Author: Collin L. Ryan, Associate Member, University of Cincinnati Law Review
George Costanza once imparted to Jerry Seinfeld the infamous advice, “It’s not a lie, if you believe it.” Although this advice is entertaining, the Supreme Court granted certiorari last March to resolve a circuit split regarding the extent to which Mr. Costanza’s advice applies in class action securities litigation. The Supreme Court will review the Sixth Circuit’s decision in Indiana State District Council v. Omnicare, Inc. from May 23, 2013. The Court will likely determine the pleading standard for plaintiff-investors filing suit under § 11 of the Securities Act of 1933 (§ 11 or section 11) against a defendant-corporation. In particular, the Court will determine whether the plaintiff’s plea that the defendant’s misstatement or omission was objectively false satisfies federal pleading requirements, or whether the plaintiff must also plead that the defendant subjectively knew that the misstatement or omission was misrepresentative.
The Sixth Circuit’s Decision
Omnicare Background and Applicable Law
On December 15, 2005, Omnicare, the nation’s largest provider of pharmaceutical care services, made a public offering of 12.8 million shares of common stock. Before doing so, Omnicare filed a Registration Statement with the Securities and Exchange Commission (SEC). Omnicare stated in its Registration Statement that its contracts with drug companies were “legally and economically valid arrangements that bring value to the healthcare system and patients that [it] serve[s].” However, according to the plaintiff-investors who brought suit, Omnicare was “engaged in a variety of illegal activities including kickback arrangements with pharmaceutical manufacturers and submission of false claims to Medicare and Medicaid.” In turn, the plaintiffs claimed that Omnicare’s statement of “legal compliance” while it was allegedly engaged in illegal activities was materially misrepresentative and in violation of § 11 of the Securities Act of 1933. The plaintiffs brought an additional § 11 claim, alleging that Omnicare failed to comply with the Generally Accepted Accounting Principles (GAAP) in its Registration Statement.
Section 11 states that if “any part of the registration statement, . . . contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make statements therein not misleading, any person acquiring such security” may sue over the untrue statement or omission. Accordingly, § 11 “provides a remedy for investors who have acquired securities pursuant to a registration statement that was materially misleading or omitted material information.” When pleading a violation of § 11, as with other claims that “sound in fraud,” a plaintiff’s plea will be subject to the heightened pleading standard under Rule 9(b) under the Federal Rules of Civil Procedure. To satisfy Rule 9(b), the plaintiff must comply with the rule’s “particularity requirement” by “alleg[ing] the time, place, and content of the alleged misrepresentations on which he or she relied; the fraudulent scheme; the fraudulent intent of the defendants; and the injury resulting from the fraud.”
The Sixth Circuit’s Decision and the Consequent Circuit Split
At the pleading stage, the district court dismissed the plaintiff-investors’ § 11 claims on the grounds that, under Rule 9(b), they “were required, but failed to plead, knowledge of falsity on the part of the Defendants.” The Sixth Circuit reversed the dismissal, however, and held that it was “inappropriate for the district court to require [the plaintiffs] to plead knowledge in connection with their § 11 claim” because § 11 of the Securities Act of 1933, while subject still to Rule 9(b)’s heightened pleading standard, “provides for strict liability.”
The Sixth Circuit’s decision in Omnicare differed from decisions in the Second and Ninth Circuits. Both of those Circuits relied on the Supreme Court’s decision in Virginia Bankshares, and held in factually similar securities class actions that a § 11 pleading must establish both that the defendant’s statement was objectively untrue and that defendant subjectively knew the statement to be untrue.
In declining to follow these circuits’ decisions, the Sixth Circuit relied on the Supreme Court’s decision in Herman & Maclean v. Huddleston to support the holding that § 11 of the Securities Act of 1933 provides for strict liability, therefore rendering the defendant’s knowledge of the statement’s falsity irrelevant. The Sixth Circuit also employed its own interpretation of the Supreme Court’s Virginia Bankshares opinion. The Sixth Circuit held that the precedent does not address any requirement to plead knowledge of falsity in § 11 claims, nor is it even applicable because the statute in question before the Court was § 14(a) of the Securities and Exchange Act of 1934, not § 11 of the Securities Act of 1933. The Sixth Circuit determined that “[t]he Second and Ninth Circuits read more into Virginia Bankshares than the language of the opinion allows and stretched to extend [a] § 14(a) case into a § 11 context.” In conclusion, the Sixth Circuit reasoned that “add[ing such] an element to § 11 claims based on little more than a tea-leaf reading [of a concurring opinion] in a § 14(a) case” would be “unwise.”
