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Legal Update

The Second Circuit Holds That Section 11 Claims Based on Opinions Require Pleading Subjective Falsity

25 August 2011
Mayer Brown Legal Update

On August 23, 2011, the U.S. Court of Appeals for the Second Circuit affirmed a lower court’s dismissal of a claim under Section 11 of the Securities Act of 1933 brought on behalf of purchasers in a public offering, holding that plaintiffs failed to plead that the alleged misstatements were subjectively false. Fait v. Regions Fin. Corp., Case No. 10-2311-cv (2d Cir. Aug. 23, 2011). The Second Circuit held that amounts reflected in an issuer’s financial statements, such as goodwill and loan loss reserves, can be considered statements of opinion that, under Virginia Bankshares v. Sandberg, 501 U.S. 1083, 1095 (1991), cannot be challenged absent allegations that the defendants did not actually believe those amounts to be accurate at the time of the offering.

The plaintiffs in Fait allegedly purchased securities issued by Regions Financial Corp. in a public offering, following Regions’ acquisition of AmSouth Bancorporation in 2006. According to plaintiffs, acting on their own behalf and on behalf of a purported class, Regions’ public offering documents, which incorporated Regions’ audited financial statements, contained material misstatements concerning two items: the amount attributable to goodwill from the AmSouth transaction and the adequacy of Regions’ loan loss reserves. Specifically, plaintiffs alleged that adverse market conditions in 2007 and early 2008 should have caused Regions to significantly decrease its goodwill and substantially increase its loan loss reserves before the April 2008 public offering. Plaintiffs asserted a Section 11 claim against Regions and Regions’ outside auditor, Ernst & Young LLP.

In its analysis, the Second Circuit agreed with District Judge Kaplan that “plaintiff’s allegations regarding goodwill do not involve misstatements or omissions of material fact, but rather a misstatement regarding Regions’ opinion” and that “loan loss reserves reflect management’s opinion or judgment about what, if any, portion of amounts due on the loans ultimately might not be collectible.” Concluding that both determinations are “inherently subjective,” the Second Circuit relied on the Supreme Court’s decision in Virginia Bankshares in holding that allegations about such matters of opinion are actionable only if the statements “misstate the opinions or belief held, or, in the case of statements of reasons, the actual motivation for the speaker’s actions, and are false or misleading with respect to the underlying subject matter they address.”

Because plaintiffs failed to allege that the defendants did not subjectively believe the statements about goodwill or loss reserves at the time they made them, the Second Circuit affirmed District Judge Kaplan’s decision to dismiss the Section 11 claim.

The Second Circuit’s decision in Fait is significant for its unambiguous interpretation of the Supreme Court’s decision in Virginia Bankshares, and its clear holding that Section 11 claims relating to financial statement amounts – if deemed to be matters of opinion – require allegations of subjective falsity. Because the Court further characterized financial statement balances for loan loss reserves and goodwill as matters of opinion, and because such balances are often attacked in litigation of this sort, the decision is likely to have a significant impact in many other pending cases in which plaintiffs allege Section 11 claims against banks and their outside auditors, based on alleged misstatements made in registration statements and incorporated audit reports.

Mayer Brown LLP represented Ernst & Young LLP in this action.

For more information about the Fait decision, or any other matter raised in this Legal Update, please contact at +1 312 701 7326 or at +1 312 701 732.

Learn more about our Professional Liability practice.


  • Stanley J. Parzen
    T +1 312 701 7326
  • James C. Schroeder
    T +1 312 701 7964

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