The Supreme Court recently grappled with the question: when can an opinion give rise to liability under Section 11 of the Securities Act of 1933 if the person speaking the opinion believes that their statement is true?  Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S.Ct. 1318 (Mar. 24, 2015).  In other words, if I state something that is false, but I truly believe what I say, am I liable?

Faced with opposing points of view, the Court decided the case by taking a path directly down the middle. The Court noted that Section 11 provides two foundations for liability and analyzed those two foundations separately: 1) liability based on an untrue statement of material fact (aka misrepresentation) and 2) liability on an omission of a material fact needed to make a statement not misleading (aka omission). 

Addressing when statements of opinion can create liability, the Court wrestled with notions of objective versus subjective falsity. If something is objectively false, it’s just wrong. For example, if I were to tell you that I drive a sedan and I actually drive a truck, I’ve made an objectively false statement. However, if at the time I told you I drive a sedan, I really did believe that I drive a sedan – perhaps due to the fact that I have never even once driven my “sedan” off of a paved road – I subjectively believed that I drive a sedan even though objectively I do not. Thus while my statement was objectively false, it was not also subjectively false.

With respect to the first basis for liability, misrepresentations, the Court held that an opinion is actionable as a misrepresentation of material fact under Section 11 only if the speaker actually does not believe the statement. It easily resolved the potential basis for liability when it stated: “[a] sincere statement of pure opinion is not an ‘untrue statement of material fact,’ regardless of whether an investor can ultimately prove that belief wrong.”  Therefore, a statement of opinion is not a misrepresentation unless: 1) the opinion expressed was not sincerely held or 2) the statement of opinion contains embedded statements of (known) untrue facts.

The Court next analyzed the second basis of liability, omissions, and held that a statement that is literally correct and earnestly believed can create liability if that statement of opinion omits material facts. The Court eased the plaintiff’s burden when it held that “literal accuracy is not enough: An issuer must as well desist from misleading investors by saying one thing and holding back another.” Now, the question courts must consider is whether a reasonable investor might consider the omission misleading. If the answer is yes, then the plaintiff has adequately alleged liability under Section 11’s omissions prong.

What does this objective versus subjective stuff mean? Well, from an investor’s perspective, the objective standard chosen by the Court is both more rational and more readily alleged in a complaint. The Court’s interpretation expands the possibilities for investors who allege that a company had information that cut against a statement of opinion where it can be alleged that a reasonable investor would want to know about that contrary information to make the statement of opinion not misleading. Of course, it has yet to be seen how courts will rule when asked what a reasonable investor might infer from a statement of opinion, but numerous lower courts are now reviving previously dismissed Section 11 cases and the emerging trends will become apparent in the months to come.