Wednesday, November 04, 2015

Petition Accused Second Circuit of Ignoring Omnicare

By Rodney F. Tonkovic, J.D.

A petition for certiorari has been filed accusing the Second Circuit of ignoring the Supreme Court’s decision in Omnicare. According to the petition, the Second Circuit relied on a rule requiring that a plaintiff show that an issuer must subjectively believe that its statements are false when made. Per se rules like this were rejected by Omnicare, which was decided while the petitioners’ appeal was pending, but was ignored by the Second Circuit in its decision, the petition asserts. The petitioners maintain that they should have a chance to plead their Section 11 omissions claims under the Omnicare standard (NECA-IBEW Pension Trust Fund v. Lewis, October 29, 2015).

Background. In January 2010, petitioner Denis Montgomery filed a class action alleging violations of Securities Act Sections 11 and 12 in connection with three Bank of America public offerings in January and May of 2008. The first amended complaint was dismissed and a magistrate judge recommended denial of plaintiffs’ motion to file a proposed second amended complaint on the grounds that the amendments would be futile. The magistrate concluded that the claims were time-barred and that the petitioners failed to establish that any of the statements of belief and omissions at issue were false or that any of the defendants did not hold the opinions or beliefs on which the claims were based when the alleged misrepresentations were made. The magistrate’s recommendation was adopted by the district court in December 2013.

Second Circuit and Omnicare. The petitioners appealed in early 2014, asserting, among other claims, that they were entitled to the relation-back doctrine for allegations stating a viable claim under the Securities Act. Following the petitioners’ formal briefing of their appeal, the Supreme Court decided Omnicare, holding that a statement of opinion can form the basis for a securities fraud suit if the speaker did not sincerely hold the opinion or the speaker omitted material facts regarding his underlying knowledge that resulted in the opinion being misleading. In May 2015, the petitioners filed a letter brief regarding Omnicare, stating that the decision was applicable to their omissions-based claims and the lower court’s denial of leave to amend. In June 2015, the Second Circuit, in a summary order, affirmed the district court’s decision on statute of limitations grounds without addressing the issues raised by Omnicare. A subsequent petition for rehearing was denied.

The petition asks whether the Second Circuit is required to follow the Supreme Court’s decision in Omnicare, and whether the petitioners stated a valid Section 11 claim under Omnicare. According to the petitioners, the Second Circuit improperly relied on its rule set forth in Fait v. Regions Financial Corp. (2011) that a plaintiff must plead that an issuer’s opinions were both objectively false and subjectively disbelieved at the time they were made. Omnicare, the petition explains, rejected Fait-type per se rules due to the difficulty of showing subjective falsehood.

The petitioners maintain that they should have a chance to plead their omissions claims under Omnicare. The class action complaint raises the same issue as Omnicare, the petition asserts, and the Court should follow “its ordinary practice of remanding” for a determination of whether the petitioners have stated a viable omissions claim. A court on remand could reasonably conclude, the petitioners observe, that the respondents’ opinions on risk factors did not align with the information in their possession at the time.

Finally, the erroneous application of Fait also affected the conclusion that the petitioners’ claims were time barred. The petitioners claim that the lower courts failed to distinguish between the PSAC’s omissions claims versus affirmative misrepresentation claims as required by Omnicare. Here, the petitioners contend that they first learned of the omissions at issue in January 2009, and the complaint was filed less than one year afterwards.

The petition is No. 15-562.

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