§ 5_ 1                  

I.           Introduction

Forward-Looking Statements and the Law Before the PSLRA

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The law relating to forward-looking statements (including projections and estimates) at one time was relatively straight-forward, notwithstanding it did not please everyone, and some Circuit Courts of Appeals (the Fourth Circuit in particular)[1] developed their own distinctive versions. The mere fact that the prediction embodied in the statement proves to be wrong does not make it actionable. Forward-looking statements inevitably prove to be wrong to some degree.[2] The Ninth Circuit in Apple Computer[3] established the premise that projections include three implied representations: “(1) that the statement is genuinely believed, (2) that there is a reasonable basis for that belief, and (3) that the speaker is not aware of any undisclosed facts tending to seriously undermine the accuracy of the statement.” At issue in Apple Computer were two new technological developments, a new computer named “Lisa” and a disk drive named “Twiggy.” The much loved, but ill-fated, “Lisa” introduced the graphical interface featuring the mouse, icons and many of the features associated today with the Macintosh and Windows. Among the projections under scrutiny were the following:

“I don’t think we will have any problem selling all the Lisas we can build.”

“Lisa is going to be phenomenally successful in the first year out of the chute.”

Following is an excerpt from the Ninth Circuit’s opinion:[4]

The most obvious example of a false or misleading statement is a misrepresentation of historic fact. . . . Most of the statements challenged by plaintiffs are projections or general expressions of optimism, as opposed to simple representations of historic fact. The “truth” of such statements as the prediction that “Lisa is going to be phenomenally successful” and the assertion that “we are very pleased with the market acceptance and orders to date” presents more subjective issues. Nonetheless, projections and general expressions of optimism may be actionable under the securities laws. See, e.g., Marx v. Computer Sciences Corp., 507 F.2d 485, 489-92 (9th Cir. 1974); G & M Inc. v. Newbern, 488 F.2d 742, 745-46 (9th Cir. 1973). A projection or statement of belief contains at least three implicit factual assertions: (1) that the statement is genuinely believed, (2) that there is a reasonable basis for that belief, and (3) that the speaker is not aware of any undisclosed facts tending to seriously undermine the accuracy of the statement. A projection or statement of belief may be actionable to the extent that one of these implied factual assertions is inaccurate. Marx, 507 F.2d at 490.

The court did not fault the generalized statements relating to Lisa, but concluded that it was at least a triable issue as to whether certain statements predicting what the computer would be capable of from a technical standpoint were misleading because of the failure to disclose technical problems encountered in its development and doubts expressed internally by Apple’s engineering division responsible for its development.[5]

Prior to 1978, the SEC discouraged and, in some instances, prohibited the use of projections in filed documents. In that year, the Commission was so determined to follow the advice of the Disclosure Advisory Committee that it established and announced that it “wishes to encourage companies to disclose management projections both in their filings with the Commission and in general.”[6] Shortly thereafter, the Commission adopted two safe harbors — one relating to forward-looking statements and the other relating to oil and gas reserve estimates.[7] The safe harbor rules encompass the several fraud provisions of the Securities Acts notwithstanding differences in their precise language and scienter requirements. The safe harbor rules require that information to be protected by the rule have a reasonable basis and be disclosed in good faith. The SEC’s safe harbor rules are discussed at §5_30.

Formalized projections, such as those often included in a private placement memorandum relating to an offering of limited partnership interests, typically set forth the assumptions on which the projection is based and include a number of cautionary statements to the effect that there is no assurance that the projection will be realized, stating a number of factors that could adversely affect realization. Such cautionary statements were generally recognized to be necessary to keep a projection from being misleading. A number of courts, however, taking such cautionary statements one step further, adopted the so-called “bespeaks caution” doctrine. There are as many definitions of this term as there are courts that purport to adopt the doctrine. A representative one is as follows:[8] “The doctrine holds that economic projections, estimates of future performance, and similar optimistic statements in a prospectus are not actionable when precise cautionary language elsewhere in the document adequately discloses the risks involved.” Concerning the “bespeaks caution” doctrine, see § 5_32.