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

davidk@blbglaw.com.

FOR INSTITUTIONAL INVESTORS

5 Bernstein Litowitz Berger & Grossmann LLP www.blbglaw.com

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