The Clerk of the Court is directed to amend the caption as set forth above.

*

 Judge Jon O. Newman, originally a member of the panel, recused himself from **

consideration of this matter after oral argument took place and did not participate in this

decision. This appeal is being decided by the remaining members of the panel, who are in

agreement. See 2d Cir. R. 0.14.

08-5442-cv

Andrew Slayton v. American Express

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

_______________

August Term, 2009

(Argued: October 19, 2009 Decided: May 18, 2010)

Docket No. 08-5442-cv

_______________

ANDREW KEITH SLAYTON, on behalf of himself and all others similarly situated, GLICKENHAUS

& COMPANY, ADAM CRAIG SLAYTON, on behalf of himself and all others similarly situated,

ADAM CRAIG,

Plaintiffs-Appellants,

ATLAS EQUITIES, LORETTO ARZU, CHARLES HOVANESIAN, SAM WIETSXHNER, SHIRAZ SIDI,

WILLIAM M. PALESE, SCOTT BARRENTINE, YVETTE YEIDMAN, MALKA RUBIN, JULIE DROSS,

BROWN FAMILY TRUST,

Consolidated-Plaintiffs,

—v.—

AMERICAN EXPRESS COMPANY, KENNETH CHENAULT, HARVEY GOLUB, DAVID R. HUBERS,

JAMES M. CRACCHIOLO,

Defendants-Appellees.

*

_______________

B e f o r e :

CALABRESI and KATZMANN, Circuit Judges.

**
2

_______________

Appeal from a judgment of the United States District Court for the Southern District of

New York (William H. Pauley, Judge) entered October 9, 2008, dismissing the plaintiffs’ second

amended complaint. In the second amended complaint, the plaintiffs alleged violations of

sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. On

appeal, they limit their case to one allegedly misleading statement made in the defendants’ May

15, 2001 quarterly report. We hold that the alleged misleading statement is a forward-looking

statement that is protected by the safe harbor of the Private Securities Litigation Reform Act. 

We accordingly affirm the judgment of the district court.

_______________

KENT A. BRONSON (Sanford P. Dumain, Arthur R. Miller, of counsel),

Milberg LLP, New York, NY; Christopher Lovell and Imtiaz A. Siddiqui,

Lovell Stewart Halebian LLP, New York, NY; Law Offices of Lawrence

G. Soicher, New York, NY, for Plaintiffs-Appellants.

ROBERT E. ZIMET (Susan Saltzstein, Christopher P. Malloy, William F.

Clarke, Jr., Irene M. Ten Cate, Daniel M. Gonen, of counsel), Skadden,

Arps, Slate, Meagher & Flom LLP, New York, NY, for DefendantsAppellees.

MICHAEL A. CONLEY, Deputy Solicitor (Mark D. Cahn, Deputy General

Counsel, Jacob H. Stillman, Solicitor, Dominick V. Freda, Senior

Counsel, of counsel), Securities and Exchange Commission, Washington,

DC, for amicus curiae Securities and Exchange Commission.

_______________

KATZMANN, Circuit Judge:

This case requires us to decide whether an allegedly misleading statement made in one of

defendant American Express’s regulatory disclosure documents is protected by the safe harbor

provision of the Private Securities Litigation Reform Act (“PSLRA”). In the course of our
 Because the plaintiffs have narrowed their claim on appeal, they state that if this case

1

were remanded, they would seek a class period of May 15, 2001 through July 18, 2001.

3

analysis, we interpret Congress’s provision that a defendant shall not be liable for a forwardlooking statement if it is “identified as a forward-looking statement, and . . . accompanied by

meaningful cautionary statements identifying important factors that could cause actual results to

differ materially from those in the forward-looking statement,” or if “the plaintiff fails to prove

that the forward-looking statement . . . was . . . made or approved by [an executive] officer with

actual knowledge by that officer that the statement was false or misleading.” 15 U.S.C. § 78u5(c). 

The plaintiffs appeal from the October 9, 2008 judgment of the United States District

Court for the Southern District of New York (Pauley, J.) dismissing their Second Amended

Complaint. We determine that the defendants are not entitled to safe harbor protection under the

meaningful cautionary language prong of the safe harbor at this stage of the litigation because

their cautionary language is vague. We conclude, however, that the defendants’ allegedly

misleading statement is protected by the actual knowledge prong of the safe harbor because the

plaintiffs did not plead facts demonstrating that the statement was made “with actual knowledge .

. . that the statement was false or misleading,” id. Accordingly, we affirm the judgment of the

district court.

I

The plaintiffs are investors who purchased American Express stock between July 26,

1999 and July 17, 2001. The defendants are American Express Company (“American Express” 1
 On a motion to dismiss, we may consider “statements or documents incorporated into

2

the complaint by reference, legally required public disclosure documents filed with the SEC, and

documents possessed by or known to the plaintiff and upon which it relied in bringing the suit.” 

ATSI Comm’ns. Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007).

4

or the “Company”); Harvey Golub, Chairman and CEO of American Express until late 2000;

Kenneth Chenault, President, COO and successor to Golub as Chairman and CEO at the

Company; David Hubers, President and Chief Executive of Company subsidiary American

Express Financial Advisors (“AEFA”); and James M. Cracchiolo, Chairman and CEO of AEFA. 

According to the plaintiffs’ Second Amended Complaint (“SAC”), starting in the 1990s,

American Express began an over-investment in high-yield debt securities. These investments

included junk bonds and collateralized debt obligations (“CDOs”). While peer companies

limited high-yield debt investments to seven percent of their portfolios, ten to twelve percent of

AEFA’s portfolio was made up of these investments. Ultimately, this overinvestment resulted in

American Express losing hundreds of millions of dollars in 2000 and 2001.

This appeal regards a statement that American Express made in a quarterly report filed

with the Securities and Exchange Commission (“SEC”) in May 2001. In that filing, the

Company stated, in essence, that while it had lost $182 million from its high-yield debt

investments in the first quarter of 2001, it expected further losses from those investments to be

substantially lower for the remainder of 2001. The plaintiffs allege that the defendants violated

the Securities Exchange Act of 1934 when they made this statement because at the time they

made it, the defendants knew it was misleading.

 The source of the plaintiffs’ allegations is a Wall Street Journal Asia article that the

plaintiffs attached to their SAC, and the following account is taken from that article. In early

2
5

2001, after the Company reported losses of $123 million in 2000 from its high-yield debt

investments, Chenault belatedly ordered a “very hard look” at the Company’s high-yield debt

portfolio. By late February 2001, defendant Chenault and Gary Crittenden, then American

Express’s CFO, received an e-mail from AEFA CFO Stuart Sedlacek that “set a huge alarm

ringing” concerning the rapid deterioration of AEFA’s high-yield debt portfolio. Joint Appendix

(“J.A.”) at 1671. On April 2, 2001, the Company announced an additional $182 million in first

quarter 2001 high-yield write-downs. “The Company was quick to add, though, that the worst of

the problem was behind it and that no further surprises were expected.” Id. A press release

stated that “[t]otal losses on these investments for the remainder of 2001 are expected to be

substantially lower than in the first quarter.” J.A. at 142-43.

