Securities Regulation - John L. Latham and Jenna L. Fruechtenict

JurisdictionUnited States,Federal
Publication year1997
CitationVol. 48 No. 4

Securities Regulation by John L. Latham* and

Jenna L. Fruechtenicht**

This Article surveys significant cases decided by the United States Court of Appeals for the Eleventh Circuit during 1995 and 1996 in the field of securities regulation. This Article also examines select Supreme Court decisions and Congressional enactments during this survey period that affect Eleventh Circuit precedent.

The most significant development during this survey period was the enactment of the Private Securities Litigation Reform Act of 1995. Because the legislation affects a number of historical precedents and implements substantial changes in the area of securities regulation, this survey must begin with that Act.

I. The Private Securities Litigation Reform Act of 1995

On December 22, 1995, the Private Securities Litigation Reform Act of 1995 ("PSLRA") became law.1 The PSLRA was enacted to combat "strike" suits and other litigation abuses "while maintaining the incentive for bringing meritorious actions."2 As one of the most significant pieces of legislation enacted in the private securities area this half of the century, the PSLRA will substantially impact the manner in which the securities laws are litigated.

Because the PSLRA applies only to those actions originally filed after December 22, 1995,3 few cases have been fully litigated under its new provisions.4 Nonetheless, much could be and has been written about this momentous legislation.5 This Article, however, is meant to serve only as a brief overview of the latest developments in this circuit; thus, these authors will merely touch upon the primary areas of reform implemented by the PSLRA and leave a more thorough discussion of the Act for another day and another article.6

A. Provisions of the PSLRA Applicable to Both the Securities Act and the Exchange Act

1. Safe Harbor Provisions. One of the most important aspects of the PSLRA is the protection from civil liability afforded by the safe harbor provisions of sections 27A and 21E. Section 102 of the PSLRA amends the Securities Act of 1933 ("Securities Act") and the Securities Exchange Act of 1934 ("Exchange Act") by inserting section 27A into the Securities Act and section 2 IE into the Exchange Act. These identical provisions provide a safe harbor from civil liability for both written and oral forward-looking statements that project, explain, or estimate future events.7 The safe harbor provisions reflect the chilling effect the threat of litigation has had on corporate America's willingness to assess its own future and are intended "to enhance market efficiency by encouraging companies to disclose forward-looking information."8

The protection afforded by the safe harbor provisions is extended to forward-looking statements expressly identified as such and "accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement."9 In addition, the safe harbor provisions protect against liability for forward-looking statements deemed to be immaterial10 and statements the plaintiff fails to show were made with actual knowledge of the statement's falsity or tendency to mislead.11 Oral forward-looking statements are protected to the same extent as written statements as long as the forward-looking statement is identified as such, accompanied by a cautionary statement explaining "that the actual results could differ materially from those projected," and, if the oral statement references additional information contained in a readily available written document, the document is identified and also fulfills the statutory requirements for written materials.12

The PSLRA's safe harbor provisions are not of unlimited applicability, however, for they extend only to the statements of specifically identified individuals. The individuals protected by the safe harbor are issuers subject to the reporting requirements of sections 13(a) or 15(d) of the Exchange Act, persons acting on behalf of such issuers, outside reviewers retained by such issuers to make a statement on behalf of that issuer, or underwriters with respect to information provided by or derived from such issuers.13 Quite a few transactions are also expressly excluded from the protection of the safe harbor provisions—financial statements prepared according to generally accepted accounting principles, initial public offerings, tender offers, and a variety of other transactions.14

However, the legislative history of the Act suggests that the Securities Exchange Commission ("SEC") should consider adopting regulatory safe harbors for those forward-looking statements not protected by the PSLRA.15 Additionally, the PSLRA itself grants the Commission the authority to "provide exemptions from or under any provision of this title ... if and to the extent that any such exemption is consistent with the public interest and the protection of investors."16

