Summary

A recent ruling on a motion to dismiss in a shareholder putative class action, brought by an investor against software company Pegasystems (Pega) in the District of Massachusetts, should give legal leaders and communications management of publicly traded companies pause about making routine public statements disdaining the merits of pending claims.

The Upshot

• The plaintiff alleged that Pega reassured investors in a Form 10-K filing that claims brought in a separate lawsuit alleging theft of trade secrets were “without merit”—and that such reassurance was false and misleading because Pega’s CEO and other senior executives had taken part in the supposed misconduct at issue.
• The court held that “reassur[ing] investors” that claims are “without merit . . . is an actionable opinion statement.”
• The court also emphasized that, when discussing any pending claims, companies “must do so with exceptional care, so as not to mislead investors.”

The Bottom Line

Companies facing pending legal action should either refrain from commenting on the merits of pending claims, or consult with knowledgeable counsel and proceed with caution before doing so.

A recent ruling on a motion to dismiss in the District of Massachusetts should give legal leaders and communications management of publicly traded companies pause about making routine public statements disdaining the merits of pending claims.

The ruling came in a shareholder putative class action brought by an investor against Massachusetts software company Pegasystems (Pega) for federal securities violations. Plaintiff alleged that Pega reassured investors in a Form 10-K filing that claims brought in a separate lawsuit in Virginia alleging theft of trade secrets (the Virginia action) were “without merit”—and that such reassurance was false and misleading because Pega’s CEO and other senior executives had taken part in the supposed misconduct at issue in the Virginia action. This second lawsuit against Pega was filed after a jury in the Virginia action returned a verdict of over $2 billion against Pega, causing Pega’s stock value to decline precipitously.

In rejecting Pega’s motion to dismiss the securities case, the court made a number of statements relevant to companies crafting a 10-K filing, or indeed any public statement, about pending litigation involving their company. In particular, the court held that “reassur[ing] investors” that claims are “without merit . . . is an actionable opinion statement,” noting “a reasonable investor expects not just that the issuer believes the opinion (however irrationally), but that it fairly aligns with the information in the issuer’s possession at the time.” The Massachusetts District Judge highlighted the choice to single out claims as being “without merit”—a phrase that has arguably become public relations boilerplate in response to incipient litigation—as one which can almost inevitably lead to “reasonable investors . . . underst[anding the company]’s message that [the] claims were ‘without merit’ as a denial of the facts underlying [those] claims—as opposed to a mere statement that [the company] had legal defenses against those claims.”

The court went on to emphasize that this doesn’t mean the company has to bestow credibility on pending claims, either—even if it has knowledge that the underlying facts are true. “[H]owever, it must do so with exceptional care, so as not to mislead investors.” The safe ground, in the court’s estimation, is the Stoic approach: focus on what the company can control—namely, how it plans to approach the litigation. For instance, a company “may validly assert its intention to oppose the lawsuit.” “It may also state that it has ‘substantial defenses’ against [the lawsuit], if it reasonably believes that to be true.” According to at least one federal judge, avoiding an assessment or value judgment of the validity of the claims—and, by implication, of the veracity of the factual basis for those claims—is what’s crucial.

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