Upcoming Supreme Court Securities Cases

As the Supreme Court begins its 2014-15 term this month, it will be considering a number of securities cases, including the Omnicare case, which is scheduled for oral argument on November 3rd, and three other cases in which petitions for certiorari are currently pending before the Court. As discussed below, these cases raise significant questions concerning the standards for claims under Section 11 of the Securities Act of 1933, prosecution of insider trading, and the scope of disgorgement penalties in an SEC enforcement action. We also discuss IndyMac, another securities case that had been scheduled to be heard as the first case of the new term on October 6th, but was abruptly dismissed by the Court earlier this week.

Merits Case — Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund. This case, which we have discussed previously, concerns the standard for pleading a claim that a stock registration statement contains an untrue statement under Section 11 of the Securities Act, where the statement involves a matter of opinion. Must plaintiffs allege that the statement was subjectively false – requiring allegations that the speaker's actual opinion was different from the one expressed – or is it enough to allege that the opinion was objectively wrong? In the proceedings below, the U.S. Court of Appeals for the Sixth Circuit held that it was sufficient for the plaintiffs to plead that a false statement was made; the defendants' state of mind was irrelevant, the court held, because Section 11 is a strict liability statute.

But other federal courts have taken a different view, holding that "when a plaintiff asserts a claim under section 11 or 12 based upon a belief or opinion alleged to have been communicated by a defendant, liability lies only to the extent that the statement was both objectively false and disbelieved by the defendant at the time it was expressed," i.e., that it was subjectively false. Fait v. Regions Financial Corp., 655 F.3d 105, 110 (2d Cir. 2011). For example, in Fait the Second Circuit affirmed dismissal of the plaintiffs' Section 11 and 12 claims based on alleged misstatements concerning goodwill and loan loss reserves in the defendant's registration statement. The court held that these were matters of opinion based on subjective estimates by the company's management, and therefore concluded that the claims were properly dismissed because the plaintiffs failed to plausibly allege that the...