Couple of interesting securities law developments this week –

First, the Third Circuit’s opinion in Boilermaker Blacksmith National Pension Trust v. Maiden Holdings Ltd, interpreting the Supreme Court’s decision in Omnicare, Inc. v. Laborers District Council Construction Industries Pension Fund, 575 U.S. 175 (2015).  Omnicare explained that statements of opinion can be actionable under the federal securities laws, if they are either literally false representations of one’s own opinion (“haha I said I believed we’d do well this quarter but I don’t believe that at all!”), or if they omit material facts regarding a genuinely held belief that render the opinion misleading.  The Supreme Court gave the following examples:

A reasonable investor may, depending on the circumstances, understand an opinion statement to convey facts about how the speaker has formed the opinion—or, otherwise put, about the speaker’s basis for holding that view. And if the real facts are otherwise, but not provided, the opinion statement will mislead its audience.  Consider an unadorned statement of opinion about legal compliance: “We believe our conduct is lawful.” If the issuer makes that statement without having consulted a lawyer, it could be misleadingly incomplete. In the context of the securities market, an investor, though recognizing that legal opinions can prove wrong in the end, still likely expects such an assertion to rest on some meaningful legal inquiry—rather than, say, on mere intuition, however sincere.  Similarly, if the issuer made the statement in the face of its lawyers’ contrary advice, or with knowledge that the Federal Government was taking the opposite view, the investor again has cause to complain: He expects not just that the issuer believes the opinion (however irrationally), but that it fairly aligns with the information in the issuer’s possession at the time.

In Maiden Holdings, the Third Circuit – accepting, I believe, framing proposed by plaintiffs – held that this standard actually articulates two separate pathways by which an opinion statement may become misleading.  First, the statement may impliedly misrepresent the process by which the opinion was formed; second, the statement may impliedly misrepresent the speaker’s knowledge of contrary facts.  As the Third Circuit put it:

The Supreme Court identified two ways in which an opinion statement may mislead investors “about the speaker’s basis for holding that view.”  First, an opinion statement may mislead investors about what the speaker did by “omit[ting] material facts about the issuer’s inquiry into” the facts relevant to the opinion (“inquiry theory”).  The statement, “[w]e believe our conduct is lawful,” for example, may be misleading if the speaker concealed that he did not consult an attorney before forming the opinion.  Second, an opinion statement may mislead investors about what the speaker knew by “omit[ting] material facts about the issuer’s . . . knowledge” of the evidence for and against the opinion (“knowledge theory”).  The same statement, “[w]e believe our conduct is lawful,” may therefore be misleading if the speaker withheld the fact that his own lawyers told him otherwise.

In Maiden Holdings, the allegation was that Maiden had misrepresented the adequacy of its loss reserves, given the weak performance of one of its insureds, AmTrust.  The case was in an odd posture where the district court ordered very limited discovery, and then granted summary judgment to defendants (meaning, among other things, that the record was more developed than it would be at your typical motion to dismiss stage).

In that context, the Third Circuit held that the district court erred, because it granted summary judgment to defendants on the grounds that Maiden had, in fact, considered AmTrust’s historical performance when setting its reserves. But the plaintiffs had not alleged that defendants inaccurately described their process – i.e., the plaintiffs did not challenge that Maiden Holdings had indeed considered AmTrust’s historical performance. Instead, the plaintiffs had alleged that Maiden Holdings had misled investors by not disclosing its knowledge of contrary facts, i.e., AmTrust’s performance, which contradicted the performance information Maiden had disclosed to investors.  Because the Third Circuit believed there was a genuine issue of fact as to whether Maiden’s knowledge of contrary facts rendered the opinions misleading, the grant of summary judgment was reversed.

