihood of drug approval.”
The court focused on the Supreme Court’s statement in Omnicare that a statement of
opinion “is not necessarily misleading when an issuer knows, but fails to disclose, some fact
cutting the other way.” It stated that Omnicare imposes no obligation to disclose facts merely
because they would have undermined defendants’ optimistic projections. In particular,
Defendants need not have disclosed the FDA feedback merely because it tended
to cut against their projections—Plaintiffs were not entitled to so much
3
The use of a single-blind study was due in part to the drug’s unique treatment design. In contrast to other drugs used to
treat multiple sclerosis, which require a daily or weekly dosing regimen, the drug at issue required only two annual
treatment courses. Thus, patients would realize they were being required to undergo treatment far less frequently than
under their normal drug.
4
In re Sanofi Sec. Litig., 87 F. Supp. 3d 510 (S.D.N.Y. 2015), aff’d slip op. No. 15-588-cv (2d Cir. Mar. 4, 2016).
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One Year Later: Omnicare’s Effect on Opinion Liability
information as might have been desired to make their own determination about
the likelihood of FDA approval by a particular date….
Certainly, Plaintiffs would have been interested in knowing about the FDA
feedback, and perhaps would have acted otherwise had the feedback been
disclosed, but Omnicare does not impose liability merely because an issuer failed
to disclose information that ran counter to an opinion expressed in a registration
statement….
[D]efendants’ statements about the effectiveness of [the drug] cannot be
misleading merely because the FDA disagreed with the conclusion—so long as
Defendants conducted a “meaningful” inquiry and in fact held that view, the
statements did not mislead in a manner that is actionable.
The “no meaningful inquiry” is a difficult standard for plaintiffs to meet, but it is based on a
recognition that reasonable investors know that when a company offers an opinion, it is not
stating that it is aware of no facts that cut against it, or that the company has disclosed the
facts that cut the other way, or that no reasonable person could hold a different opinion
based on the same facts. As the Supreme Court stated in Omnicare and the Second Circuit
stated in Sanofi, the standard for opinion liability presents “no small task for an investor”
seeking to plead that an opinion is misleading.
Hedges and Disclaimers Limit an Investor’s Ability to Allege that an Opinion Is
Misleading
The Second Circuit also focused on the Supreme Court’s statement in Omnicare that
investors read each statement within a document “in light of all its surrounding text, including
hedges, disclaimers, and apparently conflicting information,” and that “an omission that
renders misleading a statement of opinion when viewed in a vacuum may not do so once
that statement is considered, as is appropriate, in a broader frame.” It stated that the offering
materials “made numerous caveats to the reliability of projections,” and that a reasonable
investor, especially investors who had dealt with complex financial instruments that arose in
Sanofi, would have considered the opinions in light of those qualifications.
Post-Omnicare, Pre-Sanofi Lower Court Precedents
Even before the Second Circuit’s decision narrowly applying Omnicare, a number of district
courts had dismissed opinion-related claims under Omnicare. For example, since Omnicare,
courts dismissed complaints alleging that the following opinions were misleading:
The company’s “strong infrastructure and other characteristics” positioned it to
“grow substantially by opening new stores at a rapid clip.” 5
In response to plaintiff’s argument that the defendants failed to disclose the company’s
generally poor infrastructure and lack of investment in improvement, the court quoted
Omnicare’s statement that an opinion “is not necessarily misleading when an issuer knows,
but fails to disclose, some fact cutting the other way.” Further, the court said, defendants had
identified numerous risks to growth in the company’s public filings and disclosed the basis for
their projections, and Omnicare had stated that “to avoid exposure for omissions…, an issuer
5
In re Fairway Group Holdings Corp. Sec. Litig., Fed. Sec. L. Rep. (CCH) (S.D.N.Y. Aug. 19, 2015) (Report and
Recommendation of Magistrate Judge Andrew J. Peck)
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One Year Later: Omnicare’s Effect on Opinion Liability
need only divulge an opinion’s basis, or else make clear the real tentativeness of its belief.”
With regard to the argument that several of the opinions included “statements of embedded
facts,” the court concluded that statements that are not “determinate or verifiable” did not
constitute statements of embedded facts.
“In our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of [the company.” 6
The court stated that plaintiff’s Section 11 claim based on an omissions theory failed
because “Plaintiff offers little more than the conclusory assertion” that the defendant’s
opinion lacked a reasonable basis, and that under Omnicare conclusory allegations or
recitations of statutory language are not enough to plead that an opinion was false or
misleading.
