2015 Securities Law Developments

On balance, the securities litigation landscape in 2015 offered a glass half-full/glass half-empty perspective for issuers and their officers, directors and advisors. Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015), the major securities law decision of the 2015 Supreme Court term, afforded defendants relatively greater protection from liability based on public statements of opinion, as long as those opinions are honestly held and have a reasonable factual basis. The SEC suffered several notable setbacks, with some federal courts striking as unconstitutional the highly debated conflict minerals rule and the SEC's method of appointing administrative law judges. The Second Circuit significantly restricted federal prosecutors' ability to pursue downstream recipients of non-public information, resulting in a spate of overturned convictions and withdrawn guilty pleas. And although decisions from lower courts within the Second Circuit dismissing derivative lawsuits will be subject to less deferential review, both the Second Circuit and the Delaware Supreme Court reaffirmed that decisions of independent and disinterested boards to reject stockholder demands are entitled to business judgment rule protection, thereby precluding minority shareholder second guessing in private lawsuits. Yet the results were not uniformly favorable to the defense. The SEC took an expansive view of Dodd-Frank's whistleblower anti-retaliation provision, formalizing its view that such protections apply to whistleblowers who allege retaliation for reporting internally (as opposed to reporting to the SEC). The Second Circuit endorsed the SEC's view shortly thereafter. And, the early returns from last year's second Supreme Court decision in Halliburton suggest that rebutting the Basic presumption of reliance through price impact evidence will be a lofty hurdle for defendants at the class certification stage. Below is a roundup of key securities law developments in 2015 and trends for 2016.

Omnicare - When Statements of Opinion Are Actionable

In March, the Supreme Court rejected a shareholder's argument that a statement of opinion is actionable under the securities laws simply because it turns out to be wrong. Yet Omnicare also does not create a complete safe harbor for statements of opinion. A statement of opinion may still be actionable, but only if the speaker did not believe the statement at the time it was made or the speaker omits material facts about its inquiry into or knowledge concerning the statement that conflict with what a reasonable investor would expect to form the basis for the statement.

Omnicarearose out of two statements by Omnicare in a registration statement expressing opinions regarding the company's compliance with state and federal law:

"We believe our contract arrangements with other healthcare providers, our pharmaceutical suppliers and our pharmacy practices are in compliance with applicable federal and state laws."

"We believe that our contracts with pharmaceutical manufacturers are legally and economically valid arrangements that bring value to the healthcare system and the patients that we serve."

Within months of filing the registration statement, Omnicare was sued by the federal government for violating anti-kickback laws in connection with its alleged receipt of bribes from pharmaceutical manufacturers. Certain pension funds then sued the company under Section 11 of the Securities Act of 1933, alleging that Omnicare's opinions regarding legal compliance were untrue statements of material fact and omitted material facts necessary to make the statements not misleading. The district court granted Omnicare's motion to dismiss, but the Sixth Circuit reversed, holding that the funds only had to allege that the stated opinions were objectively false and did not need to plead or prove that Omnicare did not believe the opinions.

The Supreme Court reversed. It first concluded that opinions can only be actionable as misrepresentations of fact if the speaker does not actually hold the opinion stated. This is because the only fact implied in an opinion is that the speaker actually believes the opinion. As the Court explained, "the coffee is hot" is a factual statement about the coffee, but "I believe the coffee is hot" states facts only about the speaker's belief and is not false even if the coffee happens to be lukewarm.

The Court then turned its attention to whether opinions can give rise to liability for related omissions. It noted that whether a statement is misleading (due to an omission of a material fact) is an objective inquiry that depends on the reasonable investor's perspective. While reasonable investors may understand that statements of opinion reflect uncertainty, they also understand those statements to convey information about how the speaker formed the opinion or the speaker's basis for holding a particular view. If the true facts are materially different from what a reasonable investor would expect, then the statement of opinion may be misleading for omitting that information. The Court made clear that an opinion will not be misleading merely because an issuer knows "some fact" contrary to the stated opinion. Instead, investors must identify particular and material facts going to the basis of the issuer's opinion, the omission of which makes the opinion misleading. The Court's belief that this would be "no small task for an investor" left it unmoved by Omnicare's concern that the Court's decision would threaten issuers with massive liability for offering opinions to the public.