Prior to the enactment of the PSLRA, most circuits, including the Eleventh Circuit in Saltzberg v. TM Sterling/Austin Associates, Ltd.,17 recognized the need to protect certain forward-looking statements and consequently adopted some form of the "bespeaks caution" doctrine to do so.18 The bespeaks caution doctrine generally places importance upon the context within which a statement is made.19 Thus, "[w]hen an offering document's projections are accompanied by meaningful cautionary statements and specific warnings of the risks involved, that language may be sufficient to render the alleged omissions or misrepresentations immaterial as a matter of law."20 Although the bespeaks caution doctrine was essentially codified by section 102 of the PSLRA,21 the legislative history states that the safe harbor provisions are not intended to entirely replace the bespeaks caution doctrine "or to foreclose further development of that doctrine by the courts."22 Thus, the PSLRA should not be interpreted as precluding the judiciary from further molding the bespeaks caution doctrine to supplement the limited applicability of the new safe harbor provisions.

The need to provide protection for forward-looking statements has been recognized for some time. Prior to widespread acceptance of the bespeaks caution doctrine, the SEC, in Rule 175, extended safe harbor protection to certain forward-looking statements made by issuers in quarterly (10-Q) and annual (10-K) reports to shareholders.23 The adoption of the bespeaks caution doctrine by the circuits and the enactment of the safe harbor provisions of the PSLRA evidence the view that the protection of certain forward-looking statements should be extended even further.

The SEC should give serious consideration to extending safe harbor protection to forward-looking statements made in connection with tender offers. Although the approach is subject to potential abuse, a target company should be able to avail itself of the safe harbor protection when providing forward-looking statements to shareholders to demonstrate that it has chosen to reject a hostile tender offer because the target believes it can create greater value for the shareholders through its business plan.24

2. Class Action Reforms. Another area of the securities practice strongly impacted by the enactment of the PSLRA is that of class actions.25 Implementing class action reforms, section 101 of the PSLRA amends the Securities Act by adding section 27(a) and amends the Exchange Act by adding section 21D(a). These class action provisions apply to any private action brought by a plaintiff class pursuant to the securities laws and are intended to curb class action abuses such as "the use of professional plaintiffs and the race to the courthouse to be the first to file the complaint."26 Congress also enacted the provisions to prevent counsel for the class from receiving a disproportionate share of any award and to require that more meaningful information be provided to class members.27

a. Certification Filed with the Complaint. Sections 27(a)(2) of the Securities Act and 21D(a)(2) of the Exchange Act set forth new requirements for plaintiffs seeking to serve as a class representative. Each plaintiff seeking to serve as a representative must provide with the complaint a sworn certification, personally signed by the plaintiff, stating "that the plaintiff has reviewed the complaint and authorized its filing," that the plaintiff did not purchase the security involved in the lawsuit at the direction of counsel or in order to participate in the lawsuit, and "that the plaintiff is willing to serve as a representative party on behalf of a class, including providing testimony at deposition and trial, if necessary."28

Additionally, the certification filed with the complaint must set forth all the plaintiff's transactions in the security during the relevant time period, identify all other actions brought pursuant to the securities laws within three years of the date of the certification in which the plaintiff sought to serve as a class representative, and state "that the plaintiff will not accept any payment for serving as a representative party on behalf of a class beyond the plaintiff's pro rata share of any recovery, except as ordered or approved by the court."29

b. Appointment of Lead Plaintiff. The class action provisions of the PSLRA also require that the first plaintiff to file a complaint publish notice to class members within twenty days of filing.30 The court is then to consider motions for appointment as lead plaintiff not later than ninety days after the date the notice is published.31 Courts are to presume that the most adequate plaintiff, and therefore the plaintiff who should be appointed to be the lead plaintiff, is the plaintiff or group of plaintiffs who possess "the largest financial interest in the relief sought by the class."32 However, to be appointed as the lead plaintiff, a plaintiff must either file a complaint or file a motion to...

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