OSEC Member Perspective – Bank Lobbyists Tread Familiar Ground in Omnicare Supreme Court Case

By Brandon Lev

Today the Supreme Court heard oral argument in Omnicare v. Laborers District Council Construction Industry Pension Fund, a case arising out of the Sixth Circuit. Omnicare is alleged to have misled investors about the legality of its pharmaceutical rebates and other practices.  The case centers on Section 11 of the Securities Act, which prohibits material misstatements in securities registration statements. Specifically, the Court will decide whether a Section 11 plaintiff must plead that the defendant subjectively knew that an offending misstatement of opinion was false.

By imposing this subjective knowledge requirement, the Court could severely undermine Section 11, which is a valuable tool in the toolbelt of aggrieved investors. Not surprisingly, industry lobbyists have lined up in support of the whittling down of Section 11.

The amici curiae briefs submitted in this case by the Chamber of Commerce (CC) and the Securities Industry and Financial Markets Association (SIFMA) demonstrate the troubling reasoning that underlies legal arguments supportive of Omnicare.

In its brief, the CC attempts to undermine the Omnicare investor-plaintiffs’ Section 11 claims by highlighting the Court’s prior contention that section 11 places a “relatively minimal burden on the plaintiff.” Furthermore, CC asserts that the strict liability interpretation of Section 11 poses untenable peril to businesses by punitively targeting innocent mistakes of opinion. They claim that this interpretation “…would deter issuers from engaging in public offerings in the United States.” Thus, CC believes that companies’ public offerings are predicated at least in part on the ability to express any self-assessing opinion regardless of objective fact and free from any accountability or risk. This is noteworthy because CC suggests that if any transaction between businesses and customers is to be fair, the burden of accounting for risk should be placed more heavily on investors. Because Section 11 does not conform to this conception of fairness, the CC believes the Court should instead rely on precedent formed by cases involving SEC Rule 14a-9.

CC’s argument is based heavily on Virginia Bankshares and the interpretation of SEC Rule 14a-9 contained therein. Under such guidelines, plaintiffs would be required to prove that not only was the information presented to them false, but that Omnicare representatives knowingly presented this false information as true. Thus, CC’s argument can be characterized as demanding that burdens be shifted from businesses to shareholders, and that these burdens be virtually impossible to meet. Indeed, the above interpretation of Rule 14a-9 demands nothing short of gleaning information directly from another person’s mind. Such a burden of proof seems excessively stringent.

In contrast to CC’s preference for Rule 14a-9, SIFMA challenges directly the Sixth Circuit’s reading of Section 11. They argue that Section 11 “is not a strict liability statute.” Instead, it provides a narrower form of liability by granting underwriters due diligence protections if they have “reasonably investigated” and “reasonably believe” that the opinion expressed by an issuer is true. In essence, SIFMA argues that the strict liability interpretation of Section 11 is unfair because it punishes companies simply for being mistaken in their own beliefs, and does not provide specific guidelines by which underwriters can assess the veracity of issuer statements. Again, these arguments seem to hinge on the belief that in order for businesses to flourish, they must be absolved of the risks associated with offering securities. Instead, such risks should be placed squarely on the shoulders of investors and consumers, because the opinions expressed by issuers are sufficient for consumers to make educated investment decisions.

The above arguments are rooted largely in precedent established by the Supreme Court, and demonstrate the extent to which financial regulations have been interpreted so as to benefit businesses rather than consumers. Thus, Omnicare presents the Court with an opportunity to reverse these retrograde interpretations. In its own amicus brief, Occupy the SEC has urged the Supreme Court to uphold the Sixth Circuit’s strict liability interpretation.

At stake is here is whether or not our economy can be a fair institution that benefits the public.

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