Securities litigation is now near an all-time high. Why? It seems to be the product of multiple factors, but two stand out: (1) the migration of “merger objection” cases from Delaware to federal court, and (2) the appearance of a new style of securities litigation that is increasingly called “event-driven” litigation. In “event-driven” securities litigation, the issuer’s financial statements are not challenged; rather, there is usually an “event” (a fire or explosion, an airplane crash, a product recall, or a law enforcement action) and a consequent stock price fall. Plaintiffs then seek to relate this “event” to prior statements by the issuer that assured the public that it was in full regulatory compliance or that attested to the high quality of its product. For example, the issuer asserts in a series of periodic filings that it is in full regulatory compliance and then is subjected to regulatory action that surprises the market and drives down its stock price. For example, in Omnicare v. Laborers Dist. Council Construction Indus. Pension Fund, 135 S. Ct. 1318 (2015), the issuer stated:
“We believe our contract arrangements with other healthcare providers, our pharmaceutical suppliers and our pharmacy practices are in compliance with federal and state laws.” (Id. at 1323).
In fact, the practices were unlawful, and the Federal Government sued Omnicare. Although the Court recognized that Omnicare’s statement was an “opinion” statement, subject only to a lesser standard of liability, the Court still remanded for further proceedings to determine if Omnicare had omitted material facts about how it had formed its belief. Had it investigated adequately? Did it recognize that there were serious questions about the legality of its practices? If so, omission-based liability, Justice Kagan said, was possible.
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