The Private Securities

Litigation Reform Act of 1995: Protecting Corporations from Investors, Protecting Investors from Corporations, and Promoting Market Efficiency

  Introduction

"And They're off . . . !"⁽¹⁾ On a Friday morning in April of 1993, Philip Morris announced its decision to cut the price of its Marlboro cigarettes by about forty cents per pack and properly cautioned that its operating results may be lower due to the lower sales price.⁽²⁾ Immediately after the announcement, the price of Philip Morris stock plummeted twenty five percent and, amazingly, the first Rule 10b-5 class-action securities suit was filed at 1:25 that afternoon.⁽³⁾ The suit alleged that months earlier Philip Morris had fraudulently made public statements projecting earnings growth that in turn artificially inflated the market price of its stock.⁽⁴⁾ Considering the immediacy of the filing, however, it is clear that the suit was filed merely on the observance of the stock's drop in price, without any investigation about whether any actual wrongdoing occurred.⁽⁵⁾

Critics charge that "strike suits"⁽⁶⁾ similar to this are filed daily by predatory attorneys seeking not to obtain a jury verdict against the corporation, but instead to extort a substantial settlement from the corporation.⁽⁷⁾ After all, the corporation can defend itself in the courts at a cost of millions of dollars for discovery and litigation,⁽⁸⁾ or it can settle the claim, thereby saving money and valuable management hours, while also avoiding the negative publicity.⁽⁹⁾

Corporate America maintains that such litigation not only unfairly targets "deep pockets" and confuses market volatility with fraud, but that it is also having a significant negative effect on America's capital markets.⁽¹⁰⁾ Namely, it has chilled the forward-looking disclosure necessary to maintain efficient capital markets and has acted as a tax on capital formation.⁽¹¹⁾

In 1979, a safe harbor provision was enacted (1979 Safe Harbor Provision) that was designed to protect corporations from fraud claims based on projections.⁽¹²⁾ This provision prohibited suits based upon forward-looking statements, unless the statement was made "without a reasonable basis or was disclosed other than in good faith."⁽¹³⁾ The 1979 Safe Harbor provision, however, was largely ineffective in practice.⁽¹⁴⁾ Its ineffectiveness was attributed to: (1) its limited scope with regard to which forward-looking statements it protected,⁽¹⁵⁾ (2) its non-amenability to application in the pre-discovery phase of the lawsuit⁽¹⁶⁾ and (3) its failure to clearly set forth any duty to correct or update projections once they had been made.⁽¹⁷⁾ In 1995, Congress, in an attempt to strengthen the safe harbor provision, overrode President Clinton's veto passing into law the Private Securities Litigation Reform Act of 1995.⁽¹⁸⁾

After defining the problems associated with Rule 10b-5 litigation,⁽¹⁹⁾ this Note will examine the evolution of the Securities and Exchange Commission's stance on forward-looking disclosure⁽²⁰⁾ and track the development of the 1979 Safe Harbor Provision.⁽²¹⁾ The Note will then analyze the 1979 Safe Harbor Provision's utility⁽²²⁾ and conclude with a discussion of the Private Securities Litigation Reform Act of 1995 and its new safe harbor provision for forward-looking statements.⁽²³⁾

  The Problem

A.  Rise in 10b-5 Class Action Lawsuits

Forward-looking information⁽²⁴⁾ plays a vital role in the United States securities markets.⁽²⁵⁾ Investors, analysts and other market participants view corporate management's own performance projections as a critical element when making investment decisions.⁽²⁶⁾ As such, it is imperative that management be encouraged to make reasonable forward-looking disclosures without fear of meritless litigation.⁽²⁷⁾

In recent years, there has been a tremendous proliferation of class-action shareholder suits relating to forward-looking statements⁽²⁸⁾ made by corporate management.⁽²⁹⁾ According to the former Commissioner of the Securities Exchange Commission, J. Carter Beese Jr., "the virtual explosion in shareholder litigation . . . is crippling effective management, and is clearly reducing the competitiveness of U.S. companies in the global marketplace."⁽³⁰⁾ Such suits, the majority of which are based on Rule 10b-5,⁽³¹⁾ claim that management has engaged in fraud in its release of allegedly false or misleading statements.⁽³²⁾

These shareholder class-action suits are often filed as a matter of course shortly after a sharp decline in the price of the security and, according to many commentators, appear to be a ticket to a guaranteed and substantial settlement regardless of the merits of the suit.⁽³³⁾ Corporations are forced to settle such suits for between five and twenty percent of the total claim rather than: (1) expend resources and expertise on extensive litigation, particularly discovery;⁽³⁴⁾ (2) become involved in litigation that may damage the company's reputation;⁽³⁵⁾ or (3) risk an adverse decision by an overly sympathetic jury in the full amount of the claim.⁽³⁶⁾ Such strike suits are having the effect of reducing the amount of forward-looking information disclosed by a corporate management seeking to limit liability for alleged fraudulent misrepresentations.⁽³⁷⁾

A safe harbor⁽³⁸⁾ was enacted to protect corporations making forward-looking statements in good faith and with a reasonable basis from such threats of litigation.⁽³⁹⁾ However, the provision is of little help to defendant corporations seeking to avoid costly discovery and litigation by obtaining an early dismissal of a meritless claim.⁽⁴⁰⁾ In most cases, the inquiry into the existence of a reasonable basis and good faith involves a factual determination to be made by a jury, thereby precluding early pre-discovery dismissal via a 12(b)(6) motion to dismiss⁽⁴¹⁾ or a motion for summary judgment.⁽⁴²⁾ Commentators charge that without a safe harbor, which would allow for early dismissal of meritless Rule 10b-5 actions, "the mere threat of litigation will continue both to discourage management from making forward-looking disclosure and cause those companies that nonetheless provide such disclosure to incur significant costs in defense of nonmeritorious litigation."⁽⁴³⁾

B.  The Rationale Behind Rule 10b-5 Actions

Private actions under Rule 10b-5⁽⁴⁴⁾ are the principal tools used to assure the accuracy and completeness of disclosure.⁽⁴⁵⁾ The Rule provides an investor with a private right of action⁽⁴⁶⁾ to recover losses that are "a result of deceptive practices touching . . . [his or her purchase or] sale of securities."⁽⁴⁷⁾ The plaintiff must prove that the loss resulted from fraud "in connection with the purchase or sale of any security"⁽⁴⁸⁾ and that such fraud was implemented with "scienter," meaning an "intent to deceive, manipulate, or defraud."⁽⁴⁹⁾

The economic rationale for such a rule can be found in the Efficient Capital Markets Hypothesis (ECMH), which is today's predominant theory of economic efficiency.⁽⁵⁰⁾ The ECMH contends that the market price of actively traded securities is representative of all relevant publicly available information.⁽⁵¹⁾ Pursuant to this contention, "relevant misrepresentations defraud investors who trade in capital markets because they unfairly affect the market price of securities."⁽⁵²⁾ Recall that private actions under Rule 10b-5 act as a deterrent against fraud by punishing companies who make misrepresentations.⁽⁵³⁾ Rule 10b-5 actions, then, are essential to the operation of efficient capital markets because they promote disclosure of only complete and accurate information.⁽⁵⁴⁾

United States courts have essentially adopted the ECMH through application of the "fraud on the market theory."⁽⁵⁵⁾ In Basic Inc. v. Levinson,⁽⁵⁶⁾ the United States Supreme Court applied the "fraud-on-the-market" theory, reasoning that misrepresentations will unfairly affect market price.⁽⁵⁷⁾ The "fraud-on-the-market" theory "presumes that the market price of a particular security reflects all available information and, therefore, accurately represents the security's intrinsic value."⁽⁵⁸⁾ Accordingly, the Basic Inc. Court held, pursuant to the "fraud-on-the-market" theory, that "investors are defrauded when they rely on the market prices of securities that have been affected by relevant misrepresentations or omissions."⁽⁵⁹⁾

Although the purpose of Rule 10b-5 is to deter the dissemination of incomplete and inaccurate information into the securities markets, thereby avoiding fraud-on-the-market and providing efficient markets in which to invest,⁽⁶⁰⁾ many investors have used the private right of action thereunder to extort settlements from deep-pocketed corporations.⁽⁶¹⁾ Because many of these meritless Rule 10b-5 claims involve allegations of fraud in connection with the issuance of a forward-looking statement that failed to come to fruition,⁽⁶²⁾ many commentators have proposed an expansion of the safe harbor that would provide corporations with increased protection for suits alleging fraudulent forward-looking disclosure.⁽⁶³⁾ Such expanded protection is an essential element in the elimination of "extortion suits" and the subsequent proliferation of forward-looking disclosure.⁽⁶⁴⁾

C.  The Issue

The problem lies in striking a balance between protecting, and therefore encouraging, forward-looking disclosure on the one hand,⁽⁶⁵⁾ and ensuring efficient markets by deterring dissemination of inaccurate or misleading information on the other hand.⁽⁶⁶⁾ Too much protection of forward-looking disclosure provides companies with the opportunity to disseminate false or misleading information to the public thereby contributing to market inefficiency;⁽⁶⁷⁾ while too little protection leaves corporations susceptible to "extortion suits," thereby taxing capital formation and hindering the release of critical forward-looking information.⁽⁶⁸⁾

  History of Forward-Looking Statements

A.  Evolution of the Securities and Exchange Commission's Position

The Securities and Exchange Commission's (SEC or Commission) position on disclosing forward-looking information has evolved tremendously since the Commission's inception, from one of absolute prohibition of such disclosure⁽⁶⁹⁾ to one of encouragement, and in some circumstances requirement of such disclosure.⁽⁷⁰⁾ This evolution was a result of advances in economic theory and accounting,⁽⁷¹⁾ along with an increasingly demanding⁽⁷²⁾ and sophisticated⁽⁷³⁾ investor.

1.  Era of Prohibition of Forward-Looking Disclosure in Filed Documents

From its inception until the early 1970s, the Commission unconditionally prohibited disclosure of forward-looking statements in documents filed with it by publicly-traded corporations.⁽⁷⁴⁾ The Commission based this policy on its perception that such statements were "inherently unreliable"⁽⁷⁵⁾ and its fear "that unsophisticated investors would place undue emphasis on the information in making investment decisions."⁽⁷⁶⁾

Commentators attacked the reliability of projections by pointing out that "[n]o management of any company ever plans to lose money; and, if it did, the entire management should be instantly discharged."⁽⁷⁷⁾ The commentators concluded from this that projections by management are in no way realistic and unbiased predictions, but instead they are merely management's hopes for the future after discounting nearly all unfavorable factors.⁽⁷⁸⁾

The Commission's philosophy was elaborated in an often quoted article written by Henry Heller, a former member of the Commission's Division of Corporation Finance.⁽⁷⁹⁾ Heller stated the following with regard to forward-looking disclosure:

Conjectures and speculations as to the future are left by the [Securities and Exchange] Act[s] to the investor on the theory that he is as competent as anyone to predict the future from the given facts. Since an expert can speak with authority only as to subjects upon which he has professional knowledge and since no engineering course or other professional training has ever been known to qualify anyone as a clairvoyant, attempts by companies to predict future earnings on their own or on the authority of experts have almost invariably been held by the Commission to be misleading because they suggest to the investor a competence and authority which in fact does not exist.⁽⁸⁰⁾

The objective of the Commission's disclosure policy has always been to provide meaningful information to the investment community.⁽⁸¹⁾ In cases of perceived conflict, however, that objective has historically "been subordinated to the objective of protecting unsophisticated investors from their own ignorance."⁽⁸²⁾

The reasons for the Commission's stance against forward-looking information goes back to the inception of the Securities Act when high risk, immature capital ventures provided no sound basis for projection.⁽⁸³⁾ As time went on, however, companies engaged in more sophisticated accounting procedures and budget planning became the subject of economic treatises.⁽⁸⁴⁾ Accordingly, corporate management came to be in a far better position than the public to forecast where a company was going.⁽⁸⁵⁾

Under the Commission's prohibitive position, professional investment analysts and advisors got management's projections informally through press conferences, speeches to analysts' societies and press releases.⁽⁸⁶⁾ This information, which was not subject to any statutory liability or administrative scrutiny, formed the basis for professional advice upon which investors relied in making their investment decisions.⁽⁸⁷⁾ Such a system precluded equal distribution of information to all investors.⁽⁸⁸⁾ Furthermore, it actually promoted the dissemination of information that had not been screened by a regulatory body and, therefore, may have been misleading.⁽⁸⁹⁾