According to the article, in early May 2001, Cracchiolo received a fax from Sedlacek

“advising him that American Express was facing additional losses on its high-yield debt

investments beyond those already booked.” J.A. at 1671. Chenault was advised of the situation

the next day, during a visit to AEFA’s Minneapolis headquarters. There, he was told that the

deterioration of the high-yield debt portfolio was so bad that “even the investment-grade CDOs

held by American Express showed potential deterioration” because defaults on the underlying

bonds had risen so sharply. Id. Chenault asked, “What are we talking about here?” Id.

Cracchiolo replied, “We really don’t know enough to even give you a range.” Id. “Didn’t we

look at this in the first quarter?” Chenault queried, “What happened?” Id. Hoping to find an

answer, American Express brought in Walter Berman, a former American Express treasurer who

had rejoined the firm at the start of that year. “He and David Yowan, the Company’s senior vice

president of risk management in New York, began crunching numbers.” Id.
6

In the meantime, on May 15, 2001, American Express filed its quarterly report (Form

10-Q) for the first quarter of 2001. In it, the Company reported the $182 million in first quarter

losses from AEFA’s high-yield debt portfolio. The Company explained, “[t]he high yield losses

reflect the continued deterioration of the high-yield portfolio and losses associated with selling

certain bonds.” J.A. at 1616. Importantly, it added that “[t]otal losses on these investments for

the remainder of 2001 are expected to be substantially lower than in the first quarter.” Id.

According to the SAC, American Express made this statement (“the May 15 statement”) despite

the fact that “Defendant[] Chenault . . . had been expressly informed in early May 2001 that the

$182 million first quarter write-down did not reflect the true magnitude of the deterioration of

AEFA’s high-yield debt portfolio.” J.A. at 224. The plaintiffs allege that the “[d]efendants were

aware that they had no reasonable basis upon which to continue to make this representation.”

J.A. at 220. 

The Form 10-Q also contained a caution. Several pages after the statement that losses for

the remainder of 2001 were expected to be substantially lower, the Form 10-Q warned that it

“contain[ed] forward-looking statements, which are subject to risks and uncertainties.” It added

that “[f]actors that could cause actual results to differ materially from these forward-looking

statements include . . . potential deterioration in the high-yield sector, which could result in

further losses in AEFA’s investment portfolio.” J.A. at 1624. 

The Wall Street Journal Asia article reported that in early July 2001, Berman and Yowan

completed their review of AEFA’s high-yield debt portfolio. American Express had previously

relied in large part “on the reports generated by outside CDO managers to evaluate the health

and performance of the investment-grade [CDOs],” and it was not until Berman and Yowan’s
7

review that “the company began to draw its own conclusions about all [of the] bonds that

underpinned the securities.” J.A. at 1671-72. When Chenault sat down in the conference room

to hear the results, he had no idea what to expect and hoped that the situation would be

manageable. He was “stunned” by Berman and Yowan’s estimate of $400 million in losses, and

“began firing questions at his team.” J.A. at 1672. The $400 million figure resulted from the

fact that “[i]nstead of adopting the optimistic view . . . that defaults already were peaking, the

company decided to use the current default rate of 8% to 9%, and assumed it would stay constant

for the next 18 months”—a very conservative assumption. J.A. at 1672. 

On July 18, 2001, American Express issued a press release announcing that it would be

taking an $826 million loss due to “additional write-downs in the high-yield debt portfolio at

[AEFA] and losses associated with rebalancing the portfolio towards lower-risk securities.” J.A.

at 225. This amount included the $403 million loss related to the investment-grade CDOs

reported by Berman and Yowan, as well as other losses from planned sales of high-yield bonds

and lower-grade CDOs.

On July 17, 2002, the plaintiffs filed this action, bringing claims under sections 10(b) and

20(a) of the Securities Exchange Act of 1934. The defendants moved to dismiss the complaint. 

The district court granted the motion on March 31, 2004, holding that two of the plaintiffs’

claims were time-barred and the remaining claims failed to state a claim upon which relief could

be granted. In re Am. Express Co. Secs. Litig., No. 02 Civ. 5533, 2004 WL 632750 (S.D.N.Y.

2004). We vacated the decision, holding that the claims were not time-barred, and remanded for

further consideration by the district court, expressing no view on the merits of any of the claims. 

See Slayton v. Am. Express Co., 460 F.3d 215, 230-31 (2d Cir. 2006). 
8

On January 11, 2007, the plaintiffs filed the SAC, alleging, among other things, that

when the defendants made the May 15 statement that losses for the remainder of 2001 were

expected to be substantially lower, they knew that they had no reasonable basis upon which to

make it. The defendants again moved to dismiss, and the district court granted the motion by

memorandum and order dated September 26, 2008. In re Am. Express Co. Secs. Litig., No. 02

Civ. 5533, 2008 WL 4501928 (S.D.N.Y. September 26, 2008). With regard to the May 15

statement at issue in this appeal, the district court found that:

The information [Cracchiolo] and Chenault received in May 2001 could support

an inference of scienter because it suggests that they had access to information

indicating that the May 15, 2001 statement was no longer accurate. However, in

light of the fact that Defendants immediately put together a team to analyze all of

AEFA’s High Yield Debt and then announced the results of the analysis in July

2001, the more compelling inference is that Defendants were not acting with an

intent to deceive, but rather attempting to quantify the extent of the problem

before disclosing it to the market. 

Id. at *8. The district court therefore held that the plaintiffs failed to state a claim with respect to

the May 15 statement. The plaintiffs appeal only this part of the district court’s

decision—contending that the defendants’ May 15 statement that “[t]otal losses on these

investments for the remainder of 2001 are expected to be substantially lower than in the first

quarter [of 2001]” violated the Securities Exchange Act.

