The COVID-19 crisis is truly global in scope. Public issuers over a course of mere weeks have been confronted with the myriad challenges presented to their workforce and business operations. Forced to navigate uncharted territory through volatile capital markets, remote work arrangements, and emerging business continuity plans, issuers must also be mindful of attempting to predict the future in a situation without parallel. Unlike an earthquake, hurricane, or other natural disasters, the current pandemic spans the world and is affecting supply chains and business partners across the world. In this difficult environment, issuers are expected to disclose risks to their business and operations as well as make good-faith predictions of future results.

In forming these disclosures, issuers must proceed with caution as the Securities and Exchange Commission (“SEC”) and investors will be watching closely and scrutinizing the statements. In order to avoid the threat of future securities fraud claims by private plaintiffs, issuers should take steps to ensure their forward-looking statements fall within the Private Securities Litigation Reform Act’s (“PSLRA”) safe harbor. And while the safe harbor only prevents liability in private actions, informed disclosure practices will help issuers avoid regulatory scrutiny as well. While the SEC has issued guidance concerning disclosures during the crisis, issuers must remain vigilant so that forward-looking projections are based on reasonable and good-faith beliefs of the risks their businesses face. Both the SEC and the plaintiff’s bar will look for issuers who got it wrong by failing to disclose known future risks, failing to timely update projections when they were no longer accurate, or presenting overly optimistic assessments of the business.

PSLRA’s Safe Harbor for Forward-Looking Statements

Forward-looking statements are often defined as statements whose truth cannot be ascertained until some time after the statements are made.[1] The PSLRA specifically defines “forward-looking statements” as, among others: (a) statements containing a projection of revenues, income, earnings per share, or other financial items; (b) a statement of the plans and objectives of management for future operations; (c) a statement of future economic performance; or (d) a statement of the assumptions underlying or relating to any of the above.[2]

Under the PSLRA’s safe harbor, these forward-looking statements are protected and cannot form the basis of a fraud claim if they are “(1) identified as such, and accompanied by meaningful cautionary statements; or (2) immaterial; or (3) made without actual knowledge that the statement was false or misleading.”[3] “Because the statute is written in the disjunctive, statements are protected by the safe harbor if they satisfy any one of these three categories.”[4]

The threshold question of whether a statement can be characterized as forward-looking is still frequently litigated. As one court has explained, “[i]n determining whether a statement is truly forward-looking, the determinative factor is not the tense of the statement; instead, the key is whether its truth or falsity is discernible only after it is made.”[5] The use of “linguistic cues” such as “we expect” or “we believe,” when combined with a description of the company’s intention to designate a statement as forward-looking, “should be sufficient to put the reader on notice that the company is making a forward-looking statement.”[6]

As for the cautionary language, it must include “substantive company-specific warnings based on a realistic description of the risks applicable to the particular circumstances.”[7] Specifically, the language must be “substantive and tailored to the specific future projections, estimates or opinions in the [statements].”[8] Accordingly, mere boilerplate does not meet the statutory standard because it is not tailored to the specific circumstances of a business operation.[9] Securities fraud claims are routinely dismissed based on predictions of future performance when the predictions are accompanied by the necessary cautionary language and warnings.[10]

Falling Short of the Safe Harbor Protection

As courts have explained, the safe harbor does not protect one “who warns his hiking companion to walk slowly because there might be a ditch ahead where he knows with near certainty that the Grand Canyon lies one foot away.”[11] While courts routinely find that the PSLRA’s safe harbor applies to forward-looking statements, there are many cases in which the statements fall short and are not entitled to protection.