Due to the problems created by prohibiting forward-looking information in filed documents, many critics believed the interests of all would be better served if the Commission recognized "the importance of disclosure for informational purposes as opposed to protectionist purposes."⁽⁹⁰⁾ Allowing expanded disclosure, it was argued, would indirectly benefit unsophisticated investors by: (1) providing equal access to forward-looking information; (2) promoting the development of more informed investment advisory services; and (3) effectuating market prices that more accurately and reliably reflect a security's intrinsic value.⁽⁹¹⁾

In 1969, the Commission, acting on the recommendation of a number of securities analysts, formed a Disclosure Policy Group (Wheat Commission) to study a number of disclosure issues including whether forward-looking statements should be permitted or mandated in Commission filings.⁽⁹²⁾ The Wheat Commission's subsequent report to the Commission (Wheat Report)⁽⁹³⁾ acknowledged that most investment decisions are based on estimates of future earnings.⁽⁹⁴⁾ The report concluded, however, that the detriments to investors associated with forward-looking statements outweighed any countervailing benefit that could be gained by lifting the ban on such disclosure.⁽⁹⁵⁾ The Wheat Commission feared that expanded disclosure would result in: (1) heightened litigation exposure; (2) onerous updating requirements; and (3) risk of undue investor reliance on such information.⁽⁹⁶⁾

Even after the release of the Wheat Report, pressure to allow forward-looking disclosure continued to mount and the Commission decided to address the issue again, in 1972, by conducting extensive public hearings on the subject.⁽⁹⁷⁾ Finally, in 1973, as a result of these hearings before the Division of Corporation Finance, the Commission made a major policy shift, "announc[ing] in a policy statement its intention to promulgate rules to permit voluntary disclosure of projections and to protect those projections from civil antifraud liability."⁽⁹⁸⁾ In the Statement by the Commission on the Disclosure of Projections of Future Economic Performance,⁽⁹⁹⁾ the Commission recognized that "management's assessment of a company's future performance is information of significant importance to the investor."⁽¹⁰⁰⁾ The Commission also stated that permitting the release of such information through documents filed with the SEC and otherwise, would be in the public interest because it would enable investors to better assess the value of securities.⁽¹⁰¹⁾ It further recognized that a policy of permitting disclosure through documents filed with the SEC would provide the Commission with an opportunity to regulate the information being released,⁽¹⁰²⁾ while also assuring that such information is available on an equitable basis to all investors.⁽¹⁰³⁾

In 1975, the Commission issued a release containing a series of proposals designed to implement the 1973 policy statement discussed above.⁽¹⁰⁴⁾ If adopted, the proposals would have established an elaborate disclosure system for companies choosing to make public projections.⁽¹⁰⁵⁾ While most commentators agreed that projection information is significant, virtually all opposed the proposed disclosed system because they felt the system was too complex, vague, and onerous for issuers to voluntarily enter into it.⁽¹⁰⁶⁾ Indeed, most commentators felt that such a system would inhibit rather than encourage projection disclosure.⁽¹⁰⁷⁾ In 1976, these proposed rules were withdrawn by the Commission in response to the opposition from commentators.⁽¹⁰⁸⁾

2.  Development of a Safe Harbor Provision

Later in 1976, the Advisory Committee on Corporate Disclosure (the Committee) was formed to evaluate several of the Division of Corporation Finance's disclosure policies, including the Division's policy on disclosing forward-looking information.⁽¹⁰⁹⁾ After much research and debate, the Advisory Committee published a report in which it not only recommended that the Commission act to encourage forward-looking disclosure, but also set forth specific recommendations regarding the form and substance of a proposed disclosure system.⁽¹¹⁰⁾

First, recognizing the Commission's lack of experience with projections, the Committee cautioned that its recommendations were intended to encourage forward-looking disclosure only on an experimental basis.⁽¹¹¹⁾ Such a proclamation allowed the commission to continue to assess the costs and countervailing benefits of forward-looking information, while leaving open the option of forsaking forward-looking disclosure entirely if it so desired.⁽¹¹²⁾

Second, if such an experiment was ultimately found to benefit investors, "the Committee believed that market forces, rather than a Commission mandate, would operate effectively to compel issuers to make such disclosures."⁽¹¹³⁾ This dispelled the fears of mandatory disclosure held by many issuers whose immaturity or chosen industry made them unable to make even reasonably accurate projections.⁽¹¹⁴⁾

Third, the Committee recommended adopting a safe harbor that would protect all forward-looking statements⁽¹¹⁵⁾ made in good faith and with a reasonable basis.⁽¹¹⁶⁾ Further, the Committee recommended that the plaintiff be required to carry the burden of proof on this issue.⁽¹¹⁷⁾ That is, the person alleging fraud in connection with a forward-looking statement would be required to establish that the statement had no reasonable basis or was not disclosed in good faith.⁽¹¹⁸⁾

Regarding the safe harbor, the Committee recommended that: (1) it be made available to all issuers, regardless of size and reporting history; (2) publication of cautionary language along with the projection be required; (3) companies be encouraged, but not required, to disclose any assumptions made in preparing the forward-looking statement; and (4) companies be encouraged, but not required, "to compare actual results with earlier projections and to explain any significant variance."⁽¹¹⁹⁾ Finally, the Committee recommended that the issuer be free to chose the type of forward-looking information it discloses.⁽¹²⁰⁾ The Committee noted, however, that issuers should not be permitted to disclose only favorable items.⁽¹²¹⁾

In 1978, the Commission acted on the Advisory Committee's recommendations and issued two versions of a safe harbor rule for forward-looking statements for public comment: the Advisory Committee version⁽¹²²⁾ and another version created by the Commission.⁽¹²³⁾ The versions were similar on two of the most controversial issues. Both proposed a safe harbor that would protect all oral and written forward-looking information, rather than just such information contained in a Commission filing; and neither required including current projections in registration statements filed with the Commission.⁽¹²⁴⁾ The proposals, however, differed on the issue of which party should bear the burden of proof.⁽¹²⁵⁾ The Commission's proposal placed the burden on the defendant (issuer) to prove that a contested forward-looking statement was made in good faith and with a reasonable basis,⁽¹²⁶⁾ while the Advisory Committee proposal recommended the burden of proof be placed on the plaintiff.⁽¹²⁷⁾

This difference in the proposals resulted from the Commission's concern that placing the burden of proving lack of reasonable basis on the plaintiff would be an "insurmountable" obstacle that would inhibit compensation for legitimate claims.⁽¹²⁸⁾ Many commentators however, argued that placing the burden on corporate defendants (as the Commission's proposal recommended) would "undermine" the Commission's goal of encouraging forward-looking disclosure and was "possibly worse than no rule at all."⁽¹²⁹⁾

3.  Adoption of a Safe Harbor Rule

In 1979, the Commission adopted a safe harbor rule that included aspects of both the Advisory Committee's and the Commission's proposals.⁽¹³⁰⁾ The provision was codified simultaneously in Rule 175 of the Securities Act⁽¹³¹⁾ and Rule 3b-6 of the Exchange Act.⁽¹³²⁾

The final rule provided corporations immunity from liability for specified forward-looking statements⁽¹³³⁾ that had a reasonable basis and were made in good faith.⁽¹³⁴⁾ Such protection, however, was only afforded to forward-looking statements that were made, reaffirmed, or later published, in documents filed with the Commission.⁽¹³⁵⁾ The Commission reasoned that such a "filing" requirement would: (1) "provide investors with better access to the information";⁽¹³⁶⁾(2) "provide . . . a more reliable framework within which to evaluate the forward-looking statement";⁽¹³⁷⁾ and (3) "enable the Commission to maintain oversight of the accuracy and completeness of the disclosure."⁽¹³⁸⁾

The final rule also adopted the Advisory Committee's recommendation of placing the burden of proof on the plaintiff to show that the forward-looking statement had no reasonable basis and/or it was not disclosed in good faith.⁽¹³⁹⁾ After much debate, the Commission adopted this provision, reasoning that the federal court system's liberal discovery procedures provided plaintiffs with sufficient means to obtain the evidence necessary to sustain such a burden.⁽¹⁴⁰⁾

On another hotly contested issue, the Commission decided not to require publication of assumptions underlying the disclosed forward-looking statements.⁽¹⁴¹⁾ In explaining its decision, however, the Commission emphasized the significance of such assumptions and stated that their disclosure may be necessary in order for such statements to meet the reasonable basis and good faith standards set forth in the Rule.⁽¹⁴²⁾ Similarly, the Commission made no explicit requirement to update projections, however, it reemphasized its earlier position that in order for projections to fall within the protection of the safe harbor they must be corrected "when subsequent events or discoveries render them false of misleading."⁽¹⁴³⁾

4.  One Final Step in the Evolution of the Commission's Position of Forward-Looking Statements

Notwithstanding several technical modifications in the years following its adoption,⁽¹⁴⁴⁾ the safe harbor provision remained unchanged until the enactment of the Private Securities Litigation Reform Act in 1995.⁽¹⁴⁵⁾ Other provisions within the Securities Act of 1933, however, have been added and refined, resulting in further evolution of the Commission's stance on forward-looking statements.⁽¹⁴⁶⁾

One such provision is Item 303 of Regulation S-K, which requires an issuer to file with the Commission "presently known data which may impact future liquidity, capital resources or operating results[,]"⁽¹⁴⁷⁾ as part of Management's Discussion and Analysis of Financial Condition and the Results of Operations (MD&A).⁽¹⁴⁸⁾ In enacting this provision, the Commission created two classes of forward-looking statements: those for which disclosure is mandatory (inclusion in MD&A is required) and those for which disclosure is merely encouraged.⁽¹⁴⁹⁾

The distinction between the two lies in the character of the projection to be made.⁽¹⁵⁰⁾ Disclosure that is required in the MD&A "is based on `currently known trends, events, and uncertainties that are reasonably expected to have material effects,'"<sup>(151)</sup> while forward-looking disclosure that remains voluntary involves "`anticipating a future trend or event or anticipating a less predictable impact of a nonevent, trend or uncertainty.'"⁽¹⁵²⁾

The following test was established by the Commission to determine when disclosure of forward-looking information in the MD&A is required: "`Is the known trend, demand, commitment, event or uncertainty likely to come to fruition?'"<sup>(153)</sup>--If the answer is "no," then disclosure is not required.<sup>(154)</sup> "`If management cannot make a determination, it must evaluate objectively the consequences of the known trend, demand, commitment, event or uncertainty, on the assumption that it will come to fruition.'"⁽¹⁵⁵⁾ The information must then be disclosed unless it is decided that it is unlikely that the known trend, demand, commitment, event or uncertainty will have a material effect on the company's financial condition or operations.⁽¹⁵⁶⁾

B.  Judicial Treatment of Forward-Looking Statements

The federal judiciary's approach toward private anti-fraud claims arising from forward-looking disclosure evolved in a manner similar to that of the Commission.⁽¹⁵⁷⁾ That is, many federal courts evolved from holding forward-looking statements per se misleading⁽¹⁵⁸⁾ to their current position of protecting such statements from suit under some circumstances.⁽¹⁵⁹⁾

The judiciary based its early position that forward-looking statements should be prohibited on much the same reasoning as the Commission based its early stance.⁽¹⁶⁰⁾ In Union Pacific Railroad Co. v. Chicago Western Railroad Co.,⁽¹⁶¹⁾ the court held that such predictions were misleading because investors may afford them too much weight by assuming the "predictor has special knowledge or unique information to bear out fully his prediction."⁽¹⁶²⁾

A decade later in Beecher v. Able,⁽¹⁶³⁾ the court altered its position slightly to allow forward-looking statements, but only if the realization of the forecast was "highly probable."⁽¹⁶⁴⁾ Many commentators suggested at the time that such a standard was too strict and would discourage rather than encourage, forward-looking disclosure as the Commission recommended.⁽¹⁶⁵⁾

