New York Law Journal | NYLJ.COM
Outside Counsel
Second Circuit Clarifies Distinguishing Opinions From Facts in Securities Cases
By Anthony Michael Sabino
Facts versus opinions. A material misstatement of the former is the first and foremost requirement in claiming federal securities fraud; the latter, even if subsequently debunked, can never be the basis for such a serious charge. Yet while the nation’s highest court concisely articulated the differences between the two in, among other milestones, Omnicare, Inc. v. Laborers District Council Construction Industries Pension Fund, 575 U.S. 175 (2015) (“Omnicare”), the lower federal courts nonetheless continue to labor with distinguishing proscribed factual miscues from permissible utterances of opinion. Union Asset Management Holding AG v. Philip Morris International Inc. (In re Philip Morris International Inc. Securities Litigation), F.3d (No. 21-2546) (2d Cir. Dec. 26, 2023) (PMI), provides a cogent example.
In a case which the U.S. Court of Appeals for the Second Circuit labelled as presenting an issue of first impression, shareholders had alleged that a global purveyor of tobacco had materially misrepresented the results of its scientific research into smokeless alternatives.
Rejecting the plaintiffs’ characterization, the panel dismissed the underlying putative class action, decreeing that the disclosures at issue were no more than opinions, opinions which were moreover reasonable, given that the U.S. Food & Drug Administration (FDA) had largely confirmed the defendant’s research.
PMI represents the Second Circuit’s latest insights into the critical task of differentiating fact from opinion in shareholder litigation. Yet before we turn to the particulars, we must first set out a précis of the essentials for alleging federal securities fraud.
Federal Securities Law and ‘Omnicare’
The paramount anti-fraud provisions of the federal securities laws are Section 10 of the Securities and Exchange Act of 1934, 15 U.S.C. §78j, its regulatory counterpart Rule 10b-5, 17 C.F.R. §240.10b-5, and Section 20 of the 1934 Act, 15 U.S.C. §78(t) (“control person” liability).
Securities fraud is comprised of six, irreducible elements: 1) material misrepresentation or omission; 2) scienter; 3) connection with the purchase or sale of a security; 4) reliance; 5) economic loss; and 6) loss causation. See Sabino, “#MeToo and Securities Fraud: Lessons From the ‘CBS’ Case,” 263 New York Law Journal p. 4, cl. 4 (June 3, 2020).
For our own coda, we emphasize that only a disclosure of fact, not mere opinion, can constitute a material misstatement. ‘PMI’ represents the Second Circuit’s latest elucidation on distinguishing one from the other.
With regard to the first requirement, Omnicare strenuously warns against “wrongly conflat[ing] facts and opinions” when alleging misleading statements of material fact. Therein Justice Elena Kagan emoted quite plainly that the statutory scheme “does not allow investors to second-guess inherently subjective and uncertain assessments.” Moreover, quotidian antecedents such as “I believe” or “I think” are sufficient to categorize a disclosure as nonactionable opinion, even if that assertion is subsequently proved to be erroneous.
‘PMI’ and Allegedly Misleading Statements
And now for the case at hand. Lead defendant PMI International (PMI) derives its global appellation from the fact that it inherited the offshore businesses of its eponymous progenitor, now known as the Altria Group, Inc. Notwithstanding that the company generally delimits itself to overseas markets, its stock is traded on the New York Stock Exchange, and its wares are still sold in the United States by its former parent.
Confronted by the reality of a dwindling demand for traditional cigarettes, PMI embarked upon developing and marketing non-combustible tobacco products. In public filings, PMI averred that: 1) its own scientific studies demonstrated its smokeless offerings potentially “reduced risk” of or “reduced exposure” to harm; 2) the FDA had generally endorsed the manufacturer’s data; and 3) nascent sales in Japan had captured a significant percentage of a growing market for noncombustible tobacco.
Unfortunately, bad news followed the good. For one, sales in Japan plateaued. Then regulators delayed any further approval of PMI’s noncombustible tobacco products, once a special advisory panel convened by the agency disputed the manufacturer’s claims that its wares were less inimical to health. A putative class action, alleging deceit by the manufacturer in its public utterances, was dismissed by a lower court on the grounds that the investors had failed to make out a sufficient cause of action for fraudulent misstatements. This appeal followed.
Opinions Not Actionable
The first step taken by the PMI court was to posit the aforementioned six elements essential to pleading, and then later proving, a violation of the anti-fraud provisions of the federal securities laws. Here the tribunal made its first clarification; the sole relevant question before it was the allegation that the manufacturer had made certain statements of opinion — not fact — in its public filings. (Continued on Page 8)
ANTHONY MICHAEL SABINO is a partner at Sabino & Sabino, P.C., and a Professor of Law at Tobin College of Business, St. John’s University. Anthony.Sabino@sabinolaw.com.