According to the US Securities and Exchange Commission, the Private Securities Litigation Reform Act’s safe harbor as it applies to certain forward-looking statements isn’t triggered by cautionary remarks made by defendants over the impact of “potential deterioration in the high-yield sector” if, per the plaintiffs’ claim, the defendants knew the deterioration was taking place. The SEC made its comments in an amicus curiae brief to the U.S. Court of Appeals for the Second Circuit.
The case is Slayton v. American Express Co. The class securities fraud action alleges that the defendant engaged in faulty disclosures related to losses in its high-yield investment portfolio. A district court dismissed the complaint over failure to plead scienter. The plaintiffs appealed the case, and the Second Circuit heard oral argument lat October.
The SEC’s statements address the application of the statutory safe harbor to specific statements that Amex made in its May 2001 Form 10-Q’s Management’s Discussion and Analysis section. Amex stated that the $182 million in high-yield losses was a reflection of it high-yield portfolio’s ongoing deterioration. Amex also stated that total investment losses for the rest of 2001 were expected to be significantly lower than losses sustained during the first quarter.
The parties disagreed about whether the cautionary language that Amex used was “meaningful” enough for the purposes of safe harbor.
According to the SEC, forward-looking statements in the MD & A, which isn’t part of a financial statement that abides by generally accepted accounting principals, doesn’t fall within the statutory exclusion for these kinds of statements. It also noted that Amex’s statement about the “potential deterioration in the high-yield sector” wasn’t enough for safe-harbor purposes because the defendants were warning about a possible deterioration that they knew was already happening. The SEC says that “It is misleading and therefore insufficient for a company to warn of a potentiality that it is aware currently exists.” Also, “If the speaker knows that any of the implied representations is false, then the speaker knows that the statement is misleading.”
Misstatements and omissions by an investment adviser, a broker, or an investment firm, can be grounds for a securities fraud claim or lawsuit if financial losses were sustained by others.
Related Web Resources:
Read the SEC’amicus curiae brief (PDF)