Chapter 6 - § 6.3 • JUDICIAL INTERPRETATIONS

• Jurisdiction: Colorado

§ 6.3 • JUDICIAL INTERPRETATIONS

§ 6.3.1—The "Bespeaks Caution" Doctrine

Because forward-looking information is so important to the capital formation process, issues surrounding the disclosure of forward-looking statements are frequently litigated. Consequently, courts have reviewed the bases for liability that results from the disclosure of forward-looking statements and other projections. Generally, the courts have resolved these issues "based on all of the facts and circumstances." Many courts have adopted the "bespeaks caution" doctrine, which generally provides that forward-looking information (but not statements of historical fact⁷ ), accompanied by sufficient cautionary statements, will not be found to be materially misleading when it eventually proves to have been inaccurate, or even materially inaccurate.

The Ninth Circuit noted that the "bespeaks caution" doctrine is "merely a new name for the venerable precept" that "statements must be analyzed in context."⁸ In a motion to dismiss based on inaccurate projections, whether a statement is misleading "may be determined as a matter of law only when reasonable minds could not disagree as to whether the mix of information in the document is misleading."⁹ The "bespeaks caution" doctrine provides that when forecasts or opinions or projections ("soft information") in a disclosure statement are accompanied by meaningful warnings and cautionary language, the statements can avoid being misleading. Cautionary language cannot be used to protect misleading statements of fact ("hard information").¹⁰

In Halperin v. eBanker USA.Com, Inc.,¹¹ Judge Richard Cardamone affirmed the dismissal of an action against an issuer, stating that not only did the statements regarding future registration of securities bespeak caution, but when read in their entirety, "they shout it from the rooftops, so to speak."¹² This case was a class action against an issuer based on statements made in a private offering memorandum that the issuer "intend[ed] to endeavor to file registration statements with the SEC. . . . However, there can be no assurance. . . ."¹³ Although the plaintiffs claimed that the cautionary language was "mere boilerplate," the district court and the court of appeals disagreed. Similarly, in 2004 the Eighth Circuit held that meaningful "[c]autionary language which relates directly to that which the Plaintiffs claim to have been misled, if sufficient, renders the alleged misrepresentation or omissions immaterial as a matter of law."¹⁴

On the other hand, in In re Amylin Pharmaceuticals, Inc. Securities Litigation,¹⁵ the court rejected the defendants' assertion that statements made concerning testing of pharmaceutical products and potential FDA approval were protected under either the "bespeaks caution" doctrine or the Private Securities Litigation Reform Act. The court concluded that the statements were actionable because the cautionary language consisted of boilerplate warnings and were not "sufficiently meaningful" in the context of the disclosure. In In re Allaire Corp. Securities Litigation,¹⁶ the court stated that positive statements concerning product performance would be misleading unless the company also disclosed known problems.

Courts have held that all statements must be analyzed in context, and that the "total mix of information" must be considered. Alleged misrepresentations regarding a loan-loss reserve and compliance with generally accepted accounting principles (GAAP) were not rendered immaterial by cautionary statements about the future; to be sufficient, cautionary statements must be substantive and tailored to the specific future projections, estimates, or opinions that investors have challenged.¹⁷ Another court stated, "[T]he mere presence of some cautionary language does not in and of itself neutralize untrue or misleading statements as a matter of law."¹⁸ It is intended to apply to projections of future events, rather than historical events. There is, however, no need to disclose conclusions that are clear from the facts disclosed. "The federal securities laws were intended to protect the average, reasonable investor, not the most unworldly [naïf]. They do not require a company to state the obvious."¹⁹

One court defined the "bespeaks caution" doctrine by looking at the motivation of the plaintiffs in a case. The court said, "Only by discarding common sense and ignoring the multitude of explicit and on-point warnings" in the prospectus could investors have been misled by the alleged misrepresentations.²⁰

It is important to distinguish between historical statements and projections. Statements of historical fact must be accurate and complete in all material respects. There is no safe harbor for materially misstating historical facts. The "bespeaks caution" doctrine and other safe harbors only provide protection for projections or forward-looking information that prove to be inaccurate or incomplete when future events become historical fact.²¹

At least one commentator, Donald Langevoort, has severely criticized the judicially created "bespeaks caution" doctrine.²² Professor Langevoort agrees that the doctrine may have a place in securities litigation, but stated that the "bespeaks caution" doctrine must be applied carefully, on a case-by-case basis. "One should be wary of giving boilerplate cautionary language talismanic power, for forecasts and projections can mislead reasonable investors notwithstanding their typically self-evident disclaimers."²³

Few, if any, courts blindly apply the "bespeaks caution" doctrine. Facts and circumstances are always an issue in the judicial decisions. In Saltzberg v. TM Sterling/Austin Assocs., Ltd.,²⁴ the court applied the "bespeaks caution" doctrine when it found that cautionary language was "no boilerplate and was not buried among too many other things, but was explicit, repetitive and linked to the projections about which plaintiffs complain." In In re Numerex Corp. Securities Litigation,²⁵ the court found that "cautionary statements . . . grounded in unambiguous, specific terms in a prominent display in the prospectus" rendered the alleged misstatements "harmless."

In Grossman v. Novell, Inc.,²⁶ the Tenth Circuit adopted the "bespeaks caution" doctrine in an unusual situation. The central allegation of the complaint was that the issuer had made a series of false statements to the press and analysts on the effect of a merger. The court held that a vice president's statement that "the merger would not dilute 'future earnings'" was a forward-looking statement. Even though the vice president did not offer any cautionary language, a contemporaneous registration statement had stated that earnings were expected to "fluctuate drastically" in the years following the merger. The registration statement had also noted certain accounting charges that were expected to impact earnings in the near term. The court rejected the contention that the cautionary language needed to be in the same document as the alleged misstatement; the court said that the relevant inquiry (especially in a fraud-on-the-market case) concerns the "total mix of information" available to the market at the time of the alleged misstatement. The court found that since the cautionary language was specific and to the point and in a contemporaneous document, it was sufficient to protect the vice president's statement under the "bespeaks caution" doctrine.

The "bespeaks caution" doctrine also applies in the case of municipal securities, exempt from registration under § 3(a)(3) of the 1933 Act. In Gasner v. Board of Supervisors,²⁷ the court held that cautionary statements in an official statement issued in connection with a bond offering to finance Dinwiddie County, Virginia's solid waste processing facility rendered certain misstatements and omissions "immaterial." The case arose when Dinwiddie County defaulted on the bonds and an investor sued alleging the misstatements and omissions were fraudulent.

On the other hand, when courts found that the cautionary statements were mere boilerplate, or were not sufficiently specific to the issues, they had no difficulty in finding the issuer making the forward-looking statements liable and the cautionary statements meaningless. For example, in In re Westinghouse Securities Litigation,²⁸ plaintiffs alleged that Westinghouse had made material misrepresentations regarding a loan-loss reserve and compliance with generally accepted accounting principles. The court held that Westinghouse's statements were not rendered immaterial as a result of the general, non-specific, cautionary statements about the future that...