The court's current position was stated in In re Apple Computer Securities Litigation:⁽¹⁶⁶⁾ "A projection or statement of belief contains three implicit factual assertions: (1) that the statement is genuinely believed, (2) that there is a reasonable basis for that belief, and (3) that the speaker is not aware of any undisclosed facts tending to seriously undermine the accuracy of the statement."⁽¹⁶⁷⁾ Only when one of these implied factual assertions is proven inaccurate can the trier of fact then analyze the statement in accordance with other elements of a Rule 10b-5 action: i.e., materiality, reliance, scienter, and causation.⁽¹⁶⁸⁾

Some courts have resolved cases involving forward-looking disclosure on the issue of materiality (or reliance as it is referred to in some cases) without ever addressing the issue of these implied factual assertions.⁽¹⁶⁹⁾ This has often been achieved by invoking the "bespeaks caution" doctrine⁽¹⁷⁰⁾ under which cautionary language, if sufficiently tailored,⁽¹⁷¹⁾ renders the alleged fraudulent forward-looking statement immaterial as a matter of law,⁽¹⁷²⁾ or makes it unreasonable for an investor to rely upon the statement.⁽¹⁷³⁾

  Criticisms of the 1979 Safe Harbor Provision⁽¹⁷⁴⁾

In voluntarily disclosing forward-looking information, companies suffer an increased risk of being named as defendants in class-action securities anti-fraud suits.⁽¹⁷⁵⁾ Empirical data indicates that "this threat of mass shareholder litigation, whether real or perceived, has had a chilling effect on disclosure of forward-looking information."⁽¹⁷⁶⁾ Critics argued that the 1979 Safe Harbor provision did not achieve its framers' original intent of encouraging voluntary forward-looking disclosure,⁽¹⁷⁷⁾ because it failed to adequately protect against nonmeritorious 10b-5 lawsuits based on such disclosure.⁽¹⁷⁸⁾

There were three major weaknesses in the 1979 Safe Harbor Provision: (1) it was too narrow because it only protected forward-looking statements made, reaffirmed, or later published in documents filed with the Commission;⁽¹⁷⁹⁾ (2) its judicial application was not conducive to quick and inexpensive dismissal of nonmeritorious lawsuits;⁽¹⁸⁰⁾ and (3) it failed to clearly set forth the nature and scope of any duty to correct or update a projection once it was made.⁽¹⁸¹⁾

A.  The 1979 Safe Harbor Provision Failed to Protect Statements Other Than Those Made in Filed Documents

The 1979 Safe Harbor Provision applied only to forward-looking statements made, reaffirmed, or later published in documents filed with the SEC.⁽¹⁸²⁾ This under-inclusiveness was a major factor undermining the utility of the 1979 Safe Harbor provision⁽¹⁸³⁾ and is antithetical to the Commission's stated goal of encouraging disclosure of forward-looking information.⁽¹⁸⁴⁾

In modern financial markets there is "increasing analyst and institutional demands for immediate access to predictive information."⁽¹⁸⁵⁾ In the face of such demands an issuer had two choices under the 1979 Safe Harbor provision: (1) answer the inquiry⁽¹⁸⁶⁾ and attempt to reaffirm the information released in a subsequent SEC filing, or (2) refuse to answer; this latter option left the analyst and investors who subscribed to that analyst's recommendations to base their investment decisions solely upon the issuer's limited and selective disclosure already on file with the SEC.⁽¹⁸⁷⁾ Both choices, however, had significant negative consequences that conflicted with the Commission's stated policy of encouraging forward-looking disclosure: releasing forward-looking information in the form of answers to analysts' inquiries burdened the corporation with significant defense costs of nonmeritorious litigation,⁽¹⁸⁸⁾ while refusing to answer the inquiries resulted in less informed and less interested analysts and investors.⁽¹⁸⁹⁾

An issuer who chose to make such forward-looking statements was required to undertake the "impossible task of memorializing" these discussions with analysts, and later reaffirming the statements in Commission documents, in order to obtain the protections of the 1979 Safe Harbor provision.⁽¹⁹⁰⁾ Such reaffirmation was extremely impractical given the informal and unpredictable nature of conversations between issuers and analysts, and was therefore rarely accomplished.⁽¹⁹¹⁾ As a result, statements made during such conversations rarely fell within the protection of the 1979 Safe Harbor provisions, and therefore subjected the corporation to the possibility of defending a lawsuit arising out of the statement.⁽¹⁹²⁾ Indeed, "[t]he majority of litigated cases . . . arise out of non-filed forward-looking statements" made during just such conversations.⁽¹⁹³⁾ Thus, answering the inquiries of demanding analysts often resulted in defense costs arising out of nonmeritorious suits based upon these informal statements.⁽¹⁹⁴⁾ It is this consequence that deterred many corporations from making any predictive statements to analysts, thereby thwarting the flow of information between issuers and investors.⁽¹⁹⁵⁾

Many issuers who have made forward-looking statements to analysts in the past and consequently faced nonmeritorious lawsuits arising from such statements, along with those issuers who recognize and fear such litigation costs,⁽¹⁹⁶⁾ have chosen not to make forward-looking disclosures directly to analysts.⁽¹⁹⁷⁾ On its face such a decision appears obvious because it will insulate the corporation from nonmeritorious securities anti-fraud lawsuits.⁽¹⁹⁸⁾ However, corporate refusal to release information to analysts could result in alienating analysts and investors while also contributing to inefficient capital markets.⁽¹⁹⁹⁾

Analysts often base their investment decisions on informal conversations with corporate management and, conversely, management often relish the opportunity to tout the corporation's future earnings potential.⁽²⁰⁰⁾ Absent such conversations, analysts may be reluctant to recommend the purchase of the corporation's stock due to their uncertainty and fear that the corporation is hiding a poor financial future.⁽²⁰¹⁾ Therefore, while lack of communication between management and analysts does insulate the corporation from suit, it can also lead to a lower stock price arising out of lack-luster analyst recommendations.

Hindering conversation between analysts and corporate management also directly conflicts with the Commission's stated goal of encouraging disclosure of forward-looking information, which would presumably lead to more efficient capital markets.⁽²⁰²⁾ Because of the inadequacies of the 1979 Safe Harbor provision, investors were not given all relevant information, therefore, America's capital markets were not as efficient as they could have been.⁽²⁰³⁾

Because the 1979 Safe Harbor provision failed to protect statements other than those made, reaffirmed, or later published in Commission documents, the issuer was placed in a precarious position: make forward-looking statements to analysts (and risk defending nonmeritorious lawsuits) or release only selected and limited information through SEC filings (and forego the opportunity to promote the corporation in conversations with analysts).⁽²⁰⁴⁾ A revised safe harbor provision that protects all forward-looking disclosures made by issuers, regardless of whether the statement was included in a filed document, would eliminate the corporation's predicament described above.⁽²⁰⁵⁾ A safe harbor provision expanded in scope to protect all forward-looking disclosure would also further the Commission's goal of encouraging disclosure and thereby contribute to the efficiency of America's capital markets.⁽²⁰⁶⁾

B.  The 1979 Safe Harbor Provision Is Not Conducive to Early, Pre-Discovery Dismissal of Nonmeritorious Lawsuits

Under the 1979 Safe Harbor Provision, a forward-looking statement was not actionable as a fraudulent statement if it was made with a reasonable basis and in good faith.⁽²⁰⁷⁾ The reasonable basis and good faith standards, however, were predominantly fact-based inquiries that resulted in jury issues.⁽²⁰⁸⁾ For this reason, a defendant corporation's pre-trial motion for summary judgment would be denied,⁽²⁰⁹⁾ even if the statement in question is ultimately found to be within the protection of the safe harbor.⁽²¹⁰⁾ Recognizing the enormous costs of discovery and litigation,⁽²¹¹⁾ advocates of reform maintain that any safe harbor provision must be amenable to application early in the lawsuit, thereby providing corporations with an avenue for obtaining pre-discovery dismissal of nonmeritorious claims.⁽²¹²⁾

In 1975, the United States Supreme Court recognized the need for a mechanism to dismiss non-meritorious 10b-5 claims before a defendant is forced to chose between making a settlement offer and incurring enormous discovery costs.⁽²¹³⁾ In Blue Chip Stamps v. Manor Drug Stores,⁽²¹⁴⁾ the Court stated:

[A 10b-5] complaint which by objective standards may have very little chance of success at trial has a settlement value to the plaintiff out of any proportion to its prospect of success at trial so long as he may prevent the suit from being resolved against him by dismissal or summary judgment.⁽²¹⁵⁾

The key to any reform then, is to empower defendants with the means to obtain pre-discovery 12(b)(6) dismissal or summary judgment of non-meritorious suits.⁽²¹⁶⁾

A suit is dismissed via a 12(b)(6) motion to dismiss for failure to state a claim if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief."⁽²¹⁷⁾ Moreover, in deciding on a defendant's 12(b)(6) motion to dismiss, the judge must take all factual allegations in the complaint as true and view the allegations in a light most favorable to the plaintiff.⁽²¹⁸⁾ Thus, when a 10b-5 defendant attempted to assert the protection of the 1979 Safe Harbor provision in his motion to dismiss, he rarely prevailed.⁽²¹⁹⁾ This was due to the extreme difficulty in showing that there is no set of hypothetical facts when the statement in question can be shown to lack a reasonable basis or to have been made other than in good faith.⁽²²⁰⁾

This quagmire is peculiar to securities litigation as explained during Senate Hearings on the matter by John Adler, President of Adaptec, Inc.:

It is unreasonable to expect that a court, in the beginning of complex litigation, would presuppose that no set of facts could possibly exist which could support a claim. When the broad net cast by the securities laws is added to the virtually unlimited hypothetical realm that must be eliminated before a case can be dismissed, [12(b)(6)] dismissal rarely occurs.⁽²²¹⁾

The 1979 Safe Harbor provision's standard also was not amenable to application in a pre-trial motion for summary judgment.⁽²²²⁾ A suit is dismissed upon summary judgment if, after considering the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, the judge determines "that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law."⁽²²³⁾ Because the 1979 Safe Harbor provision required predominately a fact-based inquiry, its application was rarely upheld in a motion for summary judgment.⁽²²⁴⁾ That is, the examination of reasonableness and good faith presented, in almost every case, a genuine issue of material fact that precluded summary judgment.⁽²²⁵⁾

Thus, it must be concluded that an effective safe harbor provision must set forth a standard that can be consistently applied to achieve pre-discovery dismissal of meritless 10b-5 actions.⁽²²⁶⁾ Such a provision has arguably been adopted in the Private Securities Litigation Reform Act of 1995.⁽²²⁷⁾

C.  Duty to Correct or Update Under the 1979 Safe Harbor

A final criticism of the 1979 Safe Harbor provision was that it failed to set forth concrete rules about whether and when an issuer had a duty to update or correct a projection, once it was made.⁽²²⁸⁾ Uncertainty in this area arose as a result of the 1979 Safe Harbor provision's failure to address the issue,⁽²²⁹⁾ and the general lack of case law on the subject.⁽²³⁰⁾ Such uncertainty with respect to liability for failing to update or correct forward-looking statements led many companies to abandon forward-looking disclosure altogether.⁽²³¹⁾ Therefore, in order to implement the Commissioner's current policy of encouraging forward-looking statements,⁽²³²⁾ a safe harbor provision must be adopted that addresses this issue.

