[This story previously appeared in Securities Regulation Daily.]
By Lene Powell, J.D.
Are opinions ever the stuff of Section 11 liability? Where an issuer expressed an overly enthusiastic view about the market for its securities that failed to pan out, a Tenth Circuit panel held that even if opinions could give rise to liability—which it somewhat doubted—the issuer was not culpable because the plaintiffs did not allege that the issuer’s belief was not sincerely held, and the challenged opinion was supported by information a reasonable issuer could rely on (MHC Mutual Conversion Fund v. Sandler O’Neill & Partners, et al., August 1, 2014, Gorsuch, N.).
Optimistic opinion on stock offering. In 2009, United Western Bancorp (Bancorp) conducted a secondary stock offering to raise about $90 million. Bancorp warned potential investors that it had major investments in mortgage backed securities, and that these investments had suffered badly during the financial crisis when many homeowners defaulted on their loans. Specifically, Bancorp said it had already taken $47 million in losses on its investments, and cautioned that if adverse market conditions persisted longer than expected, it would have to recognize further losses. However, the company stated that after conducting internal analyses and consulting independent experts, it now expected the level of delinquencies and defaults to level off and the market for its securities to rebound soon.
Unfortunately, the economy remained in deep recession, and fifteen months after the offering, the company had to recognize about $69 million more in losses in its mortgage backed security portfolio. The plaintiffs sued, arguing that the opinion the company gave in its offering statement about the prospects for its securities portfolio was false and should give rise to liability under section 11 of the Securities Act, as well as section 10(b) of the Exchange Act. The district court disagreed, holding that Bancorp’s failed market predictions, without more, weren’t enough to trigger liability, as the plaintiffs did not allege that Bancorp’s belief was not sincerely held.
Sincere belief. The panel first determined that legislative history and common law generally take a dim view of liability for opinions. Noting that section 11 creates a cause of action for an untrue statement or omission of a material fact, the panel said common law provided that the puffery of a salesman could not be relied upon, especially when the salesman is offering a guess about the future. The law does not demand good faith from a seller in “those vague commendations of his wares which manifestly are open to difference of opinion,” said Justice Holmes in Deming v. Darling (Mass. 1889), adding that it has always been understood that such statements are to be distrusted.
However, said the court, a second reading of section 11 is that in offering an opinion, a speaker is making the factual statement that he believes something. Therefore, a statement about one’s beliefs could give rise to a claim for misrepresentation in at least some circumstances. To warrant liability under this theory, a plaintiff must show both that (1) the defendant expressed an opinion that wasn’t his real opinion and that (2) the opinion didn’t prove out in the end. But this did not help the plaintiffs any, as they did not plausibly allege that Bancorp’s expressed opinion was not its true opinion.
No legally implied warranty. Another possible route for liability was that some common law misrepresentation claims have succeeded against fiduciaries, and those who hold themselves out as experts, for opinions that lack an objectively reasonable basis. This was iffy in the context of an issuer of securities, said the court, because it seemed inconsistent with Supreme Court teachings and the statutory text and history, and it wasn’t clear that securities issuers are fiduciaries or that investor protection would be enhanced by expanding opinion liability in this way.
Assuming this test was available, though, the plaintiffs did not pass it. First, the defendants’ challenged opinion was supported by information a reasonable issuer of securities could rely on. Bancorp relied not just on its own internal forecasting, but consulted multiple outside independent investment analysts who reached the same conclusion about the company’s portfolio. Even if the company “shopped around” for analysts that shared its rosy opinion about market conditions and the future prospects for its securities, plaintiffs did not allege facts suggesting that the analysts gave anything other than their sincerely held and independently reached judgments, or that they were anything less than expert.
Moreover, fiduciaries’ opinions often won’t give rise to liability if they clearly convey the limits of the work done to reach them, and that’s essentially what Bancorp did. The company clearly disclosed that it had already been forced to take some losses; that its opinion it could avoid future losses rested on an assumption the housing market would improve in the near future; and that in the event the housing market didn’t improve soon the company could incur additional losses. This placed investors on notice that the company’s opinion about the prospects for its securities wasn’t unqualified, and it was hard to see how a reasonable investor could have been misled. Examining precedent, the panel concluded that courts have long declined to impose liability in “highly analogous” circumstances.
Opinion, not fact. The court rejected plaintiffs’ contention that the statements were actually fact, not opinion. Ignoring prefatory labels like “we think” and “we believe,” the panel looked at statements in similar cases and concluded that discussions in registration statements about concentrations of risk, loan loss reserves, goodwill, and investment ratings can and often do qualify as opinions. Bancorp represented that the company’s mortgage backed securities were likely to rebound in the near term, but warned they could prove wrong, and the statement necessarily involved a heavy degree of judgment. Like the statements in similar cases, Bancorp’s statements were qualified, not definitive, and provided reasonable notice to the recipient that the speaker might be wrong. The court did not see sufficient differences from the statements in other cases to depart from precedent.
Finally, the panel made short shrift of plaintiffs’ 10(b) claim, finding that plaintiffs failed to establish the necessary intent to defraud, and affirmed the judgment of the district court to dismiss the complaint with prejudice.
The case is No. 13-1016.