Supreme Court to Consider Pleading Standards in Section 11 Actions

On March 3, 2014, the Supreme Court granted certiorari in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, No. 13-435, to address a circuit split concerning the pleading standards applicable to claims under Section 11 of the Securities Act of 1933. Section 11 provides that, where a security is issued pursuant to a registration statement that contains a material factual misstatement or omission, the issuer and its directors and underwriters -- as well as accountants and other professionals, with respect to portions of the registration statement they have "expertized" -- are strictly liable to purchasers who meet statutory standing requirements. Each court of appeals to address the question has held that statements of opinion or belief in a registration statement may be actionable under Section 11. However, the Second and Ninth Circuits have held, and the Third Circuit has suggested, that in order to bring a Section 11 claim based on a statement of opinion or belief, the plaintiff must plead and prove both that the opinion was incorrect and that it did not reflect the defendant's subjectively-held belief. See Fait v. Regions Financial Corp., 655 F.3d 105 (2d Cir. 2011); Rubke v. Capital Bancorp Ltd., 551 F.3d 1156 (9th Cir. 2009); In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357 (3d Cir. 1993).

In Omnicare, the Sixth Circuit took a different approach. There, plaintiffs sued under Section 11, alleging that the issuer opined in its registration statement that it conducted its business in a manner consistent with the law when, in fact, it was allegedly engaged in certain illegal activity. Reversing a district court's dismissal of the case -- and explicitly rejecting the reasoning of Fait and Rubke -- the Sixth Circuit held that the statement of an incorrect opinion could support recovery under Section 11, regardless of the defendants' subjectively-held beliefs. Indiana State District Council of Laborers and Hod Carriers Pension and Welfare Fund v. Omnicare, Inc., 719 F.3d 498 (6th Cir. 2013).

The divergence of rulings as to Section 11 is a matter of importance for issuers and directors, as well as underwriters, accountants and other participants in public securities offerings. While the Sixth Circuit's decision in Omnicare does not alter the due diligence defense that defendants (other than the issuer) can assert in Section 11 cases, its approach makes it easier for plaintiffs to recover under the statute, and increases the risk of litigation arising from "soft" information in offering materials. The Supreme Court's decision in Omnicare should provide additional and needed clarity concerning the scope of Section 11.