Analyzing the Decision
Explaining the Split: Fact vs. Opinion
The fundamental reasoning behind the differing circuit interpretations regarding the pleading standard for § 11 claims is the issue of what is a material fact and what is a matter of opinion or belief. For relevant purposes, § 11 expressly states that security investors may file suit if the registration statement contains an “untrue statement of material fact”. On one hand, the Sixth Circuit adopted the approach that everything disclosed within the registration statement is a statement of material fact and the issuers of the statement are subject to strict liability under § 11 for any statement’s falsity. In contrast, the Second and Ninth Circuit adopted the approach that not everything in the registration statement is a fact—a statement that is mere opinion or belief is only actionable under § 11 if the plaintiffs plead scienter of its falsity.
While the Second Circuit in Fait v. Regions Financial held that § 11 claims “do not require allegations of scienter,” the court tapered that holding strictly to § 11 claims regarding statements of fact. The court held that § 11 could only impose liability for statements of opinion if the defendant subjectively knew the statement of opinion to be false. In Fait, the contents of the registration statement at issue related to the financial corporation’s goodwill and loan loss reserves. Addressing the goodwill in the financial corporation’s registration statement, the Second Circuit affirmed that “[e]stimates of goodwill depend on management’s determination of the fair value of the assets acquired and liabilities assumed, [and] are [therefore] not matters of objective fact.” Similarly, in terms of the loan loss reserves identified within the registration statement, such data “reflect[s] management’s opinion or judgment about what, if any, portion of amounts due on the loans ultimately might not be collectible,” and thus “is not a matter of objective fact.”
The Importance of the Difference and the Impact of SCOTUS’ Decision
While the difference between the circuits’ decisions is subtle, the important distinction between the two approaches and the consequences cannot be understated. The Sixth Circuit’s approach provides plaintiff-investors with a fairly low pleading standard, essentially eliminating the possibility of having their case dismissed for failure to state a claim upon which relief can be granted, provided their claim still satisfies the particularity pleading requirement of Rule 9(b). This approach is very plaintiff-friendly and encourages investors to carefully read, interpret, and rely on a corporation’s registration statement before purchasing securities on the public market. However, this approach may create apprehension among the corporate community that a minute statement referring to a certain transaction as “financially fair to the minority shareholders” could result in strict liability to investors. Such apprehension could discourage current privately held corporations from entering the public marketplace, and also discourage publicly traded corporations from making future public offerings—thus curbing corporate funding for expansion and investment opportunities.
In contrast, the approach used in the Second and Ninth Circuits sets a much higher pleading standard, and requires plaintiff-investors, before even arguing the substantive issues underlying their § 11 securities claim, to plead with particularity the defendant’s knowledge of the false statements, or omissions, in the registration statement. This approach promotes economic growth by increasing corporate confidence in SEC registration statements filed prior to public offerings. Under the Second and Ninth Circuits’ approach, corporate entities can rest assured that if their registration statements contain an untrue statement of material fact, or omit a material fact, they can plead lack of knowledge regarding the omission, and claim an honest belief in the untrue statement.
Regardless of which standard the Supreme Court adopts—every statement subject to strict liability, or only facts and not opinions subject to strict liability—the result will be important for future class action securities claims brought under § 11 of the Securities Act of 1933. The Supreme Court will likely implement its own standard that employs a tripartite test to discern what precisely are matters of fact and matters of opinion. Such a test will presumably weigh and consider the tangibility of the statement, the subjectivity and objectivity of the statement, and whether a court can weigh with a reasonable degree of certainty the statement’s truthfulness. Accordingly, an abstract and subjective statement that cannot be measured with any reasonable degree of certainty would appear to be an opinion and, therefore, subject to the scienter pleading requirement. Conversely, a direct statement that is measureable and can be objectively proven false would be deemed a fact, with its distributor subject to strict liability for its falsity. However, if the Court adopts the Sixth Circuit’s approach, George Costanza’s notorious advice—pleading lack of knowledge or honest belief in regards to a registration statement’s untrue statement—will no longer be a viable § 11 defense.
