Indiana State Dist. Council of Laborers & Hod Carriers Pension & Welfare Fund v. Omnicare, Inc., 2013 U.S. App. LEXIS 10385 (6th Cir. May 23, 2013):

Plaintiffs, all Omnicare investors, appeal the dismissal of their securities suit under § 11 of the Securities Act of 1933, 15 U.S.C. § 77k (2010), against Defendants Omnicare, Inc., its officers, and directors. Plaintiffs allege that Defendants made material misstatements and/or omissions in a Registration Statement filed with the Securities and Exchange Commission in connection with a December 2005 public stock offering. The district court held that Plaintiffs had not adequately pleaded knowledge of wrongdoing on the part of Defendants and dismissed the complaint for failure to state a claim upon which relief can be granted. Plaintiffs seek reversal of the district court's dismissal order on the grounds that § 11 is a strict liability provision. For the following reasons, we REVERSE and REMAND in part and AFFIRM in part. ***

While notice pleading requirements are based on Rule 8, see Twombly, 550 U.S. at 555, claims for fraud are held to the heightened pleading standard of Rule 9(b). We held in Omnicare I that, although § 11 claims do not require pleading of scienter, Rule 9(b) pleading standards still apply to § 11 claims that sound in fraud. Omnicare I, 583 F.3d at 948. We furthermore held that the § 11 claims pleaded by Plaintiffs in the instant case met this requirement. Id.

Plaintiffs argue that, since this Court's decision in Omnicare I, they have amended their complaint to abandon all claims "that could be construed as alleging fraud or intentional or reckless misconduct" and that, as a result, Rule 9(b) no longer applies. They base this argument primarily on a disclaimer that has been added to the complaint stating: "Plaintiffs expressly exclude and disclaim any allegation that could be construed as alleging fraud or intentional or reckless misconduct, as this claim is based solely on the theories of strict liability and negligence under the Securities Act." This one-sentence disclaimer, however, does not achieve Plaintiffs' desired result. See Cal. Pub. Emps. Ret. Sys. v. Chubb Corp., 394 F.3d 126, 160 (3rd Cir. 2004) ("[A]n examination of the factual allegations that support Plaintiffs' section 11 claims establishes that the claims are indisputably immersed in . . . fraud. The one-sentence disavowment of fraud contained [in] . . . the . . . [c]omplaint does not require us to infer" otherwise) (footnote omitted). The basis of Plaintiffs' allegations has not changed since Omnicare I, and therefore the heightened pleading standard of Rule 9(b) still applies to the § 11 claims.

Complaints subject to Rule 9(b) must plead "with particularity the circumstances constituting fraud or mistake." Fed. R. Civ. P. 9(b). In order to meet the "particularity" requirement of Rule 9(b), "a plaintiff [must] allege the time, place, and content of the alleged misrepresentations on which he or she relied; the fraudulent scheme; the fraudulent intent of the defendants; and the injury resulting from the fraud." Sanderson v. HCA-The Healthcare Co., 447 F.3d 873, 877 (6th Cir. 2006) (internal quotation marks and citation omitted); see also Omnicare I, 583 F.3d at 942-43. "Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Fed. R. Civ. P. 9(b).***

In Omnicare I, this Court addressed Plaintiffs' § 10(b) and Rule 10b-5 claims regarding statements of legal compliance. The Court reasoned, citing Kushner v. Beverly Enterprises, Inc., 317 F.3d 820, 831 (8th Cir. 2003), and Helwig, that Plaintiffs could not stop at pleading that Defendants' disclosures were untruthful. See Omnicare I, 583 F.3d at 945. We held that in order for § 10(b) and Rule 10b-5 liability to attach to Omnicare's general assertions of legal compliance, the complaint must "adequately plead[] that the defendants knew the statements were untruthful" at the time they were made. Id. at 945 (internal quotation marks and citation omitted). The Omnicare I panel found that Plaintiffs had not adequately pleaded any allegation that Defendants knew that the legal compliance statements were false when made and accordingly held that Plaintiffs had failed to state a claim. Id. at 946-47. ***

Defendants now argue that the same reasoning should apply under § 11 to the case at hand. We do not agree. Section 10(b) and Rule 10b-5 require a plaintiff to prove scienter, § 11 is a strict liability statute. It makes sense that a defendant cannot be liable for a fraudulent misstatement or omission under § 10(b) and Rule 10b-5 if he did not know a statement was false at the time it was made. The statement cannot be fraudulent if the defendant did not know it was false. Section § 11, however, provides for strict liability when a registration statement "contain[s] an untrue statement of a material fact." 15 U.S.C. 77k(a); see Huddleston, 459 U.S. at 382. No matter the framing, once a false statement has been made, a defendant's knowledge is not relevant to a strict liability claim.

It is immaterial that this issue has been framed as a disclosure requirement. Disclosed information can nevertheless be indisputably wrong. Under the language of § 10(b) and Rule 10b-5, a defendant may take shelter in the fact that she did not know there was anything further to disclose; it was not fraudulent for the defendant to fail to disclose anything further. A plaintiff therefore fails to state a claim if she has not pleaded knowledge of falsity. Under § 11, however, if the defendant discloses information that includes a material misstatement, that is sufficient and a complaint may survive a motion to dismiss without pleading knowledge of falsity.

