FACT SUMMARY Omnicare, the nation's largest provider of pharmacy services for residents of nursing homes, filed a registration statement with the SEC in connection with a public offering of its common stock. The registration statement contained all disclosures mandated by the 33 Act as well as an analysis of the effects of various federal and state laws on its business model. One analysis included Omnicare's acceptance of rebates from pharmaceutical manufacturers. Most significantly, two sentences in the registration statement expressed Omnicare's view of its compliance with legal requirements: Statement 1) We believe our contract arrangements with other healthcare providers, our pharmaceutical suppliers and our pharmacy practices are in compliance with applicable federal and state laws (Statement 2] We believe that our contracts with pharmaceutical manufacturers are legally and economically valid arrangements that bring value to the healthcare system and the patients that we serve. Several caveats accompanied those two opinion statements. On the same page as the first statement, Omnicare mentioned several state-initiated "enforcement actions against pharmaceutical manufacturers" for offering payments to pharmacies that dispensed their products. The caveat also cautioned that the laws relating to that practice might be interpreted in the future in a manner inconsistent with our interpretation and application." Adjacent to the second statement, Omnicare noted that federal regulators had expressed significant concerns about some manufacturers' rebates to pharmacies, and Omnicare warned that revenue might suffer if these price concessions were no longer provided." Several pension funds (Funds) that purchased Omnicare stock in the public offering brought suit alleging that the company's two opinion statements about legal compliance give rise to liability under Section 11 of the 33 Act. Citing lawsuits that federal agencies later pressed against Omnicare, the Funds argued that the company's receipt of payments from drug manufacturers violated anti- kickback laws. On that basis, the Funds alleged that Omnicare made materially false representations about legal compliance, The Funds also accused Omnicare of omitting material facts necessary to render its representations to be classified as "not misleading. The Funds claimed that none of Omnicare's officers and directors possessed reasonable grounds for thinking that the opinions offered were truthful and complete. The Funds cited proof that one of Omnicare's attorneys had warned that a particular contract carried a heightened risk of liability under anti-kickback laws. At the same time, the Funds made clear that in light of Section Il's strict liability standard, they chose to exclude any allegation that could be construed as alleging fraud or intentional or reckless misconduct The federal trial court granted Omnicare's motion to dismiss holding that the statements regarding a company's belief as to its legal compliance are considered "soft" information and are actionable only if those who made them knew they were untrue at the time. The Court of Appeals for the Sixth Circuit reversed and ruled that, although the two statements expressed Omnicare's opinion of legal compliance rather than hard facts, the Funds had to allege only that the stated belief was "objectively false." The court also held that it was not necessary for the Funds to contend that anyone at Omnicare disbelieved the opinion at the time it was expressed. SYNOPSIS OF DECISION AND OPINION The U.S. Supreme Court reversed the appellate court's decision and remanded the case back to the trial court because neither the trial court nor the appellate court applied the correct standard under Section 11. The Court held that statements of opinion do not constitute an untrue statement of fact simply because the stated opinion ultimately proved to be incorrect. Because a statement of opinion admits the possibility of error, such a statement remains truc even if the opinion turns out to be wrong. The only time that an issuer can be liable for misrepresentation in a statement of opinion is when the issuer does not subjectively believe the stated opinion or if supporting facts of the opinion were untrue. However, the Court also held that an issuer could be held liable for opinion statements under Section 11's omissions clause if an objectively reasonable investor would be misled by the statement WORDS OF THE COURT: Section 11 Liability "Section 11 thus creates two ways to hold issuers liable for the contents of a registration statement-one focusing on what the statement says and the other on what it leaves out. Either way, the buyer need not prove (as he must to establish certain other securities offenses) that the defendant acted with any intent to deceive or defraud... "IL Jiability under Section II's false-statement provision would follow (once again, assuming materiality) not only if the speaker did not hold the belief she professed but also if the supporting fact she supplied were untrue." WORDS OF THE COURT: Omissions Clause 1. Al reasonable investor may, depending on the circumstances, understand an opinion statement to convey facts about how the speaker has formed the opinion or otherwise put, about the speaker's basis for holding that view. And if the real facts are otherwise. but not provided the opinion statement will mislead its audience. Consider an unadorned statement of opinion about legal compliance: 'We believe our conduct is lawful. If the issuer makes that statement without having consulted a lawyer, it could be WORDS OF THE COURT: Omissions Clause 1... Al reasonable investor may, depending on the circumstances, understand an opinion statement to convey facts about how the speaker has formed the opinion or otherwise put, about the speaker's basis for holding that view. And if the real facts are otherwise, but not provided, the opinion statement will mislead its audience. Consider an unadorned statement of opinion about legal compliance: 'We believe our conduct is lawful! If the issuer makes that statement without having consulted a lawyer, it could be misleadingly incomplete. In the context of the securities market, an investor, though recognizing that legal opinions can prove wrong in the end, still likely expects such an assertion to rest on some meaningful legal inquiry-rather than, say, on mere intuition, however sincere. Similarly, if the issuer made the statement in the face of its lawyers' contrary advice, or with knowledge that the Federal Government was taking the opposite view, the investor again has cause to complain: He expects not just that the issuer believes the opinion (however irrationally), but that it fairly aligns with the information in the issuer's possession at the time. Thus, if a registration statement omits material facts about the issuer's inquiry into or knowledge concerning a statement of opinion, and if those facts conflict with what a reasonable investor would take from the statement itself, then Section 11's omissions clause creates liability" Case Questions 1. What is the difference between the objective standard and the subjective standard in this case? Why is it important to the outcome of this case? 2. Since one of Omnicare's attorneys had concern about the company's business model should Omnicare have disclosed that in its registration statement? Is failing to include that single legal opinion an omission? 3. Focus on Critical Thinking: Could Omnicare's statements constitute a breach of contract? Is this good or bad for the investment community? Explain