 Seinfeld: The Beard (NBC television broadcast Feb. 9, 1995).
 Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 134 S. Ct. 1490 (2014). The case is set for oral argument on November 3, 2014.
 Ind. State Dist. Council v. Omnicare, Inc., 719 F.3d 498 (6th Cir. 2013).
 15 U.S.C. § 77k (2010).
 Omnicare, 719 F.3d at 500.
 United States Securities and Exchange Commission: Registration Under the Securities Act of 1933 (“[T]he Securities Act of 1933 has two basic objectives: To require that investors receive financial and other significant information concerning securities being offered for public sale; and [t]o prohibit deceit, misrepresentation, and other fraud in the sale of securities. The SEC accomplishes these goals primarily by requiring that companies disclose important financial information through the registration of securities”) (emphasis added), available at http://www.sec.gov/answers/regis33.htm.
 Omnicare, 719 F.3d at 501.
 Id. at 503.
 15 U.S.C. § 77k(a).
 Omnicare, 719 F.3d at 503.
 Id. at 502; see also Fed. R. Civ. P. 9(b) (“In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally”) (emphasis added).
 Id. at 503, citing Sanderson v. HCA-The Healthcare Co., 447 F.3d 873, 877 (6th Cir. 2006).
 Id. at 502 (“Because the [district] court found that the complaint failed to satisfy the pleading standards of Rule 9(b), and because Plaintiffs had not sufficiently pleaded Defendants’ knowledge of falsity, the complaint was dismissed”).
 Id. at 503.
 Va. Bankshares v. Sandberg, 501 U.S. 1083 (1991).
 Fait v. Regions Financial Corp., 655 F.3d 105, 110 (2d Cir. 2011) (“[W]hen 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”) (citing Virginia Bankshares v. Sandberg, 501 U.S. 1083, 2095-96 (1991)); see also Rubke v. Capital Bancorp Ltd., 551 F.3d 1156, 1162 (9th Cir. 2009).
 Huddleston, 459 U.S. 375, 381 (1983) (recognizing that since § 11 “was designed to assure compliance with the disclosure provisions of the act by imposing a stringent standard of liability on the parties who play a role in a registered offering,” a plaintiff “need only show a material misstatement or omission to establish his prima facie case” and that “[l]iability against the issuer of a security is virtually absolute, even for innocent misstatements”) (emphasis added).
 Omnicare, 719 F.3d at 506.
 Id. at 506-507 (stating that the Second Circuit relied too heavily on Justice Scalia’s concurring opinion in Virginia Bankshares and that it would be “unreasonable to extend it to this case and §11”).
 15 U.S.C. §77k (emphasis added).
 See Omnicare, 719 F.3d at 505 (“No matter the faming, once a statement has been made, a defendant’s knowledge is not relevant to a strict liability claim”).
 See Fait v. Regions Financial Corp., 655 F.3d 105, 109 (2d Cir. 2011); see also Rubke v. Capital Bancorp Ltd., 551 F.3d 1156, 1162 (9th Cir. 2009).
 Fait, 655 F.3d at 109.
 Id. at 110 (“Although sections 11 and 12 refer to misrepresentations and omissions of material fact, matters of belief and opinion are not beyond the purview of these provisions. However, 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”) (emphasis in original).
 Id. at 106.
 Id. at 110 (emphasis added) (internal quotations omitted).
 Id. at 113 (emphasis added); see also Rubke, 551 F.3d at 1162 (holding that a statement that certain corporate transactions are “financially fair to the minority shareholders” are “opinions, not statements of fact,” and “can give rise to a claim under section 11 only if the complaint alleges with particularity that the statements were both objectively and subjectively false or misleading”) (internal quotations omitted).
 Fed. R. Civ. P. 12(b)(6).
 Fed. R. Civ. P. 9(b); Omnicare, 719 F.3d at 509 (“Plaintiffs [failed] to meet the particularity requirements of Rule 9(b) in pleading that GAAP violations occurred” because their “GAAP allegations appear to contain some factual holes” and “the details of the accounting violations remain unclear”) (emphasis in original).
 See Rubke, 551 F.3d at 1162.