IndyMac and Omnicare: The Supreme Court Wades Deeper Into Securities Law

April 1, 2014

This spring, the Supreme Court of the United States has added another pair of securities law cases to its docket. By granting petitions for certiorari in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, No. 13-435 (“Omnicare”) and Police & Fire Retirement System v. IndyMac MBS, Inc., No. 13-640 (“IndyMac”), the Court has signaled its continuing interest in shaping class action securities litigation.

This term, the Court is already considering a case — Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317 — that could alter how reliance on a defendant’s misstatements can be pled in securities class actions and how the fraud-on-the-market doctrine can be used to establish class-wide reliance on misstatements. The addition of these two cases for next term leaves no doubt that the Court is interested in this important area of law. The cases present substantive and procedural questions for which lower courts have failed to find a consensus, and the outcomes of these cases will affect critical litigation decisions for investors. 

Omnicare: It may be false, but did you know it was false? On March 3, 2014, the Supreme Court accepted an appeal in Omnicare from the Court of Appeals for the Sixth Circuit concerning whether, for purposes of a claim under Section 11 of the Securities Act of 1933 (the “Securities Act”), it is sufficient for a plaintiff to allege only that a statement of opinion contained in a company’s registration statement was objectively false, or whether a plaintiff must also allege that the speaker of the statement held an opinion that was different than the one expressed. 

Omnicare is the nation’s largest provider of pharmaceutical care services for residents of long-term care facilities in the United States and Canada. At issue in the Omnicare litigation are allegations that Omnicare’s offering documents in connection with its December 15, 2005 stock offering falsely stated that its arrangements with the pharmaceutical companies were “legally and economically valid.” Investors alleged in their complaint that Omnicare was engaged in various illegal activities, revealed in allegations in a whistleblower complaint, including kickback arrangements with pharmaceutical companies and the submission of false Medicare and Medicaid claims. The investors did not allege, however, that the company knew its arrangements were illegal. As a result, the district court dismissed the investors’ Section 11 claim. See Indiana State Dist. Council of Laborers & HOD Carriers Pension Fund v. Omnicare, Inc., No. 2006-26, 2012 U.S. Dist. LEXIS 17526 (E.D. Ky. Feb. 13, 2012).

Like the district court, both the Second Circuit and the Ninth Circuit courts of appeals have previously concluded that statements of opinion in registration statements must not only be false, but also known to be false, in order for investors to adequately plead a claim under Section 11 of the Securities Act. See Fait v. Regions Financial Corp., 655 F.3d 105, 110 (2d Cir. 2011) (concluding that “when a plaintiff asserts a claim under section 11 . . . 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”); Rubke v. Capitol Bancorp Ltd., 551 F.3d 1156, 1162 (9th Cir. 2009) (holding that opinions 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”).

In reaching their holdings, both the Second Circuit and the Ninth Circuit relied on the Supreme Court’s 1991 opinion in Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991), holding that, in claims brought under Section 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), plaintiffs must allege more than belief of falsity alone. In Omnicare, the Sixth Circuit explicitly rejected the Second and Ninth Circuits’ interpretation of Virginia Bankshares and held that “[u]nder Section 11, if the defendant discloses information that includes a material misstatement, that is sufficient and a complaint may survive a motion to dismiss without pleading knowledge of falsity.” 719 F.3d at 505. The Sixth Circuit reasoned that Section 11 imposes strict liability for material misrepresentations in offering documents, and thus the plaintiffs did not need to plead knowledge of falsity. The Sixth Circuit explained that “[n]o matter the framing, once a false statement has been made, a defendant’s knowledge is not relevant to a strict liability claim.” Id.

Thus, Omnicare presents the Supreme Court with an opportunity to answer a question that has been making its way through the lower courts since the Court’s 1991 opinion in Virginia Bankshares. As with any case, it is difficult to predict how the Supreme Court may rule; however, Justice Antonin Scalia’s concurring opinion in Virginia Bankshares, in which he stated that both subjective and objective falsity were required for liability, suggests that at least one member of the Court may be inclined to overrule the Sixth Circuit’s approach in Omnicare

IndyMac: How limited are limitations periods? Just a few days after the Supreme Court accepted the Omnicare case, it granted certiorari in IndyMac on March 10, 2014. In IndyMac, the Second Circuit Court of Appeals altered the application of tolling rules in that circuit by holding that the Securities Act’s repose period could not be tolled during the pendency of a class action. See Police & Fire Retirement System v. IndyMac MBS, Inc., 721 F.3d 95 (2d Cir. 2013). That development was of pressing concern to investors because courts in the Second Circuit, where a great number of securities class actions are resolved, commonly tolled (or suspended) statutes of limitations and statutes of repose under the Exchange Act and the Securities Act until a ruling on class certification was issued. Such tolling afforded potential litigants more time to evaluate their claims and consider whether to file their own individual actions separately from the pending class action. IndyMac conflicts with authority from the Tenth Circuit which holds that the Securities Act’s statute of repose tolls while a class action is pending. See Joseph v. Wiles, 223 F.3d 1155, 1168 (10th Cir. 2000).

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