Securities Litigation: The Mechanics of the "Safe Harbor"

The Safe Harbor provisions of the Securities Litigation Reform Act afford substantial protection for: (i) "forward-looking statements"; that are (ii) made by a person eligible for safe harbor protection; are (iii) identified and accompanied by certain information; and (iv) do not pertain to a matter excluded by the Act. This outline summarizes the structure and mechanics of the statute's actual text. For a discussion of recent judicial interpretations of the Safe Harbor, see the accompanying article Securities Litigation: Lower Courts Begin to Open the Safe Harbor.

I. A "FORWARD-LOOKING STATEMENT"

The Act defines a "forward-looking statement" as:

  1. a statement containing a projection of revenues, income, earnings per share, capital expenditures, dividends, capital structure, or "other financial items"; or
  2. a statement of "the plans and objectives of management for future operations"; or
  3. a statement of "future economic performance," or
  4. a statement of the assumptions "underlying or relating to" any of the above statements.

The Act also empowers the SEC to expand the definition.

II. MADE BY A PERSON ELIGIBLE FOR PROTECTION

Caveat: If a statement is oral, it is only protectible if made by an issuer or its officer, director or employee.

  1. Issuer Statements
  1. statements made by an issuer subject to the reporting requirements of section 13(a) or 15(d) of the '34 Act; and
  2. statements made by an "officer, director or employee" of such an issuer.

Note that employee/director statements create no liability unless plaintiff proves the statement was "approved" by an "executive officer" with knowledge of the statement's falsity

  1. "Outside Reviewer" Statements
  1. Act does not define "outside reviewer"
  2. "Outside reviewer" must be "retained by" the issuer and issue the statement on "behalf" of the issuer
  3. The statement must appear in a "report" issued by the reviewer and assess "a forward-looking statement made by the issuer"
  1. Underwriter Statements

The statement must pertain to "information provided by the issuer" or "derived from" such information. The Conference Committee explains that "the term 'derived from' affords underwriters some latitude so that they may disclose adverse information that the issuer did not necessarily provide." H.R. Conf. Rep. No. 104-369, 104th Cong., 1st Sess., 45 (1995). The protection should not extend to statements made by the underwriters' brokers during sales calls. Id.

  1. Other Persons

Other persons (such as shareholders and analysts) are not eligible for Safe Harbor protection.

III. THE STATEMENT MUST BE IDENTIFIED AND ACCOMPANIED BY CERTAIN INFORMATION

A statement falling within the definition of "forward-looking statement" will not receive protection unless accompanied by information specified by the statute. The required accompaniments vary depending on whether the statement is written or oral.

Caveat: Only issuers and their officers, directors and employees may receive Safe Harbor protection for oral statements.

  1. Written statements
  1. Must be "identified as a forward-looking statement"; and
  2. accompanied by "meaningful cautionary statements" listing "important factors"
  1. Oral statements (Issuers only)
  1. the "particular oral statement" must be orally identified as forward-looking; and
  2. must be coupled with an oral warning that actual results could differ materially from those projected; and
  3. must direct the listener to additional written warnings by:
  1. informing the listener that additional information exists concerning factors that could cause material variation; and
  2. identifying a "readily available" document (or its portion) containing pertinent "meaningful cautionary statements" and "important factors"

Any document filed with the SEC or "generally disseminated" is automatically deemed "readily available."

IV. CERTAIN MATTERS ARE EXCLUDED FROM THE ACT'S PROTECTION

Even if a statement is forward-looking, accompanied by the proper litany of warnings, and made by a person generally eligible for Safe Harbor protection, the protection will not apply to certain statements:

  1. Statements "included in" certain documents:
  1. a "financial statement" prepared in accordance with GAAP;
  2. a registration statement of or issued by an investment company
  3. disclosures of beneficial ownership in reports filed pursuant to section 13(d) of the '34 Act
  1. Statements "made in connection with" certain transactions:
  1. an IPO
  2. a tender offer
  3. a going private transaction
  4. a rollup transaction
  5. an offering by a blank check company
  1. Statements made with respect to an issuer who is:
  1. criminally convicted or subject to an SEC decree;

Specifically, an issuer who, during the three years preceding the statement:

  1. was convicted of a crime under the '34 Act; or
  2. was made the subject of a judicial or administrative order that enjoins future fraud violations or determines the issuer committed a fraud violation
  1. a partnership;
  2. a limited liability company;
  3. a direct participation investment program;
  4. an issuer of penny stock

The Act, however, authorizes the SEC to grant waivers of the above exclusions on a case-by-case basis.

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