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Second Circuit Confirms that Statements of Opinion Need Not Be Accompanied by Disclosure of All Underlying Conflicting Information
May 3, 2018 Download PDF
On Tuesday, May 1, 2018, Paul, Weiss obtained a significant victory for Pretium Resources Inc. when the United States Court of Appeals for the Second Circuit affirmed dismissal of a securities fraud class action against Pretium. In Martin v. Quartermain, No. 17-2135 (2d Cir. May 1, 2018), the Second Circuit reiterated that plaintiffs must overcome a high bar to plead an actionable misstatement of opinion under Section 10(b) of the Securities Exchange Act of 1934. When an issuer’s opinion is honestly held and the issuer has a reasonable basis for its belief, disclosure of underlying information cutting the other way is not required—“even when the ‘fact’ cutting the other way is the contrary opinion of an expert or authority.” The decision is the second time that the Second Circuit has meaningfully discussed the Supreme Court’s 2015 decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund. The Second Circuit’s decision in Martin reaffirmed its prior holding in Tongue v. Sanofi that Omnicare provides broad protections for speakers with a good-faith basis underlying their estimates, projections, or opinions.
In October 2013, mining company Pretium Resources Inc.’s stock price dropped after Pretium announced that one of several independent experts Pretium had retained to assess a new potential gold-mining project, Strathcona Mineral Services Ltd., had resigned in protest. Strathcona had been hired to oversee a sampling program intended to gather additional data beyond an earlier estimate of the quantity of gold the mine would produce, which had been prepared by another independent expert, Snowden Mining Industry Consultants. Pretium had previously announced that it would disclose the sampling results as they were received and that Strathcona would report on the sampling program only once the program was complete.
Strathcona resigned before issuing its report because Strathcona disagreed with Pretium’s public statements during the pendency of the sampling program, which had reported favorable sampling results and had expressed continuing faith in Snowden’s estimates. In Strathcona’s opinion, the sampling results to date did not support Snowden’s estimates.
Shortly after Pretium’s disclosure of Strathcona’s resignation, several putative securities class actions were filed in the Southern District of New York. The consolidated class action complaint asserted claims under Sections 10(b) and 20(a) of the Exchange Act against Pretium and several of its officers, alleging that Pretium had made false and misleading statements regarding the viability of the mining project by reaffirming Snowden’s favorable estimates without disclosing that Strathcona held a competing and less-favorable opinion. Paul, Weiss moved to dismiss the complaint, and the district court granted the motion. The court concluded that Pretium’s statements regarding the projections were protected statements of opinion that the plaintiffs had failed to allege were objectively false or not honestly held—despite the fact that one of Pretium’s independent experts disagreed with those statements. The court also held that the plaintiffs had failed to plead scienter with sufficient particularity.
The Second Circuit’s Decision
The Second Circuit (Judges Jacobs, Wesley, and Livingston) affirmed the district court’s dismissal of the complaint, relying principally on Omnicare and the Second Circuit’s subsequent decision in Tongue v. Sanofi.
The court observed that, under Omnicare, a statement of opinion—including estimates and predictions—can be misleading in one of three ways: (1) if the speaker does not honestly hold the belief professed; (2) if the facts supplied in support of the belief are untrue; or (3) if the speaker’s omission of information renders the statement misleading to a reasonable investor.
The Second Circuit concluded that, under Omnicare and Tongue, the plaintiffs had not plausibly pleaded that Pretium’s statements were false or misleading under any of these three theories, and Pretium was not required to disclose Strathcona’s differing opinion, even assuming Pretium knew of it. Whether an opinion statement is misleading cannot be evaluated “in a vacuum” but, rather, involves “context” and considering the statement “in a broader frame,” including the “customs and practices of the relevant industry” and “all [of the opinion statement’s] surrounding text, including hedges and disclaimers.” The court noted that the mining industry is inherently risky, particularly for investors in a potential mining project with as-yet-uncertain viability, and Pretium had appropriately labeled its opinions with disclaimers and hedges (including noting that the figures it disclosed would “only be estimates,” resulting from a “subjective process that relies on . . . judgment” and “inferences that may ultimately prove to be inaccurate.”
The court reiterated Omnicare’s central holding that “reasonable investors understand that opinions sometimes rest on a weighing of competing facts and input,” so an opinion statement “is not misleading simply because an issuer knows, but fails to disclose, some fact cutting the other way.” The court held that this is true “even when the ‘fact’ cutting the other way is the contrary opinion of an expert or authority.” The court also recognized that Pretium had a reasonable basis for its belief: Snowden was the principal expert responsible for developing the gold estimates, and a disagreement with Snowden’s estimates before the full sampling program results were compiled, when Strathcona was to prepare and issue its own report, was outside “the narrow purpose for which Pretium retained Strathcona.” Indeed, even in the face of Strathcona’s resignation, Snowden had continued to stand by its initial estimates and criticized Strathcona’s conclusions as “premature” and based on a “flawed” sampling program. It was therefore not misleading for Pretium to publicly state its agreement with its principal expert’s opinion without disclosing that it was doing so over the objections of another expert.
