Subjective falsity under section 11 of the securities act: protecting statements of opinion
| Autor | Daniel Hooper Smith |
| Cargo | J.D., George Mason University School of Law |
| Páginas | 115-156 |
SUBJECTIVE FALSITY UNDER SECTION 11 OF THE
SECURITIES ACT: PROTECTING STATEMENTS OF
OPINION
DANIEL HOOPER SMITH*
I. Introduction ............................................................................................................................. 116
II. Background ............................................................................................................................. 120
A. The Securities Act of 1933 and Section 11 .................................................................... 120
1. History of the Securities Act of 1933 and Section 11 ............................................... 121
2. Purpose and Scope of Section 11 ................................................................................. 124
B. Section 11 Plaintiffs, Defendants, and Pleading Requirements ............................... 127
1. Section 11 Plaintiffs, the Tracing Requirement, and Reliance ............................. 127
2. Section 11 Defendants and Defenses .......................................................................... 128
3. Debate over Section 11 Pleading Requirements ...................................................... 130
4. Strict Liability and Negligence Under Section 11 .................................................... 131
III. The Sixth Circuit’s Explicit Departure from the Subjective Requirement of the
Second and Ninth Circuits ............................................................................................................. 131
A. Strict Liability Holding of Omnicare ........................................................................... 132
1. Overview of the Omnicare Decision ......................................................................... 132
2. Section 11 Claims Distinguished from Section 12(a)(2) and 14(a) Claims ........ 133
3. Statements of Opinion: Legal Compliance .............................................................. 135
4. Statements of Fact or Opinion: GAAP ..................................................................... 136
B. Subjective Falsity Requirement in Fait ....................................................................... 136
1. Goodwill Issues in Fait ................................................................................................ 138
2. Loan Loss Reserves Issues in Fait .............................................................................. 140
C. Objectively and Subjectively False or Misleading under Rubke ........................... 140
D. The Third Circuit’s Subjective Falsity Standard ....................................................... 142
IV. Analysis of Section 11 Pleading Requirements and Similar Provisions ...................... 143
A. Subjective Falsity vs. Scienter ........................................................................................ 143
B. Distinguishing Claims Brought Pursuant to Section 11 vs. Section 10(b) & Rule
10b-5 .............................................................................................................................................. 144
* J.D., George Mason University School of Law; B.A., The University of North Carolina at Chapel
Hill. Thank you to Beth Monahan and Lex Urban for providin g invaluable suggestions, comments,
and criticism throughout the process of writing this note a nd to Debbie Shrager for her diligent
reference consulting.
University of Puerto Rico Business Law Journal
Vol. 6
116
1. Section 11 Claims Distinguished from Section 10(b) and Rule 10b-5 Claims .. 144
2. Pleading Loss Causation .............................................................................................. 146
V. Strict Liability’s Detrimental Effect on Highly-Regulated Industries ....................... 147
A. Section 11 Liability of Healthcare Companies Following the Affordable Care Act
148
B. Liability of Financial Institutions Under a Strict Liability Standard ................... 150
VI. Solution to the Strict Liability Holding of Omnicare .................................................... 153
A. Objective and Subjective Falsity as the Proper Standard for Section 11 Claims . 153
B. Likelihood of Success of Objective and Subjective Falsity Requirement ............ 155
VII. Conclusion ............................................................................................................................... 155
I. INTRODUCTION
On May 23, 2013, the Sixth Circuit’s decision in Omnicare
1
created a circuit
split with both the Second
2
and Ninth
3
Circuits when it held that a plaintiff
bringing a claim under section 11 of the Securities Act of 1933 (“Securities Act”) is
not required to plead knowledge of falsity, known as “subjective falsity,”
regarding a false statement of opinion contained in a registration statement filed
with the Securities and Exchange Commission (“SEC”) in order to state a claim.
4
The decision caused uproar in the securities law community, particularly due to
its potential detrimental effects on industries that are already highly regulated.
