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From Securities Regulation Daily, March 3, 2014

High court takes yet another securities case

By Mark S. Nelson, J.D.

The U.S. Supreme Court today agreed to hear a case that asks it to resolve a circuit split over whether a plaintiff alleging the untruthfulness of a statement under Securities Act Sec. 11 must plead both that the statement is objectively wrong and subjectively false. The case pits a Sixth Circuit opinion requiring only the objective prong against others from the Second, Third and Ninth Circuits that require both objective and subjective falsity (Omnicare, Inc, et al v. Laborers District Council Construction Industry Pension Fund, et al, October 4, 2013).

By taking the case, the court adds to this term’s already bustling securities caseload. Last week the court decided Troice, could decide Lawson any day, and will hear oral arguments in Halliburton this Wednesday. The court also has been asked to reverse the Second Circuit’s affirmance of Raj Rajaratnam’s insider trading conviction.

Background. Omnicare, Inc. (Omnicare) offered nearly $13-million common shares in a December 2005 registration statement that was filed with the SEC. Omnicare provides healthcare services to long-term care facilities in North America. The Laborers District Council Construction Industry Pension Fund and Cement Masons Local 526 Combined Funds are the lead plaintiffs for a class of investors who allege that Omnicare’s registration statement contained false and misleading statements about the company’s ability to meet its legal compliance obligations.

Proxy precedent. Omnicare asked the court to clarify how federal courts should apply the Supreme Court’s 1991 Virginia Bankshares opinion. In that case, which involved Exchange Act Sec. 14(a), the court said the plaintiff would need to show the speaker’s statement was subjectively false. Some federal courts have grafted the Virginia Bankshares language to Securities Act suits.

According to Omnicare, the Second, Third and Ninth Circuits require a plaintiff to plead both objective and subjective falsity in cases under Securities Act Sec. 11. The Sixth Circuit, said Omnicare, held that the subjective falsity prong was unneeded because scienter is not an element of a Sec. 11 claim, which is instead based on strict liability.

Omnicare said the Sixth Circuit’s use of only the objective prong goes against these other circuit courts and poses risks for businesses. Said Omnicare, “Thus, in the Sixth Circuit, a plaintiff may state a claim under Sec. 11 based on an honestly expressed opinion, merely by alleging that the opinion turned out to be wrong.”

Uniformity needed. Omnicare urged the court to take the case to resolve the circuit split, and to curtail what it sees as the Sixth Circuit’s straying from long-held legislative and judicial limits on securities suits. Omnicare also warned that a failure to resolve the circuit split may result in higher litigation costs and chill executives’ ability to speak frankly with investors about “honestly held opinions.”

The case is No. 13-435.

Attorneys: Linda T. Coberly (Winston & Strawn LLP) for Omnicare, Inc. Eric Alan Isaacson (Robbins Geller Rudman & Dowd LLP) for Laborers District Council Construction Industry Pension Fund.

Companies: Omnicare, Inc.; Laborers District Council Construction Industry Pension Fund; Cement Masons Local 526 Combined Funds

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