Puffery or Promises: When Is Cheap Talk Actionable?

Date01 August 2017
Puffery or Promises:
When Is Cheap Talk Actionable?
by Brian J. Wong
Brian J. Wong is senior counsel at the U.S. Securities and Exchange Commission (SEC). As a matter of
policy, the SEC disclaims responsibility for any private publication or statement by any of its employees. e
views expressed herein are those of the author and do not necessarily reect the views of the Commission,
of individual Commissioners, or of the author’s colleagues on the sta of the Commission.
Prof. James Coleman argues that a comparison of
statements made by the same company to investors
in securities disclosures as opposed to environmen-
tal regulators in comments could check the “crying wolf ”
problem and ferret out when a proposed regulation is genu-
inely too burdensome or infeasible to implement.1
Professor Coleman’s thoughtful proposal warrants
careful attention. ere is no doubt that using a person’s
own words to respond to their arguments is a deft rhetori-
cal gambit.2 Yet it is not obvious that corporate disclosures
to investors would routinely contain detailed, quantitat ive
projections about the cost and feasibility of proposed reg-
ulation, so as to make systematic cross-check s practical.
e meticulous empirical analysis that is the centerpiece
of Professor Coleman’s a rticle sheds light on one a spect
of the chal lenge. It convincing ly shows that some compa-
nies made dierent statements to the EPA and to investors
about t he Renewable Fuel Standard and that there were
dierence s in tone.3 But measuring the aggregate number
of positive as opposed to negative statements cannot by
itself show that a ny part icular statement was false or that
any required disclosure was decient.
is comment takes a step back and provides an overview
of the securities disclosures framework and how upcoming
regulations might t in. It then looks at how courts distin-
guish between facts, opinions, forward-looking statements,
and puery when t hey evaluate fraud claims brought by
1. James W. Coleman, How Cheap Is Corporate Talk? Comparing Companies’
Comments on Regulations With eir Securities Disclosures, 40 H. E.
L. R. 47 (2016)).
2. See generally William Shakespeare, Hamlet, act III, scene 4, lines 206–207
(“For ‘tis the sport to have the enginer/Hoist with his own petar....”).
3. Coleman, supra note 1, at 70–75. A signicant number of companies en-
dorsed comments submitted by industry trade associations, which do not
typically themselves le securities disclosures. Trade association participa-
tion can be an attractive way to compile sectorwide information about cur-
rent practices and modeling about the impact of proposed regulation, while
at the same time creating distance from what may be unpopular stances.
Jonathan Weinberg, e Right to Be Taken Seriously, 67 U. M L. R.
149, 181 (2012); Timothy F. Malloy, e Social Construction of Regulation:
Lessons From the War Against Command and Control, 58 B. L. R. 267,
337–41 (2010).
private litigants. Finally, it concludes with some observa-
tions about how dierences in tone or emphasis could pro-
vide valuable information even when they do not amount
to actionable fraud.
I. Why Disclosure and What Disclosures?
Companies will often make predictions to investor s
about the business impact of proposed re gulat ions. But
not all such disclosu res are of equa l use for environ men-
tal regulators. For instance, a heavily caveate d, qualita-
tive sentiment couched i n conditional terms does little
to ease the “regulator’s dilemma,” unl ike concre te, quan-
titative data about the “monetary cost and practica l fea-
sibility” of a proposal.4
Disclosure is one of the fundamental underpinnings
of securities regulation. In the wake of the Great Depres-
sion, many urged a comprehensive system of federal “merit
review” in which a securities oering would be allowed only
if it was judged that the business was sound and that the
investment was not unfair, unjust, or inequitable.5 A com-
peting view wa s championed by Justice (then Mr.) Louis
Brandeis, who urged publicity and sunlight as the best of
disinfectants to ills social and industrial. Carried forward
by President Franklin Delano Roosevelt, Brandeis’s phi-
losophy of disclosure largely won out.
At bottom, the disclosure requirements are designed
to arm investors with information to allow them to make
informed decisions, which, in turn, fosters condence in
the markets and promotes the ecient a llocation of capi-
tal. ey represent, in F.D.R.’s words, a complement to the
“ancient rule of caveat emptor6 by not only prohibiting
armative frauds, such as misrepresentations and mislead-
4. Cf. Coleman, supra note 1, at 51.
5. See 1 L L  J S, S R §1C at p. 45
(6th ed. 2011).
6. H.R. R. N. 85, at 2, 73d Cong. 1st Sess. (1933); see, e.g., SEC v. Zand-
ford, 535 U.S. 813, 819 (2002).
Copyright © 2017 Environmental Law Institute®, Washington, DC. Reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120.

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