Several circuit courts, for example, have found that in mixed statements containing non-forwarding-looking statements as well as forward-looking statements, the non-forward-looking statements are not protected by the safe harbor.[12] Statements that are not accompanied by meaningful cautionary language may also not be entitled to safe harbor protection.[13] Nor does the safe harbor protect omissions of material information or statements known to be fictitious.[14] Statements of present or historical fact whose accuracy can be determined at the time the statements are made are likewise not protected.[15]

SEC Enforcement Actions Concerning Forward-Looking Statements

Recent SEC settlements involving forward-looking statements and projections make clear the type of conduct that the SEC will scrutinize and pursue. In 2018, the SEC charged Walgreens and two former executives with misleading investors about a forecasted earnings goal.[16] The allegations involved negligent failures by Walgreens and its senior leadership to adequately disclose to the market known increases in risk regarding the company’s ability to achieve financial projections in connection with a merger.[17] Walgreens and the former executives were charged with violations of Section 17(a)(2) of the Securities Act.[18] Walgreens agreed to pay a $34.5 million penalty, and the two former executives each paid $160,000 in penalties, to settle the SEC’s charges.[19]

Also in 2018, the SEC charged a cloud communications company and two senior executives with providing misleading revenue projections.[20] The case involved two material misstatements made by the company concerning its quarterly revenue estimates and guidance for the first quarter of 2015.[21] The company was aware of internal information and data which indicated that the company’s first quarter 2015 revenue estimates were materially misleading, including that the company had pulled forward deals initially projected to close in 2015 in order to achieve its revenue estimates for the fourth quarter of 2014.[22] Shortly before the close of the first quarter of 2015, the company announced that it was revising its revenue guidance to between $47 million and $50 million, down from the $74 million it initially disclosed.[23] The company and executives were charged with violations of Section 17(a)(2) of the Securities Act and Section 13(a) of the Exchange Act and certain rules promulgated thereunder.[24] The company agreed to pay a $1.9 million penalty to settle the SEC’s charges, and the executives paid penalties of $30,000 and $40,000, respectively.[25]

Recent SEC Guidance During the COVID-19 Crisis

The SEC has been focused on companies’ public disclosures during the COVID-19 crisis. In addition to extending certain filing deadlines, the SEC encouraged all issuers and other related persons to consider their activities in light of their disclosure obligations under the federal securities laws.[26] The SEC’s Division of Corporation Finance (“CorpFin”) issued Disclosure Guidance Topic No. 9, which provides its views on disclosure and other securities law obligations companies should consider with respect to COVID-19.[27] With respect to forward-looking statements, CorpFin “remind[ed] companies that providing forward-looking information in an effort to keep investors informed about material developments, including known trends or uncertainties regarding COVID-19, can be undertaken in a way to avail companies of the safe harbors in Section 27A of the Securities Act and Section 21E of the Exchange Act for this information.”[28]

The Office of the Chief Accountant (“OCA”) also issued a statement on the importance of high-quality financial reporting in light of the significant impacts of COVID-19.[29] OCA recognized that the accounting and financial reporting implications of COVID-19 may require companies to make significant judgments and estimates, which may be challenging in an environment of uncertainty.[30] OCA does not intend to object to well-reasoned judgments that entities have made.[31] It also provided a non-exhaustive list of some of the many accounting areas that may involve significant judgments and estimates in light of the evolving status of COVID-19, including fair value and impairment considerations, leases, hedging, revenue recognition, and income taxes, among others.[32] OCA stressed the importance of required disclosures of judgments and estimates in these and other areas.[33]

Best Practices for Issuers

In an effort to provide accurate forward-looking disclosures under the current circumstances, issuers should document as best as possible the basis for the statements made and should follow Sections 21E and 27A’s guidance very closely. As there is virtually no modern parallel to the pandemic, it is likely that many forward-looking predictions will turn out to be wrong and projections may turn out to be materially worse than currently anticipated. Issuers should be prepared to update guidance more frequently as conditions rapidly evolve, especially for material topics such as future revenues, supply chain or production issues, and other business interruption concerns surely to be on the horizon. Any statements of future optimism or exercise of accounting judgment must have a basis in reality at the point in time they are made and should be documented with a reasonable, good-faith analysis. Forward-looking statements will not be protected if the company is aware at the time of making the statements that the risks have already come to pass. Accompanying cautionary language must be sufficiently tailored to the specifics of the statements. Now more than ever, general boilerplate should not be relied upon. Issuers are not expected to have a crystal ball, especially under current circumstances, and should not incur liability for good-faith predictions and projections that turn out to be wrong. Nonetheless, creating a robust paper trail that demonstrates the basis for forward-looking disclosures should help insulate issuers from potential liability.

