MHC Mut. Conversion Fund, L.P. v. Sandler O'Neill & Partners, L.P.

• Decision Date: 01 August 2014
• Docket Number: No. 13–1016.,13–1016.
• Court: U.S. Court of Appeals — Tenth Circuit
• Parties: MHC MUTUAL CONVERSION FUND, L.P., on behalf of itself and all others similarly situated; Clover Partners, L.P., Plaintiffs–Appellants, v. SANDLER O'NEILL & PARTNERS, L.P.; FBR Capital Markets & Co.; Scot T. Wetzel; William D. Snider; Guy A. Gibson; Michael J. McCloskey; Robert T. Slezak; Lester Ravitz; Dr. James H. Bullock; Jeffrey R. Leeds; Bernard C. Darre; Crowe Horwath LLP; Dennis R. Santistevan, Defendants–Appellees, and United Western Bancorp, Inc., Defendant.

761 F.3d 1109

MHC MUTUAL CONVERSION FUND, L.P., on behalf of itself and all others similarly situated; Clover Partners, L.P., Plaintiffs–Appellants,

v.SANDLER O'NEILL & PARTNERS, L.P.; FBR Capital Markets & Co.; Scot T. Wetzel; William D. Snider; Guy A. Gibson; Michael J. McCloskey; Robert T. Slezak; Lester Ravitz; Dr. James H. Bullock; Jeffrey R. Leeds; Bernard C. Darre; Crowe Horwath LLP; Dennis R. Santistevan, Defendants–Appellees,andUnited Western Bancorp, Inc., Defendant.

No. 13–1016.

United States Court of Appeals,Tenth Circuit.

Aug. 1, 2014.

Jeffrey A. Berens of Dyer & Berens LLP, Denver, CO (Robert J. Dyer III and Darby K. Kennedy of Dyer & Berens LLP with him on the briefs), for Plaintiffs–Appellants.

Peter A. Wald of Latham & Watkins LLP, San Francisco, CA (Matthew Rawlinson of Latham & Watkins LLP, Menlo Park, CA and Pamela Robillard Mackey and Laura G. Kastetter of Haddon, Morgan and Foreman, P.C., Denver, CO, with him on the brief), for Defendants–Appellees Scot T. Wetzel, William D. Snider, Guy A. Gibson, Michael J. McCloskey, Robert T. Slezak, Lester Ravitz, Dr. James H. Bullock, Jeffrey R. Leeds, Bernard C. Darre, Dennis R. Santistevan, Sandler O'Neill & Partners, L.P., and FBR Capital Markets & Co.

Stanley J. Parzen of Mayer Brown LLP, Chicago, IL (James C. Schroeder, Dana S. Douglas, and Justin A. McCarty of Mayer Brown LLP with him on the brief), for Defendant–Appellee Crowe Horwath LLP.

Before GORSUCH, BALDOCK, and BACHARACH, Circuit Judges.

GORSUCH, Circuit Judge.

When does section 11 of the Securities Act of 1933 impose liability on issuers who offer opinions about future events? The statute prohibits companies from making statements that are false or misleading. Establishing that an opinion about the future failed to pan out in the end may go some way to meeting that standard but it doesn't go all the way. After all, few of us would label a deeply studied, carefully expressed, and earnestly held opinion about the future as false or misleading at the time it's made simply because later events proved it wrong. To establish liability for an opinion about the future more is required. But what? Answering that question is the challenge posed by this case.

*

The parties take us back to the immediate aftermath of the 2008 financial crisis. In 2009, Bancorp sought to conduct a secondary stock offering to raise about $90 million. In its securities filings the company alerted potential investors that it had significant investments in mortgage backed securities—and that these investments had suffered badly during the financial crisis when so many homeowners defaulted on their loans. The company disclosed, too, that it had already taken $47 million in losses on its investments. At the same time, the company stated that it had conducted internal analyses and consulted independent experts and now expected the level of delinquencies and defaults to level off and the market for its securities to rebound soon. But the company also stressed that if adverse market conditions persisted longer than the company expected it would have to recognize further losses. As we all know now, Bancorp's opinion about the immediate future didn't bear out. The economy remained in a deep recession—a recession that turned out to be perhaps longer and more severe than any since the Great Depression. So it was that in the fifteen months after the offering, as the market remained in the doldrums, the company had to recognize about $69 million more in losses—or what generally accepted accounting principles (GAAP) call “other than temporary impairments” (OTTI)—in its mortgage backed security portfolio.

This lawsuit followed. In it the plaintiffs alleged that the opinion the company rendered in its offering statement about the prospects for its securities portfolio was false and should give rise to liability under section 11. But the district court disagreed, holding that Bancorp's failed market predictions, without more, weren't enough to trigger liability. While opinions can be held false or misleading under section 11, the court explained, they can be only in a limited situation: when the speaker doesn't sincerely hold the opinion he expresses at the time he expresses it. Only then is it fair to declare an opinion false or misleading. And, the court held, the complaint in this case failed to allege so much, nowhere plausibly suggesting that the defendants didn't believe the opinions they offered at the time they offered them. With that, the district court dismissed the plaintiffs' suit and we have this appeal.

