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Financial Reporting and the Law

A December court ruling highlights the fact that the Private Securities Litigation Reform Act (PSLRA) and the judicially created “bespeaks caution doctrine” will not protect forward-looking statements where the cautionary language accompanying the statements is merely boilerplate and does not identify particular risks already known to the company. The PSLRA contains a safe harbor providing that a defendant is not liable if a forward-looking statement is identified and accompanied by meaningful cautionary language. Under the “bespeaks caution doctrine,” a forward-looking statement accompanied by sufficient cautionary language is not actionable because the statement is deemed immaterial as a matter of law.

In the recent disclosure fraud case, the U.S. District Court for the Eastern District of New York denied amotion to dismiss a securities class action complaint against Symbol Technologies, Inc., a publicly traded company. The court found that the cautionary language applicable to revenue projections was merely boilerplate and “did not specifically reveal the particular risks allegedly known to’ Symbol, i.e., that the revenue projections were premised upon artificially inflated sales projections and artificially reduced inventory calculations.”

This case is a reminder that merely including boilerplate cautionary statements in disclosure documents is insufficient to negate an allegation of a material misstatement or omission in a forward-looking statement. To be effective, the cautionary statements must be substantive and tailored to the company’s specific risks and cannot be vague or present a boilerplate litany of generally applicable risk factors. The cautionary statements also must be updated on a regular basis to reflect changes in a company’s business and its operating environment. Companies should review the cautionary language regarding forward-looking statements in their upcoming earnings releases and periodic reports to ensure that the language reflects the current state of affairs at the company and its relevant market.