5
The Sixth Circuit distinguished section 11 claims from those brought under
section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and SEC
Rule 10b-5,
6
which require a showing of scienter, and held that claims involving
alleged false or misleading opinions brought under section 11 are subject to a
strict liability standard and do not require a plaintiff to plead knowledge of
falsity. This Article argues that a better approach is to require a section 11 plaintiff
1
Ind. State Dist. Council of Laborers & Hod Carriers Pension & Welfare Fund v. Omnicare, Inc.,
719 F.3d 498 (6th Cir. 2013), reh’g & reh’g en banc denied (July 23, 2013), petition for cert. filed sub nom.,
Omnicare, Inc. v. The Laborers Dist. Council, 2013 WL 5532735 (U.S. Oct. 4, 2013) (No. 13 -435).
2
See Fait v. Regions Fin. Corp., 655 F.3d 105, 113 (2nd Cir. 2011) (affirming the district court’s
decision to dismiss a section 11 claim for failing to “plausibly allege subjective falsity”).
3
See Rubke v. Capitol Bancorp Ltd., 551 F.3d 1156, 11 62 (9th Cir. 2009) (requiring section 11
complaints to “allege… with particularity that the statements were both objectively and
subjectively false or misleading”).
4
See Omnicare, 719 F.3d at 505-07.
5
See Chip Phinney, Megan Gates, Kevin McGinty, & Michael Connol ly, Federal Court Rules That
Issuers Face Strict Liability for Erroneous Statements About Legal Compliance in Registration Statements, Even if
They Did Not Know the Statements Were False, MINTZ LEVIN (June 11, 2013),
http://www.mintz.com/newsletter/2013/Advisories/3134-0613-NAT-LIT/3 134-0613-NAT-LIT.pdf
(last visited Oct. 18, 2013).
6
17 C.F.R. § 240.10b-5 (2013).
No. 1
Standing to Sue for False Advertising
117
to plead both objective and subject falsity for stateme nts of opinion made in a
registration statement because such an approach would help prevent the
detrimental effects of the Omnicare decision, including increased litigation costs,
decreased shareholder value, and deterrence of expert opinions, on defendant s in
highly-regulated industries such as healthcare and finance.
Omnicare, Inc. (“Omnicare”), headquartered in Cincinnati, Ohio, is a
Fortune 500 healthcare company that directly and through its subsidiaries
provides pharmaceutical services to long term care facilities and to other
customers, specializing in senior care and serving other “targeted populations.”
7
Omnicare, a leading independent provider of pharmacy services to long-term care
institutions such as nursing homes, retirement centers and other institutional
health care facilities, serves as a market-leader in professional pharmacy-related
consulting and data management services for skilled nursing, assisted living and
other chronic care institutions.
8
Moreover, Omnicare boasts unparalleled clinical
knowledge of the geriatric market, describes their technology capabilities as
among the industry’s most innovative, and commercializes services for the “bio-
pharmaceutical industry and end-of-life disease management.”
9
Omnicare
purchases and repackages prescription and non-prescription medication,
dispenses medication, provides “computerized medical recordkeeping and third-
party billing” for patients in long-term care facilities, and maintains a pharmacist
consulting services business, which includes drug therapy evaluations for
patients and monitoring drug administration in nursing homes.
10
In addition,
Omnicare offers infusion therapy and distribution of medical supplies to nursing
home facility clients.
11
Omnicare provides services to over 167,000 residents in
almost 1,900 nursing homes and other long-term care facilities.
12
In February of 2006, two shareholder pension funds filed a class -action
suit against Omnicare in the United States District Court for the Eastern District
of Kentucky, alleging violations of section 10(b) and section 20(a) of the
Securities Exchange Act of 19 34 (“Exchange Act”).
13
In this case, plaintiffs argued
that Omnicare engaged in “a fraudulent scheme that artificially inflated
Omnicare’s stock price by misrepresenting the company’s financial results and
business practices.”
14
The court consolidated this matter with an almost identical
case against Omnicare and named Laborers District Council Construction
7
About Us, OMNICARE, INC., http://www.omnicare.com/about-us.aspx (last visited Jan. 6, 2014).
8
Corporate Profile, OMNICARE, INC., http://ir.omnicare.com/phoenix_zhtml?c=65516&p=irol-irhome
(last visited Jan. 6, 2014).
9
Id.
10
Omnicare, Inc., Registration Statement (Form S-3) (May 5, 1995).
11
Id.
12
Id.
13
Ind. State Dist. Cou ncil of Laborers & Hod Carriers Pension & Welfare Fund v. Omnicare, Inc .,
527 F. Supp. 2d 698, 700-01 (E.D. Ky. 2009).
14
Id. at 701.
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