The "Safe Harbor" section of the Private Securities Litigation Reform Act of 1995 provides that most "forward-looking statements" by corporations will be immune from liability when accompanied by "meaningful cautionary statements" or made without "actual knowledge" of falsity. (See the accompanying article Securities Litigation: The Mechanics of the "Safe Harbor.") Congress hoped to "provide certainty that forward-looking statements will not be actionable by private parties under certain circumstances," and to thus "enhance market efficiency by encouraging companies to disclose forward-looking information." H.R. Conf. Rep. No. 104-369, 104th Cong., 1st Sess., 43-44 (1995).
However, as the SEC observed, after the Act's passage corporations did not utilize the Safe Harbor to increase the quality and amount of their forward-looking disclosures. One of the explanations for this was the lack of judicial guidance on the Harbor's application. See SEC Report to the President and Congress on the First Year of Practice Under the PSLRA of 1995 (Apr. 1997). (The other explanation--the continuing fear of liability under state law--is currently the subject of proposed legislation in Congress that would preempt state law class actions alleging misrepresentations or omissions affecting nationally-traded securities.)
Now, lower courts are finally beginning to give guidance on how the Safe Harbor functions--and the initial trend appears to favor corporate defendants (and common sense), as we here report.
In analyst conference calls, cautionary statements need be made only once. Judge Ronald Whyte of the Northern District of California recently ruled that any cautionary statement made during an oral conference call, regardless of when it was made during the call, "accompanies" every "particular" forward-looking statement also made during the conversation. Wenger v. Lumisys, Inc., ___ F.Supp. ___, 1998 WL 199082 (N.D.Cal. Mar. 31, 1998). Plaintiffs argued that the Act's language required every forward-looking statement to be immediately followed by an accompanying cautionary statement. Judge Whyte rejected this, reasoning that "the unwieldy practice advocated by plaintiff appears contrary to the way in which public companies currently deliver oral forward-looking information, and contrary to the way in which people communicate," and would lead to "absurd or futile results at variance with policy or legislation as a whole."
The Wenger opinion is available online at: http://securities.stanford.edu/decisions/lumisys/97cv20609/065.html
At the outset of the case, the court can supplement plaintiff's allegations with the actual transcript of the conference call. Before the Reform Act, procedural court rules often forced judges to permit document discovery to go forward based solely on plaintiffs' selective paraphrases of what executives said in analyst conference calls. Only after months of expensive discovery would the court learn that plaintiffs' characterizations were inaccurate. In another significant holding, Judge Whyte held in the Wenger case that the Safe Harbor provisions fix this procedural flaw. When plaintiffs allege that officers made a misleading forward-looking statement during a conference call, the court may now immediately review the transcript to see the disputed statement's actual words and whether it was accompanied by meaningful cautionary statements. Caution: an earlier decision from the same court held to the contrary. In re Silicon Graphics, Inc. Securities Litigation, 1996 WL 664639, at *13-14 (N.D.Cal. Sep. 25, 1996).
Press releases can incorporate warnings in SEC filings. The Southern District of Florida has now ruled that a cautionary statement in a corporation's SEC filing "accompanies" a forward-looking statement in the company's press release--at least so long as the press release refers the reader to the SEC filing. Harris v. Ivax Corp, ___ F.Supp. ___, 1998 WL 159195 (S.D.Fla. Mar. 30, 1998). Citing the Act's Conference Report, the court concluded that Congress intended that "meaningful cautionary language could incorporate by reference information contained in documents filed with the SEC."
The Harris opinion is available online at: http://securities.stanford.edu/decisions/ivax/97cv00559/980330.html
Omitting a material risk factor does not automatically render a cautionary statement meaningless. The Harris opinion also gave the first ruling on a question securities litigators have hotly debated since the Act's passage: Can a cautionary statement be "meaningful" if it omits a risk that later eventuates? Yes, ruled Harris.
"The Court will not, looking in hindsight, hold the Defendants to the impossible burden of having to warn of every factor that ultimately causes the forward-looking statement not to come true. Such an approach was not the intent of Congress and would effectively eviscerate the safe harbor. It is sufficient that the cautionary statements identify meaningful and important factors that could affect future performance."
Caution: Courts may be less willing to rule that a conscious omission of a known risk is protected by the Act.
Statements of existing fact may be "forward-looking" in some circumstances. Two lower court decisions have now broadly construed the Act's definition of a "forward-looking statement," ruling that statements of existing or historical facts may nonetheless be forward-looking when the speaker relates them to future events. In Hockey v. Medhekar,1997 WL 203704 (N.D.Cal. Apr. 15, 1997), Judge Marilyn Patel of the Northern District of California held that "historical statements, dealing with [the company's] revenue results and product demand during the most recent quarter, relate to the unquestionably forward-looking statements that product demand and revenue are expected to grow in future quarters." She likewise held that "statements dealing with past or present facts, such as robust product demand, a shifting in product mix, and a transition from 256K SRAMS to 1 Mbit devices" were forward-looking because in the context they were "assumptions underlying or relating to" the company's accompanying projections of future performance. Similarly, the Harris opinion held that the statement "We believe that the challenges unique to this period in our history are now behind us" was forward-looking despite its grammar, because it was made mid-quarter. "Until the numbers were crunched at the end of the quarter, [such statements] were nothing more than projections intended to advise the market of anticipated third quarter financial results."
The Hockey opinion is available online at: http://securities.stanford.edu/decisions/alliance/96cv00815/064.html
Caution: From a drafter's viewpoint, it remains the wise course to assume that statements of historical fact will not be protected by the Safe Harbor. Whenever possible, use the future tense in statements you wish to anchor in the Safe harbor.
Conclusion. Wenger, Harris and Hockey are encouraging signs that the federal judiciary understands that the Congressional intent behind the Safe Harbor was to encourage companies to make forward-looking statements by simplifying the rules governing liability for such statements. Each of these courts rejected plaintiffs' lawyers' attempts to read the Act as instead prescribing a new series of intricate legal rituals that corporations must perform exactly or face liability. For now, common sense is prevailing in the lower courts, and the Safe Harbor may yet realize its promise. Whether this initial trend will continue into the appellate courts remains to be seen.