II

The plaintiffs bring their claims under sections 10(b) and 20(a) of the Securities

Exchange Act of 1934, 15 U.S.C. § 78a et seq. Section 10(b) makes it unlawful to “use or

employ, in connection with the purchase or sale of any security . . . any manipulative or

deceptive device or contrivance in contravention of such rules and regulations as the

Commission may prescribe.” 15 U.S.C. § 78j(b). SEC Rule 10b-5 states that it “shall be
9

unlawful for any person . . . [t]o make any untrue statement of a material fact or to omit to state

a material fact necessary in order to make the statements made, in the light of the circumstances

under which they were made, not misleading.” 17 C.F.R. § 240.10b-5(b). Under the law of this

Circuit, to state a claim under Rule 10b-5, a plaintiff must allege that, in connection with the

purchase or sale of securities, the defendant made material misstatements or omissions of

material fact, with scienter, and that the plaintiff’s reliance on the defendant’s actions caused

injury to the plaintiff. Ganino v. Citizens Utils. Co., 228 F.3d 154, 161 (2d Cir. 2000). Section

20(a) of the Act establishes joint and several liability subject to a good faith exception for every

person who, directly or indirectly, controls any person liable under any provision of the Act. 15

U.S.C. § 78t(a). 

The Securities Exchange Act of 1934 was amended by the PSLRA in 1995. Pub. L. No.

104-67, 109 Stat. 737 (Dec. 22, 1995). The PSLRA established a statutory safe-harbor for

forward-looking statements. With certain exceptions discussed further below, where a “private

action . . . is based on an untrue statement of a material fact or omission of a material fact

necessary to make the statement not misleading,” a defendant “shall not be liable with respect to

any forward-looking statement . . . if and to the extent that—

(A) the forward-looking statement is—

(i) identified as a forward-looking statement, and is accompanied by

meaningful cautionary statements identifying important factors that could

cause actual results to differ materially from those in the forward-looking

statement; or 

(ii) immaterial; or

(B) the plaintiff fails to prove that the forward-looking statement— . . . 

(ii) if made by a business entity; was—

(I) made by or with the approval of an executive officer of that

entity; and 
10

(II) made or approved by such officer with actual knowledge by

that officer that the statement was false or misleading. 

15 U.S.C. § 78u-5(c). The safe harbor is written in the disjunctive; that is, a defendant is not

liable if the forward-looking statement is identified and accompanied by meaningful cautionary

language or is immaterial or the plaintiff fails to prove that it was made with actual knowledge

that it was false or misleading. See Southland Secs. Corp. v. INSpire Ins. Solutions, Inc., 365

F.3d 353, 371-72 (5th Cir. 2004).

III

We review a district court’s ruling on a motion to dismiss a complaint pursuant to

Federal Rule of Civil Procedure 12(b)(6) de novo. Teamsters Local 445 Freight Div. Pension

Fund v. Dynex Capital Inc., 531 F.3d 190, 194 (2d Cir. 2008). In considering a motion to

dismiss a 10(b) action, we must accept all factual allegations in the complaint as true and must

consider the complaint in its entirety. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308,

322 (2007). A complaint alleging securities fraud must satisfy the heightened pleading

requirements of the PSLRA and Federal Rule of Civil Procedure 9(b) by stating with

particularity the circumstances constituting fraud. See 15 U.S.C. § 78u-4(b)(1); see also ECA

&Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 196

(2d Cir. 2009). Under the PSLRA, where proof of scienter is a required element, as it is in the

actual knowledge prong of the statutory safe harbor, a complaint must “state with particularity

facts giving rise to a strong inference that the defendant acted with the required state of mind.”

15 U.S.C. § 78u-4(b)(2). 
 The defendants do not assert that the May 15 statement is entitled to safe harbor 3

protection because it is immaterial.

11

Under this heightened pleading standard for scienter, a “complaint will survive . . . only

if a reasonable person would deem the inference of scienter cogent and at least as compelling as

any opposing inference one could draw from the facts alleged.” Tellabs, Inc., 551 U.S. at 324. 

In determining whether a strong inference exists, the allegations are not to be reviewed

independently or in isolation, but the facts alleged must be “taken collectively.” Id. at 323. The

“strong inference” standard is met when the inference of fraud is at least as likely as any

non-culpable explanations offered. Id. at 324. 

The parties dispute whether the statutory safe harbor applies in this case. The defendants

assert that they are entitled to safe harbor protection because the May 15 statement was a

forward-looking statement that was accompanied by meaningful cautionary language and

because the plaintiffs have not alleged facts supporting a strong inference that the defendants

actually knew that the May 15 statement was misleading. The plaintiffs respond that the May 3

15 statement is statutorily excluded from the safe harbor, and that even if it is not, the statutory

safe harbor does not protect it. We first address whether the May 15 statement is statutorily

excluded from the safe harbor, and after concluding that it is not, we turn to whether it is

protected under either the meaningful cautionary language or the actual knowledge prong of the

safe harbor.

As an initial matter, we conclude that the statement at issue in this case is a forwardlooking statement as defined by the PSLRA. The PSLRA includes several definitions of a

forward-looking statement, including “a statement containing a projection of . . . income
12

(including income loss), earnings (including earnings loss) per share, . . . or other financial

items” and “a statement of future economic performance, including any such statement contained

in a discussion and analysis of financial condition by the management . . . .” 15 U.S.C. § 78u5(i)(1)(A) & (C). The defendants’ statement, that “[t]otal losses on these investments for the

remainder of 2001 are expected to be substantially lower than in the first quarter,” in the

Managers’ Discussion and Analysis (“MD&A”) portion of its Form 10-Q, fits comfortably

within both of these definitions.

A. The May 15 Statement Was Not Included in a Financial Statement and Therefore Is

Not Statutorily Excluded From the Safe Harbor.

The parties first dispute whether the May 15 statement is excluded from the statutory safe

harbor, which excludes forward-looking statements “included in a financial statement prepared

in accordance with generally accepted accounting principles [“GAAP”].” 15 U.S.C. § 78u5(b)(2)(A). The statement at issue here was contained in American Express’s May 15, 2001

Form 10-Q filed with the SEC. The Form 10-Q contained several parts, including “Consolidated

Statements of Income,” “Consolidated Balance Sheets,” “Consolidated Statements of Cash

Flows,” “Notes to Consolidated Financial Statements,” and “Management’s Discussion and

Analysis of Financial Condition and Results of Operations [“MD&A”].” J.A. at 1569-1607.

The statement was included in the MD&A part in a subsection titled “American Express

Financial Advisors.” Id. at 1616.

