On May 23, 2013, the United States Court of Appeals for the Sixth Circuit in Indiana State Dist. Council of Laborers & HOD Carriers Pension & Welfare Fund v. Omnicare, Inc., 12-5287, 2013 WL 2248970 (6th Cir. May 23, 2013) bucked a recently developing trend and, in the process, created a split among the circuits over the requisite standard to plead a false statement of opinion or belief under Section 11 of the Securities Act of 1933. Specifically, it declined to follow the Second and Ninth Circuits and held that plaintiffs need not plead subjective falsity in order to state such a claim. Such a split over what the Supreme Court meant in its opinion in Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991) seems very likely to lead the Supreme Court to find a case, indeed perhaps this one, to resolve the issue.
The Omnicare plaintiffs were investors that purchased securities in a public offering pursuant to a Registration Statement that incorporated certain filings with the Securities and Exchange Commission. 2013 WL 2248970 at *1. Among other claims, the plaintiffs sought relief under Section 11 of the Securities Act of 1933 for alleged misstatements the defendants made in the Registration Statement, including statements of belief or opinion regarding legal compliance. Id. The district court, however, dismissed the claims on the grounds that the plaintiffs failed to plead that the statements were subjectively false — i.e., that the defendants knew that their statements were false at the time they were made. Id. at *4.
On appeal, the plaintiffs argued that the district court erred in applying a subjective falsity standard for Section 11 claims because it is a strict liability statute. The court agreed with plaintiffs’ argument. Id. at *6. In doing so, the Sixth Circuit created a split with the Second and Ninth Circuits regarding the interpretation and application of the United States Supreme Court’s opinion in Virginia Bankshares to Section 11 claims, which courts have interpreted to require plaintiffs to plead that statements of opinion or belief were both objectively and subjectively false at the time they were made.
The Omnicare court explained that in Virginia Bankshares “[t]he Court . . . held that a defendant’s disbelief in his own statement is not enough, on its own, for a plaintiff to make out a claim for a material misstatement under § 14(a). . . . [U]nder § 14(a) a plaintiff is required to plead objective falsity in order to state a claim; pleading belief of falsity alone is not enough.” Id. at *7 (citation omitted). The court noted that “[t]he Virginia Bankshares Court was not faced with and did not address whether a plaintiff must additionally plead knowledge of falsity in order to state a claim.” Id.
The Omnicare court also specifically disagreed with the Second and Ninth Circuits interpretation of Virginia Bankshares, and it opined that “[t]he Second and Ninth Circuits have read more into Virginia Bankshares than the language of the opinion allows and have stretched to extend this § 14(a) case into a § 11 context.” Id. The court explained that the Virginia Bankshares discussion “has very limited application to § 11” because the Supreme Court had assumed that the defendants had knowledge of falsity in Virginia Bankshares, and Section 11 has been held to create strict liability. Id.
CONCLUSION
The Second Circuit’s and Ninth Circuit’s interpretation of Virginia Bankshares as requiring plaintiffs to plead both objective and subjective falsity has been followed recently by numerous district courts, and it has provided the grounds for dismissing numerous cases in the last few years against independent auditors and other defendants. Numerous Circuit courts have also applied Virginia Bankshares outside the context of Section 14(a) claims. See, e.g., In re Credit Suisse First Boston Corp., 431 F.3d 36, 47 (1st Cir. 2005); Greenberg v. Crossroads Sys., Inc., 364 F.3d 657, 670 (5th Cir. 2004); Nolte v. Capital One Fin. Corp., 390 F.3d 311, 315 (4th Cir. 2004). The Omnicare ruling moves away from this trend and creates a split between the Sixth Circuit and the Second and Ninth Circuits regarding the standard for pleading false statements of opinion or belief for Section 11 claims. Given that the Sixth Circuit limited its discussion to Section 11 claims, it remains unclear whether it will adopt a subjective falsity standard for other securities claims. The split between the Sixth Circuit and the Second and Ninth Circuits may eventually lead the United States Supreme Court to address the circuit split.
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Burke-TimothyThis article was originally published by Bingham McCutchen LLP.