The 10b-5 Daily

The PSLRA’s safe harbor for forward-looking statements has a checkered history in the courts, with some judges refusing to apply it as written. It is therefore worth noting a decision that relies entirely on the safe harbor to dismiss the plaintiffs’ securities fraud claims.

In In re Aetna, Inc. Sec. Litig., 2009 WL 1619636 (E.D. Pa. June 9, 2009), the plaintiffs alleged that the health care company told investors it practiced “disciplined pricing” when, in fact, it was aggressively underpricing to bring in new business. The court found that “‘disciplined pricing’ means that Aetna expects that its pricing will be in line with its projected medical cost trend, a specific measurement of future performance.” Accordingly, the statements concerning “disciplined pricing” were forward-looking as defined by the PSLRA.

The court then applied the safe harbor and held that the statements were protected from liability. First, Aenta’s statements concerning its commitment to “disciplined pricing” were immaterial corporate puffery. Second, the company’s risk factors specifically warned investors “that profitability could be affected by Aetna’s ‘ability to forecast . . . costs’ and ‘there can be no assurance regarding the accuracy of medical cost projections assumed for pricing purposes.” The court found this was meaningful cautionary language that rendered the statements inactionable. Finally, the court noted that “there is still uncertainty” as to whether a forward-looking statement is protected by the safe harbor based on immateriality or meaningful cautionary language if a plaintiff adequately pleads that the defendant had actual knowledge of the falsity of the statements (see the Third Circuit’s recent Avaya decision). In this case, however, the plaintiffs failed to meet that pleading burden.
Holding: Dismissed with prejudice.

The U.S. Court of Appeals for the Second Circuit has held that where there has been a market-wide downturn in a particular industry, a plaintiff must plead facts which, if proven, would show that its loss was caused by the alleged misstatements as opposed to intervening events. How to determine the existence of a “market-wide downturn,” however, is an open question.

In In re Moody’s Corp. Sec. Litig., 2009 WL 435323 (S.D.N.Y. Feb. 23, 2009), the defendants argued that the plaintiffs’ losses were caused by the subprime crisis, not Moody’s alleged misstatements concerning its credit ratings. However, the court found that there was no market-wide downturn in the credit-ratings industry. Although Moody’s stock price declined by 28.8% during the class period, the stock price of McGraw-Hill (the parent company of Standard & Poor’s, Moody’s biggest competitor) fell only 1.7%. The court also found that Standard & Poor’s stock price rose 2.5% during the same period – which was strange, because Standard & Poor’s is not a publicly traded entity and has no published share price.

Not surprisingly, the defendants moved for reconsideration, citing two factual errors related to the court’s “market-wide downturn” analysis. First, the defendants noted that the court had apparently confused the Standard & Poor’s 500 Financials Index with the company itself, leading to the erroneous conclusion that Standard & Poor’s stock price had not declined. Second, the defendants argued that the court should have examined the comparative decline in stock prices from the date of the first corrective disclosure, rather than the entire class period. When measured in that manner, the stock price for Moody’s dropped by 38%, while the stock price for McGraw-Hill dropped by 28%.

The court, however, declined to change its decision (see In re Moody’s Corp. Sec. Litig., 2009 WL 1150281 (S.D.N.Y. April 29, 2009)). McGraw-Hill’s stock price, which had been the basis for the court’s original determination that there was no market-wide downturn, suddenly came under more judicial scrutiny. While not appearing to disagree with the defendants’ contention that the decline should be measured from the first corrective disclosure, the court found that it was unclear whether the drop in McGraw-Hill’s stock price was actually related to the performance of its Standard & Poor’s subsidiary. In addition, the court noted that Moody’s “other primary competitors are both private companies with no published stock price,” which left the court without a basis for comparison. The court concluded that “the question of causation is reserved for trial.”