Opinions Actionable As Securities Fraud

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

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 cuttingedge 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... (see full summary)

 
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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.”).

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