Client Alerts
The Tenth Circuit Rejects Section 11 Claims for "False" Opinions
By SHAHZEB LARI, JOHN DURRANT & SARAH KELLY-KILGORE
On August 1, 2014, the Tenth Circuit issued its decision in MHC Mutual Conversion Fund, L.P. v. Sandler O’Neill & Partners, L.P. (“MHC Mutual”), addressing whether opinions contained in securities offering documents can be actionable under section 11 of the Securities Act of 1933.
Opinion Liability Under Section 11
Section 11 provides a civil cause of action for investors when registration statements contain material misstatements or omissions.
In 1991, the Supreme Court addressed this question in Virginia Bankshares, Inc. v. Sandberg, a case evaluating opinion liability under section 14 of the Securities Exchange Act of 1934.
Omnicare
In Omnicare, the Sixth Circuit declined to follow Virginia Bankshares on the grounds that Virginia Bankshares dealt with a section 14 claim (i.e., a ‘34 Act claim with an express scienter requirement); in the Sixth Circuit’s view, it did not apply to a section 11 claim (i.e., a ‘33 Act claim which generally contains no scienter requirement). The Sixth Circuit held that section 11 imposes strict liability—even as to statements of opinion and belief. The Sixth Circuit concluded that Virginia Bankshares thus “has very limited application to [section] 11,” and held that only objective falsity is necessary to state a section 11 claim.
MHC Mutual
The allegations in MHC Mutual involve statements made in the immediate aftermath of the 2008 financial crisis. At the time, United Western Bancorp, Inc. (“Bancorp”) sought to conduct a secondary stock offering to raise about $90 million.
The recession, of course, persisted longer than Bancorp had projected, and, fifteen months after the secondary offering, the company was forced to recognize another $69 million in losses.
The Tenth Circuit affirmed the dismissal. In doing so, the Tenth Circuit clearly disagreed with the Sixth Circuit’s reasoning in Omnicare, dismissing the decision in a brief footnote:
Recently, the Sixth Circuit suggested that objective falsity alone, without more, is enough [to impose section 11 liability]. In doing so, though, the Sixth Circuit didn’t address its own prior decision in Mayer holding that both objective falsity and subjective disbelief are required. And, as we’ve seen, Omnicare’s result stands in a good deal of tension with the common law, securities law authorities, and experience suggesting that the failure of an opinion about future events to materialize, without more, doesn’t establish that the opinion was a false or misleading statement of fact at the time it was made.
Instead of following the Omnicare approach, the Tenth Circuit conducted a thorough examination of the legislative history of section 11 and more than a century’s worth of tort doctrine in order to answer the question it posed to itself: “When does section 11 of the Securities Act of 1933 impose liability on issuers who offer opinions about future events?”
The court concluded that there are “at least three possible readings of section 11 when it comes to opinion liability.”
1. Based upon common law at the time section 11 was enacted, there is no liability for opinions about future events.
2. Based upon Virginia Bankshares and numerous subsequent cases, opinion liability only exists under section 11 where there is both objective and subjective falsity.
3. Based upon present-day common law, opinion liability may exist when a speaker offers an opinion without an objectively reasonable basis for doing so, even if the speaker truly believed in the opinion.
Without explicitly choosing between these three approaches (although its decision implicitly operates at a remove from the first alternative), the Tenth Circuit concluded that more than objective falsity is required in order to impose opinion liability under section 11.
As the Supreme Court gears up to hear Omnicare, MHC Mutual presents yet another case supporting the view that section 11 claims cannot arise simply from opinions that turn out in hindsight to be false or misleading. Rather, MHC Mutual holds that such statements should only be actionable under section 11, when the speaker does not actually believe the opinion or—possibly—when the speaker lacks a reasonable basis for the opinion.
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If you have any questions concerning these developing issues, please do not hesitate to contact any of the following Paul Hastings lawyers:
Chicago
Mark D. Pollack
+1 312 499 6050
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Samuel W. Cooper
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John S. Durrant
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Joshua G. Hamilton
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Howard M. Privette
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William F. Sullivan
+1 213 683 6252
New York
Douglas H. Flaum
+1 212 318 6259
Shahzeb Lari
+1 212 318 6098
Kevin Logue
+1 212 318 6039
Barry G. Sher
+1 212 318 6085
Palo Alto
Edward Han
+1 650 320 1813
Peter M. Stone
+1 650 320 1843
San Diego
Christopher H. McGrath
+1 858 458 3027
San Francisco
Grace A. Carter
+1 415 856 7015
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