Forward looking statements create potential liability

If a company chooses to make projections and issue estimates despite the uncertainty of that information, it cannot duck liability for securities fraud by reliance upon the “soft” nature of the information it disclosed.

Helwig v. Vencor, Inc., No. 99-5153, en banc (6th Cir., 5/31/01). Class Actions, Effect of * PSLRA (Pleading Requirements; Forward-Looking Statements; Safe Harbor Defense) * Scienter (“Strong Inference”; “Actual Knowledge”) * FRCP (Rules 12 & 56) * Notice Requirements * Materiality * Bespeaks Caution Defense.

If a company chooses to make projections and issue estimates despite the uncertainty of that information, it cannot duck liability for securities fraud by reliance upon the “soft” nature of the information it disclosed.

After a Sixth Circuit Panel dismissed the class action allegations against Vencor and its officers and directors (SLA 2000-09), a motion for rehearing en banc was granted (SLA 2000-22) and, in this Opinion, the full Court’s Opinion is given. This lengthy majority Opinion and dissent discuss the parameters that define the pleading of scienter under the PSLRA and the conditions that attach to safe harbor protection when making forward-looking statements.

Vencor is accused of making glowing earnings projections at a time in reckless fashion, without discussing the adverse impact of legislation on its business. Examining the standards for meeting the “strong inference” requirement in other circuits, the Court relates that the Ninth Circuit requires “strong evidence,” a higher standard of pleading than before the PSLRA. The Second and Third Circuits have taken the position that Congress intended to make only a procedural change, but raised the “motive and opportunity” pleading standard no higher. The Eleventh Circuit has held that “a showing of motive and opportunity alone” is insufficient.

This Court strives to define a standard to guide the courts below and future litigants, but, despite some helpful markers, its approach is essentially ad hoc. It disagrees with the Panel below and reverses the dismissal.

Safe harbor protection for the projected results is rejected. While the earnings estimates were clearly “forward-looking statements,” the requirement to include “meaningful cautionary statements” was not met. “With regard to future events, uncertain figures, and other so-called soft information,” the Court instructs, “a company may choose silence or speech elaborated by the factual basis as then known, but it may not choose half-truths.” Telling analysts that it was “comfortable” with favorable earnings projections seven weeks after the enactment of the Balanced Budget Act was not protected activity, without further disclosures, “We conclude that the pleadings permit a strong inference that defendants engaged in securities fraud concerning their statements about the Balanced Budget Act and its adverse impact on Vencor’s business.” (SAC Ed: The Court remanded the case for the commencement of discovery. Vencor filed a petition for certiorari with the Supreme Court (Dkt. No. 01-538). On June 20, 2002, the petition was dismissed pursuant to Rule 46.1 of the Rules of the Court, which provides for withdrawal upon mutual consent.) (SLC Ref. No. 2003-13-05)


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Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.

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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.