While some courts have been reluctant to impose a duty on an issuer to update forward-looking statements⁽²³³⁾ that, while true at the time it was made, subsequently became materially misleading;⁽²³⁴⁾ other courts have steadily imposed such a duty on issuers.⁽²³⁵⁾ In between such positions are courts that, while recognizing a duty to update, have largely avoided imposing such a duty.⁽²³⁶⁾ Moreover, even where courts have imposed a duty to update, they "have done so without establishing a generally accepted framework for their analysis."⁽²³⁷⁾ It is this unpredictability and inconsistency among the courts in examining the issue of whether to impose a duty to update that frightens corporations into silence.⁽²³⁸⁾

Many commentators suggest that there should not be a duty to update forward-looking statements, while others merely suggest that any duty imposed be of sufficient predictive value to allow corporations to act in accordance therewith.⁽²³⁹⁾ Clear rules regarding liability are necessary to avoid "the undesirable result of decisions `made on an ad hoc basis, offering little predictive value'" to decision-makers.⁽²⁴⁰⁾ Thus, any effective safe harbor provision must be amenable to systematic and predictive application.⁽²⁴¹⁾ Without such predictability, corporations, as discussed above, will decline to release any forward-looking information.⁽²⁴²⁾ Unfortunately, the 1979 Safe Harbor provision, particularly with regard to the uncertainty surrounding any duty to update, fails in this regard.⁽²⁴³⁾

  The Private Securities Litigation Reform Act of 1995

The Private Securities Litigation Reform Act of 1995⁽²⁴⁴⁾ was enacted over President Clinton's veto on December 22, 1995.⁽²⁴⁵⁾ Most commentators agree that the Act's amendments to the safe-harbor provision are a good first step in heading off meritless suits early in the litigation process.⁽²⁴⁶⁾ Many attorneys, however, maintain their stance against advising clients to issue forward-looking statements due to the uncertainty surrounding the existence of a duty to update such statements.⁽²⁴⁷⁾

A.  A House and Senate Compromise

In the spring and summer of 1995 both the House of Representatives and the Senate passed securities litigation reform legislation containing expanded safe harbor provisions for forward-looking statements.⁽²⁴⁸⁾ The House Safe Harbor provision was highly criticized for being overly broad as it protected any forward-looking statement so long as it was clearly labeled as such and accompanied by a warning that the "projection[], estimate[], or description[] may not be realized."⁽²⁴⁹⁾ Alternatively, the Senate, while requiring the same cautionary language, excluded from the protection of its Safe Harbor provision certain types of forward-looking disclosure in an effort to provide more protection for investors.⁽²⁵⁰⁾ Nonetheless, the Senate Safe Harbor provision was also widely criticized for providing corporations with too much protection.⁽²⁵¹⁾ In the end, however, the Conference Committee adopted a safe harbor provision substantially different from both the Senate and House versions.⁽²⁵²⁾ The final version was essentially a codification of the judicially developed "bespeaks caution" doctrine and excluded from its protection many types of forward-looking statements, including those made in connection with an initial public offering and those made by an issuer of penny stock.⁽²⁵³⁾

As passed by the House in March 1995, H.R. 1058 would have protected from liability any forward-looking statement, whether made orally or in writing, so long as it was identified as a forward-looking statement and accompanied by a warning that "such protection[], estimate[], or description may not be realized."⁽²⁵⁴⁾ This safe harbor provision was considered by many to be overly broad because it protected forward-looking statements made in connection with an initial public offering or tender offer, and those contained in financial statements.⁽²⁵⁵⁾ Moreover, the House Safe Harbor provision even protected intentionally misleading forward-looking statements, provided such disclosure was labeled forward-looking and accompanied by the aforementioned boilerplate warning.⁽²⁵⁶⁾

While the Senate Safe Harbor provision similarly protected forward-looking statements labeled as such and accompanied by a warning about the uncertainty of the disclosure, it differed from the House Safe Harbor provision because it excluded certain forward-looking statements from its protection.⁽²⁵⁷⁾ Specifically excluded from the Senate Safe Harbor provision's protection were statements made in connection with issues of penny stock, initial public offerings, tender offers, and offerings of securities by a blank check company.⁽²⁵⁸⁾ Also excluded from protection were forward-looking statements included in financial statements prepared in accordance with generally accepted accounting principles.⁽²⁵⁹⁾ Most significantly, however, the Senate Safe Harbor provision did not provide protection for forward-looking statements "knowingly made with the purpose and actual intent of misleading investors."⁽²⁶⁰⁾

The final Conference Committee Bill represented a compromise between the House and Senate and was passed into law over President Clinton's veto.⁽²⁶¹⁾ The 1995 Safe Harbor Provision⁽²⁶²⁾ for forward-looking statements⁽²⁶³⁾ has two prongs.⁽²⁶⁴⁾ The first prong is essentially a codification of the "bespeaks caution" doctrine.⁽²⁶⁵⁾ Accordingly, a written forward-looking statement is protected if it "is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ "from those projected."⁽²⁶⁶⁾ Under the second prong, which applies when a forward-looking statement is not accompanied by the aforementioned cautionary statements, the defendant is protected from private liability if the plaintiff fails to prove that the forward-looking statement was made or approved with actual knowledge that it was false or misleading.⁽²⁶⁷⁾

The 1995 Safe Harbor provision also protects oral forward-looking statements in certain circumstances.⁽²⁶⁸⁾ In order to be within the Safe Harbor provision's protection, the person making the forward-looking statement must identify the statement as such and state that the results may differ from those projected in the statement.⁽²⁶⁹⁾ Additionally, the person must identify a "readily available"⁽²⁷⁰⁾ written document that contains factors that could cause results to differ materially.⁽²⁷¹⁾

The Conference Committee excluded from the 1995 Safe Harbor provision's protection many of the same forward-looking statements that were excluded from the Senate Safe Harbor provision.⁽²⁷²⁾ The most significant exclusion is that which "denies safe harbor protection to any forward-looking statements prepared in accordance with generally accepted accounting principles."⁽²⁷³⁾ The 1995 Safe Harbors provision's protection is also unavailable to investment companies, issuers of penny stock, and statements made in connection with an initial public offering or a tender offer.⁽²⁷⁴⁾

The 1995 Safe Harbor provision also includes a provision for a "stay of discovery . . . during the pendency of any motion" to dismiss or motion for summary judgment filed by the defendant.⁽²⁷⁵⁾ Moreover, Congress specifically ordered the court to consider any statement cited in the complaint and cautionary statement accompanying the forward-looking statement when deciding motions to dismiss.⁽²⁷⁶⁾ These clauses were included in the House and Senate Safe Harbor provisions, as well as the final 1995 Safe Harbor provision, as a means for eliminating any settlement leverage that a strike suit plaintiff may have over a defendant corporation seeking to minimize litigation costs.⁽²⁷⁷⁾

The 1995 Safe Harbor provision includes two other significant clauses.⁽²⁷⁸⁾ One clause states that nothing in the Safe Harbor provision imposes any duty to update forward-looking statements;⁽²⁷⁹⁾ while the other encourages the Commission to "promulgate rules or regulations to expand the statutory safe harbor by providing additional exemptions from liability or extending its coverage to additional types of information."⁽²⁸⁰⁾ These clauses, along with the 1995 Safe Harbor provision itself will be critically discussed in Part V.B.

B.  The 1995 Safe Harbor Overcomes Some, But Not all of the Inadequacies of the 1979 Safe Harbor Provision

The 1995 Safe Harbor provision remedied many of the problems associated with the 1979 Safe Harbor provision, including coverage of discussions between corporate executives and analysts, and summary dismissal of meritless claims.⁽²⁸¹⁾ However, it failed to clear up the uncertainty surrounding an issuer's duty to update a forward-looking statement once it has been made.⁽²⁸²⁾

1.  Application of the 1995 Safe Harbor Provision to Discussions Between Corporate Executives and Analysts

Recall that the 1979 Safe Harbor provision applied only to forward-looking statements made, reaffirmed, or later published in documents filed with the Commission.⁽²⁸³⁾ This "filing" requirement meant that corporate executives had to memorialize every analyst discussion and subsequently file the information disclosed therein with the Commission.⁽²⁸⁴⁾ Consequently, many corporations refused to talk to analysts or did so without the protection of the 1979 Safe Harbor provision.⁽²⁸⁵⁾

In enacting the 1995 Safe Harbor provision, Congress rejected such a "filing" requirement in an attempt to facilitate oral communication between corporate executives and analysts.⁽²⁸⁶⁾ Companies making an informal announcement of projected earnings, for example, must first identify the statement as forward-looking, and then refer to the risk that actual results may differ materially from those projected.⁽²⁸⁷⁾ Finally, reference must be made to a "readily available" document that discusses factors that could cause actual results to differ materially.⁽²⁸⁸⁾ The document in which the risk factors associated with the projected earnings are contained could be a filed document, a press release or any other widely disseminated document.⁽²⁸⁹⁾

According to William M. Kelly, General Counsel to Silicon Graphics Inc., "the easiest place to take advantage of this provision is in communications directed to the financial community."⁽²⁹⁰⁾ Kelly believes that the following warning could be used to bring conversations between corporate management and analysts within the protection of the 1995 Safe Harbor:

The matters we will be discussing today, other than historical information, consists of forward-looking statements, and as such are subject to the risks and uncertainties that we discuss in detail in our reports filed with the SEC, including our form 10-Q for the quarter ended September 30, 1995. Actual results may vary.⁽²⁹¹⁾

Kelly recommends that a similar warning preface any press conferences and print interviews that the corporation may undertake.⁽²⁹²⁾ Indeed, as a testament to the flexibility of the 1995 Safe Harbor provision, such a warning could be delivered by management, general counsel, or even the public relations staff.⁽²⁹³⁾

Thus, the 1995 Safe Harbor provision is more amenable than its 1979 counterpart to application in America's capital markets, in which informal communication between corporate executives and analysts is not only commonplace, but is essential to the market's efficiency.⁽²⁹⁴⁾ The 1995 Safe Harbor provision encourages oral forward-looking disclosure, while providing the public with a means to ascertain the context within which the forward-looking statement should be considered.⁽²⁹⁵⁾ In this regard it represents a satisfactory balance between necessary investor protection and desired corporate disclosure.⁽²⁹⁶⁾

2.  Pre-Discovery Application of the 1995 Safe Harbor Provision

As elaborated earlier, a major problem with the 1979 Safe Harbor provision was its inapplicability in the early stages of litigation.⁽²⁹⁷⁾ Recognizing this, Congress sought to provide a mechanism for summary disposition of claims based upon protected forward-looking statements.⁽²⁹⁸⁾ Accordingly, Congress created the 1995 Safe Harbor provision with an entirely different standard than that of the 1979 Safe Harbor provision.⁽²⁹⁹⁾ Furthermore, included within the 1995 Safe Harbor is a provision for a stay of discovery for the pendency of a motion to dismiss or motion for summary judgment.⁽³⁰⁰⁾ While many commentators cautiously await judicial interpretation of the new provisions, most agree that the 1995 Safe Harbor provision will eventually reduce the number of strike suits and spur forward-looking disclosure.⁽³⁰¹⁾

Recall, under the 1995 Safe Harbor provision, a forward-looking statement is protected "if and to the extent that . . . [the statement is] identified as a forward-looking statement, and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those [projected]."⁽³⁰²⁾ The key question to the success or failure of this Safe Harbor provision will be the court's interpretation of what is considered to be "meaningful cautionary statements" and "important factors."⁽³⁰³⁾

Because this Safe Harbor provision is grounded in the judicially created "bespeaks caution" doctrine,⁽³⁰⁴⁾ the courts will undoubtedly look to that line of cases for guidance.⁽³⁰⁵⁾ Under the "bespeaks caution" doctrine, cautionary language renders alleged forward-looking misrepresentations or omissions immaterial as a matter of law.⁽³⁰⁶⁾ Courts have warned that "a vague or blanket (boilerplate) disclaimer which merely warns the reader that the investment has risks" is insufficient to render the forward-looking statement immaterial.⁽³⁰⁷⁾ Rather, courts require that the cautionary statement "`be substantive and tailored to the specific future projections, estimates or opinions'" alleged to have been fraudulent.⁽³⁰⁸⁾ Further, the cautionary statements must "discredit the [misrepresentation] so obviously that the risk of real deception drops to nil" in order to be given effect by the court.⁽³⁰⁹⁾

Additionally, courts will look to the Statement of Managers⁽³¹⁰⁾ contained in the Conference Committee Report for insights into the proper application of the 1995 Safe Harbor provision.⁽³¹¹⁾ In the Statement of Managers the courts will find language similar to their own.⁽³¹²⁾ For example, "boilerplate warnings will not suffice as meaningful cautionary statements"⁽³¹³⁾ and "cautionary statements must convey substantive information about factors that realistically could cause results to differ materially from those projected in the forward-looking statement."⁽³¹⁴⁾ The Statement of Managers further asserts: the "`important factors'" that are to be included in the cautionary statement "must be relevant to the projection and must be of a nature that the factor or factors could actually affect whether the forward-looking statement is realized."⁽³¹⁵⁾

