There are two prongs to the PSLRA’s safe harbor for forward-looking statements. First, a defendant shall not be 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. Second, a defendant shall not be liable with respect to any forward-looking statement, even in the absence of meaningful cautionary statements, if the plaintiff cannot establish that the statement was made with “actual knowledge” that it was false or misleading.
Although the two prongs are written in the alternative, courts frequently have rebelled against the plain language of the statute because it appears to provide defendants with a “license to defraud” investors about a company’s future prospects so long as the statement is accompanied by meaningful cautionary language.
In a decision issued this week, In re Nash Finch Co. Sec. Litig., 2007 WL 1266658 (D.Minn. May 1, 2007), the court noted that the Eighth Circuit had not yet addressed the question of “whether allegations of actual knowledge defeat the safe harbor when cautionary language is present.” The defendants argued that their knowledge of the truth or falsity of the forward-looking statements was irrelevant under the first prong of the safe harbor. The court held, however, that “cautionary language can not be ‘meaningful’ when defendants know that the potential risks they have identified have in fact already occurred, and that the positive statements they are making are false.”
The 10b-5 Daily 