FOR INSTITUTIONAL INVESTORS A Matter of Opinion?File1/... · Summer 2015 The Advocate for...
Transcript of FOR INSTITUTIONAL INVESTORS A Matter of Opinion?File1/... · Summer 2015 The Advocate for...
FOR INSTITUTIONAL INVESTORS
1 Bernstein Litowitz Berger & Grossmann LLP www.blbglaw.com
T he US Supreme Court delivered
a recent victory for investors
with a decision that clarifies
what companies can say in their IPOs
and other securities offerings. In short,
the Court’s long-awaited decision in
Omnicare, Inc. v. Laborers District Council
Construction Industry Pension Fund,
135 S.Ct. 1318 (Mar. 24, 2015), clarifies a
robust standard of liability and encour-
ages better disclosure by securities issuers
for statements couched as “opinions.”
Omnicare concerns false and misleading
opinions in securities offering documents.
The Court’s decision makes clear that
those bringing securities to market can-
not shield themselves from liability by
cloaking material misrepresentations as
mere opinions. Instead, consistent with
the core philosophy of our federal secu-
rities laws, companies must provide full
and fair disclosure, including information
in the company’s possession that may
draw into question the accuracy of state-
ments it couches as opinions. Omnicare
reinforces the integrity of our capital mar-
kets and advances investor rights by
encouraging more extensive disclosure
of the reasoning behind stated corporate
opinions, enabling investors to make
informed decisions and bolstering their
ability to recover losses when offering
materials omit key information.
The specific issue before the Court in
Omnicare was the standard of liability for
false statements of opinion in securities
registration statements under Section 11
of the Securities Act of 1933. The Securi-
ties Act was enacted in the aftermath of
the 1929 stock market crash, its primary
purpose being to ensure that potential
buyers of securities receive complete and
By David Kaplan
The recent SupremeCourt ruling advances
investor rights and encourages better disclosure in IPOs
and other securities offerings.
Opinion?A Matter of
The Omnicare Decision WillMake it Harder for IPO Issuersto Mask Misrepresentations as Opinion Statements
The specific issue beforethe Court in Omnicarewas
the standard of liability for false statements of
opinion in securities registration statementsunder Section 11 of the
Securities Act of 1933. Inparticular, registration
statements — which contain a variety of
material informationabout a company and
must be approved by theSEC before any securitycan be sold — must not
contain any misstatementsor omissions about a matter which may be
important to investors.
accurate information before they invest.
In particular, registration statements —
which contain a variety of material infor-
mation about a company and must be
approved by the SEC before any security
can be sold — must not contain any mis-
statements or omissions about a matter
which may be important to investors.
Section 11 of the Securities Act of 1933
allows investors to pursue a legal remedy
when purchasing stock in a public offering
in which the registration statement con-
tains a materially false or misleading
statement or omission. Unlike other pri-
vate rights of action under the federal
securities laws, a claim under Section 11
imposes “strict” liability on issuers, i.e.,
without requiring proof of fault, intent
to deceive (“scienter”), causation or
“reliance” (proof that an investor relied
directly on misleading statements). As
such, Section 11 is one of the most
powerful remedies available to investors
under the federal securities laws.
The Omnicare litigation arose out of a
2005 initial public offering by Omnicare,
the nation’s largest provider of pharmacy
services for nursing home residents. The
registration statement for Omnicare’s IPO
— which raised three-quarters of a billion
dollars from investors — stated that the
company “believed” its contracts and prac-
tices were in compliance with applicable
state and federal law. Unbeknownst to
investors, Omnicare had been engaged
in a long-running scheme whereby it
solicited and received millions of dollars
in kickbacks from pharmaceutical manu-
facturers and nursing homes. When the
scheme was exposed, Omnicare was
forced to pay hundreds of millions of
dollars to federal and state authorities to
resolve charges of systemic misconduct,
and investors in the company’s IPO
suffered substantial losses.
Thereafter, several pension funds sued
Omnicare and certain of its directors and
officers under Section 11 for representing
that the company’s arrangements with
healthcare providers and pharmaceutical
suppliers complied with the law. Omni-
care, the US Chamber of Commerce, and
other well-funded corporate interests ar-
gued that there should be no liability
whatsoever under Section 11 for objec-
tively untrue statements of opinion in
offering materials unless investors can
plead and prove that the opinion was not
genuinely held. Notably, Omnicare and
its supporters in the business community
pressed for a standard that, as a practical
matter, would bar investors from seeking
any recovery for omissions in opinion
statements.
The Supreme Court rejected that position
and set forth three distinct bases of liabil-
ity for false or misleading opinion state-
ments in offering documents. First, the
Court confirmed that statements of opin-
ion in offering documents that are both
false and not honestly believed give rise
to Section 11 liability. Second, the Court
explained that opinion statements can
also give rise to Section 11 liability if they
contain “embedded” untrue statements
of fact. For example, “we believe X be-
cause Y,” where Y is false. Third, an opin-
ion statement may be actionable under
Section 11 if it omits key facts about the
basis for the opinion. In particular, the
Court held that a statement of opinion is
materially misleading under Section 11
when the “registration statement omits
FOR INSTITUTIONAL INVESTORS
3 Bernstein Litowitz Berger & Grossmann LLP www.blbglaw.com
FOR INSTITUTIONAL INVESTORS
Summer 2015 The Advocate for Institutional Investors 4
material facts about the issuer’s inquiry
into or knowledge” about the opinion
and “those facts conflict with what a rea-
sonable investor would take from the
statement itself.”