Companies should also be diligent in coordinating with senior management, legal, and operational teams when preparing their public disclosures. Issuers will be expected to remain nimble in disclosing the risks, both present and future, to their business and operations. Companies should seek the advice of disclosure counsel to craft disclosures regarding present and future operations before issuing public statements concerning the areas the SEC identified. While the challenges facing companies today are substantial, maintaining robust controls over forward-looking disclosures will limit potential liability and securities fraud claims resulting from an unpredictable crisis. These practices will also serve to prevent regulatory scrutiny by the SEC, which will be actively policing companies to ensure materially misleading information is not finding its way into the market. 

[1] In re Philip Morris Int’l Inc. Sec. Litig., No. 18-CV-08049 (RA), 2020 WL 550769, at *15 (S.D.N.Y. Feb. 4, 2020) (quoting In re Vale S.A. Sec. Litig., No. 15-cv-9539-GHW, 2017 WL 1102666, at *24 (S.D.N.Y. Mar. 23, 2017)).
[2] 15 U.S.C. § 78u-5(i)(1), § 77z-2(i)(1). The PSLRA’s safe harbor can be found in Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”), codified at 15 U.S.C. § 78u-5, and in Section 27A of the Securities Act of 1933 (“Securities Act”), codified at 15 U.S.C. § 77z-2.
[3] In re Aetna, Inc. Sec. Litig., 617 F.3d 272, 278-79 (3d Cir. 2010); see 15 U.S.C. § 78u-5(c)(1), § 77z-2(c)(1); see also Philip Morris Int’l Inc. Sec. Litig., 2020 WL 550769, at *16.
[4] Philip Morris Int’l Inc. Sec. Litig., 2020 WL 550769, at *16 (internal quotation marks omitted) (quoting Lopez v. Ctpartners Exec. Search Inc., 173 F. Supp. 3d 12, 25 (S.D.N.Y. 2016)).
[5] Julianello v. K-V Pharm. Co., 791 F.3d 915, 921 (8th Cir. 2015) (internal quotation marks omitted).
[6] Slayton v. Am. Exp. Co., 604 F.3d 758, 769 (2d Cir. 2010); see also In re Barrick Gold Corp. Sec. Litig., 341 F. Supp. 3d 358, 375 (S.D.N.Y. 2018).
[7] In re Harman Int’l Indus., Inc. Sec. Litig., 791 F.3d 90, 102 (D.C. Cir. 2015) (internal quotation marks omitted).
[8] Id. (alteration in original and internal quotation marks omitted).
[9] Id.
[10] See, e.g., Ong v. Chipotle Mexican Grill, Inc., 294 F. Supp. 3d 199, 237 (S.D.N.Y. 2018) (noting “projections of expected sales—are clearly forward-looking” and applying safe harbor).
[11] Rombach v. Chang, 355 F.3d 164, 173 (2d Cir. 2004) (internal quotation marks omitted) (citing In re Prudential Sec. Inc. P’ships Litig., 930 F. Supp. 68, 72 (S.D.N.Y. 1996)); Harman Int’l Indus., Inc. Sec. Litig., 791 F.3d at 103.
[12] In re Quality Sys., Inc. Sec. Litig., 865 F.3d 1130, 1141-42 (9th Cir. 2017) (citing In re Stone & Webster, Inc., Sec. Litig., 414 F.3d 187, 211-13 (1st Cir. 2005); In re Vivendi, S.A., Sec. Litig., 838 F.3d 223, 246 (2d Cir. 2016); Institutional Inv’rs Grp. v. Avaya, Inc., 564 F.3d 242, 255 (3d Cir. 2009); Spitzberg v. Houston Am. Energy Corp., 758 F.3d 676, 691-92 (5th Cir. 2014); Makor Issues & Rights, Ltd. v. Tellabs Inc. (Tellabs II), 513 F.3d 702, 705 (7th Cir. 2008)).