Finally,Defendants urge us to follow Fait v. Regions Financial Corp., 655 F.3d 105 (2d Cir. 2011). In Fait, a case similar to the instant one, the Second Circuit held "when a plaintiff asserts a claim under section 11 . . . based upon a belief or opinion alleged to have been communicated by a defendant, liability lies only to the extent that the statement was both objectively false and disbelieved by the defendant at the time it was expressed." Id. at 110 (citing Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1095-96 (1991)). Defendants argue that in Fait the Second Circuit correctly interpreted and applied the Supreme Court opinion Virginia Bankshares, 501 U.S. 1083 (1991), and this Court is bound to follow suit. See also Rubke v. Capitol Bancorp Ltd., 551 F.3d 1156, 1162 (9th Cir. 2009) (citing to Virginia Bankshares and holding that opinions can "give rise to a claim under section 11 only if the complaint alleges with particularity that the statements were both objectively and subjectively false or misleading").

While Defendants are correct that we are bound by Supreme Court precedent, we see nothing in Virginia Bankshares that alters the outcome in the instant case, and we decline to follow the Second and Ninth Circuits as a result. Reserving the question of whether scienter is necessary to make out a § 14(a) claim, the Supreme Court held in Virginia Bankshares that a plaintiff may bring a claim under § 14(a) of the Securities and Exchange Act of 1934 for a material misstatement or omission even if the statement is vague and conclusory. Virginia Bankshares, 501 U.S. at 1093 ("[S]uch conclusory terms in a commercial context are reasonably understood to rest on a factual basis that justifies them as accurate, the absence of which renders them misleading"); 15 U.S.C § 78n(a). The Court furthermore held that a defendant's disbelief in his own statement is not enough, on its own, for a plaintiff to make out a claim for a material misstatement under § 14(a). Id. at 1090, 1095-96. In other words, under § 14(a) a plaintiff is required to plead objective falsity in order to state a claim; pleading belief of falsity alone is not enough. Id. at 1095-96 ("proof of mere disbelief or belief undisclosed [standing alone] should not suffice for liability under § 14(a)"). In the instant case, the Plaintiffs have pleaded objective falsity. The Virginia Bankshares Court was not faced with and did not address whether a plaintiff must additionally plead knowledge of falsity in order to state a claim. Id. It therefore does not impact our decision today.

The Court, at the same point that it declined to discuss scienter, also explicitly limited its discussion to statements of opinion and belief that it presumed were made with knowledge of falsity: "[W]e interpret the jury verdict as finding that the directors' statements of belief and opinion were made with knowledge that the directors did not hold the beliefs or opinions expressed, and we confine our discussion to statements so made." Id. at 1090. A footnote to this sentence reserves "the question whether scienter [is] necessary for liability . . . under § 14(a)." Id. at 1090 n.5. The connection of these two statements indicates that the Virginia Bankshares Court itself tied the knowledge of falsity requirement to scienter but explicitly declined to address the issue further. Instead, it assumed the jury in the case had already found knowledge of falsity--whether necessary or not--and proceeded from there. See id. at 1090.

The Second and Ninth Circuits have read more into Virginia Bankshares than the language of the opinion allows and have stretched to extend this § 14(a) case into a § 11 context. Since the Supreme Court assumed knowledge of falsity for the purposes of the discussion in Virginia Bankshares, § 14(a) was effectively treated as a statute that required scienter. The Virginia Bankshares discussion, therefore, has very limited application to § 11; a provision which the Court has already held to create strict liability. See Huddleston, 459 U.S. at 381-82.

The Second Circuit reads Justice Scalia's concurring opinion as support for their interpretation of Virginia Bankshares. See Fait, 655 F.3d at 111 (citing Virginia Bankshares, 501 U.S. at 1108-1109). Justice Scalia wrote: "As I understand the Court's opinion, the statement 'In the opinion of the Directors, this is a high value for the shares' would produce liability if in fact it was not a high value and the directors knew that. It would not produce liability if in fact it was not a high value but the directors honestly believed otherwise." Virginia Bankshares, 501 U.S. at 1108-09. We do not think it is necessary to ignore Justice Scalia's interpretation of the majority Virginia Bankshares opinion; we only believe it is unreasonable to extend it to this case and §11. Because the Court chose to limit its discussion to "statements of belief and opinion . . . made with knowledge that" the statements were false, id. at 1090, any musings regarding mens rea are dicta. The Supreme Court was not faced with the question of knowledge of falsity requirements. Justice Souter carefully declined to discuss strict liability in his introduction to the majority opinion, and it would be unwise for this Court to add an element to § 11 claims based on little more than a tea-leaf reading in a § 14(a) case. While there are contexts in which dicta provides valuable insight into the Court's outlook, we must be careful in how it is extended and applied. This is a context in which extension of dicta is most dangerous. Even Justice Scalia's seemingly direct statement must be read in the context of § 14(a)--a non-strict liability statute. In writing the opinion, the Court could not have intended that musings regarding the requirement would later be applied to an unrelated statute. We therefore refuse to extend Virginia Bankshares to impose a knowledge of falsity requirement upon § 11 claims.