Cleaning the Murky Safe Harbor for Forward-Looking Statements: An Inquiry into Whether Actual Knowledge of Falsity Precludes the Meaningful Cautionary Statement Defense

42 Pages Posted: 9 Jan 2010 Last revised: 10 Apr 2010

Date Written: January 7, 2010

Abstract

Congress included a safe harbor for forward-looking statements in the 1995 Private Securities Litigation Reform Act. This affords certain issuers and other specified persons limited protection from civil liability for damages under the Securities Act of 1933 and the Securities Exchange Act of 1934 when the projections or objectives in a forward-looking statement are not realized, i.e., turn out to be false. The safe harbor contains two principal elements, in addition to protection for “immaterial” statements: One prong where projections are accompanied by “meaningful cautionary statements,” the second prong where the plaintiff fails to prove that the speaker made the statement with “actual knowledge” that it is false or misleading. This article reviews the legislative history of the safe harbor, the divergent lines of case law interpreting it and extensive commentary on how the safe harbor should be applied. The conclusion of this analysis is that the first prong is available as a complete defense without regard to the state of mind or intent of the speaker, so that (1) the second prong does not apply when the first prong is satisfied and (2) statements are not deemed not “meaningful” because a risk factor that rendered the forward-looking statement unlikely to be realized was knowingly omitted from the cautionary statements. Although there may be policy reasons why the safe harbor should have been different, this interpretation is compelled by the language of the statute and the legislative history, including the “bespeaks caution” line of cases on which the statutory safe harbor was based, and judicial and scholarly analyzes to the contrary are flawed.

Keywords: safe harbor, forward-looking statements, bespeaks caution, securities fraud, 10b-5

JEL Classification: K22, K20

Suggested Citation

Horwich, Allan, Cleaning the Murky Safe Harbor for Forward-Looking Statements: An Inquiry into Whether Actual Knowledge of Falsity Precludes the Meaningful Cautionary Statement Defense (January 7, 2010). Journal of Corporation Law, Vol. 35, 2010, Northwestern Law & Econ Research Paper No. 10-02, Available at SSRN: https://ssrn.com/abstract=1532934

Allan Horwich (Contact Author)

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States

Schiff Hardin LLP ( email )

6600 Sears Tower
Chicago, IL 60606-6473
United States

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