Opinions Actionable As Securities Fraud

• Author: Wendy Gerwick Couture
• Position: Associate Professor of Law at the University of Idaho
• Pages: 381-447

Opinions Actionable As Securities Fraud

Wendy Gerwick Couture*

ABSTRACT

This Article proposes a new analytical framework to apply to

statements of opinion in securities fraud cases. Although

statements of opinion form the basis of some of the most cutting-

edge securities fraud claims—such as those asserted against

securities analysts and credit rating agencies—statements of

opinion do not fit squarely within the elements of securities fraud.

In particular, three issues arise: (1) When is a statement of opinion

false so as to qualify as a misrepresentation? (2) When is a

statement of opinion material? (3) And, for that matter, what is the

distinction between a statement of fact and a statement of opinion?

Courts confronting these issues apply various analytically unsound

and inconsistent tests. In response, this Article proposes a novel

approach, drawing on the policy rationales underlying securities

fraud claims, case law and scholarly commentary addressing how

to apply the elements of securities fraud to statements of opinion,

and comparable analyses in the contexts of common law fraud and

defamation. First, this Article argues that statements of opinion are

only false if both objectively unreasonable and subjectively

disbelieved. Second, this Article proposes the following new

evaluation–inference test to differentiate statements of opinion

from statements of fact: Does the statement express the speaker’s

evaluation or inference of facts? Finally, this Article proposes the

following new reasonable implication test to distinguish opinions

that are immaterial as a matter of law from those that are

potentially material: Does the opinion reasonably imply an

allegedly false, material fact?

Copyright 2013, by WENDY GERWICK COUTURE.

* Wendy Gerwick Couture is an Associate Professor of Law at the

University of Idaho, where she teaches securities regulation and white collar

crime. She earned her J.D., summa cum laude, from Southern Methodist

University and her B.A., summa cum laude, from Duke University. The author

thanks the follo wing for their valua ble comments and c onversations: Mar k

Anderson, Barbara Black, Joan Heminway, Christian Johnson, Donald

Langevoort, Monique Lillard, Margaret Sachs, and the editors of the Louisiana

Law Review.

382 LOUISIANA LAW REVIEW [Vol. 73

TABLE OF CONTENTS

I. Introduction ..........................................................................382

II. Opinions Can Form the Basis of Securities Fraud Claims. .386

III. What Is an Opinion for Purposes of Securities Fraud

and Does It Matter? ..............................................................391

A. Courts Treat Opinions Specially by Requiring

Subjective Falsity. ..........................................................392

B. The Subjective Falsity Requirement Raises the

Applicable Scienter Level. .............................................394

C. Courts Do Not Apply a Uniform Test to Distinguish

Statements of Fact and Statements of Opinion in

Securities Fraud Cases ...................................................401

D. The Falsity of an Opinion Is Established Only if

It Is Both Objectively and Subjectively False ................404

E. Courts Should Apply the Novel Evaluation–

Inference Test to Identify Statements of Opinion ..........407

IV. When Is an Opinion Material? .............................................414

A. Courts Distinguish Between Opinions That Are

Immaterial As a Matter of Law and Those That Are

Potentially Actionable. ...................................................415

B. Courts Fail to Apply Analytically Sound Tests to

Identify Statements of Opinion That Are Immaterial

As a Matter of Law ........................................................420

C. Courts Should Apply the Novel Reasonable

Implication Test to Identify Opinions That Are

Immaterial As a Matter of Law ......................................430

V. Conclusion. ..........................................................................446

I. INTRODUCTION

One of the most compelling questions in modern securities

litigation is how to treat allegedly fraudulent statements of

opinion—such as securities-analyst recommendations, credit

ratings, and statements of corporate optimism. Much of the

2013] OPINIONS ACTIONABLE 383

securities litigation in the wake of the stock market crash of 2000

and the financial crisis of 2008 has centered on allegedly

fraudulent opinions. After the 2000 crash, sell-side securities

analysts were widely blamed for allegedly issuing “buy”

recommendations consistent with the interests of their firms’

investment banking clients but inconsistent with their own

opinions about the covered stocks,1 leading to widespread

securities litigation.2 Similarly, in the wake of the 2008 crisis,

credit rating agencies were pilloried for allegedly issuing credit

ratings consistent with the interests of their firms’ clients but

inconsistent with their own opinions about the rated securities,3

also leading to securities litigation.4 Finally, in the wake of both

crashes, many companies—including quintessential examples like

Worldcom and Citigroup—were sued by their investors for

allegedly expressing unduly optimistic opinions about their

businesses.5

1. E.g., Joint Press R elease, Sec. & Exch. Comm’n, N.Y. Attorney Gen.’s

Office, N. Am. Sec. Adm’rs. Ass’n, Nat’l Ass’n of Sec. Dealers, & N.Y. Stock

Exch., Ten of Nation’s Top Investment Firms Sett le Enforcement Actions

Involving Confli cts of Interest Be tween Research and I nvestment Bankin g (Apr.

28, 2003), available at http://www.sec.gov/news/press/2003-54.htm (announcing

the finalization of a global settlement with ten firms “follow[ing] joint

investigations b y the regulator s of allegations o f undue influence o f investment

banking interests on securities r esearch at brokerage firms”).

2. E.g., In re Credit Suisse First Bos. Corp., 431 F.3d 36, 46 (1st Cir.

2005) (Purchasers of Agilent Technologies, Inc. stock alleged that the “buy”

ratings in Credit Suisse’s analyst reports were fraudulent because the analysts

“actually believed that wise investors should not purchase Agilent securities.”).

3. CONCLUSIONS OF THE FINANCIAL CRISIS INQUIRY COMMISSION xxv

(2011), available at http://fcic-static.law.stanford.edu/cdn_media/fcic-reports

/fcic_final_report_conclusions.pdf (“We conclude the failures of credit rating

agencies were essential cogs in the wheel of financial destruction. The three

credit rating agencies were key enablers of the financial meltdown.”).

4. E.g., King Cnty., Wash. v. IKB Deutsche Industriebank AG, 708 F.

Supp. 2d 334, 336 (S.D.N.Y. 2010) (Investors who purchased notes issued by a

structured investment vehicle alleged that credit rating agencies assigned

fraudulently high credit ratings to the notes.).

5. E.g., In re Citigroup Inc. Sec. Litig., 753 F. Supp. 2d 206, 229

(S.D.N.Y. 2010) (Citigroup investors premised securities fraud claims on

various alleged misr epresentations, inc luding the CEO’s st atement that “I fee l

good about the composition of our portfolios, not only in the corporate and

sovereign area but especially in the U.S. mortgage area where we have avoided

the riskier products at some cost to revenues in prior years.”); In re MCI

Worldcom, Inc. Sec. Litig., 191 F. Supp. 2d 778, 786 (S.D. Miss. 2002)

(Worldcom investors premised securitie s fraud claims on various alleged

misrepresentations, including the company’s statement that “[t]he local and global

reach of our network continues to set Worldcom apart from the rest of the

industry.”).