While plaintiff's attorneys charge that any safe harbor provision is akin to a "license to lie,"⁽³¹⁶⁾ most commentators, and indeed most courts,⁽³¹⁷⁾ agree that the 1995 Safe Harbor provision, if applied in accordance with the bespeaks caution doctrine, provides adequate safeguards against instances of securities fraud.⁽³¹⁸⁾ Critics, United States President William J. Clinton among them, charge that the Statement of Managers contains language that weakens the cautionary language required by the 1995 Safe Harbor provision itself, and represents a deviation from the "bespeaks caution" doctrine.⁽³¹⁹⁾ They argued that this language will leave investors vulnerable to fraud because the Statement of Managers is relied upon by courts as a guide for interpreting the statute.⁽³²⁰⁾

The controverted language within the Statement of Managers includes the statement that "[t]he Conference Committee expects that the cautionary statements identify important factors that could cause [actual] results to differ materially--but not all factors."⁽³²¹⁾ The Statement of Managers goes further to state that "[f]ailure to include the particular factor that ultimately causes the forward-looking statement not to come true will not mean that the statement is not protected by the safe harbor."⁽³²²⁾

The Conference Committee's reasoning behind these statements appears to be in accordance with the legislation's stated goal of encouraging forward-looking disclosure while maintaining investor protection.⁽³²³⁾ Corporations undoubtedly would continue their non-disclosure policies "if the failure to identify the particular factor that ultimately causes results to differ automatically led to a loss of [safe harbor] protection."⁽³²⁴⁾ After all, the unidentified factor "may be one that is reasonably believed to be unimportant (or even unknown) at the time the predictive statement is made."⁽³²⁵⁾ Furthermore, because the cautionary statements must be "meaningful" as described above, investors should have more than enough information at their disposal to assess the likelihood of the forward-looking statement coming to fruition.⁽³²⁶⁾ Thus, while the "weakening" language cited by critics in the Statement of Managers is necessary to encourage forward-looking disclosure, other language in the Statement describes the extensive and "meaningful" information that these cautionary statements must include.⁽³²⁷⁾ In doing so, the Statement of Managers strikes a logical balance between the objectives of encouraging forward-looking disclosure and protecting investors.⁽³²⁸⁾

Perhaps the most significant advantage of the 1995 Safe Harbor provision over the 1979 Safe Harbor provision is its amenability to application early in the litigation process. Recall the 1979 Safe Harbor provision required examinations of reasonableness and good faith, which can only be decided by a jury, thereby precluding application in the motion to dismiss or summary judgment stage. Alternatively, the 1995 Safe Harbor provision's "use of the words `meaningful' and `important factors' are intended to provide a standard for the types of cautionary statements upon which a court may, where appropriate, decide a motion to dismiss, without examining the state of mind of the defendant."⁽³²⁹⁾ Moreover, the 1995 Safe Harbor provision provides for a stay of discovery during the pendency of any motion to dismiss or motion for summary judgment.⁽³³⁰⁾ The 1995 Safe Harbor provision then, will result in early, relatively inexpensive dismissal of meritless claims, thereby reducing the costs of litigating and removing any settlement leverage strike suit plaintiffs may have had under the 1979 Safe Harbor provision.⁽³³¹⁾

3.  Duty to Update

A major inadequacy of the 1995 Safe Harbor provision is its failure to clearly set forth when, if ever, an issuer has a duty to update forward-looking statements.⁽³³²⁾ As discussed earlier, issuers are reluctant to make forward-looking disclosure for fear that while the forward-looking statement may be protected when made, the issuer may be held liable for failing to update the statement if and when circumstances change.⁽³³³⁾ Due to the 1995 Safe Harbor provision's failure to adequately address this issue, issuers may continue their policies forbidding forward-looking disclosures by corporate executives.⁽³³⁴⁾

The 1995 Safe Harbor provision clearly states "[n]othing in this section shall impose upon any person a duty to update a forward-looking statement."⁽³³⁵⁾ Unfortunately, the meaning of this is unclear.⁽³³⁶⁾ If there is a pre-existing duty to update, the above language would appear to leave such a duty "unchanged and intact."⁽³³⁷⁾ Opponents of the duty to update, however, contend that by using this language "Congress was overturning those judicial decisions that have imposed a duty to update projections under certain circumstances."⁽³³⁸⁾

Due to such uncertainty, experts maintain that the only prudent option for any issuer making forward-looking disclosure is to assume a duty to update.⁽³³⁹⁾ Congress' failure to address this issue is antithetical to its objective of encouraging forward-looking disclosure and the uncertainty will continue to hinder, rather than encourage such disclosure.

  Conclusion

The increase in shareholder litigation involving allegations of fraudulent forward-looking statements has acted to discourage forward-looking disclosure and impose a tax on capital formation in America.⁽³⁴⁰⁾ In order to remedy this problem, an effective Safe Harbor provision must be implemented that would preclude litigation of class-actions securities suits involving forward-looking statements.⁽³⁴¹⁾ The 1979 Safe Harbor provision offered very little protection; what little protection was offered came too late in the process to be of any value.⁽³⁴²⁾ The 1995 Safe Harbor provision appears to have the potential, if applied in accordance with the judicially created "bespeaks caution" doctrine and the Statement of Managers, to deter meritless suits, thereby spurring forward-looking disclosure.⁽³⁴³⁾ The major disappointment in this legislation is its failure to adequately address the uncertainty surrounding any duty to update.⁽³⁴⁴⁾ In the future, the courts, Congress, or the Commission would be well-advised to clear up this uncertainty, as it is a major hurdle preventing many corporations from making forward-looking disclosure.

Forward-looking statements are predictions made by corporate executives who have a personal stake in the future of the company and as such, are bound to be optimistic. However, under the 1995 Safe Harbor provision, investors will be provided with the information necessary to evaluate the likelihood of the forward-looking statement coming to fruition, and can invest accordingly.⁽³⁴⁵⁾ The 1995 Safe Harbor provision therefore encourages not only the disclosure of risk factors associated with a forward-looking statement, it encourages more forward-looking disclosure by protecting such disclosure from suit. The resulting increase in disclosure can only increase the efficiency of America's capital markets. Moreover, the protection provided by the 1995 Safe Harbor provision will also free corporate resources, now lost on litigation, to be used in research and development of new technologies. Thus, effective application of the 1995 Safe Harbor provision will not only result in more efficient capital markets, but it will also lead to growth in America's economy.

Stephen M. Muniz^*

1. James F. Stapleton, The Securities-Fraud Litigation Reform, Conn. L. Trib., July 31, 1995, at 15.

2. See Harvey L. Pitt & Karl A. Groskaufmanis, The Securities Litigation Reform Act's Safe Harbor for Forward Looking Statements Would Deter Fraud Suits Against Companies, Nat'l L.J., Apr. 17, 1995, at B4.

3. See id. Four additional suits were filed later that afternoon and five more appeared the next business day. See Harvey L. Pitt et al., Contracting With America--The Need for Securities Litigation Reform and a Midpoint Assessment of H.R. 1058, in Advanced Securities Law Workshop 1995, at 587, 590 (PLI Corp. Law & Practice Course Handbook Series No. B-902, 1995).

4. See In re Philip Morris Sec. Litig., [1994-1995 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,509, at 91,450 (Jan. 6, 1995).

5. See Stapleton, supra note 1, at 15. The court agreed that this suit was a transparent attempt to sue Philip Morris without any real evidence of fraud. See In re Philip Morris Sec. Litig., [1994-1995 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,509, at 91,449-50 (Jan. 6, 1995). The court dismissed the complaints noting that:

[I]n the few hours that counsel devoted to getting the initial complaints to the courthouse, overlooked was the fact that two of them contained identical allegations, apparently lodged in counsel's computer memory of `fraud,' . . . that the defendants here engaged in conduct to create and prolong the illusion of [Philip Morris'] success in the toy industry.Id. at 91,450.

6. A strike suit is a class-action suit "brought by shareholders against a company after the company's stock price drops." John L. Latham & Jay E. Sloman, Securities Regulation, 46 Mercer L. Rev. 1463, 1494 (1995) (footnote omitted). In such actions "the plaintiff is able to obtain a favorable settlement from the defendant even though the defendant knows that the plaintiff's claim would be unlikely to prevail at a trial." Curt Cutting, Turning Point for Rule 10b-5: Will Congressional Reforms Protect Small Corporations?, 56 Ohio St. L.J. 555, 556 n.4 (1995); see also 141 Cong. Rec. S8891 (daily ed. June 22, 1995) (statement of Sen. D'Amato) ("[Strike] suits . . . are often based on nothing more than a company's announcement of bad news, not evidence of fraud.").

7. See D. Brian Hufford, Deterring Fraud vs. Avoiding the "Strike Suit": Reaching an Appropriate Balance, 61 Brook. L. Rev. 593, 595 (1995). "Of the approximately 300 securities lawsuits filed each year, almost 93% settle at an average settlement cost of $8.6 million." Private Securities Litigation Reform Act of 1995, [1995 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 85,629, at 86,760 (June 19, 1995) [hereinafter 1995 Reform Act] (footnote omitted). According to Senator Alfonse D'Amato, these settlements were generally based on the wealth of the defendant corporation rather than the merits of the plaintiff's case. See id.

8. See Private Litigation Under the Federal Securities Laws: Hearings Before the Subcomm. on Securities of the Senate Comm. on Banking, Housing and Urban Affairs, 103d Cong. 104-05 (1993) [hereinafter Hearings] (statement of John G. Adler, President, Adaptec, Inc.).

9. See id. at 189 (statement of Edward R. McCracken, President, Silicon Graphics, Inc.).

10. See infra notes 24-37 and accompanying text.

11. See infra notes 24-37 and accompanying text.

12. See 17 C.F.R. § 230.175 (1996); see id. § 240.3b-6.

13. 17 C.F.R. § 240.3b-6 (1996); see also infra Part III.A.3.

14. See infra Part IV.

15. See infra Part IV.A.

16. See infra Part IV.B.

17. See infra Part IV.C.

18. See infra Part V.

19. See infra Part II.

20. See infra Part III.

21. See infra Part III.

22. See infra Part IV.

23. See infra Part V.

24. The Code of Federal Regulations defines the term forward-looking statement as:

(1) A statement containing a projection of revenues, income (loss), earnings (loss) per share, capital expenditures, dividends, capital structure or other financial items;

(2) A statement of management's plans and objectives for future operations;

(3) A statement of future economic performance contained in management's discussion and analysis of financial condition and results of operations included pursuant to Item 303 of Regulation S-K . . . ; or

(4) Disclosed statements of the assumptions underlying or relating to any of the statements described in [the above].17 C.F.R. § 230.175(c) (1996).

25. See Safe Harbor for Forward-Looking Statements, Exchange Act Release No. 33-7101, 57 SEC Docket (CCH) 2011 (Oct. 13, 1994) [hereinafter Safe Harbor]; see also 1995 Reform Act, supra note 7, at 86,764 ("`Understanding a company's own assessment of its future potential would be among the most valuable information shareholders and potential investors could have about a firm.'" (quoting Securities Litigation Reform Proposals, S. 240, S. 667, and H.R. 1058: Hearings Before the Subcomm. on Securities of the Senate Comm. on Banking, Housing and Urban Affairs, 104th Cong. 260 (1995) (statement of Richard C. Breeden, former SEC Chairman))).

