How Many Prongs Are There?

The long-running securities litigation related to Iridium World Communications, which attempted to create and market a global satellite phone system, has produced an interesting decision. In Freeland v. Iridium World Communications, 2008 WL 906388 (D.D.C. April 3, 2008), the court considered a summary judgment motion brought by Motorola, the former parent company of Iridium and the sole remaining defendant in the case. The decision was a sweeping victory for the plaintiffs, with at least two determinations of note.

(1) Forward-Looking Statements – A continuing analytical problem for courts is how to interpret the PSLRA’s safe harbor for forward-looking statements. One issue is whether the first prong of the safe harbor, which states that a defendant shall not be liable with respect to any forward-looking statement if it is accompanied by “meaningful cautionary statements,” insulates the defendant from liability for false statements made with actual knowledge of their falsity. Courts have sometimes balked at applying the safe harbor in this manner, even though there is no state of mind limitation in the first prong and the second prong creates an alternative actual knowledge requirement for liability.

The Iridium court’s conclusion: the cautionary statements at issue could not be “meaningful” if Iridium and Motorola knew their statements to be false and misleading at the time they were made. As The 10b-5 Daily has pointed out before, however, this approach simply does not comport with the plain language of the statute. Again, Congress did not impose a state of mind limitation in the first prong of the safe harbor, instead leaving that examination for the second prong. It is hard to justify collapsing the two prongs into a single “actual knowledge” test on the basis of “statutory interpretation.” Adding insult to injury, the Iridium decision relies heavily on a recent law review article in support of its decision. Not mentioned in the decision, but surely noted by the defendant, is that the article’s author is a staff attorney with the SEC’s Division of Enforcement.

(2) Expert Report On Loss Causation – In several recent decisions, courts have declined to consider expert reports on loss causation due to methodological concerns. The Iridium court, however, rejected Motorola’s motion to exclude damages testimony. Although Motorola complained that the plaintiffs’ expert simply assumed that certain disclosures corrected prior misrepresentations and did not consider other information already known to the market, the court held that these were factual issues that went “to weight, not admissibility” and could be resolved by the jury.

Holding: Motion for summary judgment denied (except as to certain bondholder claims).

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