Opinions regarding the adequacy of bad debt reserves and the collectability of
receivables. 7
With respect to the omissions prong in Omnicare, the court found that the bulk of the alleged
omissions concerned circumstances that either had not occurred at the time of the offerings
or were matters of general public knowledge or were not material when viewed in context of
facts that were disclosed in the registration statement.
In another case involving the adequacy of reserves, 8 the court stated that reserves
necessarily require judgment and thus are statements of opinion or belief, not of fact. The
court stated that under Omnicare, plaintiffs must allege “not only that the financial statement
‘omits material facts about the issuer’s inquiry into or knowledge concerning a statement of
opinion,’ but that ‘those facts conflicts with what a reasonable investor would take from the
statement itself.’”
“We believe these findings [regarding the results of certain drug trials] continue to
support the robustness of the PRECEDENT trial results, particularly in the
group of FR (100%) patients,” and “[W]e expect that the [European Medicines
Agency] will grant the conditional marketing authorization for the two products
or the products in the 28 countries in the EU probably in two to three
months.” 9
The court stated that plaintiffs had not pleaded sufficient facts to demonstrate that the
defendant lacked a reasonable basis for making these statements. It stated that the
company and its officers and directors were “’not required to take a gloomy, fearful or
defeatist view of the future’ but were instead ‘expected to be confident about their
stewardship and the prospects of the business that they manage’ within the bounds of the
information that they actually had when the statements were made.’”10
6
SEPTA v. Orrstown Fin. Servs., Inc., Fed. Sec. L. Rep. (CCH) ¶ 98,550 (M.D. Pa. June 22, 2015).
In re Velti PLC Sec. Litig.,2015 U.S. Dist. LEXIS 135004 (N.D. Cal. Oct. 1, 2015).
8
City of Westland Police and Fire Ret. Sys. v. Metlife, Inc., Fed. Sec. L. Rep. (CCH) ¶98,811 (S.D.N.Y. Sept. 11, 2015).
9
Vallabhaneni v. Endocyte, Inc., Fed. Sec. L. Rep. (CCH) ¶ 98,888 (S.D. Ind. (Jan. 4, 2016).
10
Id., quoting Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1129-30 (2d Cir. 1994).
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4
One Year Later: Omnicare’s Effect on Opinion Liability
Statements that the company did not believe an SEC investigation would have a
material adverse effect on the company. 11
The court stated that the plaintiffs had failed to provide adequate factual allegations as to
why the defendants would have believed that the investigation would have a material
adverse effect on the company’s financial statements.
“We believe we are in a far better financial situation than we were a year ago and
the preservation of our liquidity is essential to maintain and improve our
balance sheet.”12
With regard to plaintiff’s allegation that this omitted facts regarding the company’s liquidity
issues, difficulty in paying its bills and cash flow problems, the court stated that the plaintiffs
had not alleged any “facts that would cast doubt on the sincerity or reasonableness of [the
defendant’s] statement of his opinion.” It cited Omnicare for the proposition that an issuer’s
opinions do not become misleading because they are undercut by some facts known to the
issuer.
Of course, not every opinion claim is dismissed, just as not every opinion claim was
dismissed before Omnicare. One court denied dismissal of a claim based on the company’s
statement that it believed it was “in substantial compliance with all laws, rules and
regulations that affect its business and operations,” because, the court found, plaintiffs had
adequately alleged facts that, if true, showed “that the legal compliance statements were
both objectively false and disbelieved at the time they were made.” 13 Another court declined
to dismiss a complaint regarding the adequacy of reserves where the complaint alleged that
defendants fraudulently used a 2.2 average claim duration to calculate reserves when they
knew that such duration was actually 3 years. 14 Another court rejected a motion to dismiss a
complaint that it found plausibly alleged that the company “misled investors by suggesting
that the company was not facing an investigation that could have a material impact on its
business, when, in fact, it was facing such an investigation,” and it subsequently filed a
restated 10-K that stated that an adverse outcome in the investigation could have a material
effect on the company’s business, financial condition or results of operations. 15
In the aggregate the cases suggest that even after Omnicare, pleading that an opinion was
misleading is “no small task for an investor.” Plaintiffs must rely on facts, not conclusions;
the omitted facts must go beyond contradicting the opinions expressed because “issuers
need not disclose a piece of information merely because it cuts against their projections”;
and the omitted facts must be material even in light of the qualifications and disclaimers that
are also present.
No Change to the Scienter and Safe Harbor Requirements
Two other important qualifications deserve mention.
