United States Supreme Court Applies a “Reasonable Standard” to Corporations’ “Beliefs”

Posted on: March 24th, 2015 by Nadine Gartner

The United States Supreme Court issued today its opinion in Omnicare, Inc. v. Laborers Dist. Council, a case previously discussed here. The Court struck down the Sixth Circuit’s ruling that executives can be held responsible for opinions expressed to investors that later are shown to be false, but ordered the lower court to apply a legal standard requiring issuers to prove a “reasonable” basis for statements of opinion.

Federal securities laws already protect a corporation if it makes so-called “forward-looking statements,” that is, predictions about the future. The issue in Omnicare was whether there are further protections when a corporation says “it believed” a fact, even if the fact is not true. The Court ruled that, while statements of opinion cannot be held as untrue simply if they are found ultimately to be incorrect, those statements are still subject to some liability.

Writing for the majority, Justice Kagan explained that the Sixth Circuit incorrectly interpreted Section 11 of the Securities Exchange Act: “The provision is not, as the Court of Appeals and the [plaintiffs] would have it, an invitation to Monday morning quarterback an issuer’s opinions.” However, issuers may not escape liability simply by framing statements as opinions: “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 Section 11’s omissions clause creates liability.” Justice Kagan emphasized that an issuer’s opinion statements should always be read in the context of the surrounding document.

The case is remanded to the Sixth Circuit to determine whether Omnicare actually omitted any relevant facts from its registration statement, and, if so, whether those facts rendered the company’s opinion statements misleading.