Exercise Caution: Why Cautionary Statements May Misdirect

I have had the good fortune of talking to friend-of-the-BLPB Frank Gevurtz about some of his illuminating "takes" on Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, a decision we all wrestle with, it seems, in one way or another.  I recently ran into Frank (at the AALS Annual Meeting), and he informed me that some of those thoughts have made their way into a full-length article.  That article, Important Warning or Dangerous Misdirection: Rethinking Cautions Accompanying Investment Predictions, was recently posted to the Social Science Research Network (SSRN) and is available here.  The abstract follows.

We are constantly bombarded with cautions warning us of dangers to our health or wellbeing. Sometimes, however, cautions increase the danger. This article addresses one example: cautions warning investors of the risks that predictions regarding corporate performance will not pan out.

Here, the danger is investors falling prey to trumped up predictions of corporate performance, the result of which is to misallocate resources, increase the cost of capital for honest businesses, and create a drag on the overall economy. This article shows how the typical cautions accompanying predictions of corporate performance facilitate rather than avoid this danger by misdirecting both investors and courts from looking at what they should: the credibility of the speaker in giving the prediction.

To solve this problem, this article introduces a radically different approach to determining the legal impact of cautions accompanying predictions of corporate performance. This is to distinguish between cautions alerting investors to problems with the speaker’s credibility in giving the prediction versus those that simply list various risks that might lead the prediction to not pan out. The article thereby provides a roadmap for courts to replace their current misguided focus on the wrong type of cautions in the numerous cases raising the issue of when cautions serve as a defense to claims of securities fraud based upon a failed prediction.

Although Frank's draft article is ultimately directed at judicial decision-making, there is much in it for use by others.  I have been teaching materiality law and lore to my Securities Regulation students this past week.  So much of this article is relevant to our discussions.  In the article, Frank writes about (among other things) the bespeaks caution doctrine and the Private Securities Litigation Reform Act safe harbor for forward-looking statements, both of which are part of my materiality coverage.  I am finishing talking about these aspects of materiality litigation tomorrow.

While I am on the topic of materiality , I also want to thank BLPB co-editor Ann Lipton for her great post on Saturday on Tesla and Basic.  I use the Securities Regulation text coauthored by her, Jim Cox, Bob Hillman, and Don Langevoort (thanks for that, too, Ann!), which allows for a robust coverage of materiality.  The Tesla trial has been on our minds and in our classroom.  I am adding Ann's blog post to the mix.