May 24, 2013

Reading the Tea Leaves

Section 11 of the '33 Act creates liability for material misrepresentations in a registration statement. According to the Second Circuit (Fait) and Ninth Circuit (Rubke), however, if the alleged misrepresentation is an opinion, the plaintiff must establish that the opinion was both objectively false and disbelieved by the defendant at the time it was made. In effect, these rulings convert a Section 11 claim based on an opinion from a strict liability (the company) or negligence (the individual defendants) standard to a knowing falsity standard.

The Omnicare securities litigation has generated a number of decisions discussing the pleading standards for Section 11 claims. After the district court dismissed the case, the Sixth Circuit reversed as to the Section 11 claim, finding that the district court had erred by requiring the plaintiffs to plead loss causation. The plaintiffs initially pursued a writ of certiorari on the issue of whether Section 11 claims can be subject to the heightened pleading standard of FRCP 9(b), but then, after the U.S. Supreme Court asked for the government's view of the cert request, withdrew their petition and went back to the district court. The district court then dismissed the Section 11 claim again, finding that the alleged misrepresentations were opinions and the plaintiffs had failed to sufficiently plead the defendants' knowledge of falsity.

In Indiana State District Council of Laborers v. Omincare, Inc., 2013 WL 2248970 (6th Cir. May 23, 2013), the court examined the "knowing falsity" rule for opinions. The court found that while it "makes sense that a defendant cannot be liable for a fraudulent misstatement or omission under Section 10(b) and Rule 10b-5 if he did not know the statement was false at the time it was made" that logic does not extend to strict liability claims. Under Section 11, if a defendant "discloses information that includes a material misstatement, that is sufficient and a complaint may survive a motion to dismiss without pleading knowledge of falsity." Nor was the court persuaded by the reasoning of the Second and Ninth Circuits, which had relied on the Supreme Court's decision in the Virginia Bankshares case interpreting a non-strict-liability securities statute. According to the court, "it would be unwise for this Court to add an element to Section 11 claims based on little more than a tea-leaf reading in a Section 14(a) case."

Holding: Dismissal reversed in part and affirmed in part.

Posted by Lyle Roberts at May 24, 2013 8:09 PM | TrackBack
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