Title: The Problem of Meaningful Language: Safe Harbor Protection in Securities Class Action Suits after Asher V. Baxter
Abstract: INTRODUCTION 1907 I. A HISTORY OF THE PSLRA 1911 A. The Perceived Need for Securities Litigation Reform 1911 B. The Legislative History of the PSLRA 1913 C. Analysis 1918 II. CASE LAW INTERPRETING THE MEANINGFUL CAUTIONARY PROVISION OF THE SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS 1923 A. The Eleventh Circuit 1924 B. The Seventh Circuit 1926 C. Analysis 1928 III. INCREASED DISCLOSURE OR INCREASED FRAUD? 1932 A. The Lemon Problem 1932 B. Should the Courts Regulate Corporate Disclosure? 1933 C. Asher and the Lemon Problem 1934 CONCLUSION 1936 INTRODUCTION In any class action involving securities fraud, one of two negative consequences will inevitably follow: more fraud or more extortion.1 If the court blocks a class of plaintiffs from conducting the discovery required to substantiate their allegations of fraud, a potentially meritorious suit will fail. On the other hand, if the court permits the plaintiff to conduct expensive discovery, the courts will encourage future suits2 that extract undeserved settlements from deep-pocketed defendants.3 How to strike the optimal minimization of either danger-without stifling corporate disclosure of vital investor information from potential corporate defendants-has been a fundamental question with which legislators, courts, and scholars have struggled.4 In Asher v. Baxter International Inc.,5 the Seventh Circuit weighed in. For the first time, the court, in a decision written by Judge Frank Easterbrook, interpreted the safe harbor provisions of the Private securities Litigation Reform Act of 1995 (PSLRA or Reform Act).6 As discussed below, this decision split the circuit courts.7 Among the PSLRA's provisions aimed at curbing nuisance litigation related to strike suits were immunizations8 for companies that attach meaningful cautionary statements9 to any forward-looking statements10: In case corporate promises of future performance go unfulfilled, the PSLRA's safe harbors can protect a company from liability. The Asher decision, which turned on a new interpretation of the meaningfully cautionary statements requirement, bent the contours of this safe harbor into a new and previously unknown shape.11 The PSLRA case law now features two competing interpretations, one broad and one narrow, of the standard under which companies can claim safe harbor protections.12 Before Asher, companies that warned investors even generally of significant corporate dangers-whether those dangers were realized or not-entered into the safe harbor.13 In Asher, however, the court restricted the statute's seemingly broad protection: If investors could raise even the possibility that important corporate dangers were omitted from the cautionary language, safe harbor protection was eliminated.14 Coming from one of the most important business-law judges of the 20th century, Judge Easterbrook's rejection of the majority standard is bound to have major consequences for corporate disclosure around the country;16 the decision augurs a deepening circuit split.17 The additional ambiguity results in higher stakes, since a number of circuits in which elevated numbers of securities class action suits are typically filed have not yet interpreted the provision.18 The injection of additional uncertainty into the law makes any corporate disclosure to the public fraught with greater risks of liability.19 The additional ambiguity will likely give rise to two major issues. First, courts and companies will struggle with the problem of how to interpret Asher in order to safely identify the important risk factors that must accompany predictions about future earnings. …
Publication Year: 2006
Publication Date: 2006-07-01
Language: en
Type: article
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Cited By Count: 1
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