On June 30, 2010, the United States Court of Appeals for the Ninth Circuit clarified its interpretation of the Private Securities Litigation Reform Act of 1995’s (“PSLRA”) statutory safe harbor provision, 15 U.S.C. § 78u-5, in In re Cutera Securities Litigation (Hamilton v. Conners), No. 08-17627, 2010 WL 2595281 (9th Cir. Jun. 30, 2010). In doing so, the court resolved the conflicting lower court interpretations of the safe harbor provision that followed its holding in No. 84 Employer-Teamster Joint Council Pension Trust Fund v. American West Holding Corp., 320 F.3d 920, 937 n.15 (9th Cir. 2003).
Plaintiffs in Cutera alleged that Cutera artificially inflated its stock price throughout the class period in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by withholding material information from investors concerning the true extent of its sales force’s poor sales performance. 2010 WL 2595281, at *2. Plaintiffs further alleged that Cutera made no meaningful cautionary statements that identified important factors that could cause Cutera’s actual results to differ materially from its revenue and earnings projections, and that Cutera and its officers “knew that the particular forward-looking statement was false.” Id. at *6.
The district court granted Cutera’s motion to dismiss the complaint, finding no material difference between Cutera’s January 31, 2007, disclosures and its May 2007 disclosures, and concluded that Cutera’s alleged failure to fully disclose information about its sales staff’s performance did not sufficiently allege a violation of the securities laws. Id. at *2. The district court also held that allegations about Cutera’s misleading revenue and earnings projections fell within the PSLRA’s safe harbor for forward-looking statements. Id.
On appeal, the plaintiffs argued that a sufficiently strong inference of actual knowledge of fraud would overcome a claim of safe harbor protection under the PSLRA even for statements identified as forward-looking and accompanied by meaningful cautionary language. Id. at *7. In support of this reading, the plaintiffs relied upon the Ninth Circuit Court of Appeals’ decision in No. 84 Employer-Teamster Joint Council Pension Trust Fund v. American West Holding Corp., 320 F.3d 920, 937 n.15 (9th Cir. 2003), where the court suggested in a footnote that “a strong inference of actual knowledge” could except forward-looking statements from the safe harbor rule. 2010 WL 2595281, at *8.
The Ninth Circuit disagreed and characterized its footnote from American West as “obiter dicta” that offered no statutory analysis or discussion of the safe harbor itself. Id. at *8. The court emphasized that the investors’ reading of the safe harbor provision “ignores the plain language of the statute, which is written in the disjunctive as to each subpart,” a reading similarly rejected by every other circuit court that has considered the issue. Id. at *7. The court explained that “[t]he logical reading of the statute is simply to take it as written — subsections (A) and (B) and their subpoints each offer safe harbors for different categories of forward-looking statements. The defendants’ state of mind is not relevant to subsection (A). To read the provisions otherwise would make no sense.” Id. Thus, whether or not Cutera had actual knowledge of fraud, its revenue and earnings projections were protected by the statutory safe harbor because they were forward looking and contained sufficient cautionary language. Id. at *8.
The Ninth Circuit’s opinion thus makes clear that the focus of the PSLRA’s statutory safe harbor is on the nature and quality of a defendant’s disclosures and not on its state of mind. Allegations of actual knowledge of falsity will not permit investors to make an end run around the safe harbor’s protection.
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This article was originally published by Bingham McCutchen LLP.