So far, lower courts that have applied Omnicare at the pleading stage appear to have faithfully applied the case, insisting that plaintiffs allege particularized facts demonstrating a defendant's subjective disbelief in an opinion or the omission of specific material facts rendering an opinion misleading. For example, in City of Westland Police & Fire Ret. Sys. v. MetLife, Inc., 2015 U.S. Dist. LEXIS 121571 (S.D.N.Y. Sept. 11, 2015), the court granted MetLife's motion to dismiss claims under Section 11 and Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") based on the company's allegedly false opinion concerning the adequacy of its loss reserves. The court held that the plaintiff adequately alleged that MetLife's reserves proved insufficient. But under Omnicare, that MetLife's opinion turned out to be wrong did not plead an actionable claim. And the plaintiff did not allege the type of facts necessary to plead either MetLife's subjective disbelief of its opinion—such as facts regarding the methodologies MetLife employed to calculate its reserves or MetLife's analysis of the impact of various states' policies as they relate to its reserves—or that its opinion was offered without the foundation that a reasonable person would have expected. See also In re Fairway Group Holdings Corp. Secs. Litig., 2015 U.S. Dist. LEXIS 109941 (S.D.N.Y. Aug. 19, 2015) (granting renewed motion to dismiss for, among other things, plaintiffs' failure to sufficiently pleading particularized facts under Omnicare).

Although Omnicare clarified the standard for pleading and proving a securities claim based on a defendant's statement of opinion, it did not change the underlying evidentiary rules governing how to prove the claim. At least one court has held that direct evidence of the defendant's disbelief of his opinion, while helpful, is not necessary for a claim to survive to trial. A plaintiff may rely on circumstantial evidence to meet its burden. In SEC v. Goldstone, 2015 U.S. Dist. LEXIS 116847 (D.N.M. Aug. 22, 2015), the court held that the plaintiff need not present evidence that directly establishes the speaker's disbelief of his opinion where inferences drawn from circumstantial evidence in various emails created a genuine issue of material fact on the question.

Lower courts' continued application Omnicare will test the Supreme Court's stated belief that sufficiently stating a securities claim based on a statement of opinion will be "no small task." The quantum and type of allegations and evidence necessary to satisfy Omnicare remain unclear, and how courts address that issue will determine the level of protection Omnicare affords to issuers. Similarly, lower courts will likely continue to wrestle with where to draw the line regarding when a statement is one of opinion rather than fact.

Proving Lack of Price Impact at the Class Certification Stage Remains Difficult After Halliburton II

The long and winding road of the Erica P. John Fund's attempt to certify a class in its securities litigation against Halliburton Co. shows no sign of ending. After the Supreme Court issued its second decision in the case in 2014—Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) ("Halliburton II")—courts across the country, including the lower court in Halliburton itself, continue to wrestle with how to address price impact evidence at the class certification stage. Now Halliburton heads back to the Fifth Circuit for further guidance on just that question.

As is well known, Halliburton II addressed the continuing viability for purposes of class certification of Section 10(b) claims of the fraud-on-the-market presumption articulated in Basic Inc. v. Levinson, 485 U.S. 224 (1988). That presumption, in turn, rests on an economic theory known as the Efficient Capital Markets Hypothesis ("ECMH"), which posits that securities prices rapidly adjust to reflect new public information impacting the underlying value of the securities being traded. In such an ''efficient'' market, investors are justified in relying on the market price as a substitute for investigating corporate reports, which should be reflected in the market price. Any misrepresentation by the issuer would also be incorporated into the price until there is a corrective disclosure. The presumption that an...