United States: Second Circuit Underscores The Difficulties Of Pleading Securities Fraud Based On Statements Of Opinion After Omnicare

On May 1, 2018, the US Court of Appeals for the Second Circuit issued a summary order affirming a district court decision dismissing plaintiffs' putative class action complaint asserting violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as Rule 10b-5, with prejudice for failure to plead falsity in Martin v. Quartermain.1

In Martin, the Second Circuit addressed application of the standard set forth by the US Supreme Court in Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund and the Second Circuit's prior decision in Tongue v. Sanofi for alleging a false or misleading statement of opinion in public filings or press releases.2 Consistent with its opinion in Tongue, the Second Circuit emphasized in Martin that it is not sufficient for securities plaintiffs to point to omissions of facts known to the issuer that cut against its publicly stated opinions, even if such facts are the contrary opinions of experts or authorities. Taken together, these cases illustrate the difficulty plaintiffs face in the Second Circuit in asserting securities fraud claims in connection with opinion statements.

The Facts in Martin

The Martin plaintiffs alleged statements made by Pretium Resources, Inc. (Pretium) in its public filings overstated the quantity of gold that could be extracted from a recently-acquired mining site. Pretium hired several independent experts in connection with its assessment of the site, including Snowden Mining Industry Consultants (Snowden) to provide estimates regarding the amount of gold that could be produced, and Strathcona Mineral Services Ltd. (Strathcona) to oversee the work prior to the start of a sampling program, and to issue a final report at the conclusion of the program. Pretium announced that it would release interim sampling program results as they were received, but that Strathcona would issue a final report after all data was compiled. The sampling program commenced in June 2013.3

Over the next few months, Pretium reported results from the sampling program, including Snowden's promising projections relating to a particular gold vein, which were atypical of the remaining disclosed samples, and its plans with Strathcona to increase sampling of the higher grade area surrounding the vein. Subsequent press releases announced that the sampling program was proceeding as planned and continued to express confidence in Snowden's projections.4

In an October 2013 press release, however, Pretium announced that Strathcona was resigning prior to the completion of the sampling program and without issuing a final report. In a subsequent press release issued about two weeks later, Pretium disclosed Strathcona's opinion that it believed Pretium's previous suggestions that Snowden's estimates remained viable were "erroneous and misleading." Pretium stated that Strathcona's opinion, which was based on only 20 percent of the drilling results, was premature, and both Pretium and Snowden expressed concerns that Strathcona's opinion was based on a flawed analysis. Pretium's stock price steeply declined in reaction to each of these two October 2013 public announcements, and the plaintiffs commenced their securities fraud suit.5

The Second Circuit's Ruling

In affirming the district court's dismissal of the action, the Second Circuit initially agreed with the district court conclusion that the statements at issue were opinions and not assertions of purported facts. The Second Circuit then noted that Omnicare identified three categories of statements of opinion that can be false or misleading: (i) where the speaker does not hold the belief professed; (ii) where the facts supplied in support of the belief professed are untrue; or (iii) where the speaker omits information that makes the statement misleading to a reasonable investor.6

The Second Circuit noted that the plaintiffs had not alleged facts to establish either that the speaker did not hold the belief professed or that the facts supplied in support of the belief were untrue.7 With respect to the omission theory, the Court reiterated that pursuant to Omnicare and Tongue, that statements of opinion are not false simply because an issuer is aware of, but fails to disclose, facts cutting the other way, even when such facts are "the contrary opinion of an expert or authority."8 As noted in Omnicare, "[t]hat is because '[r]easonable investors understand that opinions sometimes rest on weighing competing facts' and input."9

The Second Circuit emphasized that opinions must always be considered in the proper context, recognizing that investments in gold mines are inherently risky, particularly when the mine is still under development, and that Pretium had disclosed it was providing information based on its subjective judgment which might ultimately prove to be inaccurate.10

The Second Circuit ultimately concluded that Pretium had no duty to disclose Strathcona's opinions about the preliminary results of the sampling program because Strathcona stopped work before issuing a final report, and it had not been retained to evaluate or provide any interim opinions. Thus, Strathcona's views "were not relevant to the narrow purpose for which" it was retained, and Pretium was "entitled to investigate and confirm" whether Strathcona's opinions were valid.11

Implications

The Martin decision hews closely to the Second Circuit's earlier ruling in Tongue, which held that Sanofi's optimistic opinion statements regarding the expected timing of the FDA approval of a drug were not actionable even though the FDA had provided Sanofi with feedback that cut against its projections. In Tongue, the Court, relying on Omnicare, found that shareholder plaintiffs are "not entitled to so much information as might have been desired to make their own determinations about the likelihood" of the FDA's approval date, even if they certainly "would have been interested in knowing" the information and "perhaps would have acted otherwise had the feedback been disclosed."12

Martin and Tongue illustrate that, in the Second Circuit, meeting the Omnicare standard is "no small task for an investor," particularly where the claims are based on an issuer's alleged omission of known information that cuts against its stated opinions.13

© Arnold & Porter Kaye Scholer LLP 2018 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

Footnotes

1 Martin v. Quartermain, No. 17-2135, __ Fed.Appx.__, 2018 WL 2024719 (2d Cir. May 1, 2018).

2 Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund, 135 S. Ct. 1318 (2015); Tongue v. Sanofi, 816 F.3d 199 (2d Cir. 2016). For in-depth analyses of Omnicare, see the following Arnold & Porter advisories: Supreme Court Clarifies Liability for Statements of Opinion Under Section 11 of the Securities Act; Supreme Court Clarifies Scope of Section 11 Liability for "False Opinions" in Omnicare Decision.

3 Martin, 2018 WL 2024719, at *1.

4 Id. at *2.

5 Id. at *1-2.

6 Id. at *2 (citing Tongue, 816 F.3d at 210).

7 Id. at *2-3.

8 Id. at *3.

9 Id. (citing Omnicare, 135 S. Ct. at 1329).

10 Id. at *3.

11 Id. at *4.

12 Tongue, 816 F.3d at 212.

13 Omnicare, 135 S. Ct. at 1332.

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