In its March 2015 decision in the Omnicare v. Laborers District Council Construction Industry Pension Fund (here), the U.S. Supreme Court held that an issuer may be liable for opinions set forth in a registration statement if the issuer did not genuinely hold the stated opinion, or if the issuer failed to disclose material facts relating to the foundation for the opinion, as discussed here. Because the Omnicare decision was made with respect to claims under the liability provisions of the Securities Act of 1933, one of the questions that arose following the Court’s decision was whether and to what extent the principles the Court enunciated are applicable to securities fraud actions under the Securities Exchange Act of 1934. In an interesting article entitled “False Statements of Belief as Securities Fraud” (here), University of Idaho Law Professor Wendy Gerwick Couture takes a look at these questions and argues that the Omnicare’s holding with respect to statements of opinion analytically should apply equally to securities fraud claims under Section 10 of the ’34 Act as to prospectus liability claims under Section 11 of the ’33 Act. A summary version of Professor Couture’s article appeared on October 28, 2015 on the CLS Blue Sky Blog (here).
In its Omnicare opinion, the Supreme Court held that a statement of opinion can be actionable as an untrue statement of material fact under Section 11 only if the speaker did not hold the stated belief. The Court also held that an opinion, even if not actionable as an untrue statement of material fact, potentially can give rise to liability under Section 11 of the speaker “omitted to state a material fact … necessary to make [the opinion] not misleading.” This latter omissions point is context dependent; the potential for liability depends on the presence of alleged material facts “whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.”
The first question courts applying Omnicare will have to confront is whether or not the statements at issue are statements of fact or statements of opinion. As Professor Couture notes, in Omnicare, the Court articulated a new test to differentiate statements of opinion from statements of fact; “the key distinction is the degree of certainty conveyed by the statement, and the inclusion of words of uncertainly like ‘I think’ and ‘I believe’ can transform a statement of fact into a statement of opinion.”
Professor Couture contends Omnicare’s new test under Section 11 to differentiate statements of opinion from statements of fact applies equally to claims asserted under Section 10(b) and Rule 10b-5. Nothing in the Court’s analysis, Professor Couture contends, confines the Court’s reasoning to Section 11 cases. Therefore, she asserts, post-Omnicare, and regardless of whether a claim is based on Section 11 or Section 10(b), “courts should focus on the degree of certainty conveyed by a statement to differentiate statements of fact from statements of opinion.” She says further that in making this inquiry, courts should “examine the certainty of the statement from the perspective of the reasonable investor; if a reasonable investor would interpret the statement as expressing a lack of certainty – either because the statement includes introductory language like ‘I believe’ or ‘I think’ or because the subject matter is inherently uncertain – then the statement should be categorized as opinion.”
With respect to Omnicare’s holding under Section 11 that an opinion is actionable as a false statement only if the speaker did not hold the belief, Professor Couture contends that the Court’s reasoning and conclusion apply equally to claims under Section 10(b) and Rule 10b-5. Professor Couture contends that post-Omnicare, a statement of opinion should be actionable under Section 10(b) and Rule 10b-5 as a false statement of fact only if the speaker did not hold the statement of belief (that is, the opinion was subjectively false) and the matter addressed in the opinion was not accurate (that is, it was objectively false).
However, in order for the statement of opinion to be actionable under Section 10(b) and Rule 10b-5, the other elements of securities fraud must also be satisfied; in particular, the requirement to plead scienter, materiality, and loss causation must be met.
Professor Couture contends that “the better rule is to recognize that, if the plaintiff adequately pleads that a speaker expressed an opinion that he or she did not hold, the plaintiff also pleaded a strong inference of scienter.” She adds that “absent some out-of-body experience, it is inconceivable that a speaker could falsely express the contents of his or her own brain without doing so at least recklessly.”
With respect to securities fraud requirement to plead materiality, Professor Couture says the appropriate test with respect to statements of opinion should be a two-step inquiry : “First, is the subject matter addressed in the opinion important to a reasonable investor: Second, if so, does the speaker’s expression of belief convey meaningful information to a reasonable investor about the likelihood that the subject matter is accurate?”
Finally, with respect to the issue of loss causation, Professor Couture notes that “pinpointing the moment when the purported ‘truth’ is disclosed to the market is potentially relevant to the elements of reliance and loss causation.” There are, she says, two moments when the truth is disclosed to the marketplace: either when the market discovers the speaker’s disbelief of the earlier-expressed opinion or when the market discovers that the matter addressed in the opinion was inaccurate. As a practical matter, the speaker’s prior disbelief will rarely be disclosed. The “better analysis,” Professor Courture says, is to “treat the disclosure of the inaccuracy of the matter addressed in the opinion as the ‘materialization of the risk’ concealed by the speaker’s false statement of belief.”
In her conclusion, Professor Courture notes that her analysis of the Omnicare issues under Section 10(b) and Rule 10b-5 is limited to the first part of Omnicare’s two-part liability analysis – that is, to the Omnicare court’s statements concerning liability of statements of opinion. Her analysis does not address the omissions component of Omnicare’s analysis – that is, the part of the Omnicare court’s holding stating that an expression of opinion, even if believed by the speaker, can still give rise to liability under Section 11 if the speaker omitted facts necessary to make the statement not misleading. The extent to which the Omnicare Court’s omissions analysis under Section 11 is applicable to claims asserted under Section 10(b) is a separate question that should be considered separately (one the author proposes to consider in future work).
One final note, it was my pleasure to have met Professor Couture at a recent conference at the Loyola University Chicago Law School.