11
In re Lions Gate Entertainment Corp. Sec. Litig, 2016 U.S. Dist. LEXIS 7721 (S.D.N.Y. Jan. 22, 2016).
782 F.3d 1142 (10th Cir. 2015).
13
In re Bioscrip, Inc. Sec. Litig., 95 F. Supp.3d 711 (S.D.N.Y. 2015).
14
In re Genworth Financial Inc. Sec. Litig., 103 F. Supp. 3d 759 (E.D. Va. 2015).
15
Menaldi v. Och-Zipp Capital Management Group LLC, 2016 U.S. Dist. LEXIS 19083 (S.D.N.Y. Feb. 17, 2016).
12
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One Year Later: Omnicare’s Effect on Opinion Liability
First, Omnicare was a Section 11 case, and Section 11 imposes strict liability on issuers for
material misrepresentations and omissions in a registration statement. Many opinion cases,
however, arise not under Section 11 but under Section 10(b) of the Securities Exchange Act,
which requires plaintiffs to plead not only a materially misleading misrepresentation or
omission but also facts that create a cogent inference of “scienter”—which the Supreme
Court has defined as “a mental state embracing intent to deceive, manipulate, or defraud.” 16
As Judge Kaplan observed in In re Lehman Brothers Sec. and ERISA Litig., 17 “whether such
statements [of opinion] are made with the requisite scienter is, of course, another question”
than whether those opinions are misleading under Omnicare. Fait, or something very close
to Fait, should still be good law when it comes to Section 10(b) cases because a defendant
who believes his opinion is unlikely to have acted with scienter.18 The Sixth Circuit, in the
decision that the Supreme Court reversed in Omnicare, held that an objectively wrong
opinion is misleading under Section 11. But even the Sixth Circuit held that an opinion is
actionable under Section 10(b) only if the defendants knew that the statements were false
when made. 19 And the district court decision in Sanofi dismissed the opinion claims not only
because the opinions were not misleading but, with respect to Section 10(b), because the
plaintiffs had failed to plead facts creating a strong inference of scienter.
Second, many opinions are forward-looking—they express a view about the future rather
than the present or the past. Subject to very limited exceptions, forward-looking statements
are protected by safe harbors under the securities laws if the statements are honestly
believed or if they are accompanied by meaningful cautionary statements. 20 The pleading
requirements necessary to satisfy the safe harbors “are not affected by the recent Supreme
Court decision in Omnicare….” 21 Indeed, in the district court Sanofi decision, the court held
that many of the opinions were protected by the safe harbors in the securities laws and
dismissed on that basis as well. The Second Circuit in Sanofi described the district court’s
opinion as “thorough and thoughtful” and stated that it “agree[d] with the district court’s
reasoning and holding.”
Conclusion
By focusing on the omissions prong in Section 11, Omnicare created a new test for opinion
liability under Section 11 of the Securities Act. Sanofi and other post-Omnicare decisions,
however, show that the hurdles to pleading opinion liability remain high even with regard to
strict liability Securities Act claims, and are extraordinarily high when brought under Section
10(b) or when protected by the securities law safe harbors for forward-looking statements.
16
Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12 (1976).
Fed. Sec. L. Rep. (CCH) ¶[ 98,818 at fn 103 (S.D.N.Y. Sept. 18, 2015).
18
See Menaldi v. Och-Ziff Capital Management Group LLC, 2016 U.S. Dist. LEXIS 19083 at fn 8 (S.D.N.Y. Feb. 17, 2016)
(“[I]nsofar as Omnicare supplants Fait, the distinction between the two standards may be less salient in § 10(b) cases,
because in those cases—as opposed to § 11 cases – Plaintiffs must allege scienter. Because pleading scienter requires
plaintiffs to address a defendant’s state of mind, eliminating the subjective prong of Fait may have less impact on analysis
of whether a § 10(b) claim survives a motion to dismiss.”)
19
Indiana State District Council of Laborers and HOD Carriers Pension and Welfare Fund v. Omnicare, Inc., 583 F.3d
935, 945 (6th Cir. 2009).
20
15 U.S.C. §77z-2(c)(i); 15 U.S.C. § 78u-5(c)(i).
21
Firefighters Pension & Relief Fund of City of New Orleans v. Bulmahn, 2015 U.S. Dist. LEXIS 107198 (E.D. La. Aug. 14,
2015).
17
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One Year Later: Omnicare’s Effect on Opinion Liability
Author:
Jon Eisenberg
jon.eisenberg@klgates.com
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