The PSLRA created a safe harbor for forward-looking statements to encourage companies to provide investors with information about future plans and prospects. Under the first prong of the safe harbor, a defendant is not liable with respect to any forward-looking statement if it is identified as forward-looking and is accompanied by “meaningful cautionary statements” that alert investors to the factors that could cause actual results to differ.
Some commentators have described this provision as a “license to lie,” because it arguably protects companies from liability based on even deliberately false forward-looking statements. The U.S. Court of Appeals for the First Circuit agrees. In In re Stone & Webster, Inc., Sec. Litig., 2005 WL 1654040 (1st Cir. July 14, 2005), the court evaluated an allegedly misleading statement that the company “has on hand . . . sufficient sources of funds to meet its anticipated [needs].” The district court found the statement to be forward-looking based on its reference to an anticipated futher need for funds and dismissed the claim based on the PSLRA’s safe harbor. On appeal, the First Circuit found “that the meaning of this curious statute, which grants (within limits) a license to defraud, must be somewhat more complex and restricted.”
In the instant case, the statement was “composed of elements that refer to estimates of future possibilities and elements that refer to present facts.” The court found that the specific claim of fraud related to whether the defendants were “lying about the Company’s present access to funds,” not whether the defendants “were underestimating the amount of their future cash needs.” Under these circumstances, the “mere fact that a statement contains some reference to a projection of future events cannot sensibly bring the statement within the safe harbor.”
Holding: Judgment affirmed in part and vacated in part. (The decision contains holdings on a number of other pleading issues. It also creates an interesting bit of nomenclature, referring to the PSLRA’s heightened pleading standards for false statements as the “clarity-and-basis” requirement.)