Echoing a famous epistemological observation from The Big Lebowski, the Supreme Court today rejected the argument, for the most part, that a statement of opinion stands on the same footing as a statement of fact.The Court held that reasonable investors, like the Dude, appreciate the difference between facts and opinions, and they evaluate them accordingly. Recognizing the distinction, the Court refused to extend federal securities liability to statements of opinion simply because they turn out to be wrong.
Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund clarifies the standards for liability under Section 11 of the Securities Act of 1933 for statements of opinion made in registration statements. Omnicare holds that a statement of opinion may only subject a speaker to liability if it is knowingly false when made or if the registration statement omits material facts about the issuer's inquiry into or knowledge concerning the statement of opinion and if those facts conflict with what a reasonable investor would take from the statement itself.
Writing, sometimes colloquially, for a seven-justice majority, Justice Kagan broke her analysis into two parts, following the two prohibitions of Section 11: (1) the prohibition against untrue statements of material fact; and (2) the prohibition against omitting to state a material fact necessary to make the statements not misleading.
As to the first prong, the Court acknowledged the difference between a statement of material fact and a statement of opinion and observed that the words "I believe" or "I think" signify statements of opinion. Justice Kagan offered an example: "the coffee is hot" is a fact, while "I think the coffee is hot" is an opinion. Nonetheless, even statements of opinion explicitly affirm one fact: that the speaker actually holds the stated belief. Under the first Section 11 prong, liability will only attach if the speaker does not sincerely hold the opinion he or she expresses.
As to the second prong, the Court observed that whether a statement is misleading by omission is analyzed through the lens of a reasonable investor. When faced with a statement of opinion, a reasonable investor may understand that statement to convey facts about how the speaker formed the opinion or the speaker's basis for holding that view. If the true facts are different but go undisclosed, then the statement of opinion may be misleading for having omitted those facts.
The Court made clear that a statement will not be misleading merely because an issuer knows, but fails to disclose, "some fact" contrary to the stated opinion. Nor can a plaintiff state a viable claim merely by alleging that the issuer has not disclosed the basis for its opinion. Instead, under Iqbal, the plaintiff "must 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 statement at issue misleading to a reasonable person reading the statement fairly and in context." As Justice Kagan observed, "That is no small task for an investor."
Although the propensity of many executives to begin their sentences with "I think..." and "we believe..." may sometimes seem like an artifact of speech, the instincts are true. These simple qualifications in written and oral statements can limit potential liability under federal securities laws.
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