March 26, 2019

Tenth Circuit: Opinions Not Enough to Trigger Liability Under Section 11 of the Securities Act

The Tenth Circuit Court of Appeals issued its opinion in MHC Mutual Conversion Fund, L.P. v. Sandler O’Neill & Partners, L.P. on Friday, August 1, 2014.

In 2009, in the immediate aftermath of the financial crisis, Bancorp sought to conduct a secondary stock offering to raise money. In its securities filings, the company informed investors that it had significant assets in mortgage backed securities and those investments had suffered badly, but advisors had predicted that the market would begin to rebound. Those predictions did not, however, pan out, and MHC, one of the investors, suffered losses as a result of Bancorp’s predictions. MHC sued under Section 11 of the Securities Act, but the district court denied its petition with prejudice, ruling that failed market predictions, without more, were not enough to trigger liability. MHC appealed to the Tenth Circuit.

The Tenth Circuit reviewed the district court’s decision for error and found none. Upon detailed review of Section 11 of the Securities Act, the Tenth Circuit determined that mere opinions are not enough to trigger liability. The offerer of the opinion must know it to be false and harm must come to the entity relying on the opinion in order to trigger liability. Because nothing in the record supported an inference that Bancorp did not believe its opinion to be true, this test was not met.

MHC also argued that by offering the erroneous opinion, Bancorp did not fulfill its requirement of due diligence. The Tenth Circuit first expressed dissatisfaction with this argument because securities offerers are not fiduciaries and should not be held to a fiduciary standard. Next, the Tenth Circuit determined that Bancorp made the necessary warnings and disclaimers to its potential investors that if its opinion turned out to be false, the company would face significant additional losses.

Finally, MHC argued that Bancorp’s assertions violated section 10(b) of the Securities Act. To show a violation of section 10(b), though, the plaintiff must prove that defendant made an untrue statement of material fact with intent to defraud or with reckless disregard for the truth. However, plaintiffs did not allege facts sufficient to make a strong showing of scienter in the Bancorp opinion.

The district court’s opinion was affirmed.

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