In a classic Seinfeld episode, George Costanza opined: "it's not a lie, if you believe it". In a ruling handed down on March 24th, the Supreme Court agreed with this sentiment as it concerned claims brought under Section 11 of the Securities Act of 1933. In Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, the Supreme Court determined that under Section 11, a statement of opinion in a registration statement is only untrue (and therefore actionable) if the issuer does not believe it. However, in the same case the Supreme Court held that, even if an issuer believes the opinions offered in a registration statement, the issuer may still be liable under Section 11 if it omits material facts which are necessary to make the opinion not misleading to a reasonable investor.
As the Court's opinion explained, "belief" that an opinion in a registration statement is true is only half the battle. A company may still be liable, even if it truly believes the opinion, if it should have disclosed more information about the opinion or the basis for the opinion in the registration statement. For a defense to claims that more information needed to be disclosed, companies should have a basis for the opinions offered and, if the company is aware of conflicting or additional information that would qualify or undermine the opinions, it should identify and disclose such information in its registration statement or face potential liability under Section 11.
Section 11 of the Securities Act of 1933 provides that a purchaser may sue for damages if a registration statement filed with the SEC "contain[s] an untrue statement of a material fact" or "omit[s] to state a material fact … necessary to make the statements therein not misleading." In Omnicare, the registration statement contained opinions which, in essence, stated "we believe we are obeying the law." Plaintiffs sued Omnicare claiming (1) the opinion was "untrue" because Omnicare was not obeying the law and (2) the registration statement omitted material facts necessary to make the opinion not misleading.
In Omnicare the plaintiffs did not claim that the opinion of legal compliance was not honestly held but, instead, claimed that the opinion turned out to be incorrect and therefore was "an untrue statement of a material fact" under Section 11. The Supreme Court disagreed. The Court held that a statement of opinion is only untrue under Section 11 if "the speaker did not hold the belief she professed" and the belief professed was untrue. It is not "untrue" under Section 11 if the speaker truly held the belief professed, even if that belief turns out to be untrue.
The Supreme Court remanded the Omnicare case to determine whether the registration statement omitted material facts necessary to make the opinion of legal compliance not misleading. In doing so, the Court recognized that an opinion in a registration statement conveys to investors not just that such opinion is believed, but also that such opinion "fairly aligns with the information in the issuer's possession at the time." For example, if an issuer makes a statement about legal compliance "without having consulted a lawyer, it could be misleadingly incomplete." However, to show an omission of facts necessary to make an opinion not misleading, a plaintiff cannot simply say that an issuer "failed to reveal its basis" for the opinion or make conclusory assertions. Instead, a plaintiff 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." As the Court recognized, this "is no small task" for a plaintiff.
