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Thursday, June 13, 2024 | Back issues
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Supreme Court Hears Arguments on What’s|a ‘Reasonable Basis’ in Securities Offerings

(CN) - The Supreme Court heard arguments Monday in a securities class action against pharmaceutical giant Omnicare, asking to what extent, if any, a corporation needs a "reasonable basis" for opinions in its SEC registration statement.

Omnicare is the largest provider of pharmaceutical services for residents of long-term care facilities in the United States and Canada.

In 2005, it raised $750 million in a public stock offering, after filing a registration statement with the Securities and Exchange Commission.

The statement said that Omnicare's contracts with drug companies were "legally and economically valid arrangements that bring value to the healthcare system and patients that we serve."

But a rash of whistleblower suits before and after the offering accused Omnicare of taking kickbacks from pharmaceutical companies to promote certain drugs, and submitting false claims to Medicare and Medicaid.

Omnicare agreed in June to pay $124 million to settle claims brought by the Department of Justice involving false billings to federal healthcare programs.

A 2006 shareholder class action accused Omnicare of making false statements to the SEC. A federal judge in Kentucky dismissed that action, finding that plaintiffs could not show Omnicare knew its statements of legal compliance were false at the time.

But the 6th Circuit revived the lawsuit under Section 11 of the Securities Act of 1934, holding that it was unnecessary for shareholders to plead that Omnicare did not believe its own statement.

The Supreme Court heard oral arguments in the case Monday.

Omnicare attorney Kannon Shanmugam, with Williams & Connolly, told the court that the company can be held liable for a false statement in its registration statement only if the person who signed the statement did not actually hold the stated belief - regardless of whether it was reasonable.

Justice Elena Kagan doubted it: "Mr. Shanmugam, suppose that in a particular registration statement there was a statement that said a particular kind of transaction was lawful, all right, and the person who makes that statement, whoever it is, really believes it. But in fact, that person knows that the government is breathing down his neck, that the government seems to have a different view. That person knows that its competitors have a different view. And that person has also consulted three lawyers, and two of them have given a different view. But he still believes what he believes.

"But the only thing he says is, 'I think this is lawful.' Now, why isn't that something where there is an omission that makes the statements misleading?"

Shanmugam said this hypothetical underscored the fact that Congress did not impose liability on untrue or misleading statements - according to Omnicare's reading of the statute. The statements have to be knowingly false to impose liability, he said.

Mark Foster, a securities litigator with Morrison Foerster, told Courthouse News: "Omnicare argues that opinions are exactly that. They are beliefs, not based on objective facts, but expressions of judgment.

"Others may disagree with that judgment - this case raises the question, do all statements of opinion inherently contain this disclaimer?"

Shareholders' attorney Thomas Goldstein, with Goldstein & Russell, argued before the court for the Laborers District Council Construction Industry Pension Fund.


"With respect," Goldstein said, "[Section 11] is a strict liability statute. If the factual representations that are expressed or implied are incorrect, then [Omnicare is] liable."

Under this reading of the law, Omnicare would be liable even if it genuinely believed its statement at the time it was made, because events showed the statement to be objectively false.

"The whole point of having these [statements] in the registration statement is to persuade people about the state of the company, about the state of what it's doing, about its profitability and the like. And if you announce a legal rule that says ... so long as you put the words 'we believe' in front of any of those sentences, then what you're going to have is a situation in which every single time when Congress is trying to make sure that the company speaks truthfully, the plaintiff is going to be held to the burden of proving what's inside people's heads. And I don't think that that is what you would naturally infer from a statute like this," Goldstein said.

Justice Samuel Alito asked to what extent a CEO must investigate whether something illegal is going on in his company - could he or she just trust the general counsel's word, or would they have to hire an outside firm to investigate whether someone was paying bribes?

"All you're saying is 'reasonable, reasonable, reasonable,'" Alito said. "I would like some more concrete guidance as to what is reasonable."

Goldstein said the answer depends upon the context.

Chief Justice John Roberts interjected: "Is it reasonable for [the CEO] to say, 'I don't know anything about any bribes.' The lawyer comes in. 'Do you know anything about bribes?' 'No, I don't know anything about any bribes.' Is it reasonable for him to say, 'In our opinion, our employees are not giving bribes?'"

Goldstein responded: "If that is true across the company, because it's not just the CEO that signs the registration statement, then yes."

Goldstein said that shareholders alleged that Omnicare's own lawyers told the company that some of its purchases could be illegal kickbacks.

"What we want to do on remand is the following: We want to show the actual facts, and we want to show that a person would not reasonably conclude this activity was legal," Goldstein said.

Foster told Courthouse News that a corporate general counsel usually does not sign a registration statement, even though he or she wrote it. "They're more like speechwriters than speechmakers," Foster said.

He added: "There's a worry that there's a little bit of a shell game separating those who speak from those who know. But there are other sources of law that prohibit CEOs from sticking their head in the sand to avoid liability under the Securities Act. If they do stick their head in the sand, they may subject themselves to liability under state law for breach of fiduciary duty."

The Department of Justice weighed in on the issue in support of shareholders, and presented its opinion as a middle ground.

Nicole Saharsky, for the government, said that statements made in a registration statement must have a reasonable basis.

"We mean a basis that would be expected under the circumstances, that a lack of a reasonable basis is what makes an omitted fact make the statement about the opinion misleading," Saharsky said.

The government disputed the 6th Circuit ruling that a company could be liable for an opinion in a registration statement that was later found to be untrue.

"The key point that I want to make when you are thinking about petitioner's statement is, the SEC does really view this as a problem to say that the petitioner's idea that you can just put 'we believe' in front of something and then not have any need to make an investigation into it or see whether it has a basis," Saharsky said.

Foster said that if the Supreme Court decides to vacate and remand the case, "It would lead to uniformity, as the 6th Circuit is the odd man out right now.

"Alternatively, if the court adopts the middle ground approach, that would lead to more uncertainty. The reasonable basis test is unsettled, and may lead to a certain amount of uncertainty for judges and juries as to what constitutes a reasonable basis."

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