MEANINGFUL CAUTIONARY LANGUAGE UNDER THE PSLRA
A critical question in making forward looking statements is whether there is meaningful cautionary language. If there is, then the PSLRA provides a safe harbor from liability. If there is not, the speaker may be liable, but only upon proof of knowing falsity. A critical question then is what constitutes meaningful cautionary language under the PSLRA. In Slayton v. American Express Co., Case No. 08-5442-cv (2nd Cir. Decided May 18, 2010), the Second Circuit rejected defendants’ claim that their forward looking statements came within the safe harbor because the cautionary language was boilerplate. Nevertheless, the Court affirmed the dismissal of the action, concluding that plaintiffs had failed to adequately plead facts demonstrating knowing falsity.
The action is based on a statement made by American Express in its May 2001 10-Q regarding its portfolio of high-yield debts investments in the MD&A section of the filing. There, the company reported a loss of $182 million from those investments. It went on to state that the company expected substantially lower losses for the remainder of 2001. Plaintiffs claim that this statement is false. According to the second amended complaint, at the time of the quarterly filing, the company knew that the $182 million first quarter write down did not reflect the true magnitude of the deterioration of the portfolio. In fact, when the 10-Q was filed, senior management was investigating the question and later reported substantially larger losses totaling over $800 million.
The Form 10-Q also contained cautionary language which appeared several pages after the allegedly false statement. There, the report warned that it “contain[ed] forward-looking statements, which are subject to risks and uncertainties.” It also stated 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 . . .”
First, the court concluded that the statement challenged by plaintiffs was clear a forward looking statement. The PSLRA has several definitions of forward looking statement. One provides that “a statement containing a projection of . . . income . . . or other financial items . . .” is a forward looking statement. Although projections included in financial statements are excluded from the safe harbor, here the statement was in the MD&A section of the 10-Q, not in the financial statements.
Second, the critical question is whether the projection is accompanied by meaningful cautionary language. The PSLRA only provides a safe harbor from liability if the statement is “identified as a forward-looking statement, and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward looking statement . . .” 15 U.S.C. § 78u-5(c)(1)(A)(i).
In this case, the Court concluded that the cautionary language was not sufficient. Nothing in the statute requires that the forward looking statement be contained in a separate section. Equally clear is the fact that cautionary language which is misleading in light of historical fact cannot be meaningful within the meaning of the statute. The difficulty in this case, the Court noted, is that the defendants knew of specific risks about the portfolio, but did not warn of them. At the same time however, Congress foreclosed any inquiry into a defendants’ state of mind in applying the safe harbor provision. This creates a difficult tension in applying the statute.
The Court resolved this problem by focusing on a provision in the Conference Report to the PSLRA which warns that the cautionary language may not be boilerplate. Rather, the warnings should be extensive and specific.
Here, the warning was boilerplate. The same cautionary language appeared in several other filings both before and after the one at issue here. The consistency of the language demonstrates it was not tailored to the specific situation. Clearly such language is not meaningful as required by the PSLRA. Accordingly, defendants could not rely on the safe harbor.
Nevertheless, plaintiffs’ complaint failed because it did not adequately plead facts demonstrating knowing falsity. In this case, the totality of the circumstances demonstrates that while there is an inference of scienter, the contrary inference is at least as strong. In addition, the fact that there was no motive to falsify the facts supports the conclusion that the complaint fails to adequately plead actual knowledge. Accordingly, the decision of the district court dismissing the complaint was affirmed.