The Supreme Court and Securities Fraud: No Barking Tuesday Night

bulldogThe Supreme Court as currently constituted is disinclined to make sweeping changes in the law on securities fraud and class actions. It has repeatedly had opportunities to do so, and repeatedly has issued split-the-difference opinions taking as small a step in one direction or another as it could manage.

The latest case in this line of dogs that refuse to bark in the night is Omnicare v. Laborers District Council, decided by a unanimous court on March 24th.

The Halliburton case in 2011, the Amgen case in 2013, and then the Halliburton case in its next incarnation, in 2014, all fit this pattern. All of these cases got to the Justices’ docket in the first place due to pressure by corporate managers unhappy that the fraud-on-the-market theory makes life too easy for plaintiffs’ lawyers. Yet the upshot of that series of cases has been modest. Halliburton and other defendants will hereafter be allowed to argue against the presumption that misstatements of fact by corporate officials impacted the market price, but the presumption remains.

Omnicare arose over a related issue. Section 11 of the Securities Act of 1933 encourages the purchaser of a security to sue an issuer if the registration statement that underlies that security contains an untrue statement of material fact, or omits to state a material fact in such a way as to create a misleading impression. This is a strict liability provision, that is, liability does not depend upon what the state of mind of any drafter of the documents may have been. The misstatement of fact can be established within the four corners of the document.

The Question of Law

The question of law is whether any statements that are on their face statements of opinion can create liability under §11. In this case, Omnicare’s documentation included the following (italics added):

  • We believe our contract arrangements with other healthcare providers, our pharmaceutical suppliers and our pharmacy practices are in compliance with applicable federal and state laws.”
  • We believe that our contracts with pharmaceutical manufacturers are legally and economically valid arrangements that bring value to the healthcare system and the patients that we serve.”

The circuit courts have taken opposing views on whether such statements can create liability, and SCOTUS took the case to straighten that out.

A clever trader could take “belief” statements [anything beginning “we believe” or “It is our opinion that”] as indicating uncertainty. Thus, the qualification of bad-sounding news by such language is good news, and the qualification of good news by such language is bad news.

The federal government later brought lawsuits against Omnicare on the ground that it had violated federal anti-kickback laws. If true, those charges imply that the opinions stated in the quotations above were false, the contract arrangements that included those kickbacks were not “in compliance” or “legally valid.”

Pension funds brought suit under §11. Defendant Omnicare responded that it had only asserted a belief that it was in compliance, and such opinion language should shield it from liability. The district court agreed with that response, and granted a motion to dismiss.

The court of appeals for the Sixth Circuit reversed. It said that the pension funds will only have to prove that the opinion expressed was “objectively false,” they won’t have to prove that Omnicare didn’t really believe it.

Coming Down on Neither Side

The point is: had the Supreme Court come down four-square behind either the logic of the district court or the logic of the appeals court, it could have changed the law, in a way that would have mattered to, say, activist investors seeking alpha in publicly traded companies. But the Supreme Court came down four-square in favor of splitting the difference, leaving the law on this question as muddled as it was before the court heard the arguments.

It said that the district court must start over again, and it created a new standard for opinionated statements in issuing documents. To find fraud, the finder of fact must decide that in context, the investors could reasonably have understood that the speaker knew facts sufficient to justify the formation of that opinion, and knows of no facts incompatible with that opinion. In such a context, the statement of an opinion can amount to a misleading omission of facts tending to the contrary.

Nobody has any idea how this is going to play out in the courts below. The Supreme Court is a dog with a definite preference for declining to bark.





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