Opinion ID: 152706
Heading Depth: 4
Heading Rank: 1

Heading: PSLRA Safe Harbor for Forward-Looking Statements

Text: The PSLRA's safe harbor for forward-looking statements provides in relevant part: (1) [I]n any private action . . . based on an untrue statement of a material fact or omission of a material fact necessary to make the statement not misleading, a person . . . shall not be liable with respect to any forward-looking statement, whether written or oral, 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 (i) if made by a natural person, was made with actual knowledge by that person that the statement was false or misleading; or (ii) if made by a business entity;[,] was (I) made by or with the approval of an executive officer of that entity; and (II) made or approved by such officer with actual knowledge by that officer that the statement was false or misleading. (2) Oral forward-looking statements. In the case of an oral forward-looking statement . . ., the requirement set forth in paragraph (1)(A) shall be deemed to be satisfied (A) if the oral forward-looking statement is accompanied by a cautionary statement (i) that the particular oral statement is a forward-looking statement; and (ii) that the actual results might differ materially from those projected in the forward-looking statement; and (B) if (i) the oral forward-looking statement is accompanied by an oral statement that additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statement is contained in a readily available written document, or portion thereof; (ii) the accompanying oral statement referred to in clause (i) identifies the document, or portion thereof, that contains the additional information about those factors relating to the forward-looking statement; and (iii) the information contained in that written document is a cautionary statement that satisfies the standard established in paragraph (1)(A). 15 U.S.C. § 78u-5(c)(1)-(2). Thus, the safe harbor applies to statements that are forward-looking as defined by the statute provided that they are (1) identified as such, and accompanied by meaningful cautionary statements; or (2) immaterial; or (3) made without actual knowledge that the statement was false or misleading.
Our threshold inquiry is whether defendants' statements fall within the broad statutory definition of `forward-looking statement,' which includes, inter alia, projections of future performance, plans and objectives for future operations, and assumptions underlying statements about future financial, economic or operational performance. 15 U.S.C. § 78u-5(i)(1). [5] We recently construed the statutory definition in Institutional Investors Group v. Avaya, Inc., 564 F.3d 242 (3d Cir.2009). There, shareholders alleged a fraudulent scheme wherein executives of Avaya, a telecommunications company, denied the company was offering unusual price discounts and that its profit margins were being impaired, and then publicized falsely-optimistic financial projections that could not be achieved because of the price discounting's negative effect on profitability. Id. at 249. The shareholders filed suit under Section 10(b) and alleged two types of misleading statements: First, there are pricing pressure statements, in which [defendants] are alleged to have falsely denied Avaya was offering unusual discounts and facing significant pricing pressure from market rivals. Second, there are forecast-related statements, in which defendants projected financial results (such as operating margin and revenue growth) and made positive portrayals, notably the statement that Avaya was on track to achieve its goals or projections. Avaya, Inc., 564 F.3d at 246. The pricing pressure statements were made by Avaya's chief financial officer, who denied that deteriorating demand adversely affected the market price for the company's products. [6] The forecast-related statements contained forward-looking projections, but described those projections in present-tense language. For example, defendants stated, Our first quarter results position us to meet our goals for the year . . . . [W]e are on track to meet our goals for the year, even though there were some aspects to our performance that are below our expectations and that we are working on to improve. Id. at 254. We concluded that such a mixed present/future statement is not entitled to the safe harbor with respect to the part of the statement that refers to the present. Id. at 255. However, when read in context, the present-tense statements ( i.e., we are on track and first quarter results position us) could not meaningfully be distinguished from the future projection of which they are a part ( i.e., Avaya's future goals). Id. To the extent that those statements contained assertions about the present, we found the assertions of current fact are too vague to be actionable. Id. As we noted in Avaya, it was distinguishable from cases in which the allegedly misleading statements contained separately discernable references to the present. Id. For example, in Makor Issues & Rights, Ltd. v. Tellabs Inc., the statement that sales were still going strong was not forward-looking because it would be misleading if [defendant] knew that its sales were about to collapse. 