CLEANING THE MURKY SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS: AN INQUIRY INTO WHETHER ACTUAL KNOWLEDGE OF FALSITY PRECLUDES THE MEANINGFUL CAUTIONARY STATEMENT DEFENSE

I. INTRODUCTION AND BACKGROUND II. THE PSLRA STATUTORY SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS III. THE LEGISLATIVE HISTORY OF THE PSLRA SAFE HARBOR A. Criteria for Considering Legislative History B. The PSLRA Conference Report C. Legislative History of the PSLRA Prior to the Conference Report D. Legislative History of the PSLRA After the Conference Report E. The President's Veto and the Override F. Conclusion--The Reliance by Congress on Bespeaks Caution in Fashioning the First Prong of the Statutory Safe Harbor IV. JUDICIAL INTERPRETATIONS OF THE SAFE HARBOR A. Many Cases Treat the Second (Actual Knowledge) Prong as Irrelevant if the First Prong Is Satisfied B. Some Cases Treat the Second Prong as Pertinent Even if the First Prong Has Been, or May Be, Satisfied C. Some Cases Find that Actual Knowledge of the Falsity of the Forward-Looking Statement Precludes a Finding that Meaningful Cautionary Statements Were Made Within the Meaning of the First Prong of the Safe Harbor D. Summary of the Case Law V. THE VIEWS OF COMMENTATORS AND THE SEC A. Many Commentators Treat the Second (Actual Knowledge) Prong as Irrelevant if the First Prong Is Satisfied B. Some Commentators Urge That Actual Knowledge of the Falsity of the Forward-Looking Statement Be Taken into Account in Determining Whether the First Prong of the Safe Harbor Applies C. The SEC Urges that Application of the First Prong Take into Account Knowledge of Historical Facts Bearing on the Forward-Looking Statement VI. THE FIRST PRONG OF THE SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS PROVIDES A COMPLETE DEFENSE THAT CANNOT BE OVERRIDDEN BY ALLEGATIONS OF ACTUAL KNOWLEDGE OF THE FALSITY OF A PROJECTION VII. CONCLUSION Many public companies disclose earnings projections and make other statements about their future. Those companies are sometimes sued when the projection is not borne out. This Article addresses action by Congress to afford a safe harbor to public companies that make projections that are not accurate. Based on an analysis of the statute, its legislative history, judicial decisions, and commentary regarding the interaction of the multiple prongs of the safe harbor, this Article proposes a definitive resolution of the extent to which the prongs overlap--that the prongs are independent and, in particular, actual knowledge of the weaknesses in a projection, including lack of a good faith belief in the projection, is not relevant to reliance on the meaningful cautionary statement safe harbor. I. Introduction And Background The Securities and Exchange Commission (SEC) once frowned upon--indeed, "generally prohibited"--public company (1) disclosure of earnings projections. (2) The SEC relented, (3) and in some cases now mandates disclosure of information with a forward looking element. (4) Making projections sometimes comes with a cost, however, as investors may seek damages when the projection does not come true, claiming that they were misled into buying or selling a security in reliance on an incorrect projection. (5) In a private damage action based on a violation of section 10(b) of the Exchange Act (6) and SEC Rule 10b-5, (7) the most common basis for a private damage claim under the federal securities laws, (8) there is liability for an incorrect projection only if the defendant stated the projection with scienter, an intent to deceive. (9) "Scienter" is generally understood to encompass reckless conduct, although the Supreme Court has not addressed that issue. (10) If a materially incorrect projection is made in an effective registration statement for a public offering of securities, however, the issuer could be liable under section 11 of the Securities Act of 1933 (11) irrespective of any culpability. (12) Directors and officers of the issuer can defend a section 11 claim by showing that after reasonable investigation the person had reasonable ground to believe that the projection was sound. …