Misleading corporate statements of opinion can be basis for investor suits, Supreme Court says
Companies that make misleading statements of opinion in federal registration statements with the Securities and Exchange Commission may be liable in investor suits, even if the beliefs are sincerely held, the U.S. Supreme Court has ruled.
In an opinion (PDF) by Justice Elena Kagan, the U.S. Supreme Court held companies may be liable for statements of opinion in corporate registration statements if they omit facts that would have been considered important by a reasonable investor, and the missing facts made the opinion misleading. Kagan’s opinion was joined in full by six justices; two others concurred in the judgment.
Companies can’t be sued, however, under a theory of making materially false statements simply because they make statements of opinion that turn out to be wrong, Kagan said.
The case stems from a registration statement filed with the Securities and Exchange Commission by pharmaceutical services company Omnicare. The company said it believed its contractual arrangements were legal, but added some caveats about state challenges to its practice of paying rebates to pharmacies that dispense its products. State pension funds sued over the statements after the federal government contended the rebates were illegal kickbacks.
The Cincinnati-based 6th U.S. Circuit Court of Appeals said the plaintiffs could sue for a materially false statement if its opinion turns out to be incorrect. But Kagan said that standard was wrong because it would allow second-guessing of subjective assessments. “In other words,” Kagan said, the ban on false statements, “is not, as the Court of Appeals and the funds would have it, an invitation to Monday morning quarterback an issuer’s opinions.”
But investors can sue under a second provision of securities law allowing suits for materially false omissions in registration statements, Kagan said. Omnicare had argued that as long as a statement of opinion is sincere, there is no material omission and no basis for a lawsuit.
While the claim has “more than a kernel of truth,” Kagan said, it fails to take into account that a reasonable investor may understand an opinion statement to convey facts about how the speaker has formed the opinion. “And if the real facts are otherwise, but not provided, the opinion statement will mislead its audience,” Kagan said.
The Supreme Court remanded the case for an analysis using its standard for judging omissions. The case is Omnicare v. Laborers District Council.
