The PSLRA created a safe harbor for forward-looking statements to encourage companies to provide investors with information about future plans and prospects. Under the first prong of the safe harbor, a defendant is not liable with respect to any forward-looking statement if it is identified as forward-looking and is accompanied by "meaningful cautionary statements" that alert investors to the factors that could cause actual results to differ.
In a controversial decision, the U.S. Court of Appeals for the Seventh Circuit has held that it may be impossible, on a motion to dismiss, to determine whether a company's cautionary statements are "meaningful." In Asher v. Baxter Intern. Inc., 2004 WL 1687885 (7th Cir. July 29, 2004), the court addressed whether Baxter's published risk factors were sufficient to foreclose liability for its allegedly false financial projections. The court, in an opinion authored by Judge Easterbrook, made three important holdings:
(1) The plaintiffs relied on the fraud-on-the-market theory (i.e., reliance by investors on an alleged misrepresentation is presumed if the company's shares were traded on an efficient market) in bringing their claims. The court found that an "investor who invokes the fraud-on-the-market theory must acknowledge that all public information is reflected in the price." Accordingly, a company's cautionary statements, no matter where found, "must be treated as if attached to every one of its oral and written statements."
(2) A company does not have to have "prevision." It is enough for the cautionary statements "to point to the principal contingencies that could cause actual results to depart from the projection."
(3) Nevertheless, the court found that Baxter's cautionary statements, though company-specific and not boilerplate, may have fallen short because there "is no reason to think - at least, no reason that a court can accept at the pleading stage, before plaintiffs have access to discovery - that the items mentioned in Baxter's cautionary language were those thought at the time to be the (or any of the) 'important' sources of variance." The court noted that Baxter's cautionary language had remained fixed even as the ri