What’s the difference between an opinion and a fact? That sounds like a question of philosophy, or language, or maybe social science — but it’s also a highly practical question of law, one the U.S. Supreme Court decided Tuesday in a case about registration statements filed by issuing companies under the Securities and Exchange Act.
The court tried to frame a compromise between the interests of corporations that issue securities and securities class-action lawyers, whose job it is to keep the corporations honest and get rich in the process. The compromise had two parts. First, in a win for the corporations, the court said that an incorrect opinion can’t count as a materially misleading fact. The only thing factual about an opinion, the court said, is the fact that you hold it on the basis of certain information — and if you lie about that, you can be liable.
Then, in the part of the decision that was good for class- action lawyers, the court went on to say that someone who hears you express an opinion can assume not only that you believe it but also that you made reasonable inquiries to ascertain your opinion. If you didn’t make reasonable inquiry, or you knew things that contradicted what a reasonable person would consider the basis for your opinion, then you can be held liable.
How coherent is the court’s compromise? To evaluate it, let’s use the example of the case before the court. Omnicare, a provider of pharmacy services for nursing homes, issued a registration statement in which it said “we believe” that contracts with other actors “are in compliance with applicable state and federal laws” and also that “we believe” some other contracts “are legally and economically valid arrangements.” The subsequent lawsuit asserted that the contracts in fact were unlawful kickbacks — and that the statements were therefore materially false or misleading.
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The court’s compromise begins by saying that the mere fact that the contracts may actually have been legally invalid kickbacks doesn’t stand as an independent ground for liability. The basic reason is supposed to be that an opinion is different from a fact: one is “an actual happening,” said the court, quoting Webster’s; the other is a “belief” or a “view.”
Although it sounds plausible, this distinction is, in fact, quite weak. The court asserted that the words “we believe” imply some lack of certainty about the truth of the statement. But this is often not the case. When I say I believe that 2+2=4, it doesn’t mean that I’m uncertain about it. Rather, I hold the belief of its truth. In fact, when I say that 2+2=4, I’m implicitly saying that I believe it to be true. Indeed, every factual statement includes the implicit idea that I believe the statement to be true.
There’s some common-law background supporting the court’s idea that belief implies uncertainty. But that background doesn’t seem especially relevant to statements made by issuing companies. When Omnicare said it thought it was following the law, reasonable listeners probably wouldn’t have distinguished that statement from the assertion that Omnicare was, in fact, following the law. After all, that you’re following the law isn’t the kind of fact that can be demonstrated definitively, like 2+2=4. It’s a probabilistic judgment based on your actions and their interpretation by courts. Seen in this light, “we believe we are following the law” is really no different from “we’re following the law.”
So the first part of the court’s opinion isn’t terribly convincing on grounds of philosophy or language. What about the second? Here the court said that in the context of a registration statement, a reasonable investor would expect a company statement of opinion to be based on a “meaningful legal inquiry,” not “intuition.”
This conclusion seems correct. But notice that it subtly contradicts the first part of the court’s opinion, in which it said that the expression of an opinion ordinarily doesn’t implicate the truth of the basis for that opinion. Now the court is saying that, when I express my opinion, I must be basing it on some reasonable effort to ascertain the facts that underlie the opinion. Well, yes. I don’t just say that I believe 2+2=4 unless I’ve made some effort to make sure it’s true. That’s exactly why opinions do convey information about facts. But the words “I believe” don’t make a difference. If I say the 2+2=4, that also means I’ve made reasonable efforts to ascertain its truth.
But enough analysis. In the real world, the court’s test might encourage issuing companies to put the words “we believe” in front of many of the most important facts in their registration statements. That would shift the courts’ subsequent inquiry from whether the statements were true to whether the companies made reasonable efforts to ascertain that they were true. This might well serve the interests of the companies and be bad for the class-action lawyers.
From the standpoint of the economy as a whole, it seems like a waste of time and money for companies to have to put in place internal procedures to prove that they reasonably attempted to ascertain the truth of the opinions asserted in their registration statements. On the whole, it would’ve been easier and simpler for the court to admit that there’s no practical difference between asserting a fact and asserting your belief in that fact. A little pragmatism would’ve gone a long way, even if it might’ve been a victory for the lawyers.