Saturday, September 12, 2020

Everybody wants the next thing to be just like the first

I write briefly to call attention to the opinion in SEB Investment Mgmt v. Align Tech., 2020 U.S. Dist. LEXIS 164661 (N.D. Cal. Sept. 9, 2020), partially dismissing a 10(b) action against Align Technology, the manufacturer of Invisalign teeth-straightening products.  Plaintiffs alleged, among other things, that the company’s financial projections were false for failing to consider what would happen when its patents expired and competitors entered the space.  The court rejected this claim on the ground that the projections were protected by the PSLRA’s safe harbor, which insulates forward-looking statements if they are “accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement.”  15 U.S.C. § 78u-5.  According to the PSLRA’s legislative history, “boilerplate warnings will not suffice.... The cautionary statements must convey substantive information about factors that realistically could cause results to differ materially from those projected.”  Thus, in the Align case:

The Court agrees with Defendants that the statement was accompanied by adequate warnings. Defendants explain that, at the beginning of the investor call, Align’s representative stated:

As a reminder, the information that the presenters discuss today will include forward-looking statements, including statements about Align’s future events, product outlook and the expected financial results for the third quarter of 2018. These forward-looking statements are only predictions and involve risks and uncertainties that are set forth in more detail in our most recent periodic reports filed with the Securities and Exchange Commission. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statement. We’ve posted historical financial statements, including the corresponding reconciliations and our second quarter conference call slides on our website under Quarterly Results. Please refer to these files for more detailed information.

The warning, in turn, thus explicitly incorporated risks identified in written filings with the SEC, specifically with respect to “competition, promotions, and decreased ASP.” …

Defendants are correct that substantially similar disclaimers have repeatedly been held by the Court to be a sufficient “meaningful cautionary statement” for purposes of the PSLRA Safe Harbor. For example, in In re Fusion-io, Inc. Securities Litigation, the Court found sufficient a disclosure at the beginning of an earnings call “that forward-looking statements were predictions based on current expectations and assumptions, that these expectations and assumptions involved risks and uncertainties, and [that] referred listeners to Fusion’s registration statements and reports filed with the SEC.” No. 13-CV-05368-LHK, 2015 WL 661869, at *13 (N.D. Cal. Feb. 12, 2015). Similarly, in McGovney v. Aerohive Networks, Inc., the Court found sufficient a disclaimer at the beginning of a call “that the call would contain ‘forward-looking statements’ that involve a ‘number of risks and uncertainties,’ and that investors should reference the ‘Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our recent annual report on Form 10-K and quarterly report on Form 10-Q.’“ McGovney v. Aerohive Networks, Inc., 367 F. Supp. 3d 1038, 1061 (N.D. Cal. 2019).

Moreover, these cautionary statements are virtually identical to language approved by the Ninth Circuit as “meaningful cautionary language” for purposes of the PSLRA Safe Harbor. See, e.g., Police Ret. Sys. v. Intuitive Surgical, Inc., 759 F.3d at 1059-60 (approving cautionary language in earnings call warning that comments may contain forward-looking statements, that such statements may differ based on “certain risks and uncertainties,” and referring listeners to “the company’s [SEC] filings”); In re Cutera Sec. Litig., 610 F.3d 1103, 1112 (9th Cir. 2010) (approving cautionary language at beginning of earnings call that remarks contained forward-looking statements “concerning future financial performance and guidance,” and that “Cutera’s ability to continue increasing sales performance worldwide could cause variance in the results.”) (internal quotation marks omitted).

Plaintiff’s arguments to the contrary are unpersuasive. For example, Plaintiff argues that these warnings were “boilerplate risk disclosures” that were thus too generic. Opp’n at 17. However, as explained above, this Court as well as the Ninth Circuit has found substantially similar disclosures to be adequate cautionary statements.

See, these warnings are exactly like the warnings of every other company for past 10 years; therefore they’re not generic!

(Yes, apparently the defendants made reference to the SEC filings, which may have had more detail, but the court seemed entirely unconcerned with the contents of those filings.)

Suffice to say, when warnings for “risks and uncertainties” and that “[a]ctual results may vary significantly” are held not to be boilerplate, we really have given up on the concept of “meaningful cautionary statements” altogether.  Which really goes to show that there’s something very incongruous about relying on precedent to determine whether a risk warning passes muster under the PSLRA in the first place.  These warnings are supposed to be tailored to each company’s circumstances; that one company’s warning, concerning particular statements at a particular time, satisfied the PSLRA, should have little relevance to the sufficiency of the warnings of a completely different company, facing different risks, and often operating in an entirely different industry.

In fact, I previously blogged about a paper that purports to show that judges, and the SEC, reward longer, more generic warnings, which only encourages companies to copy the warnings of their industry peers.

To be fair, the SEC has been trying to improve the situation.  In its latest amendments to Regulation S-K, the SEC is now requiring that a summary of risk factors be provided if the full list is particularly lengthy, and that issuers group their risk factors by topic, with generally-applicable risk factors to be included in a “General Risk Factors” category.  So, I guess we’ll see whether that makes a difference, either to issuers or to regulators.

Ann Lipton | Permalink


Risk factors have been out of control as a meaningful disclosure mechanism for a couple of decades now. Perhaps the apotheosis of canned disclosures that only lawyers will be reading is the 48-page Risk Factors section of the Uber prospectus. Asking for more differentiation from disclosures that have been blessed by courts under the PSLRA would likely only produce more lengthy, unread-by-investors, disclosure of little value.

Posted by: Craig Sparks | Sep 12, 2020 10:06:03 AM

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