[13] Harman Int’l Indus., Inc. Sec. Litig., 791 F.3d at 108.
[14] See, e.g., Galestan v. OneMain Holdings, Inc., 348 F. Supp. 3d 282, 304 (S.D.N.Y. 2018) (“Since these allegations relate to omissions of material information, the PSLRA safe harbor provision cannot insulate the challenged statements.”); Fresno Cty. Emps.’ Ret. Ass’n v. comScore, Inc., 268 F. Supp. 3d 526, 548 (S.D.N.Y. 2017) (finding safe harbor inapplicable and the resort to cautionary language ineffective where “defendants knew at the time that a significant portion of the revenue undergirding their revenue projections was fictitious”); In re iDreamSky Tech. Ltd. Sec. Litig., 236 F. Supp. 3d 824, 833 (S.D.N.Y. 2017) (finding safe harbor inapplicable where defendants were fully aware of the delays affecting a launch date and their statements predicting a certain launch date were false and misleading).
[15] City of Providence v. Aeropostale, Inc., No. 11 Civ. 7132 (CM)(THK), 2013 WL 1197755, at *13 (S.D.N.Y. Mar. 25, 2013) (finding statements about having “taken the necessary steps to give the customers what they want,” “appropriately attacking the inventory problem,” and that defendants “know the mistakes that we made and . . . have taken steps to rectify those” not to be forward-looking).
[16] Press Release 2018-220, SEC Charges Walgreens and Two Former Executives with Misleading Investors About Forecasted Earnings Goal (Sept. 28, 2018), available at https://www.sec.gov/news/press-release/2018-220.
[17] Walgreens Boots Alliance, Inc., Admin. Proc. File No. 3-18850, Securities Act Release No. 10562 (Sept. 28, 2018), available at https://www.sec.gov/litigation/admin/2018/33-10562.pdf.
[18] Id.
[19] Id.
[20] Press Release 2018-150, SEC Charges Cloud Communications Company and Two Senior Executives with Misleading Revenue Projections (Aug. 7, 2018), available at https://www.sec.gov/news/press-release/2018-150.
[21] Ribbon Communications Inc., Admin Proc. File No. 3-18624, Securities Act Release No. 10528 (Aug. 7, 2018), available at https://www.sec.gov/litigation/admin/2018/33-10528.pdf.
[22] Id.
[23] Id.
[24] Id.
[25] Id.
[26] Press Release 2020-73, SEC Extends Conditional Exemptions from Reporting and Proxy Delivery Requirements for Public Companies, Funds, and Investment Advisers Affected by Coronavirus Disease 2019 (COVID-19) (Mar. 25, 2020), available at https://www.sec.gov/news/press-release/2020-73.
[27] See Division Corporation Finance Securities and Exchange Commission CF Disclosure Guidance: Topic No. 9 (Mar. 25, 2020), available at https://www.sec.gov/corpfin/coronavirus-covid-19 (“CF Disclosure Guidance”); see also BakerHostetler, SEC Provides Guidance Regarding COVID-19 Disclosures (Mar. 30, 2020), available at https://www.bakerlaw.com/alerts/sec-provides-guidance-regarding-covid-19-disclosures.
[28] CF Disclosure Guidance.
[29] SEC Chief Accountant Sagar Teotia, Statement on the Importance of High-Quality Financial Reporting in Light of the Significant Impacts of COVID-19 (Apr. 3, 2020), available at https://www.sec.gov/news/public-statement/statement-teotia-financial-reporting-covid-19-2020-04-03.
[30] Id.
[31] Id.
[32] Id.
[33] Id.