(Article from Securities Law Alert, August/September 2019)
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On August 15, 2019, the Eleventh Circuit affirmed the dismissal of a securities fraud action alleging that a financial services company made material misstatements concerning its prospects for achieving regulatory compliance. Carvelli v. Ocwen Fin. Corp., 2019 WL 3819305 (11th Cir. 2019) (Newsom, C.J.). The court found that some of the alleged misstatements “are immaterial puffery, some are mere statements of opinion, some fall within the [Private Securities Litigation Reform Act’s (“PSLRA”)] safe harbor for forward-looking statements, and still others are simply not alleged to be false.” The court’s ruling marks the first published Eleventh Circuit decision applying the puffery defense in the securities fraud context.
Excessively Vague and Optimistic Corporate Statements Are Typically Immaterial as a Matter of Law
The Eleventh Circuit noted that although it has “accepted the puffery defense in the common-law context,” the court had “yet to apply it in a reported securities-fraud case.” The court found that “the defense seems a particularly good fit in the securities context” because Rule 10b-5 prohibits only “untrue statements of a material fact, with ‘material’ defined to mean something that a reasonable investor would view as having significantly altered the total mix of information made available.” The court explained that “[e]xcessively vague, generalized, and optimistic comments—the sorts of statements that constitute puffery—aren’t those that a ‘reasonable investor,’ exercising due care, would view as moving the investment decision needle—that is, they’re not material.”
The court cautioned that “[a] conclusion that a statement constitutes puffery doesn’t absolve the reviewing court of the duty to consider the possibility—however remote—that in context and in light of the ‘total mix’ of available information, a reasonable investor might nonetheless attach importance to the statement.” The court instructed that “when considering a motion to dismiss a securities-fraud action, a court shouldn’t grant unless the alleged misrepresentations—puffery or otherwise—are so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance.”
The court found that many of the compliance-related statements at issue—such as assertions that the company “was taking a ‘leading role’ and making ‘progress’ toward compliance”—were “quintessential puffery” and “immaterial as a matter of law.” The court rejected plaintiffs’ contention that the statements “can’t be nonactionable puffery because [the company] did not genuinely or reasonably believe them.” The court explained that “[w]hether a statement was made in bad faith or without a reasonable basis is irrelevant to the question [of] whether the statement is nonetheless so airy as to be insignificant.”
A Statement Concerning Future Plans Is Not Ineligible for Safe Harbor Protection Merely Because It Includes Implicit Statements Concerning Present Facts
The court found the company’s forward-looking statements were entitled to safe harbor protection even though they included “statements about the [c]ompany’s present condition and intentions.” The court explained that “a present-tense declaration is, in some cases, an inextricable part, rather than an easily severed ancillary, of a forward-looking statement.” For instance, the statement that the company “would ‘continue to provide strong servicing results’ . . . impl[ies] both that servicing results are currently strong and that [the company] commits to provide strong results in the future.” The court found “[t]hese types of statements, when accompanied by meaningful cautionary language, are properly sheltered under the safe-harbor because they convey management plans for yet-to-be proven future operations and goals.”
The court reasoned that “[i]t would be illogical to bar forward-looking statements from protection simply because they implicitly communicate information about the present—indeed, many plans and projections are conveyed in just this way.” The court noted, for example, that the statement, “‘I’ll leave my desk in 5 minutes,” includes an implicit statement that the speaker is “presently at work.” The court found statements of this nature “are intended, first and foremost, to communicate a future plan.”
The court clarified that its decision did not stand for the proposition “that false misrepresentations of present fact can be ‘smuggled’ in under the cover of forward-looking statements.” But the court did specifically hold that “when a forward-looking statement is of the sort that, by its nature, rolls in present circumstances—that is, when a statement forecasts in a tentative way a future state of affairs in which a present commitment unfolds into action—the statement isn’t barred from safe harbor protection solely on that ground.”
A Statement of Opinion Is Not Actionable Simply Because the Speaker “Should Have Known” the Opinion Was Objectively Inaccurate
The court also deemed inactionable a number of the company’s statements of opinion. The court found plaintiffs failed to allege either that the company did not actually believe these statements of opinion, or that the statements “contained embedded false statements of fact,” as required under the Supreme Court’s decision in Omnicare v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015).[1] The court found the company’s optimistic statements concerning its compliance efforts were not “mutually exclusive of—or even inconsistent with—[the company’s] alleged knowledge that it had persistent software problems” that hampered its compliance attempts. The court reasoned that the company “could have believed both that [its software] was a mess—even a ‘train wreck’—and that it had made progress towards compliance.” The court found plaintiffs’ allegations might “[a]t best . . . giv[e] rise to an inference that [the company] perhaps could or should have known that it would have difficulty improving results.” But the court underscored that this is “not enough” to state a securities fraud claim based on a statement of opinion.
[1] Please click here to read our discussion of the Supreme Court’s decision in Omnicare.