We conclude that the May 15 statement, contained in the MD&A, was not included in a

financial statement prepared in accordance with GAAP. That Congress understood financial

statements and MD&As to be distinct is apparent from the text of the PSLRA. Congress

explicitly included “a statement of future economic performance . . . contained in a discussion
13

and analysis of financial condition by the management” in its definition of a forward-looking

statement, 15 U.S.C. § 78u-5(i)(1)(C), and then excluded “a forward-looking statement . . . that

is . . . included in a financial statement prepared in accordance with [GAAP].” Id. § 78u5(b)(2)(A). The plaintiffs assert that the exclusion logically highlights the reasonable

expectation that representations made in SEC filings will be more closely scrutinized and more

heavily relied upon by investors, and that it would be irrational to allow issuers to gain safe

harbor protection merely by placing a statement in the MD&A portion of a filing. But the

legislative history of this provision makes plain that a statement may receive safe harbor

protection even where it is in an MD&A that is part of a required disclosure to the SEC. See

H.R. Conf. Rep. 104-369, at 45-46 (1995), as reprinted in 1995 U.S.C.C.A.N. 730, 744-45

(hereinafter “Conference Report”) (including in the definition of a forward-looking statement

“certain statements made in SEC required disclosures, including management’s discussion and

analysis”). Moreover, drawing a distinction between the financial statement portion of the Form

10-Q and the MD&A section is not irrational, as the plaintiffs suggest. While the financial

statement lays out the firm’s income, balance sheets and cash flows, the purpose of the MD&A

is to present the company’s business “as seen through the eyes of those who manage [it].”

Commission Guidance Regarding Management’s Discussion and Analysis of Financial

Condition and Results of Operations, 68 Fed. Reg. 75,056, 75,056 (Dec. 29, 2003). 

Our conclusion finds support in the SEC’s different treatment of financial statements and

MD&A sections. SEC Regulation S-X sets forth “the form and content of and requirements for

financial statements,” 17 C.F.R. § 210.1-01, and requires interim financial statements in Form

10-Qs to include interim balance sheets, statements of income, and statements of cash flow, see
 Our conclusion is also in line with both the SEC’s argument in its amicus curiae brief

4

in this case and its stated view that “[w]hile the statutory safe harbors by their terms do not apply

to forward-looking statements included in financial statements prepared in accordance with U.S.

GAAP, they do cover MD&A disclosures.” Disclosure in Management’s Discussion and

Analysis About Off-Balance Sheet Arrangements and Aggregate Contractual Obligations, 68

Fed. Reg. 5,982, 5,993 n.146 (Feb. 5, 2003). This statement was contained in the preamble to a

2003 rule promulgated in response to the Sarbanes-Oxley Act, which included an identical safe

harbor provision for the disclosure of forward-looking information required by that Act. 68 Fed.

Reg. at 5,992-93. The defendants urge us to defer to the SEC’s view pursuant to Chevron

U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), as this view has been

articulated by the SEC in a formal release—the preamble to the 2003 rule. However, we need

not determine whether the SEC’s view should be granted Chevron deference, because we would

reach the same conclusion regardless of whether we afforded deference.

14

id. § 210.10-01. SEC Regulation S-K sets forth “the requirements applicable to the content of

the non-financial statement portions” of certain filings, including MD&As. Id. § 229.10

(emphasis added). That regulation requires the MD&A section of a Form 10-Q to “[d]iscuss

registrant’s financial condition, changes in financial condition and results of operations.” Id. §

229.303. These regulations suggest that the SEC views the financial statement and the MD&A

as wholly different; there is no suggestion that the MD&A is viewed as a subset of a financial

statement. This view also draws support from the Form 10-Q itself, which lists “Financial

Statements” and “Management’s Discussion and Analysis of Financial Condition and Results

and Operations” as separate required items, see SEC Form 10-Q, available at

http://www.sec.gov/about/forms/form10-q.pdf, belying an assertion that the MD&A is “included

in [the] financial statement,” and so excluded from the safe harbor, see 15 U.S.C. §

78u-5(b)(2)(A).4

Accordingly, we conclude that forward-looking statements contained in a separate

MD&A discussion in a Form 10-Q, such as the May 15 statement at issue here, are not excluded

from the statutory safe harbor under 15 U.S.C. § 78u-5(b)(2)(A). We next turn to whether the
15

May 15 statement is protected under either the meaningful cautionary language prong or actual

knowledge prong of the safe harbor.

B. The May 15 Statement Was Not Accompanied by Meaningful Cautionary Language.

Under the PSLRA, the defendants are not liable if the allegedly false or misleading

statement is “identified as a forward-looking statement, and is accompanied by meaningful

cautionary statements identifying important factors that could cause actual results to differ

materially from those in the forward-looking statement . . . .” 15 U.S.C. § 78u-5(c)(1)(A)(i). 

The parties dispute both whether the May 15 statement was adequately identified as a forwardlooking statement and whether it was accompanied by meaningful cautionary language.

The May 15 statement indicated that following AEFA’s first quarter loss of $182 million,

“[t]otal losses on [AEFA’s high-yield] investments for the remainder of 2001 are expected to be

substantially lower than in the first quarter.” J.A. at 1616. Several pages later, the Form 10-Q

warned that it “contain[ed] forward-looking statements, which are subject to risks and

uncertainties.” J.A. at 1624. The Company wrote, “[t]he words ‘believe’, ‘expect’, ‘anticipate’,

‘optimistic’, ‘intend’, ‘aim’, ‘will’, ‘should’ and similar expressions are intended to identify such

forward-looking statements.” Id. It added that “[f]actors that could cause actual results to differ

materially from these forward-looking statements include . . . potential deterioration in the highyield sector, which could result in further losses in AEFA’s investment portfolio.” Id.

The plaintiffs first contend that the defendants failed to adequately identify the May 15

statement as forward-looking. They argue that in order to be adequately identified as forwardlooking, forward-looking statements must either be included in a discrete section clearly marked

“Forward-Looking Statements” or specifically labeled as “forward-looking.” The SEC
16

disagrees, asserting that the facts and circumstances of the language used in a particular report

will determine whether a statement is adequately identified. It opines that “[t]he use of linguistic

cues like ‘we expect’ or ‘we believe,’ when combined with an explanatory description of the

company’s intention to thereby designate a statement as forward-looking, generally should be

sufficient to put the reader on notice that the company is making a forward-looking statement.”

The defendants join the SEC’s argument on this point. We agree with the SEC.

 Nothing in the statute indicates that to be adequately identified, a forward-looking

statement must be contained in a separate section or specifically labeled, and we decline to write

in such a requirement. We agree with the SEC that the facts and circumstances of the language

used in a particular report will determine whether a statement is adequately identified as

forward-looking. The May 15 statement is plainly forward-looking—it projects results in the

future. It is also accompanied by a statement of the common-sense proposition that words such

as “expect” identify forward-looking statements. See Harris v. Ivax Corp., 182 F.3d 799, 804-

806 (11th Cir. 1999) (holding that the statement “we expect reserves for returns and inventory

writeoffs to be well above typical quarters,” was a forward-looking statement protected by the

cautionary language prong of the statutory safe harbor). Under these circumstances, we

conclude that the May 15 statement was adequately “identified as a forward-looking statement.”

See 15 U.S.C. § 78u-5(c)(1)(A)(i).