26. See 1995 Reform Act, supra note 7, at 86,764.

27. See supra notes 10-11 and accompanying text.

28. See supra note 24 for a definition of forward-looking statements.

29. See Harold S. Bloomenthal, Emerging Trends in Securities Law § 9.01[1] (1995). A contentious debate has taken place in recent years about whether shareholder class-action securities litigation has in fact hindered the growth of the American economy. Compare Attitude Shift Acknowledging Abuses in Shareholder Litigation Seen at SEC, 26 Sec. Reg. & L. Rep. (BNA) No. 26, at 937 (July 1, 1994) [hereinafter Attitude Shift] ("[T]he virtual explosion in shareholder litigation that is occurring in the United States is crippling effective management, and is clearly reducing the competitiveness of U.S. companies in the global marketplace.") with Joel Seligman, The Merits Do Matter: A Comment on Professor Grundfest's "Disimplying Private Rights of Action Under the Federal Securities Laws: The Commission's Authority," 108 Harv. L. Rev. 438, 440 (1994) ("For all the emotional appeal of arguments that excessive litigation is destroying capital formation, existing data illustrate a quite different picture."). Proponents of reform claim that forced inflated settlements are equivalent to "`a tax on capital formation'" and place American corporations at a competitive disadvantage. Id. at 439 n.6 (quoting Hearings, supra note 8, at 37 (statement of Edward R. McCracken, President, Silicon Graphics, Inc.)). Plaintiffs on the other hand argue: (1) that such settlements are achieved only because corporations fear a finding of fraud by the court and (2) that absent the threat of private class-action litigation, corporate reported information will become less reliable and investors will become more susceptible to fraudulent schemes. See Joseph A. Grundfest, Disimplying Private Rights of Action Under the Federal Securities Laws: The Commission's Authority, 107 Harv. L. Rev. 963, 974 (1994). As this debate continues before Congress, in the courts and in academia, proposals continue to mount that advocate either the dramatic expansion of shareholder class action litigation or the sharp curtailment of such litigation. See id. Senator Dodd complained that even after extensive congressional hearings addressing the issue, there was "no agreement on whether there is in fact a problem, the extent of the problem, or the solution to the problem." Hearings, supra note 8, at 280 (statement of Senator Dodd). He further remarked that he had "never encountered an issue where there is such disagreement over the basic facts." Id. (statement of Senator Dodd). However, regardless of whether shareholder litigation has actually justifiably or unjustifiably increased or decreased over the past several years, one point is clear: The mere threat of mass shareholder litigation, "whether real or perceived," has had an adverse effect on capital markets in that it has chilled the disclosure of forward-looking information. Safe Harbor, supra note 25, at 2007. Arthur Levitt, Chairman of the SEC agrees: "`[T]here is no denying that there are real problems in the current system--problems that need to be addressed not just because of abstract rights and responsibilities, but because investors and markets are being hurt by litigation excesses.'" 1995 Reform Act, supra note 7, at 86,757 (quoting Arthur Levitt, "Between Caveat Emptor and Caveat Vendor: The Middle Ground of Litigation Reform," Remarks at the 22d Annual Securities Regulation Institute, San Diego, California (Jan. 25, 1995)).

30. Attitude Shift, supra note 28, at 937; see also 1995 Reform Act, supra note 7, at 86,760. According to a survey conducted at the American Business Conference, 75% of directors feel that 10b-5 litigation is affecting their ability to compete, 81% of directors are spending increased amounts of time on litigation, and the same 81% believe that the commitment of time and resources to litigation has doubled over the past five years. See Hearings, supra note 8, at 346 (statement of Sen. Pete Domenici). But see Seligman, supra note 29, at 443-45 (attacking data upon which many commentators based their conclusion that securities litigation has significantly increased in recent years).

31. See 17 C.F.R. § 240.10b-5 (1996); see also infra notes 44-64 and accompanying text.

32. See Bloomenthal, supra note 29, § 9.01[1].

33. See Janet C. Alexander, Do the Merits Matter? A Study of Settlement in Securities Class Actions, 43 Stan. L. Rev. 497, 569 (1991). Of the seventeen computer or computer related initial public offerings executed during the first six months of 1983, every company with a market loss of at least twenty million was sued. See id. at 510-11; see also 1995 Reform Act, supra note 7, at 86,760 ("A drop in a public company's stock price, a failed product development project, or even unpredictable adverse market conditions that affect earnings results for a quarter can trigger numerous securities fraud lawsuits against a company."); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 739 (1975) ("[L]itigation under Rule 10b-5 presents a danger of vexatiousness different in degree and in kind from that which accompanies litigation in general."). But see Seligman, supra note 29, at 442-45 (stating that claims based merely on a drop in stock price are regularly dismissed by federal courts).

34. See Anthony Q. Fletcher, Note, Curing Crib Death: Emerging Growth Companies, Nuisance Suits, and Congressional Proposals for Securities Litigation Reform, 32 Harv. J. on Legis. 493, 499-506 (1995); see also 1995 Reform Act, supra note 7, at 86,765 ("One witness described the broad discovery requests that resulted in the company producing over 1,500 boxes of documents at an expense of $1.4 million." (footnote omitted)).

35. See Fletcher, supra note 34, at 502.

36. See Grundfest, supra note 29, at 973 n.38. The damages claimed in these actions are enormous. See Hearings, supra note 8, at 189 (statement of Edward R. McCracken, President, Silicon Graphics, Inc.). Often settlement is a far better option than the risk of bankruptcy even if that risk is nominal. See id. (statement of Edward R. McCracken, President, Silicon Graphics, Inc.). The reasoning behind settling such suits was aptly explained by one corporate executive as follows:

[I]f [for example,] the potential damages are $100 million, and it will cost $3 million to take the case to trial, then even if we think our chances of winning ultimately are 90 percent, it may be a rational business decision to settle for some fraction of $13 million, which is the discounted likelihood of losing plus attorney's fees.

Id. (statement of Edward R. McCracken, President, Silicon Graphics, Inc.).

37. See 1995 Reform Act, supra note 7, at 86,765 ("[T]wo-thirds of venture capital firms were reluctant to discuss their performance with analysts or the public because of the threat of litigation." (footnote omitted)).

38. See 17 C.F.R. § 230.175 (1996); see id. § 240.3b-6.

[A forward-looking statement] which is made by or on behalf of an issuer or by an outside reviewer retained by the issuer shall be deemed not to be a fraudulent statement . . . unless it is shown that such statement was made or reaffirmed without a reasonable basis or was disclosed other than in good faith.Id. § 240.3b-6.

39. See id. § 240.3b-6.

40. See Bloomenthal, supra note 29, § 3.05[1]; see also 1995 Reform Act, supra note 7, at 86,765; Safe Harbor, supra note 25, at 2007.

41. See Fed. R. Civ. P. 12(b)(6); see also infra notes 217-21 and accompanying text.

42. See Fed. R. Civ. P. 56; see also infra notes 222-25 and accompanying text.

43. Safe Harbor, supra note 25, at 2008.

44. 17 C.F.R. § 240.10b-5 (1996). Rule 10b-5 states the following:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any devise, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.Id.

45. See James D. Cox, Securities Regulation 717 (1991). The SEC lacks sufficient resources to pursue Rule 10b-5 violations on its own, therefore private enforcement of this rule is considered indispensable to maintaining the "fairness and efficiency" of capital markets and promoting investor confidence. See Fletcher, supra note 34, at 496 n.18. Moreover, considering the budgetary constraints placed upon SEC resources in recent years, the private right of action will likely play an increasingly significant role in regulating securities markets in the future. See 1995 Reform Act, supra note 7, at 86,777.

46. "Although Rule 10b-5 does not expressly provide for a private right of action to enforce the federal securities laws, the courts have interpreted the Rule to be enforceable through an implied right of action." Fletcher, supra note 34, at 497 (footnoting Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilberston, 501 U.S. 350, 358-59 (1991) ("[R]ecognizing that private claims arising under 10b-5 are of judicial creation and have been implied by courts for nearly fifty years.")); see also Herman & MacLean v. Huddleston, 459 U.S. 375, 380 (1983) (stating that the existence of an "implied remedy is simply beyond peradventure"); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 196 (1976) (stating that a private right of action for violations of Rule 10b-5 is "well established"); Kardon v. National Gypsum Co., 69 F. Supp. 512, 514 (E.D. Pa. 1946) ("The statute would be of little value unless a party to the contract could apply to the Courts to relieve himself of obligations under it or to escape its consequences."); 1995 Reform Act, supra note 7, at 86,757.

47. Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 12-13 (1971).

48. 17 C.F.R. § 240.10b-5 (1996); see also SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 858-62 (2d Cir. 1968) (discussing the scope of the "in connection with" requirement).

49. Ernst & Ernst, 425 U.S. at 193 (emphasis added) (footnote omitted).

50. See Fletcher, supra note 34, at 497 n.22. See generally Roger J. Dennis, Materiality and the Efficient Capital Market Model: A Recipe for the Total Mix, 25 Wm. & Mary L. Rev. 373, 374-81 (1984) (discussing the research behind ECMH); Jeffrey N. Gordon & Lewis A. Korhauser, Efficient Markets, Costly Information, and Securities Research, 60 N.Y.U. L. Rev. 761 (1985) (providing a critical analysis of ECMH); Michael W. Prozan & Michael T. Fatale, Revisiting "Truth in Securities": The Use of the Efficient Capital Market Hypothesis, 20 Hofstra L. Rev. 687, 710-22 (1992) (discussing the court's application of ECMH); Lynn A. Stout, The Unimportance of Being Efficient: An Economic Analysis of Stock Market Pricing and Securities Regulation, 87 Mich. L. Rev. 613 (1988) (providing a critical discussion of ECMH).

51. See Fletcher, supra note 34, at 497; see also T.J. Raney & Sons, Inc. v. Fort Cobb, Okla. Irrigation Fuel Auth., 717 F.2d 1330, 1332 (10th Cir. 1983) (holding that market price reflects all known material information); Blackie v. Barrack, 524 F.2d 891, 907 (9th Cir. 1975); Grossman v. Waste Management Inc., 589 F. Supp. 395, 403 (N.D. Ill. 1984); In re LTV Securities Litig., 88 F.R.D. 134, 142-47 (N.D. Tex. 1980).

52. Fletcher, supra note 34, at 497-98.

53. See supra notes 44-49 and accompanying text.

54. See Fletcher, supra note 34, at 498.

55. See infra notes 56-59 and accompanying text. See generally Victor L. Bernard et al., Challenges to the Efficient Market Hypothesis: Limits to the Applicability of Fraud-on-the-Market Theory, 73 Neb. L. Rev. 781 (1994) (providing a critical analysis of ECMH and Fraud on the Market); Barbara Black, Fraud on the Market: A Criticism of Dispensing with Reliance Requirements in Certain Open Market Transactions, 62 N.C. L. Rev. 435 (1984) (including the history and analysis of fraud on the market theory and discussing the efficient capital markets hypothesis); Nicholas L. Geogakopoulos, Frauds, Markets, and Fraud-on-the-Market: The Tortured Transition of Justifiable Reliance from Deceit to Securities Fraud, 49 U. Miami L. Rev. 671 (1995) (criticizing the fraud on the market theory as it rests upon the ECMH); Jonathan R. Macy & Geoffrey P. Miller, Good Finance, Bad Economics: An Analysis of the Fraud-on-the-Market Theory, 42 Stan. L. Rev. 1059 (1990) (criticizing and discussing Fraud on the Market and ECMH); Andrew R. Simmonds et al., Dealing with Anomalies, Confusion and Contradiction in Fraud on the Market Securities Class Actions, 81 Ky. L.J. 123 (1992-93) (criticizing and discussing Fraud on the Market and ECMH).

56. 485 U.S. 224 (1988).

57. See id. at 246-47.

58. Fletcher, supra note 34, at 498 (footnote omitted); see also In re LTV Securities Litig., 88 F.R.D. 134, 143 (N.D. Tex. 1980) ("The market is acting as the unpaid agent of the investor, informing him that given all the information available to it, the value of the stock is worth the market price.").

59. Fletcher, supra note 34, at 498 (footnote omitted); see also Basic Inc., 485 U.S. at 247. Because most publicly available information is reflected in market price, the Court held that an investor's reliance on any proven misrepresentation is presumed for the purpose of a Rule 10b-5 action. See id. The presumption of reliance, however, may be rebutted if the defendant can show that the price was not affected by the misrepresentation, or that the plaintiff did not, in fact, trade in reliance on the integrity of the market price. See id. at 248-49. See, e.g., In re Apple Computer Sec. Litig., 886 F.2d 1109, 1113-15 (9th Cir. 1989); Blackie v. Barrack, 524 F.2d 891, 906 (9th Cir. 1975); Tolan v. Computervision Corp., 696 F. Supp. 771, 773 (D. Mass. 1988); Grossman v. Waste Management, Inc., 589 F. Supp. 395, 400-03 (N.D. Ill. 1984); McNichols v. Loeb Rhoades & Co., 97 F.R.D. 331, 337-38, 344 (N.D. Ill. 1982).

60. See supra notes 44-54 and accompanying text.

61. See supra notes 1-9 and accompanying text; see also 1995 Reform Act, supra note 7, at 86,760. This Note references such actions as "extortion suits" because their primary purpose is to extort a settlement from a deep-pocketed corporation that seeks to avoid costly litigation. See supra notes 1-9 and accompanying text.

