Safe Harbors: A Refuge For The Reckless
By Lawrence J. Fox
Chair, ABA Section of Litigation
"Concept 2000 today announced that new orders in the fourth quarter for its integrated scientific software for the biotech industry were running 25% higher than previous estimates. A company spokesman attributed the stronger than anticipated numbers to the public endorsement of the product by Professor Michael Mushlin of Beth Zion Medical College in New York. When asked about fiscal '97, the prediction was for earnings to at least double." Wall Street Journal, December 1, 1996.
"One of the stocks that led last week's surge in the NASDAQ composite index was Concept 2000 which gained 4 3/4 rising to 16 1/2 on reports of a huge increase in orders and an anticipated doubling of profits next year." Business Week, December 5, 1996.
"Concept 2000 led all decliners on NASDAQ yesterday as it announced disappointing first quarter results, confirming rumors that have circulated for weeks that a flaw in the company's integrated software had resulted in a number of order cancellations. 'Our predictions for earnings for 1997 have been revised downward substantially,' a company spokesman observed. 'We hope that earnings will remain at the same high level we achieved in 1996.'" Wall Street Journal, April 20, 1997.
"We have as our guest tonight Robert Kurland, the CEO of Concept 2000, a legend in the marriage of biotech and computer software industries. Robert, you disappointed a lot of investors yesterday with your company's announcement of a decline in earnings."
"It wasn't a decline, Lew. They were actually flat."
"But your company had predicted earnings would double this year."
"We did. But you know we had the required disclaimer warning investors that all predictions are just that."
"So you were just guessing last December, is that what you are saying?"
"No. We thought we were right, Lew."
"So what went wrong?"
"Someone discovered a glitch in the system. We're working on a fix right now and we should have it solved by June at the latest."
"And when did you make that discovery?"
"It was first raised by one of our customers last August, but at the time we thought the problem was in their operating system."
"And you didn't tell anyone about it until today?"
"To tell you the truth, Lew, when we made the announcement in December we didn't think it was a software problem."
"But you knew about the complaint and made the prediction without disclosing it."
"Sure. Our lawyers told us so long as we put that silly warning language in, we could say anything we wanted to say."
"And you never updated the announcement?"
"Our lawyers told us the new law said we had no obligation to do so."
"Do you have any idea how much money has been lost in Concept 2000 since April 1?"
"Unfortunately. If it's any consolation to our shareholders, I've lost $6,000,000 myself."
"Though you did pocket $10,000,000 on your sales last month."
"Well ... I needed to diversify, Lew."
"Folks, we'll be back to talk to Muriel Grace from First Boston, an analyst who has followed this section of the high-tech industry, after this station break." Wall Street Week, April 20, 1997.
"District Judge Malcolm Munger dismissed a securities class action complaint filed on behalf of investors in Concept 2000 on the ground that under the reforms passed last year by Congress, the plaintiffs failed to state a claim. 'Plaintiffs do not dispute that defendant's initial press release contained the cautionary language mandated by the Reform Act of 1995. Rather, they note that none of the press reports of the press release picked up that language. Furthermore, they point to what they characterize as the admission by Concept 2000's CEO, defendant Robert Kurland, that he intentionally ignored disclosing the August customer complaint.
But while there is no doubt Kurland's statement reflects intentional conduct by the company in issuing the press release, Congress in enacting this new legislation, has made it clear that it intended to insulate from any liability those who engage in such conduct so long as the cautionary language is used. That's a policy decision for Congress to make; this Court, as much as it might disagree that defendants should escape responsibility for their conduct, is bound by the terms of the new legislation,' Judge Munger concluded." New York Law Journal, September 30, 1997.
Is that what we want? If a corporation issues predictions about future performance invoking cautionary language that will never see the light of day, should the company's intentional or reckless disregard for the truth, its failure to make complete disclosure, its failure to assure that it got the facts right, be completely insulated from liability?
The answer is a resounding no. There is no more important information issued by public companies than predictions about their future. Analysts, investment advisers and shareholders hang on every nuance of such announcements. While it is one thing to assure that predictions made in good faith and with due care should not result in liability, there is no public policy that justifies immunizing statements made intentionally or in reckless disregard of the truth. "I forgot" should never be a valid defense to a claim that investors were damaged by relying on materially incorrect predictions.