To be protected under the first prong of the safe harbor, however, a forward-looking

statement must be both identified as such and “accompanied by meaningful cautionary

statements identifying important factors that could cause actual results to differ materially from

those in the forward-looking statement . . . .” Id. The SEC asserts that the May 15 statement
 Such a proposition is supported by our case law. In applying the judicially-created 5

bespeaks caution doctrine, on which the cautionary language prong of the PSLRA is based in

part, see Conference Report at 43, 1995 U.S.C.C.A.N. at 742, we have held that cautionary

language that is misleading in light of historical fact cannot be meaningful. See Rombach v.

Chang, 355 F.3d 164, 173 (2d Cir. 2004) (holding that “[c]autionary words about future risk

cannot insulate from liability the failure to disclose that the risk has transpired”). It is also

supported by the Conference Committee’s report. See Conference Report at 44, 1995

17

was not accompanied by meaningful cautionary language because the cautionary language itself

was misleading in light of historical fact. By historical fact, the SEC means the facts that were

established at the time the statement was made. Looking to the facts alleged by the plaintiffs, the

SEC concludes that at the same time the defendants warned of potential deterioration in the

high-yield sector, they knew of actual deterioration in that sector. The plaintiffs agree, and

further point out that despite the additional knowledge gained by the defendants in early May

2001, the cautionary language contained in the May 15, 2001 Form 10-Q did not differ from the

cautionary language the Company had used from at least January 2001 onwards. 

The defendants respond that while they agree that misleading cautionary language is not

meaningful, their cautionary language was not misleading. The defendants contend that the

plaintiffs have not pleaded with the necessary particularity facts giving rise to a strong inference

that they knew that the high-yield market would deteriorate further in the second quarter of 2001. 

Instead, pointing to the Wall Street Journal Asia article’s statements that “more losses could still

be lurking,” and that the “investment grade CDOs . . . showed potential deterioration,” the

defendants contend that the plaintiffs have only shown that the defendants were aware of

potential deterioration—the precise risk of which they cautioned. 

We agree with the SEC and the parties that cautionary language that is misleading in

light of historical fact cannot be meaningful, but we do not think that proposition applies in this 5
U.S.C.C.A.N. at 743. 

 This case is quite different from the level of certainty that has been present in cases in

6

which courts have concluded that a cautionary statement misstated historical fact. See Lormand,

565 F.3d at 247 (“These warnings did not disclose that the defendants knew from past

experience that the sub-prime subscriber programs and US Unwired’s loss of control of customer

care, billings and service posed an imminent threat of business and financial ruin and that some

damage from these risks had already materialized.”); Dolphin & Bradbury, Inc. v. SEC, 512 F.3d

634, 640 (D.C. Cir. 2008) (“Bradbury’s cautionary language only disclosed a risk that tenants

might leave Forum Place—not his knowledge that PennDOT actually planned to do so in the

near future.”).

18

case. As the defendants correctly assert, the facts alleged by the plaintiffs and supported by the

Wall Street Journal Asia article do not demonstrate that the defendants misstated a historical

fact—that the risk of which they warned, deterioration in the high-yield market that could cause

further losses in AEFA’s portfolio beyond those projected, had already transpired. Instead they

demonstrate that the defendants knew that AEFA’s portfolio would very likely deteriorate due to

rising defaults on the bonds underlying the investment-grade CDOs, a future projection that was

not a historical fact.6

Instead, we think this case presents a different challenge. What strikes us as the problem

here is not that the defendants misstated a historical fact, but that they knew of the major and

specific risk that rising defaults on the bonds underlying AEFA’s investment-grade CDOs would

cause deterioration in AEFA’s portfolio at the time of the May 15 statement, and yet did not

warn of it. By directing us not to inquire into a defendants’ state of mind, however, Congress

may have foreclosed any inquiry into this problem. 

The safe harbor protects forward-looking statements that are “accompanied by

meaningful cautionary statements identifying important factors that could cause actual results to

differ materially from those in the forward-looking statement.” 15 U.S.C. § 78u-5(c)(1)(A)(i). 
19

The question we face here is what Congress meant by “important.” The statute itself does not

define the term, and we find it ambiguous. Thus, while our analysis begins with the statutory

text itself, where we find ambiguity we may delve into other sources, including the legislative

history, to discern Congress’s meaning. SEC v. Dorozhko, 574 F.3d 42, 46 (2d Cir. 2009). The

conference report “is generally the most reliable evidence in legislative history of congressional

intent because it represents the final statement of the terms agreed to by both houses.” Auburn

Hous. Auth. v. Martinez, 277 F.3d 138, 147 (2d Cir. 2002).

The Conference Report accompanying the PSLRA explains that “[u]nder this first prong

of the safe harbor, boilerplate warnings will not suffice . . . . The cautionary statements must

convey substantive information about factors that realistically could cause results to differ

materially from those projected in the forward-looking statement, such as, for example,

information about the issuer’s business.” Conference Report at 43, 1995 U.S.C.C.A.N. at 742. 

While the Conference Committee expected that “cautionary statements identify important factors

that could cause results to differ materially,” it did not expect them to identify all factors. Id. at

44, 1995 U.S.C.C.A.N. at 743. Importantly, the Conference Committee directed that “[t]he use

of the words ‘meaningful’ and ‘important factors’ are [sic] intended to provide a standard for the

types of cautionary statements upon which a court may, where appropriate, decide a motion to

dismiss, without examining the state of mind of the defendant.” Id. The Conference Committee

explicitly advised that its requirement that the cautionary statement identify important facts is

not intended to provide “an opportunity for plaintiff counsel to conduct discovery on what

factors were known to the issuer” at the time the statement was made. Id. It stressed that

“[c]ourts should not examine the state of mind of the person making the statement.” Id. 
 The Eleventh and Sixth Circuits have held that courts may not inquire into a 7

defendant’s state of mind. See Edward J. Goodman Life Income Trust v. Jabil Circuit, Inc., 594

F.3d 783, 795 (11th Cir. 2010) (“So long as the language accompanying the projections is

meaningfully cautionary, the law requires us to be unconcerned with the speaker’s state of mind

at the time he makes the projections.”); Miller v. Champion Enters., Inc., 346 F.3d 660, 678 (6th

Cir. 2003) (“No investigation of defendants’ state of mind is required.”). 

 This view is supported by the Seventh Circuit’s rule that in order to be protected by the 8

cautionary language prong of the safe harbor, an issuer must have disclosed the “major risks [the

issuer] objectively faced when it made its forecasts.” Asher v. Baxter International Inc., 377

F.3d 727, 734 (7th Cir. 2004). Such a rule is necessary, according to that court, because

otherwise “any issuer could list its lines of business, say ‘we could have problems in any of

these,’ and avoid liability for statements implying that no such problems were on the horizon

even if a precipice was in sight.” Id. at 733. And that is our fear here as well. Accepting the

facts in the SAC as true, prior to making the May 15 statement, the defendants were presented

with the major and specific risk that due to rising defaults in the underlying bonds, AEFA’s own

high-yield portfolio—including the investment-grade slices that, up to that point, American

Express had assumed were solid—was very likely deteriorating, but they did not warn of it.