Providing guidance for future cases, the
Court explained that investors reasonably
believe that an opinion included in a reg-
istration statement is the product of a
meaningful investigation and “aligns with
the information in the issuer’s possession
at the time.”Thus, an opinion may be
materially misleading — and actionable
— under Section 11 if the company failed
to conduct a careful inquiry before pro-
viding an opinion, or if an inquiry yielded
unfavorable information, such as contrary
advice by lawyers, adverse analysis from
technical experts, or a negative position
from regulators. As Justice Kagan sum-
marized, under our securities laws, “say-
ing one thing and holding back another”
is not allowed. Indeed, the Court noted
that at least one attorney had specifically
warned Omnicare that its dealings “car-
rie[d] a heightened risk” of legal expo-
sure under anti-kickback laws.
The issues presented in Omnicare are
of great importance to the institutional
investor community. Institutional investors
commit billions of dollars annually to
public stock offerings, and the past year
witnessed a record number of IPOs —
over 860 deals globally raising over $160
billion, more than a third of which came
from the United States. Groundless opin-
ions have no place in securities offering
materials. Investors rely on registration
statements, and expect that opinions in
offering materials are made responsibly
as the product of a meaningful inquiry
and careful consideration. These standards
are critical to the strength and effective
functioning of the US capital markets,
and to the protection of valuable retire-
ment assets.
Omnicare is a clear victory for investor
rights and the integrity of our capital mar-
kets, particularly given recent rulings by
lower federal courts. Omnicare overrules
contrary precedent in both the Second
and Ninth Circuits, which had imposed
onerous standards on investors, requir-
ing them to marshal detailed facts at the
outset of a case showing that a speaker
did not honestly hold an opinion. Obvi-
ously, that is an extremely difficult stan-
dard for investors to meet without the
investigation and fact-finding afforded by
litigation discovery. Omnicare removes
that barrier in Section 11 cases involving
opinion statements. Moreover, Omnicare
is likely to be extended beyond the offer-
ing context and applied to other provisions
of the federal securities laws, including
those covering stock purchased on the
open market or acquired through mergers
and acquisitions.
While it remains to be seen how Omni-
care will be applied by the lower courts,
it bears emphasis that Omnicare is not
“an invitation to Monday morning quar-
terback an issuer’s opinions,” as Justice
Kagan explained. Instead, Omnicare re-
quires a complaint to “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 state-
ment at issue misleading to a reasonable
person reading the statement fairly and
Omnicare is a clear victory for investor rightsand the integrity of our capital markets, particularly given recentrulings by lower federalcourts. Omnicare over-rules contrary precedentin both the Second andNinth Circuits, which had imposed onerousstandards on investors,requiring them to marshaldetailed facts at the outset of a case showingthat a speaker did nothonestly hold an opinion.
The registration statementis central to the mission of the Securities Act —
transparency. A sacrosanctdocument for investors, itrequires disclosure of an
array of detailed and important information
about the company, itsbusiness operations and
financial condition, andthe security being issued.
Investors should be allowed to take these
statements at face value,and not be forced to incur
additional costs of independent verification.
in context.” In most cases, this will require
a thorough investigation by counsel and
careful deliberation by the judge. How-
ever, it is likely that many more meritori-
ous Section 11 cases will survive as a
result of Omnicare’s sensible “reasonable
investor” test.
More broadly, Omnicare is a strong state-
ment from the nation’s highest court
affirming that investors properly rely on
the integrity of all statements in offering
documents and the special knowledge of
the company, its officials, underwriters,
auditors, and other experts who sign the
registration statement and convey infor-
mation to investors. The registration state-
ment is central to the mission of the
Securities Act — transparency. A sacro-
sanct document for investors, it requires
disclosure of an array of detailed and im-
portant information about the company,
its business operations and financial con-
dition, and the security being issued.
Investors should be allowed to take these
statements at face value, and not be forced
to incur additional costs of independent
verification. As the Court explained, the
utility of a securities prospectus would be
substantially eroded if those involved in
its preparation could avoid liability for
demonstrably untrue statements by hiding
behind “magic words” like “we believe.”
In reaching its decision, the Omnicare
Court considered amicus curiae (or “friend
of the court”) briefs supported by nearly
fifty prominent institutional investors
with more than $2 trillion of assets under
management. The Court’s decision in
Omnicare adopted many of the points
made in the institutional investor amicus
briefs, including that “[w]ere Omnicare
right, companies would have virtual carte
blanche to assert opinions in registration
statements free from worry about §11” —
an outcome that would “ill-fit Congress’s
decision to establish a strict liability of-
fense promoting ‘full and fair disclosure
of’ material information.” Additionally,
the Court firmly rejected the notion that
its ruling would chill useful disclosures.
The Court noted that issuers and others
involved in securities issuances have
“strong economic incentives” to sell and
“[t]hose market-based forces push back
against any inclination to underdisclose.”
Accordingly, the Court explained, its ruling
would chill only misleading opinions while
keeping “valuable information flowing”
and ensuring better disclosure to the mar-
kets. The voice of the institutional investor
community was clearly heard by the
Omnicare Court.
David Kaplan is an Associate at BLB&G’s
California office. He can be reached at
FOR INSTITUTIONAL INVESTORS
5 Bernstein Litowitz Berger & Grossmann LLP www.blbglaw.com
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