Is a CEO’s statement that “I believe the TVs we manufacture have the highest resolution on the market” potentially actionable as an “untrue statement of material fact” under § 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder? If so, how does this statement map onto the elements of securities fraud? Must the CEO actually disbelieve the statement? Must the matter addressed in the opinion—i.e., the resolution of the company’s TVs—actually be false? How does the CEO’s belief or disbelief intersect with the element of scienter? What portion of this statement must be material to investors—the CEO’s expression of belief, the resolution of the company’s TVs, or both? When is the “truth” about the statement disclosed for the purposes of assessing price impact and measuring loss—when it is revealed that the CEO disbelieved his or her prior opinion or when it is revealed that the TVs did not have the highest resolution on the market?
The Supreme Court’s recent decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015), provides guidance on these questions but also raises new issues. In Omnicare, the Supreme Court charted a new course for opinions actionable under § 11 of the Securities Act. First, the Court pronounced a new test to differentiate statements of opinion from statements of fact: the key distinction is the degree of certainty conveyed by the statement, and the inclusion of words of uncertainty like “I think” and “I believe” can transform a statement of fact into a statement of opinion. Second, the Court held that a statement of opinion is actionable as a misrepresentation of fact only if the speaker did not hold the stated belief and if the matter addressed in the opinion is inaccurate. An open question is whether Omnicare’s teachings apply equally to opinions actionable as securities fraud. Against this backdrop, I make six recommendations.
First, I contend that Omnicare’s new test to differentiate statements of opinion from statements of fact likely applies equally to securities fraud claims. Nothing in the Court’s analysis confined its reasoning to § 11 claims, and the Court’s reliance on dictionary definitions would seem to apply equally to Rule 10b-5. Therefore, post-Omnicare, courts should focus on the degree of certainty conveyed by a statement to differentiate statements of fact from statements of opinion in securities fraud cases. In addition, contrary to pre-Omnicare case law, courts should recognize that the inclusion of words like “I believe” or “I think” can transform a statement of fact into a statement of opinion. After Omnicare, it is less clear if the converse is likewise true: if an inherently uncertain statement is expressed without an introductory signal of uncertainty, will it still be characterized as a statement of opinion? I argue that the better rule post-Omnicare is to examine the certainty of the statement from the perspective of a reasonable investor: if a reasonable investor would interpret the statement as expressing a lack of certainty–either because the statement includes introductory language like “I believe” or “I think” or because the subject matter is inherently uncertain–then the statement should be categorized as an opinion.
Second, Omnicare’s holding that, under § 11, an opinion is actionable as a false statement of fact only if the speaker did not hold the stated belief—likely also applies to claims under § 10(b) and Rule 10b-5. Both of the propositions underlying the Court’s holding in Omnicare apply equally to securities fraud claims. First, the proposition that a statement of opinion only affirms the fact that the speaker actually holds the stated belief is not limited to the context of § 11. Second, like § 11, Rule 10b-5 only imposes liability for “untrue statement[s] of . . . fact.”
Third, Omnicare’s caveat to this holding—that even if the speaker did not hold the stated belief, the opinion would not be actionable if the matter addressed in the opinion were in fact true—also likely applies equally to securities fraud claims. The Omnicare Court relied on Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991), which arose under § 14(a) of the Securities Exchange Act and Rule 14a-9 promulgated thereunder, for this caveat. According to the Virginia Bankshares Court, permitting liability on the basis of “the ‘impurities’ of a director’s ‘unclean heart’” would “threaten just the sort of strike suits and attrition by discovery that Blue Chip Stamps sought to discourage.” Virginia Bankshares’s holding, which itself relied on § 10(b) precedent, is at least as persuasive in § 10(b) actions as in § 11 actions.
Fourth, in light of the Virginia Bankshares caveat, when a securities fraud action is premised on an allegedly false statement of belief, two elements of the claim relate to the speaker’s state of mind. The element of falsity requires the speaker to have actually disbelieved the opinion expressed, and the element of scienter requires the speaker to have made that false statement about his or her state of mind at least recklessly. I argue that, if the plaintiff adequately pleads that a speaker expressed an opinion that he or she did not in fact hold, the plaintiff has also pleaded a strong inference of scienter. Absent some sort of out-of-body experience, it is inconceivable that a speaker could falsely express the contents of his or her own brain without doing so at least recklessly.
Fifth, a speaker’s false statement of fact—that he or she believed the opinion expressed—must be materially misleading in order to be actionable. When is there a substantial likelihood that a reasonable investor would find the speaker’s expression of belief about the matter addressed in the opinion to be important when making an investment decision? I contend that the appropriate materiality analysis is a two-step inquiry. First, is the subject matter addressed in the opinion important to a reasonable investor? Second, if so, does the speaker’s expression of belief convey meaningful information to a reasonable investor about the likelihood that the subject matter is accurate?
Finally, pinpointing the moment that the purported “truth” is disclosed to the market is potentially relevant to the elements of reliance and loss causation. There are two potential moments that the “truth” is disclosed to the market: (1) when the market discovers that the speaker actually disbelieved the earlier-expressed opinion; or (2) when the market discovers that the matter addressed in the opinion was inaccurate. As a practical matter, the former “truth” would rarely be disclosed to the market. The better analysis is to treat the disclosure of the inaccuracy of the matter addressed in the opinion as the “materialization of the risk” concealed by the speaker’s false statement of belief.
Hopefully, my essay will aid litigants, courts, market participants, and scholars when analyzing allegedly false statements of belief as false statements of fact under § 10(b) and Rule 10b-5 post-Omnicare.
The preceding post comes to us from Wendy Gerwick Couture, Associate Professor at the University of Idaho College of Law. It is based on her recent paper entitled “False Statements of Belief as Securities Fraud”, which is forthcoming in the Securities Regulation Law Journal and is available here.