20

We find Congress’s directions difficult to apply in this case. On the one hand, the

Conference Report makes quite plain that it does not want courts to inquire into a defendant’s

state of mind, i.e., a defendant’s knowledge of the risks at the time he made the statements. At 7

the same time, however, the Conference Report requires cautionary statements to convey

substantive information about factors that realistically could cause results to differ materially

from projections. In order to assess whether an issuer has identified the factors that realistically

could cause results to differ, we must have some reference by which to judge what the realistic

factors were at the time the statement was made. We think that the most sensible reference is the

major factors that the defendants faced at the time the statement was made. But this requires an

inquiry into what the defendants knew because in order to determine what risks the defendants

faced, we must ask of what risks were they aware. 

8

Congress may wish to give further direction on how to resolve this tension, and in
21

particular, the reference point by which we should judge whether an issuer has identified the

factors that realistically could cause results to differ from projections. May an issuer be

protected by the meaningful cautionary language prong of the safe harbor even where his

cautionary statement omitted a major risk that he knew about at the time he made the statement?

In this case, however, we need not decide that thorny issue because we conclude that at any rate

the cautionary statement the defendants point to here was vague. 

To avail themselves of safe harbor protection under the meaningful cautionary language

prong, defendants must demonstrate that their cautionary language was not boilerplate and

conveyed substantive information. See Conference Report at 43, 1995 U.S.C.C.A.N. at 742. 

The Third Circuit has interpreted this direction to mean that:

Cautionary language must be extensive and specific. A vague or blanket

(boilerplate) disclaimer which merely warns the reader that the investment has

risks will ordinarily be inadequate to prevent misinformation. To suffice, the

cautionary statements must be substantive and tailored to the specific future

projections, estimates or opinions in the prospectus which the plaintiffs challenge.

Inst. Investors Group v. Avaya, Inc., 564 F.3d 242, 256 (3d Cir. 2009) (quotation marks,

citations, and alterations omitted). Similarly, the Fifth Circuit has held that “[t]he requirement

for ‘meaningful’ cautions calls for ‘substantive’ company-specific warnings based on a realistic

description of the risks applicable to the particular circumstances, not merely a boilerplate litany

of generally applicable risk factors.” Southland Secs. Corp., 365 F.3d at 372; see also Lormand

v. US Unwired, Inc., 565 F.3d 228, 246-47 (5th Cir. 2009) (concluding that cautionary language

was not meaningful where the warning was “very vague and general” and did not “disclose the

specific risks and their magnitude”). 

Here, all that the defendants point to in support of their argument that they are protected
22

by the cautionary meaningful language prong is the statement in the Form 10-Q that “potential

deterioration in the high-yield sector . . . could result in further losses in AEFA’s portfolio.” See

J.A. at 1624. The defendants argue that by including this language, they warned of the exact risk

that caused their projection to miss the mark. But they did not. The defendants’ caution,

referencing the deterioration in the high-yield sector generally, is vague, and the pleaded facts do

not support the defendants’ assertion that this is the exact risk that materialized. Instead, the

pleaded facts support a conclusion that the risk that materialized was that rising defaults on the

bonds underlying AEFA’s own investment-grade CDOs would cause deterioration in AEFA’s

portfolio. Moreover, even if we read the defendants’ caution to warn of potential deterioration in

AEFA’s own portfolio, it verges on the mere boilerplate, essentially warning that “if our

portfolio deteriorates, then there will be losses in our portfolio.”

 Our conclusion is bolstered by the fact that the defendants’ cautionary language

remained the same even while the problem changed. The same cautionary language that

appeared in the May 15, 2001 Form 10-Q was included by the defendants in numerous reports as

early as January 2001, and appeared both before and after the defendants reported the $182

million loss and received the early May 2001 communications. The consistency of the

defendants’ language over time despite the new information they received in early May 2001

belies any contention that the cautionary language was “tailored to the specific future

projection,” Avaya, Inc., 564 F.3d at 256. See Asher, 377 F.3d at 734 (“Moreover, the

cautionary language remained fixed even as the risks changed.”); Helwig v. Vencor, Inc., 251

F.3d 540, 559 (6th Cir. 2001) (en banc) (noting that “as the Budget Act neared enactment and as

the warning signs flared, Vencor’s precautions grew more cursory and abstract” and that
23

“[s]ubstantially similar language” appeared in defendant’s filings over the course of several

years), abrogated on other grounds by Tellabs, Inc., 551 U.S. 308. 

Of course, the cautionary statement we focus on here was only one of many cautionary

statements in the Form 10-Q. We recognize that the Conference Committee specifically stated

that a defendant need not include the particular factor that ultimately causes its projection not to

come true in order to be protected by the meaningful cautionary language prong of the safe

harbor, Conference Report at 44, 1995 U.S.C.C.A.N. at 743, and we do not hold to the contrary. 

The defendants, however, carry the burden of demonstrating that they are protected by the

meaningful cautionary language prong of the safe harbor, and they have not argued that the other

factors they identified were important factors that could realistically cause results to differ

materially. Absent such argument, we have no way of knowing if they were. Accordingly, we

conclude that the defendants have failed to demonstrate that the May 15 statement is protected

by the cautionary meaningful language prong of the statutory safe harbor.

C. The Plaintiffs Have Not Shown that the May 15 Statement Was Made with Actual

Knowledge that It Was Misleading.

The safe harbor provision also requires dismissal if the plaintiffs do not “prove that the

forward-looking statement . . . was . . . made or approved by [an executive officer] with actual

knowledge by that officer that the statement was false or misleading.” 15 U.S.C. § 78u5(c)(1)(B) (emphasis added). To do so, the plaintiffs must “state with particularity both the facts

constituting the alleged violation, and the facts evidencing scienter, i.e., the defendant’s intention

‘to deceive, manipulate, or defraud.’” Tellabs, Inc., 551 U.S. at 313 (quoting Ernst & Ernst v.

Hochfelder, 425 U.S. 185, 194 & n.12 (1976)). Under this heightened pleading standard, a

plaintiff must plead facts to support a strong inference of scienter, 15 U.S.C. § 78u-4(b)(2), that
24

is, the “inference of scienter must be more than merely plausible or reasonable—it must be

cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Tellabs,

Inc., 551 U.S. at 314. Moreover, because the safe harbor specifies an “actual knowledge”

standard for forward-looking statements, “the scienter requirement for forward-looking

statements is stricter than for statements of current fact. Whereas liability for the latter requires a

showing of either knowing falsity or recklessness, liability for the former attaches only upon

proof of knowing falsity.” Avaya, Inc., 564 F.3d at 274.

