05.10.2017

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Updates

In City of Dearborn Heights Act 345 Police & Fire Retirement System v. Align Technology, Inc. (Dearborn), the Ninth Circuit established additional requirements for pleading securities fraud claims based on statements of belief under Section 10(b), which already must be stated with particularity. Prior to the decision, a statement of belief qualified as a misrepresentation or omission if “there [was] no reasonable basis for the belief.” Plaintiffs were not required to plead that the speaker lacked a subjective belief in the statement. In Dearborn, the Ninth Circuit overruled circuit precedent and held that the U.S. Supreme Court’s Omnicare standard—which applies to Section 11 claims—also applies to Section 10(b) claims, and requires a plaintiff to allege facts showing that a speaker did not believe his or her statement.

Background

To plead a claim under Section 10(b) of the Securities Exchange Act of 1934 (and SEC Rule 10b-5), a plaintiff must allege a misrepresentation or omission. Courts have grappled with the issue of when statements of opinion or belief qualify as misrepresentations or omissions. Prior to Dearborn, Ninth Circuit precedent held that statements of belief could qualify as misrepresentations or omissions in three situations: “(1) the statement is not actually believed, (2) there is no reasonable basis for the belief, or (3) the speaker is aware of undisclosed facts tending seriously to undermine the statement’s accuracy.”

In 2015, the U.S. Supreme Court held in Omnicare that under Section 11 of the Securities Act of 1933, a statement of belief may be a misrepresentation or omission in the following three circumstances. The first and third circumstances were similar to the Ninth Circuit’s Section 10(b) standard, but the second was not:

  1. The speaker does not actually hold the belief that he or she professes to hold and the belief is objectively untrue. For example, a CEO states: “I believe our TVs have the highest resolution on the market.” If the TVs do not, and the CEO knew it at the time of the statement, the statement is a misrepresentation. Omnicare, Inc. v. Labor. Dist. Council Constr. Indus. Pen. Fund, 135 S. Ct. 1318, 1326 (2015).        
  2. The speaker’s statement of opinion includes a statement of supporting fact that is untrue. For example, the CEO states: “I believe our TVs have the highest resolution on the market, because we use a patented technology.” If the company has no patent, the statement of belief is a misrepresentation. Id. at 1327.    
  3. The speaker omits certain facts and the omission makes the opinion statement misleading to a reasonable investor. For example, the CEO states: “I believe the company’s conduct is lawful,” without disclosing that the company never consulted a lawyer. A reasonable investor would understand the CEO’s statement to convey that the company had consulted a lawyer, and omitting the fact that no lawyer was consulted renders the statement misleading. Id. at 1328-29.

Ninth Circuit’s Dearborn Opinion

In Dearborn, plaintiffs alleged that defendants’ statements of belief concerning the fair value of a subsidiary violated Section 10(b). Plaintiffs argued that under the Ninth Circuit’s second method for pleading falsity, they did not need to allege “subjective falsity,” and only needed to allege facts showing “no reasonable basis for the belief.” Defendants argued that Omnicare required plaintiffs to allege both the subjective and objective falsity of the statements of belief.

The Dearborn panel held that, “[a]lthough Omnicare concerned Section 11 claims, we conclude that the Supreme Court’s reasoning is equally applicable to Section 10(b) and Rule 10b-5 claims.” 

The panel noted that the first and third methods of pleading falsity under existing Ninth Circuit precedent were “consistent with” the first and third methods under Omnicare. However, the Ninth Circuit’s second method—“no reasonable basis for the belief”—was “‘clearly irreconcilable’ with Omnicare, and is therefore overruled.” Applying Omnicare, the panel held that the plaintiff failed to plead falsity under the first method, because plaintiff did not “sufficiently allege subjective falsity.” And plaintiff failed under the third method, because plaintiff failed to “identify any material facts omitted by Defendants.” The panel therefore affirmed the dismissal with prejudice of the second amended complaint.

© 2017 Perkins Coie LLP


 

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