11/01/1999
Quartet of Victories Proves The Value of "Safe Harbor" Warnings in Forward-Looking Statements
Introduction
From time to time, our public company clients ask us whether they really need to give Safe Harbor warnings for forward-looking statements, as envisioned by the Private Securities Litigation Reform Act of 1995. They are, understandably, concerned that these awkward-sounding warnings are distracting at best, annoying at worst, and in any event a dead giveaway that their communications with investors are being "over lawyered." These concerns are particularly evident when it comes to communications between company officers and securities analysts.
Recently, members of Cooley's Securities Litigation Practice Group have obtained four major court victories in class actions brought against our clients. In two of these cases, the court based its decision on the fact that the company had appropriately warned investors that their forward-looking statements could turn out to be incorrect. As a result, the courts reasoned, the companies could not be liable for fraud.
Results like these leave no doubt that when properly crafted and invoked, these Safe Harbor warnings provide invaluable protection. Our practical experience also suggests that as investors and analysts have become used to these kinds of statements, they are less and less likely to be distracted by them. If anything, they are gratified that the company is taking the right steps to protect itself from unwarranted litigation.
Background
Before the passage of the Reform Act, companies routinely found themselves targets of class actions when their earnings projections went awry, even when there was nothing to indicate that the original statements had been made with intent to deceive investors. These kinds of "strike suits" were inconsistent with the intent of the securities laws to protect investors from deliberate fraud. The Reform Act was designed to eliminate some of these abuses, and one of its key provisions is a "Safe Harbor" for certain kinds of forward-looking statements. In the case of written statements, such as SEC filings, companies are not be liable if they warn investors that the actual outcome could be different, and if they provide a reasonably specific description of the reasons such a difference could occur. In the case of oral statements, companies can avoid liability by warning of the possible difference and referring the listener to written documents that contain a more detailed discussion of risk factors.
The Safe Harbor allows companies whose predictions simply turn out to be wrong to invoke its protection and win a quick dismissal. As a result, it has become routine for companies to warn their audiences that, like the mileage their cars get in highway driving, "actual results may vary."
The Four Cases
Madruga v. PacifiCare Health Systems, Inc.
Last month, Cooley successfully obtained dismissal of a major securities class action brought against our client PacifiCare. One of the main parts of the court's ruling was that PacifiCare had given meaningful cautionary statements at the beginning of analyst conference calls and investor conferences and was therefore immune from liability for earnings projections made during those conference calls that did not come to pass. The judge listened to the tapes of the conference calls to verify that these warnings were really given. When the judge was satisfied that the warnings were given, and that they were meaningfully tailored to PacifiCare's business and not just boilerplate, he dismissed the case under the Reform Act.
Wenger v. Lumisys, Inc.
This is the first case to apply the Reform Act's Safe Harbor to oral forward-looking statements. The court held that earnings projections made during an analyst conference call were not actionable because Lumisys gave the Safe Harbor warning at the beginning of the call. Cooley's securities litigators successfully argued that a single warning made at the outset of a conference call is sufficient to immunize all of the forward-looking statements made during the course of that call. Many courts have since adopted this rule, including the court in Madruga v. PacifiCare.
Brady v. PacifiCare Health Systems, Inc.
Cooley successfully moved to dismiss all claims against PacifiCare arising out a $4 billion merger agreement. Rather than state specific facts creating a strong inference that the defendants had committed a fraud, as the Reform Act requires, the plaintiffs stated that their complaint was based on the investigation of their attorneys, and that they believed that if they were given an opportunity to conduct discovery, they would find facts to support their claims. The court held that this kind of "sue first and hope to find support later" approach was not permitted under the Reform Act, and that the complaint utterly failed to set forth any specific facts supporting the plaintiffs' claim that PacifiCare or its officers and directors had made any false statements in connection with the merger.
In re PETsMART, Inc. Securities Litigation
The court dismissed this securities fraud complaint filed against PETsMART and several of its officers. The plaintiffs alleged that PETSMART committed accounting fraud, made false earnings projections, and failed to warn investors of potentially adverse market developments. Cooley's securities litigators brought an aggressive motion to dismiss, highlighting the total absence of detail supporting the claims. Following Cooley's suggested approach, the Court examined the complaint in depth, found that it did not meet the standards established by the Reform Act and dismissed the entire case.