Wednesday, January 31, 2018

High Court asked to weigh in on mixed statement mix-up

By Rodney F. Tonkovic, J.D.

A petition for certiorari has been filed asking the Supreme Court to resolve a circuit split over how to interpret the PSLRA safe harbor provision for forward-looking statements. At issue is whether a defendant must admit that non-forward-looking statements made as part of "mixed statements" are false in order to have safe harbor protection for the accompanying forward-looking statements? In this case, the Ninth Circuit held that if the non-forward-looking statement is alleged to be false, the forward-looking statement is not protected by the safe harbor unless the cautionary language admits that the non-forward-looking statement is false. This requirement, the petition says, establishes "a new extreme among those circuits that have chipped away at the PSLRA’s safe harbor" (Quality Systems, Inc. v. City of Miami Fire Fighters' and Police Officers' Retirement Trust, January 26, 2018).

Dismissal and reversal. The complaint alleged that software company Quality Systems, Inc. had real-time sales information that contradicted its public statements denying any decline. The district court dismissed the case, concluding that the challenged statements were either protected forward-looking statements or, in the case of the non-forward-looking statements, non-actionable puffery. A Ninth Circuit panel disagreed, however, finding that some of the statements were "mixed" and contained non-forward-looking statements that were materially false or misleading. The decision was reversed and remanded.

According to the appellate court, some of the statements at issue were "mixed statements" that contained both forward-looking statements of projected revenue and earnings and non-forward-looking statements. This issue had not yet been addressed in the Ninth Circuit, but the panel agreed with other circuits which have concluded that non-forward-looking statements are not protected under the PSLRA safe harbor where defendants make mixed statements containing non-forward-looking statements as well as forward-looking statements. Here, many of the non-forward-looking statements were materially false and misleading, and, short of an outright admission of falsehood, any cautionary language accompanying the forward-looking part of a mixed statement was insufficient to correct these misrepresentations, the panel said.

Mixed statements. The petition asks whether or in what circumstances a defendant must admit that non-forward-looking statements are false or misleading, in order to be protected by the PSLRA safe harbor for forward-looking statements. The petition notes that most courts confine their analysis to the factors identified by the company in the actual cautionary language accompanying the forward-looking projections. Other courts look beyond the cautionary language and consider whether the company failed to mention unstated risks that it faced when the forward-looking statement was made. In this case, the petition maintains, the Ninth Circuit took the latter approach to a new extreme, holding that the PSLRA "meaningful cautionary language" requirement is not satisfied when a forward-looking statement is accompanied by an allegedly false non-forward-looking statement unless the company admits the falsity of the non-forward-looking statement. This conclusion was reached even though held that the cautionary language was meaningful and would have triggered the safe harbor, if considered without reference to the false non-forward-looking statements.

The Ninth Circuit's rule, the petition asserts, is "a stark outlier" from the tests applied by other circuits and, moreover, is simply "wrong." According to the petition, the PSLRA does not require that all important factors be identified, and it does not require that companies make an outright admission of the falsity of any non-forward-looking statements. The petition argues further that the Third, Sixth, Eighth, and Eleventh Circuits have held that courts should examine only the cautionary language accompanying the forward-looking statement. The Seventh and D.C. Circuits, on the other hand, also look at whether the cautionary language is misleading by omission. The Ninth Circuit takes the latter approach to a new extreme, the petition argues, by imposing an affirmative requirement to admit falsity.

Additionally, the Ninth Circuit's position is at odds with the text, structure, and history of the PSLRA. The petition contends that the court imposed a categorical requirement requiring cautionary statements to warn against risks associated with non-forward-looking statements that is not in the statutory text. False or misleading non-forward-looking statements are independently actionable, the petition continues, but should not be a basis for denying safe harbor protection to forward-looking statements.

If allowed to stand, the Ninth Circuit's rule will effectively nullify the PSLRA safe harbor, broaden the scope of liability in securities cases, and cause companies to stop providing meaningful forecasts and projections. For "obvious reasons," the petitioner remarks, no company will include an affirmative admission of falsity in its cautionary language. There are currently at least three different approaches to the PSLRA safe harbor, the petition says, and the Ninth Circuit's rule serves only to exacerbate the confusion and invite forum shopping.

The petition is No. 17-1056.

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