62. See Bloomenthal, supra note 29, § 9.01[1] ("A LEXIS search discloses in excess of 100 opinions relating to Rule 10b-5 projection cases for the 20-month period commencing January 1, 1993.").

63. See Grundfest, supra note 29, at 974; see also Safe Harbor, supra note 25, at 2009-12.

64. See 1995 Reform Act, supra note 7, at 86,757-58.

65. See supra Part II.A-B.

66. See 1995 Reform Act, supra note 7, at 86,757-58.

67. See id.

68. See id.

69. See Safe Harbor, supra note 25, at 2000.

70. See Guides for Disclosure of Projections of Future Economic Performance, Exchange Act Release No. 15,305, 16 SEC Docket 81, 82 (Nov. 7, 1978).

71. See Homer Kripke, The SEC, The Accountants, Some Myths and Some Realities, 45 N.Y.U. L. Rev. 1151, 1197 (1970).

72. See House Comm. on Interstate and Foreign Commerce, Rep. of the Advisory Committee on Corporate Disclosure to the Securities and Exchange Commission, 95th Cong., 1st Sess. D-60 (Comm. Print 1977) [hereinafter Advisory Committee Report].

73. See Cox, supra note 45, at 9. "Institutional investors are America's largest shareholders, with about $9.5 trillion in assets, accounting for 51% of the equity market." 1995 Reform Act, supra note 7, at 86,761. Examples of "institutional investors . . . [include] public and private pension plans, mutual funds, and other investment companies, bank trust departments, and insurance companies." Joel Seligman, The Obsolescence of Wall Street: A Contextual Approach to the Evolving Structure of Federal Securities Regulation, 93 Mich. L. Rev. 649, 657 (1995).

74. See Safe Harbor, supra note 25, at 2000.

75. Id.

76. Id. (footnote omitted); see also Advisory Committee Report, supra note 72, at 347 ("[T]he Commission may have been primarily motivated by a desire to protect unsophisticated investors from being misled by the natural optimism of business enterprises selling their securities to the public."). It is arguable, however, that:

[T]he statutory disclosure system created by the 1933 and 1934 Acts was perceived by Congress and commentators as being particularly suited to the interests of sophisticated investors and securities professionals for many years the disclosure policy of the Commission was based on the belief that the relevant constituency was the unsophisticated investor.Advisory Committee Report, supra note 72, at 348 (footnote omitted).

77. Symposium, New Approaches to Disclosure in Registered Security Offerings, 28 Bus. Law. 505, 529-30 (1973) (statement of Harold Marsh, Jr., member of the California Bar, Los Angeles, California).

78. See id. at 530.

79. See Henry Heller, Disclosure Requirements Under Federal Securities Regulation, 16 Bus. Law. 300 (1961).

80. Id. at 307 (footnote omitted).

81. See Advisory Committee Report, supra note 72, at 348.

82. Id. For example, the Commission's pre-1970's disclosure policy excluded forward-looking information "from SEC filings for fear that such information, although useful and important to knowledgeable constituents of the investment community, might be "misunderstood and unduly relied upon by unsophisticated investors." Id.

83. See Kripke, supra note 71, at 1197.

84. See id.

85. See id. It should also be noted, as confirmation of how reliable these projections have become, that management spends months of labor in calculating projections and uses this information as a basis for making significant "decisions as to borrowing, building new plants, establishing new branches, ordering materials, hiring and training labor, etc." Id. In other words, the fact that management has such a high stake in the accuracy of its projection is further evidence not only that such information is rendered in good faith, but also that such information is relatively reliable. See id. at 1198. "Solely because a forecast is also a prophecy does not change the very important circumstance that it is a highly informed judgment, made in a rational and careful manner." Id. at 1198.

86. See id. at 1199.

87. See id.

88. See id.

89. See id.

90. Advisory Committee Report, supra note 72, at 349.

91. See Kripke, supra note 71, at 1197-99.

92. See Safe Harbor, supra note 25, at 2000.

93. See Disclosure to Investors: A Reappraisal of Administrative Policies Under the 1933 and 1934 Acts, [1963-1972 Special Studies Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 74,603, at 65,242 (May 9, 1969).

94. See Safe Harbor, supra note 25, at 2000; see also 1995 Reform Act, supra note 7, at 86,764 ("`Understanding a company's own assessment of its future potential would be among the most valuable information shareholders and potential investors could have about a firm.'" (quoting Securities Litigation Reform Proposals, S. 240, S. 667, and H.R. 1058: Hearings Before the Subcomm. on Securities of the Senate Comm. on Banking, Housing and Urban Affairs, 104th Cong. 260 (1995) (statement of Richard C. Breeden, former SEC Chairman))); Kripke, supra note 72, at 1197 ("[P]rojections are the ultimate purpose of all disclosure.").

95. See Safe Harbor, supra note 25, at 2000.

96. See id.

97. See Statement by the Commission on the Disclosure of Projections of Future Economic Performance, Exchange Act Release No. 9984, 1 SEC Docket (CCH) 4 (Feb. 2, 1973). The Division of Corporation Finance presided over the hearings that considered testimony from 53 witnesses (including representatives of the securities industry, the academic community, publicly-held corporations, accounting and legal professionals) and over 200 letters of comment. See id.

98. Safe Harbor, supra note 25, at 2000-01 (footnote omitted).

99. Statement by the Commission on the Disclosure of Projections of Future Economic Performance, Exchange Act Release No. 9984, 1 SEC Docket (CCH) 4 (Feb. 2, 1973). This statement was set forth in the form of a "Release." Id. A "Release" simply sets forth the views of the Commission or its staff on questions of current concern, without stating them in the form of legal requirements. See David L. Ratner & Thomas Lee Hazen, Securities Regulation 16 (4th ed. 1991).

100. Statement by the Commission on the Disclosure of Projections of Future Economic Performance, Exchange Act Release No. 9984, 1 SEC Docket (CCH) 4 (Feb. 2, 1973). The Commission also expressed concern that all investors, whether institutional or individual, have equal access to these forward-looking disclosures. See id.

101. See id.

102. See id. It should be noted that there was widespread dissatisfaction expressed at the hearings that there were no guidelines or standards upon which the issuer, the financial analyst or the investor could rely in issuing or interpreting projections that were informally released in press conferences and press releases. See id. The Commission, however, did say that it was "considering a requirement that all issuers who elect to disclose their projections to the public through the financial media, financial analysts, or otherwise file such projections with the Commission." Id.

103. See Statement by the Commission on the Disclosure of Projections of Future Economic Performance, Exchange Act Release No. 9984, 1 SEC Docket (CCH) 4 (Feb. 2, 1973).

104. See Notice of Proposed Rule 3b-6 to Implement the "Statement by the Commission on the Disclosure of Projections of Future Economic Performance," Exchange Act Release No. 11,374, 6 SEC Docket (CCH) 746 (Apr. 28, 1975).

105. See id.

106. See Guides for Disclosure of Projections of Future Economic Performance, Exchange Act Release No. 15,305, 16 SEC Docket (CCH) 83 (Feb. 3,1978); see also Notice of Withdrawal of Proposals Contained in Release No. 5581 and Statement by the Commission on Disclosure of Projections, Exchange Act Release No. 12,371, 9 SEC Docket (CCH) 472 (Apr. 23, 1976) (stating that 420 letters of comment were received and virtually all opposed the proposed disclosure system); Louis Loss & Joel Seligman, Fundamentals of Securities Regulation 628-29 (1995) (setting forth grounds for opposition to the proposed system).

107. See Guides for Disclosure of Projections of Future Economic Performance, Securities Act Release No. 15,305, 16 SEC Docket (CCH) 83 (Feb. 3, 1978).

108. See Notice of Withdrawal of Proposals Contained in Release No. 5581 and Statement by the Commission on Disclosure of Projections, Securities Act Release No. 12,371, 9 SEC Docket (CCH) 472 (Apr. 23, 1976).

109. See Safe Harbor, supra note 25, at 2001.

110. See id.

111. See id.

112. See id.

113. Id. at 2001-02.

114. See Fletcher, supra note 34, at 499-502; Kripke, supra note 71, at 1197.

115. This would include both forward-looking statements made in documents filed with the Commission and forward-looking statements released to the public by other means. See Safe Harbor, supra note 25, at 2002.

116. See id.

117. See id.

118. See id.; see also Bloomenthal, supra note 29, § 3.04[1].

119. Safe Harbor, supra note 25, at 2002. The Committee decided against recommending mandatory disclosure of assumptions and historical data upon which the projections are based because, as an experimental program, the Committee wanted to keep the rules as simple as possible, thereby facilitating compliance and encouraging as many issuers to use the safe harbor rule as possible. See id. at 2002 n.20. For much the same reason, the Committee recommended that no formal duty be imposed to update past projections. See id. at 2002.

120. See id. at 2002.

121. See id.

122. See supra notes 109-21 and accompanying text.

123. See Safe Harbor, supra note 25, at 2002.

124. See id. at 2002-03.

125. See id. at 2002.

126. See id.

127. See id.; see also supra notes 109-21 and accompanying text.

128. See Safe Harbor, supra note 25, at 2002.

129. Id. at 2003 n.28.

130. See id.

131. See 17 C.F.R. § 230.175 (1996). The 1979 Safe Harbor Provision read as follows:

(a) [A forward-looking statement as defined in § 230.175(b)] which is made by or on behalf of an issuer or by an outside reviewer retained by the issuer shall be deemed not to be a fraudulent statement . . . , unless it is shown that such statement was made or reaffirmed without a reasonable basis or was disclosed in other than in good faith.Id.

132. See 17 C.F.R. § 240.3b-6 (1996); see also supra note 131 for the text of identical Rule 175.

133. See supra note 24.

134. See 17 C.F.R. § 230.175 (1996); see id. § 240.3b-6.

135. See 17 C.F.R. § 230.175 (1996); see id. § 240.3b-6.

136. Safe Harbor, supra note 25, at 2003.

137. Id.

138. Id.

139. See 17 C.F.R. § 230.175(a) (1996); see id. § 240.3b-6(a).

140. See Safe Harbor, supra note 25, at 2003. Critics charge that precisely this line of reasoning has led to today's proliferation of extortion suits. See supra notes 6-9 and accompanying text. That is, plaintiffs file meritless claims with the hope of either extorting a substantial settlement or finding evidence of fraud during discovery. See supra notes 6-9 and accompanying text.

141. See Safe Harbor, supra note 25, at 2003.

142. See id. at 2003-04.

143. Id. at 2004.

144. See id. at 2003.

145. See id.; see also infra Part V.

146. See Safe Harbor, supra note 25, at 2003.

147. Bloomenthal, supra note 29, § 3.04[1].

148. See 17 C.F.R. § 229.303 (1996).

149. See Management's Discussion and Analysis of Financial Condition and Results of Operations; Certain Investment Company Disclosures, Exchange Act Release No. 26831, 43 Docket (CCH) 1330, 1334-35 (May 18, 1989).

150. See Safe Harbor, supra note 24, at 2004.

151. Bloomenthal, supra note 29, § 3.04[1] (quoting Codification of Financial Reporting Policies, 7 Fed. Sec. L. Rep. (CCH) ¶ 73,193, at 62,842). Examples of forward-looking disclosure that is required are: "[A] reduction in the [issuer's] product prices; erosion in the registrant's market share; changes in insurance coverage; [and] the likely non-renewal of a material contract." Id.

152. Id. (quoting Codification of Financial Reporting Policies, § 501.02, 7 Fed. Sec. L. Rep. (CCH) ¶ 73,193, at 62,842 (June 7, 1989)).

153. Id. (quoting Codification of Financial Reporting Policies, § 501.02, 7 Fed. Sec. L. Rep. (CCH) ¶ 73,193, at 62,843 (June 7, 1989)).

154. See id.

155. Id. (quoting Codification of Financial Reporting Policies, § 501.02, 7 Fed. Sec. L. Rep. (CCH) ¶ 73,193, at 62,843 (June 7, 1989)).

156. See id. It should be noted that the safe harbor provision encompasses both required and voluntary forward-looking disclosures. See 17 C.F.R. § 229.303 (1996); see id. § 230.175; see id. § 240.3b-6.

