PSLRA Provisions

1
PSLRA Provisions

• Section 27A 33 Act 21E of 34 Act
• Extensive legislative history
• Rewritten in Conference Committee
• Chairman Levitts compromise awry
• Focus only on Presidents Veto
• Provision in both Acts identical
• Definition of forward-looking
• Availability
• Exclusions
• Three prongs of safe-harbor

2
Definition of Forward-Looking Statement

• Projection of revenues,income(loss), EPS(loss),
  cap expend, dividends, other financial items
• Plans for future operations, products, services
• Future economic performance, MDA
• Assumptions underlying any of the above
• Report of outside reviewer retained by issuer
  assessing FLS made by the issuer

3
Available to FLS Made by

• An issuer that is a reporting company
• A person acting on behalf of such issuer
• Retained outside reviewer making statement on
  behalf of the issuer
• An underwriter
• With respect to info provided by such issuer
• Or with respect to info derived from information
  provided by such issuer

4
Significant Exclusions

• IPOs, tender offers, going private, Schedule
  13Ds, investment companies
• Included in GAAP financial statements
• Direct participation programs, penny stock
  issuer, blank check offfering, role-ups
• Issuers w/3 years found guilty of wide range of
  crimes, or
• Issuer enjoined, ordered to cease or desist, or
  otherwise determined to have violated antifraud
  provisions

5
Safe Harbor in actions alleging false or
misleading statement

• Meaningful cautionary statement prong
• Statement identified as FLS
• Accompanied by meaningful cautionary statements
  identifying important factors that
• Could cause actual results to differ materially
• Conference Committee on meaningful
• Boiler plate will not suffice
• Must convey substantive information re factors
• Realistically could cause results to differ
  materially
• Such as information about issuers business

6
Clintons License to Lie Agrument

• Three prongs are disjunctive (or)
• Not liable as to FLS if and to extent
• Meaningful cautionary statements, or
• Immateriality, or
• Plaintiff fails to prove was made with actual
  knowledge was false or misleading
• Ergo if meaningful cautionary statement prong
  satisfied, do not get to whether knew was false
  or misleading
• See IvaxSec. 5.20

7
Conference Committee and Cautionary Statements vs
Intent

• Veto Message Stressed Conf. Comm. Statement
• Required to identify important factors, but not
  all
• Failure to include ultimate cause not fatal
• Standard upon which a court may decide MTD
  without examining the state of mind of the
  defendant
• First prong court only to examine cautionary
  statements
• Courts should not examine the state of mind of
  the person making the statement
• Can there be meaningful cautionary statements
  without disclosing undermining factors?

8
The Actual Knowledge ProngWhose Actual Knowledge?

• If made by natural personhis/her
• In made by an entity
• Made by or with approval exec. Officer
• With actual knowledge of the officer
• Probably not intended to distinguish between sole
  proprietor and entity
• Individual making representation liable if has
  knowledgebut who makes
• Entity liable only if with approval of E.O.

9
When is a FLS False or Misleading?

• By its nature accuracy of FLS not knowable
• Apple Computer (9th Cir. 1989) implied rep
• Representation genuinely believed
• Reasonable basis for the belief
• Not aware of facts seriously undermine
  representation
• SECs Rule 175/3b-6
• Plaintiff has burden prove do not have reasonable
  basis
• Or were not made in good faith
• Legislative history discloses dissatisfaction
  with R.175
• One reason for PSLRA safe harbor/encourage FLS

10
Possible Reconciliation

• Must be some standard to measure cautionary
  statements that have to be included
• Not adequate if dont include undermining factors
• Dont examine state of mind to determine whether
  cautionary factors adequate
• But if dont include serious undermining factors
• Then go to the actual knowledge prong and
• Determine if appropriate person had actual
  knowledge
• See Commissions amicus brief in Ivax-sec. 5.20

11
Pleading Actual Knowledge

• Plaintiff appears to have burdenproof
• Since involves state of mind in 10b-5 action
  strong inference applicable
• In Section 11 is Rule 9(b) applicable
• Now it involves fraud should be
• 9th Cir-plead generally 2d strong infer
• Changes Sec. 11 burden/proof/standard
• Not only as to officers and directors
• But as to the underwriter

12
Pleading Actual Knowledge in Enron

• What was wrong at par. 985-everything
• Related to Enron Defendants (O D)
• Speaker knew (who is the speaker)
• Authorized etc.-relevant to Enron Enron in
  bankruptcy not defend
• Harmons opinion related to secondary actors
• None of them are Enron defendants
• Refers to analysts statements safe harbor
• Seem to say safe harbor doesnt apply if fraud
• Equates fraudrecklessness rather than actual
  knowledge

13
Oral Forward-Looking Statements

• Applicable to issuer or persons making statement
  on behalf of issuer
• Stated is a Forward-Looking Statement
• Actual results could differ mat. from projected
• Additional cautionary factors available in
  readily available written document
• Identifies the document
• Information in document satisfies (1)(A)
• Any document filed with SEC or generally
  disseminated is readily available
• Queryoral FLS by underwriters

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Second Prong--Immateriality

• Would be applicable in any event
• Specifically included to cover
• Puffery
• General Statements of Optimism
• Market already knows statements
• Soft statements??

15
Rule 175/3b-6

• Come in play as to excluded FLS
• Must be in filed document or in some instances
  reaffirmed in a filed document
• E.g. IPO
• Places burden of proof on plaintiff to establish
  no reasonable basis or not made in good fatih

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Other Matters

• Safe Harbor Not Applicable to
• Statements of Historical Facts
• Statements of Existing Facts
• Statements in GAAP Financials
• Consideration of cautionary statements referenced
  by defendant
• Stay of discovery on motion for summary judgment