A unanimous U.S. Supreme Court ruled Tuesday that investors can't sue companies for making misleading statements of opinion prior to a public stock offering, even if those statements turn out to be wrong.
But the ruling said some opinions in registration documents might omit important facts that could mislead investors, giving them a right to sue for securities fraud.
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The narrow opinion offered a limited victory to pharmacy services provider Omnicare Inc., which was sued by two pension funds that bought stock when the company went public in 2005.
Investors claimed the Cincinnati-based Omnicare misled them when it said in registration documents that it "believed" its contracts with other companies were legal. Omnicare later paid $124 million to settle charges it gave kickbacks to facilities in exchange for patient referrals.
A federal judge dismissed the investors' lawsuit, ruling they failed to show Omnicare knowingly made false statements. But a federal appeals court reversed, saying the plaintiffs only had to allege the statements were "objectively false."
The high court said that wasn't the right standard. The justices sent the case back to lower courts to decide whether Omnicare's statement left out facts that would have been material to investors.
Writing for the court, Justice Elena Kagan said opinion statements are not automatically immune from liability. Investors could try to show that a company did not sincerely believe the opinions it made, or that they are based on inaccurate facts.
Omnicare's statements essentially boiled down to "we believe we are obeying the law," Kagan said. The pension funds did not dispute that Omnicare officials believed its contracts were legal, even though it was later discovered they weren't. Kagan said securities laws do not give investors "an invitation to Monday morning quarterback an issuer's opinions."
But Kagan said Omnicare could be liable if the registration statement left out critical facts, such as making an opinion about legal compliance without having consulted a lawyer, or in the face of its lawyer's contrary advice.
Kagan said she sees no reason the court's ruling would make companies hesitant to disclose information useful to investors.
"To the extent our decision today chills misleading opinions, that is all to the good," Kagan said, noting that Congress wanted investors to have better information, not simply more of it.
Daniel Lewis, a securities litigator in New York, said he didn't expect the ruling to produce a slew of new litigation. But he said it has the potential to create more uncertainty for companies.
"A plaintiff relying on hindsight could complain that a company didn't disclose enough about the basis for an opinion," Lewis said.
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