*

Section 11 creates a cause of action for investors when a registration statement “contain[s] an untrue statement of a material fact” or omits “a material fact ... necessary to make the statements therein not misleading.” 15 U.S.C. § 77k. Liability extends to those who (like several of the defendants before us) sign, certify, or underwrite the registration statement. 15 U.S.C. § 77k(a)(1), (4), (5).

All the statute's talk about facts—hinging liability as it does on “untrue statements of fact” or omissions of “material fact”—naturally invites the question: are opinions ever the stuff of section 11 liability? The question becomes more lively still when one recalls that in 1933 when Congress passed section 11, it was “stated very often as a fundamental rule in connection with all of the various remedies for misrepresentation, that they will not lie for misstatements of opinion, as distinguished from those of fact.” William L. Prosser, Law of Torts § 109, at 720–24 (4th ed.1971); see also Gordon v. Butler, 105 U.S. 553, 557, 26 L.Ed. 1166 (1881); F.B. Connelly Co. v. Schleuter Bros., 69 Mont. 65, 220 P. 103, 105 (1923) (“It is the general rule that to constitute actionable fraud the misrepresentation must relate to an existing fact or a fact which has existed, thereby excluding mere expressions of opinion.”).

Of course, the dichotomy these authorities drew between facts and opinions is far from unassailable. It seems fair to say, for example, that an expression of opinion often conveys at least one fact—the fact that the speaker believes what he is saying when he says it. “[E]very assertion of the existence of a thing is a representation of the speaker's state of mind, namely, his belief in its existence.” Restatement (Second) of Torts § 525 cmt. d (1977); see alsoRestatement (First) of Torts § 525 cmt. c (1938); Seven Cases v. United States, 239 U.S. 510, 517, 36 S.Ct. 190, 60 L.Ed. 411 (1916) (“[S]tate of mind is itself a fact, and may be a material fact, and false and fraudulent representations may be made about it.”).

All the same, many common law authorities took a dim view of opinion liability. No one should depend on the puffery of salesmen, the thinking went, especially when the salesman's offering a guess about the future or when you're afforded the chance to inspect the goods for sale yourself. Even if an opinion does contain a factual representation ( I believe ... ). Even if that representation is false (the speaker doesn't really believe what he says he believes). Speaking in the language of misrepresentation doctrine's essential elements, one might say the law at the time looked dubiously on liability for failed opinions less because opinions fail to convey a statement of fact and more because any seller's opinion should be thought immaterial by a buyer or not the sort of thing a buyer might justifiably rely upon. Emblematic of this spirit of caveat emptor was Justice Holmes's opinion in Deming v. Darling, 148 Mass. 504, 20 N.E. 107 (1889):

It is settled that the law does not exact good faith from a seller in those vague commendations of his wares which manifestly are open to difference of opinion,—which do not imply untrue assertions concerning matters of direct observation, and as to which it always has been understood, the world over, that such statements are to be distrusted.

Id. at 108 (internal quotation marks and citations omitted); see also Mosher v. Post, 89 Wis. 602, 62 N.W. 516, 516 (1895); Chrysler v. Canaday, 90 N.Y. 272, 279 (1882); Prosser, supra, at 721 (citing examples).

Some contemporaneous scholars clearly thought the Securities Act of 1933 embraced this same view. See, e.g., Harry Shulman, Civil Liability and the Securities Act, 43 Yale L.J. 227, 236 (1933) (“If a buyer relies on an opinion expressed by a seller, he is a fool and has his own folly, not the seller's deceitfulness, to blame for his loss.”). Suggestively, too, the SEC itself for years prohibited companies from issuing “[c]onjectures and speculations as to the future”—precisely the sort of opinion at issue in this case—because it believed the typical investor “as competent as anyone to predict the future from the given facts.” See Harry Heller, Disclosure Requirements Under Federal Securities Regulation, 16 Bus. Law. 300, 307 (1961).¹ If section 11's terms were best understood in this light, the resolution of this appeal would of course be pretty simple. To the extent the plaintiffs complain about the defendants' opinion about future events, there could be no liability.

*

Still, this is only one of at least three possible readings of section 11 when it comes to opinion liability. And the second possible reading we've already hinted at. Though section 11 creates a cause of action only for untrue or misleading factual statements or omissions, an opinion can qualify as a factual claim by the speaker regarding his current state of mind. In offering an opinion, after all and again, a speaker is making the factual statement that he believes something. By 1933, moreover, at least some common law courts had embraced just this notion, accepting that a statement about one's beliefs could give rise to a claim for misrepresentation in at least some circumstances. See, e.g., Vulcan Metals Co. v. Simmons Mfg. Co., 248 F. 853, 856 (2d Cir.1918) (L. Hand, J.) (“An opinion is a fact, and it may be a very relevant fact; the...