157. See Safe Harbor, supra note 25, at 2005; Bruce A. Hiler, The SEC and the Courts' Approach to Disclosure of Earnings Projections, Asset Appraisals, and Other Soft Information: Old Problems, Changing Views, 46 Md. L. Rev. 1114, 1116-31 (1987); Janet E. Kerr, A Walk Through the Circuits: The Duty to Disclose Soft Information, 46 Md. L. Rev. 1071, 1072 (1987).

158. See Kripke, supra note 71, at 1198.

159. See, e.g., Hillson Partners Ltd. Partnership v. Adage, Inc., 42 F.3d 204, 211 (4th Cir. 1994) (alleging misstatements not actionable because they were no more than puffery); Malone v. Microdyne Corp., 26 F.3d 471, 479 (4th Cir. 1994) (stating that projections of future performance are generally only actionable if "supported by specific statements of fact or . . . worded as guarantees"); Raab v. General Physics Corp., 4 F.3d 286, 290 (4th Cir. 1993) (imposing liability on companies for prediction of future growth, which are often and inevitably wrong, would lead to further proliferation of lawsuits and would be contrary to the "goal of full disclosure underlying the securities laws"); Shushany v. Allwaste, Inc., 992 F.2d 517, 524 (5th Cir. 1993) (holding that predictive statements are actionable only if false when made); Krim v. BancTexas Group, Inc., 989 F.2d 1435, 1446 (5th Cir. 1993) (stating that "projections of future performance not worded as guarantees are generally not actionable").

160. See supra notes 74-89 and accompanying text.

161. 226 F. Supp. 400 (N.D. Ill. 1964).

162. Id. at 409; see also Heller, supra note 79, at 307 (stating that predictions by experts are "misleading because they suggest to the investor a competence and authority which in fact does not exist").

163. 374 F. Supp. 341 (S.D.N.Y. 1974).

164. Id. at 347.

165. See Bloomenthal, supra note 29, § 9.01[3].

166. 886 F.2d 1109 (9th Cir. 1989).

167. Id. at 1113.

168. See id.; Safe Harbor, supra note 25, at 2006. See supra notes 45-49 and accompanying text for a discussion of the elements of Rule 10b-5 action.

169. See, e.g., Basic Inc. v. Levinson, 485 U.S. 224, 232 (1988) (holding that a statement is not material because it was not substantially likely to be considered important in a reasonable shareholder's decision); see also Hillson Partners Ltd. Partnership v. Adage, 42 F.3d 204, 213 (4th Cir. 1994) (holding that a statement "on schedule" was not material because a reasonable investor would not have considered its omission significant); In re Donald Trump Casino Sec. Litig., 7 F.3d 357, 369 (3d Cir. 1993) (holding that the statement at issue would not influence a reasonable investor's decision and therefore was immaterial); Glazer v. Formica Corp., 964 F.2d 149, 155 (2d Cir. 1992) (holding that the statement at issue was immaterial as a matter of law); Milton v. Van Dorn Co., 961 F.2d 965, 972 (1st Cir. 1992) (holding that undisclosed information was not material as a matter of law); Haralson v. E.F.Hutton Group, Inc., 191 F.2d 1014, 1033 (5th Cir. 1990) (stating that a reasonable jury could have found a substantial likelihood that the statement would be important to a reasonable investor).

170. Bloomenthal, supra note 29, § 3.05[2] ("Most of the [federal] circuits have either expressly adopted the bespeaks [caution] doctrine or applied its principle."); see also Mayer v. Mylod, 988 F.2d 635, 639 (6th Cir. 1993) ("[B]eliefs about future earnings which turn out to be incorrect are not actionable under section 10(b) if the statements contain sufficient cautionary language."); I. Meyer Pincus & Assocs. v. Oppenheimer & Co., 936 F.2d 759, 763 (2d Cir. 1991) (affirming the lower court's dismissal of a complaint because the statements in question were accompanied by adequate cautionary language); In re Convergent Tech. Sec. Litig., 948 F.2d 507, 515 (9th Cir. 1991) (holding that the issuer sufficiently warned investors of the risks involved in the purchase of its stock); Moorhead v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 949 F.2d 243, 245 (8th Cir. 1991) (affirming the lower court's dismissal of a fraud claim when statements in question were accompanied by "repeated specific warnings of significant risk factors"); Romani v. Shearson Lehman Hutton, 929 F.2d 875, 879 (1st Cir. 1991) (affirming the lower court's dismissal when the statements in question were accompanied by statements bespeaking caution); Sinay v. Lamson & Sessions Co., 948 F.3d 1037, 1040 (6th Cir. 1991) ("Economic projections are not actionable if they bespeak caution."); Luce v. Edelstein, 802 F.2d 49, 56 (2d Cir. 1986) (declining to impose liability when statements clearly bespoke caution); Polin v. Conductron Corp., 552 F.2d 797, 805 (8th Cir. 1977) (affirming dismissal of a fraud claim when the issuer gave fair warning of the risks).

171. It should be noted than the cautionary language must be substantive and tailored to the specific projection in order to be effective; "vague" or boilerplate disclaimers will not suffice. See In re Donald J. Trump Casino Sec. Litig., 7 F.3d at 371.

172. See id.; see also supra note 170.

173. See Rubinstein v. Collins, 20 F.3d 160, 169 (5th Cir. 1994) (stating that cautionary language affects the reasonableness of reliance on projections); see also supra note 166.

174. For purposes of this Note, "1979 Safe Harbor" refers to the safe harbor for forward-looking statements as codified in 17 C.F.R § 230.175 (1996) and 17 C.F.R. § 240.3b-6 (1996). The 1979 Safe Harbor provision was the safe harbor provision in effect prior to the enactment of The Private Securities Litigation Reform Act of 1995. See supra Part III.A.4.

175. See Safe Harbor, supra note 25, at 2007.

176. Id. (footnote omitted); see also 1995 Reform Act, supra note 7, at 86,757-58 (fearing that 10b-5 liability has become more than a deterrent to fraud). "In a recent survey of publicly held venture-backed companies, approximately seventy-one percent of all respondents reported a reluctance to discuss business performance with analysts and the public, although only seventeen percent of these respondents had been defendants in shareholder suits." Fletcher, supra note 34, at 512 (footnote omitted). Similarly, another study concluded that "over two-thirds of venture capital firms were reluctant to discuss their performance with analysts or the public because of the threat of litigation." 1995 Reform Act, supra note 7, at 86,765 (footnote omitted).

177. See Advisory Committee Report, supra note 72, at 350; see also Statement by the Commission on the Disclosure of Projections of Future Economic Performance, Exchange Act Release No. 9984, 1 SEC Docket (CCH) 4 (Feb. 2, 1973).

178. See Safe Harbor, supra note 25, at 2007-09; see also 1995 Reform Act, supra note 7, at 86,765 (stating that the 1979 Safe Harbor provision did not provide companies with meaningful protection from litigation).

179. See infra Part IV.A.

180. See infra Part IV.C.

181. See infra Part IV.C.

182. See 17 C.F.R. § 230.175 (1996); see id. § 240.3b-6.

183. See Safe Harbor, supra note 25, at 2007.

184. See Statement by the Commission on the Disclosure of Projections of Future Economic Performance, Securities Act Release No. 9984, 1 SEC Docket (CCH) 4 (Feb. 2, 1973); see also Safe Harbor, supra note 25, at 2000 (stating that forward-looking information occupies a vital role in the United States Securities markets).

185. Safe Harbor, supra note 25, at 2008. See, e.g., Basic, Inc. v. Levinson, 485 U.S. 224, 248-49 (1988) (holding that a corporation's denial of the existence of merger talks was not within the safe harbor's protection).

186. Conversations between issuers and analysts are often informal and unpredictable, however, many analysts base their investment recommendations on such conversations, thereby affording their clients Rule 10-b5 remedies. See Safe Harbor, supra note 25, at 2008; see also Harvey L. Pitt & Karl A. Groskaufmanis, Selective Disclosure Can be Perilous, Nat'l L.J., Apr. 18, 1994, at B4 (discussing the disclosure between corporate executives and analysts).

187. See Safe Harbor, supra note 25, at 2008; see also 1995 Reform Act, supra note 7, at 86,758-59 ("Private securities class actions inhibit free and open communication among management, analysts and investors.").

188. See infra notes 193-96 and accompanying text.

189. See infra notes 197-203 and accompanying text.

190. See Safe Harbor, supra note 25, at 2008.

191. See id.

192. See 17 C.F.R. § 230.175 (1996). See, e.g., Elkind v. Liggett & Myers, 635 F.2d 156, 158 (2d Cir. 1980) ("This case presents a number of issues arising out of what has become a form of corporate brinksmanship--non-public disclosure of business-related information to financial analysts."); SEC v. Bauch & Lomb, Inc., 565 F.2d 8, 9 (2d Cir. 1977) (analogizing conversations between corporate executives and financial analysts to "a fencing match conducted on a tightrope").

193. Safe Harbor, supra note 25, at 2007 n.68.

194. See Testimony of Harvey L. Pitt: Securities and Exchange Commission Hearings on the Safe Harbor for Forward-Looking Statements, in Advanced Securities Law Workshop 1995, at 521, 531 (PLI Corp. Law & Practice Course Handbook Series No. B-902 (1995).

195. See Safe Harbor, supra note 25, at 2008.

196. Under the 1979 Safe Harbor Provision, "the mere threat of litigation . . . both . . . discourage[d] management from making forward-looking disclosure and cause[d] those companies that nonetheless provide[d] such disclosure to incur significant costs in defense of nonmeritorious litigation." Id.

197. See id.

198. See Thomas Lee Hazen, Rumor Control and Disclosure of Merger Negotiations or Other Control-Related Transactions: Full Disclosure or "No Comment"--The Only Safe Harbors, 46 Md. L. Rev. 954, 958 (1987) ("[T]otal silence may be justified as a matter of sound business policy.").

199. See In the Matter of Carnation Co., Exchange Act Release No. 22,214 [1984-1985 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 83,801, at 87,595 (July 8, 1985) ("The importance of accurate and complete issuer disclosure to the integrity of the securities markets cannot be overemphasized."); 1995 Reform Act, supra note 7, at 86,758 (stating that the non-disclosure by corporations "makes investing more risky and increases the cost of raising capital"); Kerr, supra note 157, at 1110 ("Efficiency of the market is ensured by the full disclosure of all relevant information."); Hiler, supra note 157, at 1196 ("Future-oriented and soft information can be extremely relevant to investors.").

200. See Richard A. Rosen, Liability for "Soft Information": New Developments and Emerging Trends, 23 Sec. Reg. L. J. 3, 20 (1995). Indeed, "[m]any firms review and make comments and correction to draft research reports prepared by the analysts that follow them." Id.; see also Alan J. Berkeley & Michael S. Smith, Corporate Disclosure: Potential Pitfalls, Rev. Sec. & Commodities Reg., June 26, 1991, at 125 ("Disseminating valuable corporate information increases investor confidence . . . .").

201. See Pitt, supra note 186, at B4 (stating that corporate executives must balance the desire to avoid liability "against the need to develop . . . investor relations").

202. See Statement by the Commission on the Disclosure of Projections of Future Economic Performance, Exchange Act Release No. 9984, 1 SEC Docket (CCH) 4 (Feb. 2, 1973); see also Safe Harbor, supra note 25, at 2000 ("Forward-looking information occupies a vital role in the United States securities markets." (footnote omitted)); Kerr, supra note 157, at 1110.

203. See Kerr, supra note 157, at 1110.

204. See supra notes 182-203 and accompanying text.

205. See supra notes 182-203 and accompanying text.

206. See supra notes 182-203 and accompanying text.

207. See 17 C.F.R. § 230.175(c) (1996); see id. § 240.3b-6(a).

208. See Bloomenthal, supra note 29, § 3.05[1]; Safe Harbor, supra note 25, at 2008.

209. See infra notes 222-25 and accompanying text.

210. See Bloomenthal, supra note 29, § 3.05[1]; Safe Harbor, supra note 25, at 2008. See generally Elizabeth Joan Cabraser, Developments in Termination of Securities Actions by Dismissal or Summary Judgment: Two Case Studies, in California MCLE Marathon Weekend, at 727 (PLI Corp. Law & Practice Course Handbook Series No. B-803, 1993); Bruce G.