The Supreme Court has laid out a three-part prescription for carrying out this inquiry. 

First, as with any motion to dismiss, we must accept all factual allegations in the SAC as true. 

Tellabs, Inc., 551 U.S. at 322. Second, we must consider the SAC, along with documents

incorporated into the SAC, in their entirety. Id. “The inquiry . . . is whether all of the facts

alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual

allegation, scrutinized in isolation, meets that standard.” Id. at 322-23. Third, “in determining

whether the pleaded facts give rise to a ‘strong’ inference of scienter, [we] must take into

account plausible opposing inferences.” Id. at 323. This is because “[t]he strength of an

inference cannot be decided in a vacuum[;]” it “is inherently comparative: How likely is it that

one conclusion, as compared to others, follows from the underlying facts?” Id. “A complaint

will survive . . . only if a reasonable person would deem the inference of scienter cogent and at

least as compelling as any opposing inference one could draw from the facts alleged.” Id. at 324.

The SEC explains that the May 15 statement contained three implicit factual

assertions—“(i) that the statement is genuinely believed; (ii) that there is a reasonable basis for

that belief; and (iii) that the speaker is not aware of any undisclosed facts tending to seriously
25

undermine the accuracy of the statement.” Brief for SEC as Amicus Curiae at 11. It asserts that

“a forward looking statement is misleading if the speaker actually knows that one or more of

these implicit factual representations is not true.” Id. at 12; see In re Apple Computer Secs.

Litig., 886 F.2d 1109, 1113 (9th Cir. 1989). The parties agree with this statement of the

standard.

Pointing to the Sedlacek fax warning of losses, the Minneapolis briefing, at which

AEFA’s CFO said he could not even give a range of potential losses, and the immediate

formation of an investigative team to ascertain the extent of losses, the plaintiffs contend that the

defendants had no reasonable basis upon which to issue the May 15 statement. The plaintiffs

emphasize that while Cracchiolo told Chenault that “[w]e really don’t even know enough to give

you a range,” the May 15 statement projected that very range—that future losses would be

“substantially lower.” The defendants disagree. They argue that the facts contained in the Wall

Street Journal Asia article suggest that the defendants first learned that additional losses would

likely be higher in July 2001, several weeks after the May 15 statement was made, when

Chenault was “stunned” by Berman and Yowan’s estimate. This new estimate was the result of

conservative assumptions, and there is nothing in the SAC to indicate that these more

conservative assumptions had been adopted prior to the May 15 statement, according to the

defendants. Moreover, the defendants contend that American Express’s history of disclosures

about its high-yield portfolio, and commencement of an investigation and prompt disclosure of

its findings must be counted against any inference of fraudulent intent. The defendants urge that

the plaintiffs do not provide any reason why the defendants would knowingly make a false

prediction, in deviation from their usual practice of prompt disclosure, even though the truth
26

would inevitably come to light within a few weeks. 

The defendants have not contested that the plaintiffs adequately specified each statement

alleged to have been misleading, see 15 U.S.C. § 78u-4(b)(1); Tellabs, Inc., 551 U.S. at 321, and

we conclude that they have been adequately specified. The question before us is whether the

plaintiffs have stated with particularity facts giving rise to a strong inference that the defendants

made the May 15 statement with actual knowledge that it was false or misleading. See 15 U.S.C.

§ 78u-4(b)(2); Tellabs, Inc., 551 U.S. at 321. In other words, we must determine whether a

reasonable person would, based on the facts alleged in the SAC and contained in the Wall Street

Journal Asia article upon which the SAC exclusively relies, deem an inference that the

defendants (1) did not genuinely believe the May 15 statement, (2) actually knew that they had

no reasonable basis for making the statement, or (3) were aware of undisclosed facts tending to

seriously undermine the accuracy of the statement, “cogent and at least as compelling as any

opposing inference.” Tellabs, Inc., 551 U.S. at 323; see Apple Computer Secs. Litig., 886 F.2d at

1113. While we find this question close, we conclude that a reasonable person would not. 

Our analysis is case-specific. See Avaya, Inc., 564 F.3d at 269. Our “job is not to

scrutinize each allegation in isolation but to assess all of the allegations holistically.” Tellabs,

Inc., 551 U.S. at 326. We rest our conclusion “not on the presence or absence of certain types of

allegations, but on a practical judgment about whether, accepting the whole factual picture

painted by the Complaint, it is at least as likely as not that defendants acted with scienter.”

Avaya, Inc., 564 F.3d at 269. “Just as facts innocent in themselves may appear more suspicious

in the company of other facts, so too can a fact that seems damning when presented alone

sometimes be explained away by reference to other circumstances.” Id. at 273 n.46. 
27

We first consider the facts in the SAC that support an inference of scienter. See S.

Cherry St., LLC v. Hennessee Group LLC, 573 F.3d 98, 111 (2d Cir. 2009). As we have already

explained, the facts support a conclusion that the defendants were presented with the highly

likely risk that AEFA’s high-yield portfolio would deteriorate due to rising defaults in the

underlying debts in early May. The plaintiffs’ facts also support an inference that the defendants

did not know the extent of the likely deterioration. Specifically, at the early May meeting, after

being told that even the investment-grade CDO’s, which had been wrongly thought to be solid,

showed potential for deterioration, defendant Chenault asked, “What are we talking about here?”

Defendant Cracchiolo responded, “We really don’t know enough to give you a range.” 

Thereafter, the defendants brought in Berman and Yowan to find an answer to Chenault’s

question. These alleged facts support an inference that the defendants actually knew that they

did not know the extent of the deterioration and therefore had no reasonable basis for predicting

that very range by stating that “[t]otal losses on these investments for the remainder of 2001 are

expected to be substantially lower than in the first quarter.” The many warnings and “red flags,”

such as the “huge alarm ringing,” J.A. at 1671, described in the Wall Street Journal Asia article

further support this inference, see Matrix Capital Mgmt. Fund, LP v. BearingPoint, Inc., 576

F.3d 172, 188 (4th Cir. 2009), which we find plausible.

We next consider “whether [the] inference of scienter is at least as compelling as any

opposing inference of nonfraudulent . . . intent,” S. Cherry St., 573 F.3d at 111, bearing in mind

that we cannot “scrutinize each allegation in isolation but [must] assess all the allegations

holistically.” Tellabs, Inc., 551 U.S. at 326. The opposing nonfraudulent inference is that while

the defendants knew that their high-yield portfolio was likely deteriorating, and that they did not
 We emphasize that under this prong of the statutory safe harbor, the plaintiffs must

9

show more than recklessness—an objective inquiry—they must show actual subjective

knowledge. Therefore, even if we were to conclude, based on the alleged facts, that the risk that

losses would exceed $182 million was “so obvious that . . . defendant[s] must have been aware

of it,” see Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 47 (2d Cir. 1978) (quoting Sanders

v. John Nuveen & Co., 554 F.2d 790, 793 (7th Cir. 1977)), this would not avail the plaintiffs. 

