When Speaking to Investors, Mix Facts with Predictions at Your Peril

by Pillsbury Winthrop Shaw Pittman LLP
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Ninth Circuit holds that statements of present fact made in the context of predictions about the future are not covered by the PSLRA’s Safe Harbor.

Takeaways

  • Don’t use the past tense when speaking about the future. Flashbacks may work in the movies but Atossa suggests they are dangerous when speaking to investors.
  • Think twice before using current facts to buttress or explain future predictions. The opinions won’t protect the facts, while the facts could drag down the opinions.
  • Be careful when paraphrasing or summarizing bad news. One person’s euphemism is another person’s evasion. Better to get the bad news out there and move on.

The Private Securities Litigation Reform Act of 1995 protects “forward-looking statements”—that is, predictions about the future, at least when they are accompanied by “meaningful cautionary statements” that could cause the predictions not to come true. But what if the prediction is presented with, and based upon, statements of current fact? Does the protection extend to the predicate for the prediction? Or must a court parse the two and apply different rules to each? In what it labels a matter of first impression, the Ninth Circuit has held that courts must parse the two, suggesting that nothing short of an admission of falsity would save a false statement of current fact, even if presented only as a predicate for a prediction of the future.

Background

Corporate executives often combine a review of current business conditions with predictions of the future. Take, for example, a statement such as “Current demand remains strong and gives us confidence that sales for the year will exceed $Y million.” Or: “We just finished a quarter with record sales of $X million and therefore are comfortable forecasting that the sales for the year will exceed $Y million.” If accompanied by “meaningful cautionary statements,” the predictions of $Y million should be safe from suit. But what about the statements as to current conditions?

Until very recently, courts in the Ninth Circuit (both district and, seemingly, appellate) extended the PSLRA’s protections to predicate statement such as this. Thus, in a recent district court opinion, the judge said, “When a statement includes both forward-looking and non-forward-looking statements, the challenged statements still fall within the safe harbor as forward-looking if, when ‘examined as a whole, the challenged statements relate [ ] to future expectations and performance.’”1 The district court therefore held to be protected a statement that “’[a]ll the fundamentals of the business is [sic] looking good… [and that] [d]emand for the product is strong. We expect Q4 bookings to be greater than Q3 bookings…. But the demand is strong.”2

Quality Systems

A recent opinion by the Ninth Circuit, however, calls that analysis into question. At issue were the sales of a company that develops and markets software used by doctors and dentists to manage health records. Business boomed after a government program provided incentives for doctors and dentists to convert from paper to electronic records. The most profitable sales were so-called “greenfield” sales to those adopting electronic recordkeeping for the first time. Throughout the alleged class period the management of this company said that demand was strong and most of what was in the pipeline were greenfield sales. When the company missed its guidance for FY 2012 and the stock price dropped, shareholders sued. The district court dismissed the complaint, but the Ninth Circuit reversed, holding that the allegedly false non-forward-looking parts of mixed statements, which also contained forward-looking statements, were not protected by the PSLRA’s safe harbor and further, that “virtually no cautionary language short of an outright admission that the non-forward-looking statements were materially false or misleading would have been adequate” to save the non-forward-looking aspects of the mixed statements.3

In so holding, the Ninth Circuit deemed this a matter of first impression, distinguishing its prior Intuitive Surgical opinion as one where the court did not need to “‘resolve whether the safe harbor covers non-forward-looking portions of forward-looking statements’ … because ‘examined as a whole’ the statements were forward-looking statements.”4 But an examination of the two opinions suggests that Quality Systems is less a matter of first impression and more a silent overruling of Intuitive Surgical. An even-more-recent Ninth Circuit opinion suggests as much, stating: “It makes no difference if some of those opinions about then-present circumstances were expressed in the same breath as forward-looking statements. ‘[W]here defendants make mixed statements ... the non-forward-looking statements are not protected by the safe harbor.’”5

Jurisprudential niceties aside, where does this leave the practitioner, not to mention the client? Is it better to utter the non-forward-looking in the same breath as the forward-looking, in the hopes that the latter will protect the former? Or is it better not to mix the two, lest the  former  infect the entire statement?

