Plaintiff Investors Must Establish That Opinions in SEC Registration Statements Were Known to Be False at the Time They Were Issued

March 26, 2015

On March 24, 2015, in Omnicare, Inc. v. Laborers’ District Council Construction Industry Pension Fund, the U.S. Supreme Court, in a unanimous decision, tendered a limited victory to defendants in securities law cases. In the highly anticipated decision, the Supreme Court held that investors seeking to assert a Section 11 claim cannot sue companies for making misleading statements of opinion prior to a public stock offering just because those statements ultimately turn out to be wrong. Nevertheless, the ruling noted that some opinions in registration documents might omit important facts that could mislead investors, giving them a right to sue under the securities laws.

Omnicare, Inc., a pharmaceutical care company, was sued by two pension funds that bought stock when the company went public in 2005. Laborers’ District Council Construction Industry Pension Fund (Laborers) alleged that Omnicare was engaged in illegal activities when it filed the registration statement with the SEC, and therefore the representations made in the registration statement were “material, untrue, and misleading” and thus in violation of Section 11 of the Securities Act of 1933. Section 11 imposes liability on issuers and related parties (e.g., underwriters) for untrue statements of material fact or omissions of true statements of material facts in the registration statement. Although not relevant to the Omnicare case, Section 11 may also impose liability on auditors of the companies that file the registration statements.

The Opinion
In an opinion written by Justice Elena Kagan, the Court ruled that statements made by Omnicare as part of the registration statement that the company believed to be true at the time should not be considered “an untrue statement of a material fact” just because it later turns out to be incorrect. The Court ruled that investors could try to show that a company did not sincerely believe the opinions it made or that they were based on inaccurate facts.

Omnicare's statements essentially were that "we believe we are obeying the law," Judge Kagan said. The pension funds did not dispute that Omnicare officials believed that, even though it was later discovered to be wrong. Judge Kagan said securities laws do not give investors "an invitation to Monday morning quarterback an issuer's opinions." The Court, however, went on to explain that Omnicare could be liable 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," those omissions give investors a right to sue.

The Court’s holding that plaintiffs must establish both objective and subjective falsity is significant for the accounting profession. Every registration statement filed with the SEC must include audited financial statements and auditors often find themselves defending a Section 11 claim based on their audit opinions. The relatively minimal burden on a plaintiff bringing a Section 11 claim against an accountant has now been raised. Plaintiff investors now must establish that the accountant knew its audit opinion was false at the time it was made. Accountants can take a deep breath knowing that they will not be held strictly liable simply because it is learned later on that their opinion was not factually true.

View more Insights