Probably a lot of attorneys will want to study the Third Circuit’s discussion of how loss reserve statements may become misleading, but I’m actually more intrigued by the frame, i.e., deficient process vs. contrary facts, which is not something I’d seen before.  At a high level, I’d say they collapse in the way the Supreme Court described: the investor is misled about the basis for the opinion.  A reasonable process presumably takes contrary facts into account, and if investors expect your process is reasonable, they probably expect there are some number of contrary facts in the mix, and therefore won’t be misled if you fail to mention them specifically.  By contrast, if your contrary facts are overwhelming and didn’t affect your opinion, probably the process is verkakte, you know?  Still, I imagine this approach may help clarify the analysis for courts.

Second, we have the Ninth Circuit’s opinion in Sneed v. Talphera, which concerned marketing statements surrounding a new opioid drug.  The company used the slogan “Tongue and Done” to refer to easy under-the-tongue administration.  The FDA issued a warning letter objecting that the slogan was misleading.  But that was not enough for the Ninth Circuit to conclude the slogan was misleading to investors. The facts are colorful but Imma skip them; I’m interested in the legal principle here, which is:

This case provides an example of how FDA regulations may require the disclosure of information to medical personnel that a reasonable investor would not need. … the FDA regulations on misleading marketing conflict with our expectation of how reasonable investors behave. We expect reasonable investors to read an entire document, including the fine print and caveats, while FDA regulations dictate that “a brief statement[]” “in another distinct part of an advertisement” does not correct misleading statements made elsewhere in an ad. 21 C.F.R. § 202.1(e)(3)(i). FDA regulations also explain that an “advertisement does not satisfy the requirement that it present a ‘true statement’ of information . . . [if it] fails to present a fair balance between . . . side effects and contraindications and . . . benefits.” 21 C.F.R. § 202.1(e)(5)(ii). But we expect reasonable investors to pay attention to caveats and disclaimers even if less prominently displayed.

See, this is weird to me.  If you think of a single average investor, I’d expect them to pay a lot less attention to medical caveats than the medical professionals with medical degrees who are expected to administer a drug without killing their patients.

That said, the specific context of fraud on the market is different.  In a fraud on the market case, you’re not talking about a single investor, but the entire market of them – some of whom will include people with specialized training.  In that context, when you’re talking about the entire universe of people who will read disclaimers and set the price, sure, I can believe the entire universe of people, who include medical professionals, will weight disclaimers more than any single medical professional or single investor.  And, in fact, the Ninth Circuit has drawn that distinction before.

Sadly, however, in this case, the Ninth Circuit made no distinction between fraud on the market and other contexts – it simply held that average stock trader understands medical disclaimers better than doctors.  Which, you know.  Here’s hoping not.

And then there’s Masimo.  Mike Levin and I discussed the Masimo activist dispute in our Shareholder Primacy podcast, here. (Podcast currently on a summer break; back after Labor Day.)

The latest is: Activist investor Politan, having taken control of Masimo, filed suit against the investor RTW, alleging that it formed a 13d group with founder and former CEO Joe Kiani to fight the Politan attack.  In doing so, they are alleged to have coordinated their votes (including empty votes, which is a whole separate thing), and because, together, they counted as insiders for the purposes of Section 16(b), any short swing profits received by RTW would need to be disgorged.  A district court recently rejected RTW’s attempts to dismiss the case, concluding that Politan adequately alleged – for pleading purposes – that RTW and Kiani had “combined in furtherance of a common objective—a common objective of either acquiring, holding, voting, or disposing of securities,” which would make them a 13d group.

What’s interesting here is, a 13d group is formed when investors combine to further a common objective, but – absent mindreading devices – it’s usually hard to tell when a group exists among apparently-disparate shareholders who take care not to paper their arranegement.  And there are precious few actual reported cases that discuss the kinds of allegations that are sufficient to establish, for pleading purposes, the existence of a combination.  The Masimo case is unusual for that reason, but – and here’s the rub – the actual facts are so outrageous that they’re unlikely to transfer to other scenarios.  Like, Kiani apparently sent a text photo of a whiteboard with confidential vote totals to RTW.  That’s … pretty good evidence that the two were “combined in furtherance of a common objective.”  One can only hope that future plaintiffs/enforcers don’t need to hit quite so high a bar.