See Avaya, Inc., 564 F.3d at 274 (“In the case of the forward-looking statements, however, an

inference of recklessness does not avail plaintiffs—that is, it must be placed on the nonculpableexplanation side of the balance when we weigh competing inferences.”).

28

know the extent of the deterioration, they subjectively believed that the extent of the

deterioration would lead to losses that would be substantially less than $182 million. The fact

that Chenault was “stunned” by the $400 million figure in July supports such an inference. 

While the defendants’ prediction that losses would be substantially lower does give us pause,

nothing in the Wall Street Journal Asia article, on which the plaintiffs exclusively rely, directly

supports the plaintiffs’ contention that the defendants had reason to believe that the scope of the

expected losses would be comparably large, i.e. that they had no basis to believe that the extent

of the losses would be substantially lower than $182 million. Such “omissions and ambiguities

count against inferring scienter.” Id. That the losses eventually reported in July greatly

exceeded $182 million likewise does not undermine the nonfraudulent inference because the

plaintiffs may not plead fraud by hindsight. See Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124,

1129 (2d. Cir. 1994). 

9

Importantly, the plaintiffs have not alleged any theory as to why the defendants would

knowingly mislead investors. The plaintiffs have not pleaded any facts supporting a motive to

deceive. While “the absence of a motive allegation is not fatal,” motive can be a relevant factor,

and “personal financial gain may weigh heavily in favor of a scienter inference.” Tellabs, Inc.,

551 U.S. at 325. “[T]he significance that can be ascribed to an allegation of motive, or lack
29

thereof, depends on the entirety of the complaint.” Id.; see Teamsters Local 445, 531 F.3d at 197

(noting that because the plaintiffs “failed to allege that anyone at Dynex or Merit had a

compelling motive to mislead investors . . . a number of competing inferences regarding scienter

arise”). In evaluating scienter under a recklessness standard outside the context of the safe

harbor, where the plaintiffs need only demonstrate that the defendants acted recklessly, we have

stated that where the plaintiffs cannot make a motive showing, to raise a strong inference of

scienter, their circumstantial evidence of fraud must be correspondingly greater. ECA & Local

134 IBEW Joint Pension Trust of Chicago, 553 F.3d at 198-99. While here we do not apply the

same test that we apply where the requisite scienter is recklessness, see id. at 198; see generally

Novak v. Kasaks, 216 F.3d 300, 308-09 (2d Cir. 2000), we likewise conclude that where the

plaintiffs do not allege facts supporting a motive, under our holistic review, their circumstantial

evidence of actual knowledge must be correspondingly greater. Here, the plaintiffs

circumstantial evidence of actual knowledge is not adequate.

Instead, when the facts contained in the Wall Street Journal Asia article are examined in

their entirety, the circumstantial evidence supporting an inference of non-fraudulent intent is

more compelling. See Tellabs, Inc., 552 U.S. at 326. Rather than suggesting an intent to deceive

investors, the facts contained in that article exhibit the defendants engaging in a good-faith

process to inform themselves and the public of the risks. According to the article, following a

disclosure that American Express lost $182 million in its high-yield debt investments in the first

quarter, and after learning that there was potential deterioration in even the investment-grade

CDOs, Chenault asked Berman and Yowan to crunch the numbers using a conservative set of

assumptions. Working with in-house analysts, American Express was able to draw its own
30

conclusions about the bonds underlying their securities instead of relying on reports generated by

outside CDO managers as they had previously. Shortly after Berman and Yowan reported the

results, American Express formally announced an $826 million write-down. 

These facts do not support an inference that American Express was trying to hide

anything from its investors. Rather, they suggest that American Express had disclosed its losses

in 2000 and in the first quarter of 2001, and that it was endeavoring in good faith to ascertain and

disclose future losses. See BearingPoint, Inc., 576 F.3d at 187 (“Later disclosures that timely

raised questions about the reliability of financial information . . . lend weight to an inference that

contemporaneous financial statements were made in good faith.”); ACA Fin. Guar. Corp. v.

Advest, Inc., 512 F.3d 46, 66 (1st Cir. 2008) (concluding that the plaintiffs’ inference of scienter

was not as strong as the nonfraudulent inference because the defendants’ statements “candidly

laid out the sorry financial history of the college”). Ordering an investigation as soon as they

learned that the investment-grade CDOs might be deteriorating, and directing Berman and

Yowan to use conservative assumptions, was “a prudent course of action that weakens rather

than strengthens an inference of scienter.” Horizon Asset Mgmt. Inc. v. H&R Block, Inc., 580

F.3d 755, 763 (8th Cir. 2009); see Higginbotham v. Baxter Int’l Inc., 495 F.3d 753, 761 (7th Cir.

2007) (“Taking the time necessary to get things right is both proper and lawful. Managers

cannot tell lies but are entitled to investigate for a reasonable time, until they have a full story to

reveal.”). 

Moreover, the losses reported in July were the product of using different assumptions,

representing the first time American Express drew its own conclusions rather than relying on

reports generated by outside CDO managers, and also of the Company’s subsequent business
31

decision to reduce the level of its high-yield portfolio. These new assumptions and decisions

undermine any inference that the defendants suspected the magnitude of losses reported in July

when they made the May 15 statement. See Advest, Inc., 512 F.3d at 66 (concluding that fact

that the “defendants may have been operating under a different set of assumptions” supported an

inference that they did not set a target that they knew they could not achieve).

While we find the inference of fraudulent intent plausible, and consider this to be a close

case, when we examine the record as a whole, we conclude that the inference of fraudulent intent

is not “at least as compelling as any opposing inference one could draw from the facts alleged.”

See Tellabs, Inc., 551 U.S. at 324. Accordingly, the May 15 statement is protected under the

statutory safe harbor and the district court correctly dismissed the plaintiffs’ claim under section

10(b) of the Securities Exchange Act of 1934. 

Because “[i]n order to establish a prima facie case of liability under § 20(a), a plaintiff

must show . . . a primary violation by a controlled person,” Boguslavsky v. Kaplan, 159 F.3d

715, 720 (2d Cir. 1998), the district court also correctly dismissed the plaintiffs’ claim under

section 20(a) of the Securities Exchange Act of 1934.

IV

For the foregoing reasons, we AFFIRM the district court’s judgment.