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New Guidance for Protecting Forward-Looking Statements

June 10, 2010

On May 18, 2010, the United States Court of Appeals for the Second Circuit shed light on how public companies may protect forward-looking statements under the safe-harbor provisions of the Private Securities Litigation Reform Act (PSLRA). In Slayton v. American Express Company, the court provides public companies with practical guidance on how to better insulate their forward-looking statements against liability.

The Slayton case is significant because it provides a substantive judicial review of the elements of the safe-harbor provision holding that, with respect to the meaningful cautionary statement prong, blanket or “boilerplate” warnings will not suffice—the statements must be tailored to the specific risks involved. With regard to the actual knowledge prong of the safe harbor, the court held that a plaintiff has the burden of overcoming the heightened pleading standard that requires a strong inference of scienter.

Private Securities Litigation Reform Act

The Securities Exchange Act of 1934 was amended by the PSLRA in 1995 to establish a safe harbor for forward-looking statements. In enacting the PSLRA, Congress sought to encourage companies to make forward-looking statements concerning, for example, projections of revenues, plans and objectives for future products and services, and future economic performance. Congress did not want corporate officers to be inhibited “from fully explaining their outlooks.” Under the safe-harbor provisions, a person “shall not be liable with respect to any forward-looking statement” if:

  1. The forward-looking statement is identified and “accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement”; or
  2. The forward-looking statement is immaterial; or
  3. The plaintiff fails to prove that the statement was made with actual knowledge that it was false or misleading.

A critical question in securing the protections of the safe harbor is whether there is meaningful cautionary language accompanying the forward-looking statements. If there is, then the PSLRA provides protection from liability. If there is not, then the speaker may be liable, but only upon proof of materiality and knowing falsity.

Slayton v. American Express Company

In Slayton, the plaintiffs, who were shareholders of American Express Company (Amex), brought suit against Amex and its executive officers, alleging that they violated the Securities Exchange Act of 1934 when they made an allegedly misleading statement with the knowledge that the statement was false. The alleged misleading statement was made by Amex in its 2001 first-quarter report, regarding potential losses from its high-yield debt portfolio. The quarterly report stated that, although Amex had incurred losses of $182 million in the first quarter from its highyield debt securities, “[t]otal losses on these investments for the remainder of 2001 are expected to be substantially lower than in the first quarter.” This statement was accompanied by subsequent statements warning that the report “contain[ed] forward-looking statements, which are subject to risks and uncertainties.” It added that “[f]actors that could cause actual results to differ materially from these forward-looking statements include . . . potential deterioration in the high-yield sector, which could result in further losses in AEFA’s investment portfolio.”

Following an internal investigation of its high-yield debt portfolio, and contrary to the prediction in its earlier report, Amex subsequently announced an estimated $826 million loss due to additional losses in its high-yield debt portfolio. The plaintiffs argued that the statement regarding the expectation of substantially lower losses was not protected by the safe harbor of the PSLRA because the cautionary language was not meaningful. Moreover, the plaintiffs alleged that, according to a Wall Street Journal article, Amex was aware of the rising defaults on the underlying bonds at the time it stated its expectation of substantially lower losses, making that statement knowingly false and not protected by the safe harbor.

The Second Circuit rejected Amex’s defense that the forward-looking statements were accompanied by meaningful cautionary language within the safe harbor. Nevertheless, the court, while calling it a “close case,” affirmed the lower court’s dismissal of the action, concluding that plaintiffs had failed to adequately plead facts demonstrating knowing falsity.

Meaningful Cautionary Statements. The Second Circuit held that meaningful cautionary statements must be “substantive and tailored to specific risks.” In other words, they cannot be a vague or “boilerplate litany of generally applicable risk factors.” More important, the court noted that cautionary statements must reflect new information that has been received over time. In Slayton, Amex used the same cautionary information in its January 2001 and May 2001 quarterly reports, despite the $182 million loss disclosed in the May 2001 report and the changing factors in the relevant market. According to the court, the “consistency of the defendants’ language over time despite the new information they received in early May 2001 belies any contention that the cautionary language was ‘tailored to the specific future projection’” because the “cautionary language remained the same even while the problem changed.” Accordingly, the court concluded that Amex “failed to demonstrate that the May 15 statement is protected by the cautionary meaningful language prong of the statutory safe harbor.”

Actual Knowledge. The court next addressed the actual knowledge prong of the safe harbor. In discussing this prong, the court applied the heightened pleading standard set forth in 2007 by the U.S. Supreme Court in Tellabs, Inc. v. Makor Issues & Rights, Ltd. According to the court, because the safe harbor specifies an “actual knowledge” standard for forward-looking statements, scienter—i.e., the defendant’s intention “to deceive, manipulate, or defraud—attaches only upon proof of knowing falsity. The court stated that in order to find liability, it must determine whether a reasonable person would find, based on the alleged facts, whether Amex “(1) did not genuinely believe the May 15 statement, (2) actually knew that they had no reasonable basis for making the statement, or (3) were aware of undisclosed facts tending to seriously undermine the accuracy of the statement, ‘cogent and at least as compelling as any opposing inference.’”

The court held that the fact that the $826 million loss reported in July was significantly higher than the $182 million loss did not necessarily mean that Amex knew that the losses would be significantly higher. Furthermore, the court held that the required “strong inference of scienter” was weakened by the fact that Amex ordered an investigation as soon as it became aware that potential future losses were suspected. Ultimately, the court decided that the plaintiffs did not satisfy the heightened pleading standard for forward-looking statements under the safe harbor of the PSLRA, because “[t]he plaintiffs have not pleaded any facts supporting a motive to deceive.” According to the court, in the absence of facts supporting a motive to deceive, the circumstantial evidence of actual knowledge must be correspondingly greater. In Slayton, the court held that the plaintiffs’ circumstantial evidence of actual knowledge was inadequate.

Action Items

  1. Review the current version of a company’s forward-looking statements and compare it to recent previous versions of the language for unduly repetitious phrases, general risks and boilerplate warnings.
  2. The Slayton decision emphasizes that risk-factor language must be specific and relevant if it is to be considered “meaningful cautionary language” that conveys the protection of the PSLRA safe harbor. Consider whether the company’s “meaningful cautionary language” (i) conveys substantive information about factors that realistically could cause results to differ materially from those projected in the forward-looking statements, (ii) consists of statements that are tailored to the specific risks associated with the statement or specific issue, and (iii) reflects any new information.
  3. Treat each press release or report as an opportunity for a fresh review of the “important factors that could cause actual results to differ materially from those in the forward-looking statement.” Ensure that any material changes in underlying facts are properly reflected in the risk factors and other cautionary language.

For more information, please contact Abimbola Obisesan at 313-568-5333, Bob Murphy at 202-906-8721, Rick McDonald at 248-203-0859, or Mark Metz at 313-568-5434. You may also contact any other member of Dykema's Corporate Finance Practice Group.


As part of our service to you, we regularly compile short reports on new and interesting developments and the issues the developments raise. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments are always welcome. © 2010 Dykema Gossett PLLC. 

As part of our service to you, we regularly compile short reports on new and interesting developments and the issues the developments raise. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments are always welcome. © 2017 Dykema Gossett PLLC.