The Private Securities Litigation Reform Act of 1995 (PSLRA), codified in Section 27A of the Securities Act of 1933 (Securities Act) and Section 21E of the Securities Exchange Act of 1934 (Exchange Act) and implemented in part by Exchange Act Rule 3b-6, provides a safe harbor from private securities liability for written or oral forward-looking statements that meet the conditions of the Act.
The key to obtaining the protections of the PSLRA is the provision of meaningful cautionary statements identifying important factors that could cause actual results to differ from those anticipated in the forward-looking statements.
For purposes of PSLRA, forward-looking statements include:
- Statements containing a projection of revenues, income (loss), earnings (loss) per share, capital expenditures, dividends, capital structure or other financial items
- Statements of management’s plans and objectives for future operations
- Statements of future economic performance, including Management’s Discussion and Analysis (MD&A)
- Any statement of the assumptions underlying any of the foregoing statements
PSLRA covers forward-looking statements in the non-financial statement portions of registration statements and reports, as well as forward-looking statements in investor presentations and earnings calls. Rule 3b-6 covers written or oral affirmations of forward-looking statements previously made in registration statements and reports. The safe harbor is only available to public companies and does not apply to investment companies or statements made in registration statements for initial public offerings.
To overcome the safe harbor, a plaintiff is required to prove that a false or misleading forward-looking statement:
- If made by a natural person, was made with actual knowledge that the statement was false or misleading
- If made by a business entity, was made by or with the approval of an executive officer with actual knowledge that the statement was false and misleading
To qualify for the safe harbor, forward-looking statements must be accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from the results anticipated in the forward-looking statements.
An amicus brief filed recently by the Securities and Exchange Commission (SEC) in a private securities case against American Express (AMEX) provides a valuable reminder that in order to avail yourself of the safe harbor, your meaningful cautionary statements must actually be meaningful.
In the AMEX case, AMEX described losses on a portfolio of high yield securities in the MD&A section of its first quarter 2001 Form 10-Q. After describing the actual losses previously recorded, AMEX predicted that losses would continue during the remainder of the year but that total losses were expected to decline over that period.
Unfortunately at the time that the statement was made, an internal analysis had been prepared and circulated among executives predicting that future losses on the portfolio would not decline, but would instead increase substantially. The plaintiff thus alleged that AMEX’s meaningful cautionary statement was false and misleading and therefore outside the safe harbor.
The Second Circuit Court of Appeals asked the SEC to comment on whether, in light of the internal report, AMEX’s cautionary statement that erroneously predicted a decline in future losses was meaningful and therefore adequate under PSLRA.
The SEC noted that what suffices as a meaningful cautionary statement depends on the facts and circumstances of each case, specifically the cautionary language and the specific forward-looking statement it is meant to address.
The SEC took the position that AMEX’s cautionary statement warning of potential deterioration in the portfolio but predicting a decline in total losses was not meaningful, because at the time that statement was made AMEX’s executive officers were aware that a future decline in total losses was an unrealistic expectation. The SEC advised that it was misleading, and therefore insufficient, for a company to warn of one potentiality when aware that a different reality could actually occur.
As the SEC put it, the safe harbor offers no protection to someone who warns his hiking companion to walk slowly because there might be a ditch ahead when he knows the Grand Canyon lies one foot away. As explained by an SEC official in an appearance at a public conference, “in the forward-looking statement, if you are not telling us the factors that are keeping you and your CFO awake at night, then you are not including the material factors here.”
The SEC brief offers a helpful reminder. To be meaningful and thus provide the protections of the safe harbor, a cautionary statement must disclose any specific facts of which executive officers are aware that could cause actual results to differ materially from those predicted in the forward-looking statement to which it relates.
To ensure your forward-looking statements are protected by the safe harbor, we urge you to pay careful attention to whether your cautionary statements take into account known material facts that could affect the results predicted and are therefore meaningful in accordance with the SEC’s guidance in the AMEX brief.
For More Information
For more information on this topic, please contact Marc Salle at
(816) 360-4137 or msalle@polsinelli.com. |
