On February 21, 2014, the United States Supreme Court will hear argument in a case involving interpretation of a securities law permitting what are known in that field as “Section 11 actions”. Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k, provides a private remedy for a purchaser of securities issued under a registration statement filed with the Securities and Exchange Commission if the registration statement “contained an untrue statement of material fact or omitted to state a material fact required to be stated therein or necessary to make the statement therein not misleading.” When a company seeks to make a public offering of stock it publishes a registration statement as part of its prospectus to provide certain pertinent information to potential purchasers of its stock.
In the case which the Court will consider taking, Omnicare, Inc., a provider of pharmaceutical services for the elderly, issued a registration certificate as part of a sale of 12.8 million shares of common stock stating that the company was in material compliance with all applicable laws. Two groups of investors representing the full class of new investors brought a Section 11 action on the ground that such statement was false and misleading. The company responded that the plaintiffs needed to be able to show that the officers who wrote and approved the registration certificate knew such statement was false at the time it was issued. They put forth two major points in support of that argument. First, a statement that any company fails to comply with the law is not a fact but an opinion as determinations of legality are usually not so clear cut. Second, three federal appellate circuits have ruled that their interpretation of a relevant Supreme Court case from 1991 requires that plaintiffs must not only prove that a statement is objectively false but also that the people standing behind the claims in a registration certificate subjectively believed them to be true at the time they were made. Presumably, Omnicare is contending that none of its officials had any reason to believe that the company had violated any pertinent laws at the time.
This distinction goes to the crux of the case. The Second, Third and Ninth Circuit Courts of Appeals have all held the view that a plaintiff in these Rule 11 securities fraud actions must establish that the companies had a “subjective knowledge” it was rendering a materially false statement. But in this case of Laborer District Council, et. al. V. Omnicare, Inc., No. 12-5287, the Sixth Circuit held that the plaintiffs had succeeded in pleading a claim that merited consideration in the trial court. It found that as a Section 11 violation of the Securities Act of 1933 constitutes a strict liability offense – one in which its mere occurrence regardless of intent or knowledge is actionable- it would be inconsistent to require a plaintiff to have to show that the corporate officials vouching for the statements in a registration certificate possessed this subjective awareness of the statement’s falsity.
As this position apparently conflicts with the decisions of the three aforementioned circuits, it is likely the Supreme Court will agree to hear the case. While it maintains its own discretion as to which cases to accept, it makes a practice of taking cases in which the appellate circuits disagree over significant issues so as to resolve any conflicts.
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