New Standard for Section 11 Liability in the Sixth Circuit

Last week, the Sixth Circuit issued a ruling which defined the standard in the Sixth Circuit for liability under Section 11 of the Securities Act of 1933, created a circuit split, and likely garnered the attention of the Supreme Court. 

In Indiana State District Council et al. v. Omnicare, Inc., 2013 WL 2248970 (6th Cir. May 23, 2013), the Court ruled that a plaintiff bringing a Section 11 claim was not required to plead knowledge of the false statement by the issuer or signer of a registration statement, and that simply alleging that the statement was false or materially misleading was sufficient.  Although the Court previously ruled that Rule 9(b) pleading standards apply in alleging a Section 11 claim, the Omnicare Court reasoned that Section 11 is still a strict liability statute and that “[n]o matter the framing, once a false statement has been made, a defendant’s knowledge is not relevant to a strict liability claim.”

The Court focused on what it considered “soft information” disclosures and distinguished between liability under Section 10(b) and Rule 10b-5 and liability under Section 11 for such disclosures.  The Court concluded that soft information disclosures regarding “legal compliance” were potentially actionable -- but also concluded that disclosures regarding “compliance with GAAP” were not soft information disclosures because “[t]hese are allegations of hard facts.” 

The Court recognized that its ruling conflicted with decisions from the Second and Ninth Circuits, which require both objective and subjective falsity and disbelief at the time the allegations in the registration statement are made.  See Fait v. Regions Financial Corp., 655 F.3d 105 (2d Cir. 2011) and Rubke v. Capitol Bancorp Ltd., 551 F.3d 1156 (9th Cir. 2009).  The Court, however, declined to follow these decisions and presented its own analysis.

The Omnicare decision creates an acknowledged circuit split, which the Supreme Court may resolve if Omnicare chooses to seek certiorari review. 


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