Outside the Safe Harbor

The Second Circuit requested that the Securities and Exchange Commission give it some help with certain issues as to the lawfulness (or otherwise) of forward-looking statements under the Private Securities Litigation Reform Act of 1995.

Accordingly, the SEC has filed an amicus brief in the case of Slayton v. American Express Co.

The litigation arose out of certain statements in the May 2001 Form 10-Q filed by the American Express Co. regarding losses in the high-yield investments of Amex subsidiary American Express Financial Advisors (AEFA).

Here's the link.

In section 102 of the PSLRA, Congress sought to protect certain forward-looking statements from liability in civil lawsuits, in order to weed out what the legislators decided were meritless claims. This was part of the Gingrichian "contract with America."

Civil liability will not attach due to a forward-looking statement that is identified as such, "and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement."

The controversial May 2001 10-Q said that Amex expected that total losses of AEFA's high-yield investments would be lower in the second quarter than they had been in the first. But at the end of the second quarter that year, Amex issued a press release that announced that its subsidiary AEFA would be recognizing a loss of $826 milion, due largely to write-downs of high-yield debt.

Slayton came about because the plaintiffs alleged that Amex should not have made the statement it did in May, because "the Company and the other Defendants had no basis for making this representation."

The SEC's amicus filing is generally but not entirely supportive of the plaintiffs. Amex was outside of the safe harbor, because the cautionary statements were not sufficiently meaningful. Furthermore, "A speaker who makes a forward-looking statement with actual knowledge that he or she has no reasonable basis upon which to make the statement has actual knowledge that the statement is misleading," it says. That is what the plaintiffs want to hear. On the other hand, the SEC added that the defendants are entitled to be particular about the pleadings. "[To] survive a motion to dismiss, the plaintiff must plead facts sufficient to establish the defendant was subjectively aware that one of the implicit factual assertions underlying its forward-looking statement was false when the statement was made." The defendants must either have disbelieved their own statement about what the second quarter would show, or they must have known that they had no reasonable basis for that belief, or they must have been "aware of ... undisclosed facts tending to seriously undermine the accuracy of the statement."

So, although the good ship Amex is outside the safe harbor and the waters are a bit choppy, it is not necessarily sunk.