Supreme Court Says Company May Be Sued For Omitting Facts Which Contradict “Opinions”
On March 24, the U.S. Supreme Court issued a major decision related to securities fraud. The justices addressed the legal standards necessary for shareholders to sue companies for allegedly misleading statements contained in official securities filings. The Court’s decision opens the door for a more permissive standard that could benefit shareholders in the long run.
Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund
This is a lawsuit filed by a pension fund against a company it owns stock in. The company, Omnicare, filed a registration statement with the U.S. Securities and Exchange Commission before making its public offering of stock. Under Section 11 of the Securities Act of 1933, a company’s registration statement must include a “full and fair disclosure of information” related to the stock offering. If the statement contains any “untrue statement of material fact” or “omitted to state a material fact…necessary to make the statements therein not misleading,” a shareholder may sue for damages.
In this case, the pension fund has alleged Omnicare violated Section 11 because of two statements related to the legality of the company’s business model. Omnicare provides pharmacy services to nursing homes. As part of its business, Omnicare accepts rebates from pharmaceutical companies as an incentive to carry certain products. In its registration statement, Omnicare said, “We believe our contract arrangements…are in compliance with applicable federal and state laws,” and, “We believe that our contracts…are legally and economically valid.”
But following the public offering of Omnicare stock, the federal government sued the company, claiming violation of anti-kickback laws. The pension fund argued this rendered Omnicare’s prior statements “materially false” and therefore subject to action under Section 11. A trial court disagreed and dismissed the lawsuit. The U.S. Sixth Circuit Court of Appeals later reversed, saying dismissal was premature. Omnicare then appealed to the Supreme Court.
Justice Elena Kagan, writing for the Supreme Court, said there were two distinct issues here. The first was whether Omnicare’s opinions—i.e., “we believe” we are not doing anything illegal—could constitute an “untrue statement of fact” under Section 11. Justice Kagan said the answer was no: a statement of “pure opinion” could not give rise to a lawsuit, “regardless of whether an investor can ultimately prove the belief wrong.” Companies are free to state honestly held opinions about the legality of their business practices. In this respect, Section 11 is not, Justice Kagan explained, “an invitation to Monday morning quarterback an issuer’s opinions.”
But the second issue is more complicated. Justice Kagan framed the question: Can an “omission of a fact” make a company’s opinions “misleading to an ordinary investor” even if the opinion itself is honestly held and “literally accurate”? Justice Kagan and the majority answered it “always depends on context.” A company cannot mislead investors simply by prefacing all of its statements with the words, “We believe.” At the same time, the Court explained, the investor must identify specific facts omitted from a company’s registration statement which demonstrate the challenged opinions were misleading. For example, if a company’s attorney warns management about the potential legal risks of a particular contract, and management fails to disclose that advice to investors, that could render the company’s opinions regarding the legality of its actions misleading under Section 11. Because the lower courts failed to consider these omission questions in greater detail, the Supreme Court ordered further proceedings.
The Supreme Court’s decision may be good news for investors in that companies are now on notice they may be liable for failing to disclose facts which may contradict misleading opinions offered by management. Section 11 remains an important protection for investors who are misled into buying certain stocks. If you have been the victim of a false or misleading registration statement and need advice on how to proceed, contact Florida securities fraud attorney Gregory Tendrich, P.A., today.