The great thing for plaintiffs about claims under the Securities Act of 1933 (as opposed to the Exchange Act of 1934) is that you usually don't have to show that defendants intentionally misled investors. The Securities Act carries strict liability for factual misstatements in offering documents, so plaintiffs get to slip under the high bar for establishing fraud.

There's an exception, however, for statements that are deemed to be opinions. To proceed with Securities Act claims based on opinions in offering materials, investors do have to establish that the speaker (typically the corporation raising capital) knew the opinions were false. The 2nd Circuit Court of Appeals confirmed that distinction in August 2011 in a ruling called Fait v. Regions Financial, which held that, to be actionable under the Securities Act, opinions must falsely represent the speaker's beliefs at the time they were expressed.

The carve-out for opinions puts investors with Securities Act claims in a bit of a pickle. Their best option is to disclaim assertions that misstatements were intentional, since then they don't have to offer detailed allegations of fraud in their complaints. But if the statements are eventually determined to be opinions, plaintiffs risk having their cases dismissed because they've disclaimed the speaker's knowledge and intent.

That was exactly what happened to the State Universities Retirement System of Illinois and its lawyers at Berman DeValerio in a securities class action stemming from General Electric's $12 billion stock offerings after the Lehman collapse in 2008. Investors asserted securities fraud under the Exchange Act but also made claims under the Securities Act. Berman DeValerio explicitly disclaimed that GE knew or intended statements in the offering materials to be false. U.S. District Judge Richard Holwell of Manhattan found that almost all of the alleged misstatements were opinions and dismissed most of the Securities Act claims against GE and its 26 underwriters.

After Holwell retired, U.S. District Judge Denise Cote took over the case. In April, ruling on a motion for reconsideration by the defendants, Cote held that the alleged misstatements Holwell hadn't already tossed were also opinions under the Securities Act. And because the plaintiffs had disclaimed GE's knowledge and intent, she dismissed them. The April ruling meant GE's underwriters, represented by Willkie Farr & Gallagher, were out of the case entirely. (GE, represented by Weil, Gotshal & Manges, still faced securities fraud claims under the Exchange Act.)

But Berman DeValerio then moved to amend its complaint so it could disavow its previous disclaimer of GE's knowledge and intent. The plaintiffs asked Cote to let them assert in a new filing that GE did not, in fact, believe the opinions it expressed, which would put the company and its underwriters back on the hook for liability under the Securities Act. The defendants vehemently opposed the motion, pointing out that Berman DeValerio had already amended its complaint twice before Holwell ruled on the original defense motion to dismiss and, in all the briefing since, had never proposed the alternative theory that GE intentionally deceived investors under the Securities Act.

"Now that plaintiffs' three-year strategy of pursuing 1933 Act claims that disclaim GE's knowledge and intent has failed," the defense brief said, "plaintiff seeks to 'eliminate the disclaimer' and pursue the very claims it initially abandoned. This attempt to switch horses after the race is both too little and too late." That was particularly true, the brief noted, because at a March hearing on the defense motion for reconsideration, Cote specifically said that she wanted to decide the Securities Act claims once and for all, so she would treat the briefs as if the defense had moved for judgment on the pleadings. Cote said that she wanted to rule "once and not twice," so both sides would know "whether there are Securities Act claims in or out of this case."

On Thursday, Cote gave her last word on the claims, agreeing with the defense that Berman DeValerio may not file an amended complaint with the new theory that GE knowingly misrepresented opinions in the offering materials. She did more than that, however: The judge accused the plaintiffs' firm of making a "tactical decision" to disclaim GE's knowledge until its claims were dismissed, and only then raising the new theory. "Such actions," she said, "are indicative of bad faith."

The ruling means that the class will not get a second chance against the underwriters. It also means, according to underwriter counsel Richard Bernstein of Willkie Farr & Gallagher, that plaintiffs can't wait for one Securities Act theory to fail before asserting another one. "This case is a warning to plaintiffs that they have a choice to make on knowledge and intent," Bernstein said. "They will not get a free pass" at an amended complaint.

Cote's decision isn't the end of the world for all Securities Act plaintiffs. Remember, in this case Berman DeValerio had already filed two amended complaints, and Cote had specifically warned the class in March that she wanted her April ruling to be the last word on the Securities Act claims. Class counsel in a case without that history might have more success in moving to amend a complaint to include allegations of knowledge and intent for opinions under the Securities Act after the easier no-intent theory has failed. Or, of course, plaintiffs could include allegations of knowledge and intent as an alternative theory in their original complaints.

Berman DeValerio declined to comment, citing the ongoing litigation.

(Reporting by Alison Frankel)

(This blog post has been updated to include response from Berman DeValerio.)

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