This week, we examine a pair of Ninth Circuit decisions addressing when opinions are materially false under securities law, and what a plaintiff must plead to establish a duty-of-prudence violation under the Employee Retirement Income Security Act.
The Ninth Circuit holds that statements of opinion can be materially false, and thus actionable under SEC Rule 14-a9, where they convey misleading information about the speaker’s basis for holding that view.
The Panel: Judges Fernandez, Wardlaw, and Collins, with Judge Wardlaw writing the opinion.
Key highlight: “Omnicare’s elucidation of what ‘facts’ a statement of opinion may convey and the possibility and manner of proving those ‘facts’ false or misleading through an omission theory applies to the Rule 14a-9 context.”
Background: Gigamon’s Board of Directors negotiated a proposed sale of the company. In a proxy statement, they asked Gigamon’s shareholders to approve it. Believing that the company was being undervalued, and that the proxy statement was false and misleading, a number of shareholders brought suit. They ultimately alleged violations of SEC Rule 14a-9, which prohibits any statement in a proxy statement that “is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading.” 17 C.F.R. § 240.14a-9(a). The district court granted the defendants’ motion to dismiss, holding that the plaintiff shareholders had failed to plead any actionable misrepresentation or omission.
Result: The Ninth Circuit affirmed. In a published decision, the Court addressed the standard for determining liability under Rule 14a-9. As it explained, while the Rule refers to false statements of “fact,” courts had previously concluded that a plaintiff’s claim may also be based on false “statements of reasons, opinions, or beliefs.” Since then, the Supreme Court had decided Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 575 U.S. 175 (2015), which addressed the standard for pleading falsity under section 11 of the Securities Act of 1933. There, the Court held that statements of opinion could be false in three ways: if the speaker did not actually hold the stated belief; if the statement contained a false embedded statement of fact; and if the reader would understand the statement to convey a false impression regarding the speaker’s basis for holding the stated view. Courts had not previously recognized this third, omissions, category of potential falsity in the context of Rule 14a-9 claims.
The Ninth Circuit saw no reason to distinguish Rule 14a-9 claims from the Section 11 claims considered in Omnicare. As the Court explained, both provisions contain nearly identical language, limiting liability to certain types of misstatements of “material fact.” Thus, the Court concluded, the standard applied in Omnicare should also govern Rule 14a-9 claims.
The Ninth Circuit applied that standard in a concurrent memorandum disposition. As the Court explained, the plaintiffs failed to plead any facts that might support the conclusion that the issuers of the proxy statement did not in fact hold the beliefs they professed to hold. To the extent these statements of opinion contained any “embedded facts,” they were either protected as forward-looking statements, or were not false. And as for plaintiffs’ omissions theory, the Court concluded that the challenged opinion statements were not rendered false by the failure to disclose any updated earnings projections, and in any event were again protected as forward-looking statements.
The Court holds that allegations relying on generic economic principles, without more, are not enough to plead a duty-of prudence violation under the Employee Retirement Income Security Act (“ERISA”).
The Panel: Judges Tashima, M. Smith, and Murguia, with Judge Murguia writing the opinion.
Key highlight: “The [complaint] relies solely on general economic theories and is devoid of context-specific allegations explaining why an earlier disclosure was so clearly beneficial that a prudent fiduciary could not conclude that disclosure would be more likely to harm the fund than to help it.”
Background: Power company Edison International offered its employees an employee stock ownership plan or “ESOP”—in which diverted earnings were invested primarily in Edison’s own stock. Edison’s ESOP was managed by a Trust Investment Committee, appointed by CEO Theodore Craver, and which included Vice President and Treasurer Robert Boada. Edison employee Cassandra Wilson sued Craver and Boada, alleging they breached their fiduciary duty because they knew that undisclosed misrepresentations were artificially inflating Edison’s stock price, but took no action to protect plan participants. The district court dismissed, concluding that Wilson failed to satisfy the pleading standard for duty-of-prudence claims set out in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 428 (2014).
Result: The Ninth Circuit affirmed. First, the Court explained the relevant Fifth Third standard: “To state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken.” That analysis is further informed by the recognition that the requisite duty does not require a fiduciary to breach securities laws (for example, by divesting stock in light of insider information) or disclosure requirements, and whether a prudent fiduciary in the defendant’s position might have concluded that taking some corrective action would do more harm than good. The Court rejected Wilson’s argument that the district court had applied a standard making it impossible to state a duty-of-prudence claim, reasoning that the district court had merely concluded that Wilson failed to make context-specific allegations plausibly explaining why a prudent fiduciary in Defendants’ position could not have concluded that a corrective disclosure would do more harm than good. Wilson “relied on wholly conclusory allegations ‘framed in a manner that could apply to any similar ERISA claim.’” Citing decisions in the Second, Fifth, Sixth, and Eighth Circuits, the Court noted that “nearly every court to consider duty-of-prudence claims post Fifth-Third has rejected the notion that general economic principles,” such as increased risk, volatility, or the passage of time, “are enough on their own to plead duty-of-prudence violations.” And it declined to rely on a Second Circuit decision where plaintiffs had alleged that disclosure of harmful information was inevitable and no further investigation was needed to permit a comprehensive corrective disclosure. The Ninth Circuit thus joined the consensus of its “sister circuits in concluding that the recitation of generic economic principles, without more, is not enough to plead a duty-of prudence violation” under ERISA.