The U.S. Court of Appeals for the Second Circuit has affirmed its 2011 decision that effectively halts a major class action suit brought by Deutsche Bank AG shareholders against the company and several underwriters for misleading them about the risks posed to the bank by toxic mortgage-backed securities.
The California appellate court’s July 16 decision in Kaess v. Deutsche Bank AG relied on its 2011 ruling in Fait v. Regions Financial, holding that statements of opinion are only actionable if they are both objectively and subjectively false. The court found in Fait that plaintiffs seeking remedy based on Section 11 claims under the Security Act of 1933 must prove that defendants knew their offering materials included false statements.
Following its reasoning in Fait, the Second Circuit found in Kaess that Deutsche Bank’s statements about its exposure risk on mortgage-backed securities were optimistic opinions, not misstatements of fact. It affirmed an earlier District Court order dismissing the plaintiffs’ claims, stating that the plaintiffs’ complaint did not include any allegations that Deutsche “disbelieved its own disclosures about credit trading, market risk and its exposure to the subprime and nonprime markets, or its own VaR metrics and internal valuation models.”
This recent Second Circuit opinion is in opposition to a 2013 Sixth Circuit opinion in Indiana State District Council of Laborers and HOD Carriers Pension and Welfare Fund v. Omnicare, Inc., where the Sixth Circuit rejected Fait and held that plaintiffs are only required to allege that a statement of opinion was objectively false when it was made.
The U.S. Supreme Court has granted certiorari in Omnicare and is expected to address the circuit split in its next term. The question the high court will address is:
Whether, for purposes of a claim under Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k, a plaintiff may plead that a statement of opinion was “untrue” merely by alleging that the opinion itself was objectively wrong, as the Sixth Circuit has concluded, or must the plaintiff also allege that the statement was subjectively false – requiring allegations that the speaker’s actual opinion was different from the one expressed – as the Second, Third, and Ninth Circuits have held.
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