(Article from Securities Law Alert, August 2017)
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On July 28, 2017, the Ninth Circuit held that “a defendant may not transform non-forward-looking statements into forward-looking statements that are protected by the safe harbor provisions of the” Private Securities Litigation Reform Act (“PSLRA”) “by combining non-forward-looking statements about past or current facts with forward-looking statements about projected revenues and earnings.” In re Quality Sys. Sec. Litig., 2017 WL 3203558 (9th Cir. 2017) (Fletcher, J.).
If a Statement of Current Facts Includes Predictions or Projections, the PSLRA’s Safe Harbor Only Applies to the Forward-Looking Aspects of That Statement
The PSLRA’s safe harbor provides that “a defendant will not be liable for a false or misleading statement if it is forward-looking and either is accompanied by cautionary language or is made without actual knowledge that it is false or misleading.”[1]
The Ninth Circuit explained that it has “not previously addressed . . . the status of mixed statements under the PSLRA.” However, the court noted that “[t]he First, Second, Third, Fifth, and Seventh Circuits have all concluded that where defendants make mixed statements containing non-forward-looking statements as well as forward-looking statements, the non-forward-looking statements are not protected by the safe harbor of the PSLRA.”
The Ninth Circuit stated that it “agree[d] with these circuits.” The court explained that “[t]he mere fact that a statement contains some reference to a projection of future events cannot sensibly bring the statement within the safe harbor if the allegation of falsehood relates to non-forward-looking aspects of the statement.” Id. (quoting In re Stone & Webster Sec. Litig., 414 F.3d 187 (1st Cir. 2005)).
The Ninth Circuit found the First Circuit’s decision in Stone & Webster offered a “useful example of an unprotected false or misleading non-forward-looking statement embedded in a mixed statement.” The First Circuit considered the applicability of the PSLRA’s safe harbor to representations that the company “has on hand and has access to sufficient sources of funds to meet its anticipated operating, dividend and capital expenditure needs.” The court found “the alleged falsehood” was “not that the [c]ompany was understating its future cash needs,” but rather, “in the fact that the statement claimed that the [c]ompany had access to ample cash at a time when the [c]ompany was suffering a dire cash shortage.” Stone & Webster, 414 F.3d 187. The First Circuit held “the safe harbor of the PSLRA does not confer a carte blanche to lie in such representations of current fact.”
Cautionary Language for a “Mixed Statement” Must Specifically Address the Possibility That the Non-Forward-Looking Portion of the Statement May Be False
The Ninth Circuit determined that in order “[f]or cautionary language accompanying a forward-looking portion of a mixed statement to be adequate under the PSLRA, that language must accurately convey appropriate, meaningful information about not only the forward-looking statement but also the non-forward-looking statement.” The court found that “[w]here . . . forward-looking statements are accompanied by non-forward-looking statements,” the possibility “that the non-forward-looking statements are, or may be, untrue is clearly an ‘important factor’ of which investors should be made aware.”
The Ninth Circuit underscored that “[i]f the non-forward-looking statement is materially false or misleading, it is likely that no cautionary language—short of an outright admission of the false or misleading nature of the non-forward-looking statement—would be ‘sufficiently meaningful’ to qualify the statement for the safe harbor.”
[1] The Ninth Circuit noted that this issue arose in Police Retirement System of St. Louis v. Intuitive Surgical, 759 F.3d 1051 (9th Cir. 2014). However, the Intuitive Surgical court did not reach the question of the applicability of the PSLRA’s safe harbor to “mixed statements” because the court found the statements at issue were forward-looking when “examined as a whole.”