Martin is only the second time that the Second Circuit has interpreted the Supreme Court’s decision in Omnicare. In both Martin and the court’s prior decision in Tongue, the Second Circuit emphasized the broad protections the Omnicare Court afforded to issuers that publicly voice estimates, predictions, and statements of opinion. The Second Circuit has closely adhered to the Supreme Court’s admonition that meeting the Omnicare standard “is no small task for an investor.”
In Tongue, a pharmaceutical manufacturer had repeatedly expressed its expectation that the FDA would approve its new experimental drug by a particular date. The Second Circuit concluded that the company had not made any false or misleading statements under Section 10(b)—even though the company did not disclose that the FDA had repeatedly expressed a “major concern” to the company about the reliability of the company’s clinical trials. Applying Omnicare, the court held that the company “need not have disclosed the FDA feedback merely because it tended to cut against their projections.” Even though the facts at issue would have been important to a reasonable investor—the FDA, after all, was the very regulator whose approval the company was predicting—the existence of “competing facts” did not, by itself, create a duty to disclose. Rather, the Tongue court held that “so long as Defendants conducted a meaningful inquiry and in fact held [their] view,” their expressions of optimism could not be misleading “merely because the FDA disagreed with the conclusion.”
The Tongue and Martin decisions underline the clear nature of the protections enjoyed by companies in disclosing estimates, predictions, and opinions. In Martin, the Second Circuit continued its strict application of Omnicare’s high bar for pleading actionable statements of opinion. Even when an issuer has multiple experts providing competing opinions, a company is free to publicly express its honestly held opinion siding with one expert without disclosing the disagreement, provided the issuer has a reasonable basis for its opinion and has conducted a meaningful investigation in reaching that opinion. In other words, “a dispute about the proper interpretation” of underlying facts and data cannot be the basis for Section 10(b) liability when a speaker honestly holds its belief about that interpretation, even if a reasonable investor might view the underlying facts that cut against the speaker’s opinion as important.
This protection of issuers’ rights to express opinions ultimately benefits shareholders as well, because it allows companies to provide shareholders with their honestly held views of complex issues and uncertainties without fear of being second-guessed in a subsequent securities fraud lawsuit. It is also consistent with other statutory indications of congressional intent regarding Section 10(b) liability for statements of this nature, such as the PSLRA safe harbor provision for forward-looking statements. Shareholders recognize that the facts underlying an issuer’s estimates, predictions, or opinions will often point in a number of different and sometimes conflicting directions. As long as statements of opinion are clearly labeled as such, shareholders will benefit from greater access to the issuer’s views. Any contrary regime requiring disclosure of the underlying information both supporting and cutting against every estimate, prediction, or opinion would disincentivize issuers from stating their honestly held opinions. That is so not only because of the risk of post-hoc liability, but also because such a rule could cause greater market confusion and expose issuers to greater liability by requiring them to disclose facts and opinions that they may not believe are accurate. Accordingly, the Second Circuit’s strict application of Omnicare gives issuers more freedom to inform the public of their views, provides shareholders with more useful information, and ensures that Section 10(b) jurisprudence remains focused on identifying truly fraudulent conduct.
The Paul, Weiss team included litigation partners Daniel J. Kramer and William B. Michael.
Associate Jacob R. Fiddelman contributed to this Client Memorandum.
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 Summary Order at 8.
 135 S. Ct. 1318 (2015).
 816 F.3d 199 (2d Cir. 2016).
 In re Pretium Res. Inc. Sec. Litig., 256 F. Supp. 3d 459 (S.D.N.Y. 2017).
 816 F.3d 199 (2d Cir. 2016).
 Summary Order at 6 (citing Tongue, 816 F.3d at 210).
 Summary Order at 8 (alterations omitted).
 Summary Order at 9.
 Summary Order at 8 (quoting Omnicare, 135 S. Ct. at 1329).
 Summary Order at 8 (quoting Omnicare, 135 S. Ct. at 1329) (alterations omitted).
 Summary Order at 8.
 Summary Order at 9.
 Summary Order at 7.
 Tongue, 816 F.3d at 210 (quoting Omnicare, 135 S. Ct. at 1332).
 Tongue, 816 F.3d at 204.
 Tongue, 816 F.3d at 212.
 Tongue, 816 F.3d at 214.
 Tongue, 816 F.3d at 214 (citing Kleinman v. Elan Corp., 706 F.3d 145, 154 (2d Cir. 2013)).