Securities Regulation - L. Briley Brisendine, Jr.

• Publication year: 2001

Securities Regulationby L. Briley Brisendine, Jr.^*

This Article surveys significant cases decided by the United States Court of Appeals for the Eleventh Circuit during 1999 and 2000 in the field of securities regulation. This Article also examines one rule adopted by the Securities and Exchange Commission ("SEC") during this survey period that affects Eleventh Circuit precedent.

I. Safe Harbor for Forward-Looking Statements

In Harris v. Ivax Corp.,¹ the Eleventh Circuit considered whether, under the Private Securities Litigation Reform Act of 1995 ("PSLRA"),² statements contained in the defendant corporation's press releases qualified as "forward-looking statements."³ The Eleventh Circuit also addressed whether these statements were accompanied by sufficient "cautionary statements" to come within the safe harbor provided by the PSLRA.⁴ In Harris investors sued defendant Ivax Corporation ("Ivax"), its chairman and chief executive officer, and its chief financial officer, alleging both fraud under Section 10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),⁵ and Rule 10b-5⁶ thereunder and common law negligent misrepresentation.⁷

On August 2, 1996, Ivax issued a press release announcing its financial results for the second quarter of 1996. On September 30, 1996, Ivax issued another press release in which it announced that it anticipated a $43 million loss for the third quarter of 1996. On November 11, 1996, Ivax announced a $179 million loss for the third quarter of 1996, $104 million of which was a reduction in the carrying value of the goodwill ascribed to certain of Ivax's businesses. Neither the August 2 nor the September 30 press releases mentioned the possibility of the goodwill write-down.⁸ Ivax had attached an italicized warning to each of its two press releases informing investors of "what kind of misfortunes could befall [Ivax] and what the effect could be."⁹ The Ivax stock price fell upon the announcement of the write-down.¹⁰ In the district court, plaintiff investors alleged liability based on two theories. First, plaintiffs alleged that Ivax's economic projections were fraudulent. Second, they alleged that Ivax's disclosure of factors that could affect its projections were misleading because the disclosure omitted the possibility of a goodwill write-down. Defendants moved to dismiss based on the safe harbor provision¹¹ and heightened pleading requirements¹² added to the Exchange Act by the PSLRA. The district court dismissed plaintiffs' complaint, and plaintiffs appealed.¹³

On appeal, plaintiffs' theories of liability included that Ivax had concealed its intent to write down goodwill by $104 million in the third quarter of 1996 in its statements disclosing an optimistic outlook and that the list of factors that could affect its projections omitted the risk of the goodwill write-down.¹⁴ The court first analyzed four excerpts from Ivax's two press releases that contained the outlooks and list of potential risks to determine whether each was a forward-looking statement within the safe harbor.¹⁵ The first statement was from the August 2 press release and stated that "[r]eorders are expected to improve as customer inventories are depleted."¹⁶ The court found that the statement was a forward-looking statement because it was '"a statement of the assumptions underlying' . . 'a statement of future economic performance.'"¹⁷ The same press release stated that "the challenges unique to this period in our history are now behind us."¹⁸ The court found that this statement, taken in context, was also a forward-looking statement.¹⁹ In rejecting the plaintiffs' argument that the statement could not be forward-looking because it was in the present tense, the court stated that "a statement about the state of a company whose truth or falsity is discernible only after it is made necessarily refers only to future performance."²⁰ Finally, the press release quoted Ivax's chairman and chief executive officer as saying, '"[O]ur fundamental business and its underlying strategies remain intact . . . . Only a limited number of companies are positioned to meaningfully participate in this rapidly growing market and, among them, Ivax is certainly very well positioned.'"²¹ As a "statement whose truth can only be known after seeing how Ivax's future plays out," the court found this statement to be forward-looking and within the safe harbor.²²

The court next considered a list of factors, both factual and forward-looking, contained in the September 30 press release that Ivax indicated would influence its financial results for the third quarter of 1996.²³ Plaintiffs alleged the list was misleading because it omitted the expectation of a goodwill write-down.²⁴ The court held that "when the factors underlying a projection or economic forecast include both assumptions and statements of known fact, and a plaintiff alleges that a material factor is missing, the entire list of factors is treated as a forward-looking statement."²⁵ Therefore, the list of factors was a "statement" within the safe harbor.²⁶ " The court reasoned that it is appropriate to treat mixed lists as forward-looking for two reasons: First, a list will only qualify as forward-looking if it contains assumptions underlying a forward-looking statement;²⁷ second, "a defendant can fully benefit from the safe harbor's shelter only when it has disclosed risk factors in a warning accompanying the forward-looking statement."²⁸

The court next considered whether the cautionary language attached to each press release was adequate, despite the fact that it did not explicitly mention the factor that ultimately rendered the forward-looking statements untrue, that is, the goodwill write-down.²⁹ The court held that the cautionary language satisfied Ivax's obligation to mention "important factors that could cause actual results to differ materially from those in the forward-looking statement[s]" and that the PSLRA did not require a listing of all factors.³⁰ Based on the foregoing, the court affirmed the district court's dismissal of plaintiffs' complaint.³¹

II. Judicial Notice of SEC Filings and Standard for Scienter Pleading

In Bryant v. Avado Brands, Inc.,³² the Eleventh Circuit considered the proper scope of materials that a district court may consider in ruling on a motion to dismiss in a securities fraud case.³³ The Eleventh Circuit also addressed what standard a plaintiff must meet in order to plead scienter adequately under Section 21D(b)(2) of the Exchange Act.³⁴ In Bryant shareholders sued defendant Apple South, Inc. ("Apple South"), which is now known as Avado Brands, Inc., and several of its officers in a securities class action lawsuit alleging that defendants made false and misleading statements and material omissions in violation of Section 10(b) of the Exchange Act³⁵ and Rule 10b-5 thereunder.³⁶ Plaintiff shareholders also alleged that certain Apple South insiders had sold shares of Apple South stock in violation of Section 20(a)³⁷ of the Exchange Act.³⁸

Apple South owned and operated several chain restaurants. During the class period denned by plaintiffs' complaint as May 26, 1995, through September 24, 1996, Apple South pursued an expansion plan, acquiring additional restaurants and expanding geographically. In May 1995, Apple South acquired eighteen restaurants located in the Midwest. Plaintiffs alleged that Apple South's integration of these new restaurants, along with restaurants in a chain previously acquired into its business model, was unprofitable and hurt Apple South's core business, which consisted of its restaurants located in the Southeast. Plaintiffs further alleged that Apple South's management knew the acquisitions were creating internal problems that would negatively affect earnings per share ("EPS"), but failed to disclose this negative material information.³⁹ Plaintiffs alleged that Apple South, in addition to concealing problems, "affirmatively misrepresented the direction in which the strategy was taking the company, telling analysts that the new restaurants would positively impact profit margins" and that EPS would grow by thirty percent in five years.⁴⁰ Plaintiffs claimed that during the class period, Apple South sold more than ten million shares of its stock and $125 million in debt securities. They also alleged that several high-ranking officers named as defendants personally sold more than $19.6 million of their stock in...