Atossa Genetics

Yet another new Ninth Circuit opinion suggests that it is better not to mix the two.6 The case involved a company that made a device for collecting nipple aspirate fluid from women’s breasts and a diagnostic tool to inspect the fluid for cancer indications. The FDA had approved the device for other uses but had not approved the diagnostic tool or the combination of the device and the tool. Nonetheless, the company started marketing the device and the tool in combination. After the company modified the device in one respect, the FDA told the company that it would have to seek a new approval for the device and clearance for the tool, and said the company’s current marketing was false and misleading insofar as it characterized the device as “FDA-approved” and the tool as “FDA Cleared.” The company filed an 8-K disclosing the need for new approval of the device; the 8-K did not mention the FDA’s comments regarding the tool or the marketing but did say that the FDA had raised certain issues that, unless resolved, could disrupt the company’s business and operations. Against this background, the company’s CEO gave an interview to the Wall Street Transcript. Speaking at the beginning of 2013, the CEO seemed to be making predictions about where the company would go in 2013 and 2014, but oddly enough he spoke in the past tense, saying: “‘I mean, 2013 and 2014 are execution years, where FDA clearance risk has been achieved, patents have been obtained, clinical trials have been achieved, manufacturing has been achieved—so now it’s really a matter of going from less than 100 doctors doing our test to the expectation of thousands of doctors.’”7 Six months later, the FDA told the company that it must recall both the device and the tool. The next month, the company disclosed the recall; its stock plummeted 46 percent and its “product and service revenue came to an abrupt end.”8 Shareholders filed a securities class action, alleging, among other things, a variety of claims under Rule 10b-5.

The district court dismissed the claims but the Ninth Circuit reversed in part, including as to the CEO’s statement that “FDA clearance risk has been achieved….” The court wrestled with the ambiguity of the CEO’s statements, noting that they could be read either as opinions about whether FDA approvals would be obtained in the future, or statements that FDA approvals had already been obtained in the past (and, if so, false). What, after all, does it mean to “achieve” a “risk”? The court ultimately deemed the statement an opinion, and not mere puffery, but nevertheless deemed the opinion to be actionable under the Supreme Court’s Omnicare decision because a reasonable person would have been misled as to the basis for the speaker’s opinion, having not been given the specifics about the FDA’s warnings to the company.9

Taken together, these new opinions suggest that it has become risky to juxtapose aggressive statements of current fact with rosy predictions of the future, in the hopes that the PSLRA’s safe harbor will protect both. Rather, these opinions, especially coupled with Omnicare, suggest that courts—at least in the Ninth Circuit—will pick apart statements more than perhaps they have done in the past, teasing out fact from opinion in a way that could make missteps as to fact doom statements of opinion, as well.


1   In re Solarcity Corp. Sec. Litig., No. C-16-04686-LHK, 2017 WL 3453387, at *11 (N.D. Cal. Aug. 11, 2017) (quoting Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., 759 F.3d 1051, 1059 (9th Cir. 2014) (citing In re Cutera Sec. Litig., 610 F.3d 1103, 1111 (9th Cir. 2010)).

2  Id. at *6-*7, *13.

3  In re Quality Systems, Inc. Sec. Litig., ___ F.3d ___, No. 15-55173, 2017 WL 3203558, at *7, *13 (9th Cir. July 28, 2017) (reversing 60 F. Supp. 3d 1095 (C.D. Cal. 2014)).

4   Id. at *7 (quoting Intuitive Surgical, Inc., 759 F.3d at 1059).

5   Cutler v. Kirchner, ___ F. App’x ___, No. 15-56897, 2017 WL 3530893, at *4 (9th Cir. Aug. 17, 2017) (quoting Quality Systems, 2017 WL 3203558, at *7).

6   In re Atossa Genetics Inc. Sec. Litig., No. 14-35933, 2017 WL 3568088 (9th Cir. Aug. 18, 2017).

7   Id. at *2-*3. Other statements and omissions also were at issue, but for purposes of this Client Alert they are not as interesting.

8   Id. at *4.

9   Id. at *11-*12, citing Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, ––– U.S. –––, 135 S. Ct. 1318, 1325 (2015) and City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc., 856 F.3d 605, 615-16 (9th Cir. 2017).

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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