513 F.3d 702, 705 (7th Cir.2008). In In re Stone & Webster, Inc., Securities Litigation, the statement that the defendant has on hand and has access to sufficient sources of funds to meet its anticipated . . . needs was not forward-looking because [t]he part of the statement that speaks of the quantity of cash on hand speaks of a present fact. 414 F.3d 187, 207, 212 (1st Cir.2005). In the case before us, the allegedly misleading representations consist of vague and generalized statements about disciplined pricing. [7] The District Court properly began its analysis by ascertaining what factual assertions were conveyed by those statements. According to the court, the parties had agreed that disciplined pricing referred to Aetna's expectation of achieving premium yields that are in line with [Aetna's] medical cost trend. Based on this understanding of the term disciplined pricing, the court concluded that the statements were forward-looking because they expressed expectations about Aetna's medical cost trend, a specific measure of future performance. So construed the representations were within the safe harbor's definition of forward-looking statement. See 15 U.S.C. § 78u-5(i)(1)(B) (statement of the plans and objectives of management for future operations) and (C) (statement of future economic performance). Applying Avaya, the court found that, while certain elements of defendants' statements were partly historical and partly present-tense (i.e., statements such as remains consistent, is unchanged, and we continue to adhere to), those elements could not be distinguished from the statements' assertions about the future. On appeal, plaintiffs argue that the District Court misunderstood what defendants meant by the term disciplined pricing. Plaintiffs contend that, by engaging in `disciplined' pricing, Aetna is telling investors that, based upon what the Company currently estimates costs to be for the policies it is writing, these policies will be profitable. Plaintiffs argue that, although the statements contain projections about future profitability, they also convey information about current pricing which is necessarily based on historic data. Plaintiffs also assert that the District Court overlooked the allegedly misleading statement in Aetna's first quarter 2006 Form 10-Q, which contained an allegedly false, past-tense explanation for the increase in MCR. Defendants contend that plaintiffs' characterization is wrong because Aetna explicitly defined disciplined pricing as a policy of achieving premium yields that are in line with [its] medical cost trend. They argue that the disciplined pricing statements are classic forward-looking statements because whether Aetna succeeds in `achieving premium yields in line with our medical cost trend' cannot be confirmed until future resultsin particular, actual medical costs incurred on policies are known. Defendants assert that the statements are not actionable because they are vague projections of future profitability. Regarding the allegedly misleading Form 10-Q disclosure, defendants argue that the 10-Q explicitly stated the fact that plaintiffs claim was fraudulently concealed, i.e., that for some insurance policies, medical costs outpaced the percentage increase in per member premiumsin other words that Aetna underpriced some of its policies. [8] Our examination begins with a determination of which aspect of the statements are false. See In re Stone & Webster, Inc., 414 F.3d at 213. Plaintiffs claim that defendants misrepresented Aetna's underwriting practices during the class period by referring to its pricing as disciplined. However, whether Aetna's pricing was, in fact, disciplined could not have been determined at the time defendants made the statements. The term disciplined pricing describes a policy of setting prices in relation to future medical costs. At the time the statements were made, the medical costs had not yet been incurred and could not be ascertained until later. Thus, to the extent that disciplined pricing said anything about the current price of premiums, it did so in the form of a projection. This is evident from plaintiffs' own understanding of the term. As noted above, plaintiffs contend that by engaging in `disciplined' pricing, Aetna is telling investors that, based upon what the Company currently estimates costs to be for the policies it is writing, these policies will be profitable. Statements about future profitability and assumptions underlying management's expectations about the future fall squarely within the definition of forward-looking statement. 15 U.S.C. § 78u-5(i)(1)(A) and (D). Plaintiffs further claim that Aetna's April 27 Form 10-Q disclosure was misleading because it falsely attributed the first quarter increase in MCR to higher medical costs without revealing the underpricing of premiums. While we agree that the safe harbor does not apply to this statement because it is historical rather than forward-looking, we find the statement itself contains no falsity. Even accepting plaintiffs' allegations about underpricing as true, the statement asserts the very fact allegedly concealed, that the increase in medical costs exceeded the increase in premium revenue. Aetna need not adopt plaintiffs' characterization of underpricing in its financial statements to avoid liability for securities fraud. [9] For these reasons, we hold that the allegedly misleading assertions regarding Aetna's disciplined pricing policy fall within the safe harbor's definition of forward-looking statement. [10]
The safe harbor provides that forward-looking statements must be 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). This aspect of the safe harbor is analogous to the bespeaks caution doctrine, which holds that cautionary language, if sufficient, renders the alleged omissions or misrepresentations immaterial as a matter of law. EP MedSystems, Inc. v. EchoCath, Inc., 235 F.3d 865, 873 (3d Cir.2000). Cautionary language must be extensive, specific, and directly related to the alleged misrepresentation. GSC Partners CDO Fund v. Washington, 368 F.3d 228, 243 n. 3 (3d Cir.2004). Cautionary statements disclosed in SEC filings may be incorporated by reference; they do not have to be in the same document as the forward-looking statements. In re Merck & Co. Sec. Litig., 432 F.3d 261, 273 n. 11 (3d Cir.2005). Plaintiffs argue that the cautionary language, which Aetna provided in financial reports filed with the SEC, was insufficient because it failed to disclose the alleged practice of underpricing premiums, and only addressed risks related to medical cost projections. The cautionary statements included the following language: Our ability to forecast and manage health care costs and implement increases in premium rates affects our profitability. Our profitability depends in large part on accurately forecasting health care costs and on our ability to appropriately manage future health care costs through underwriting criteria....    Our ability to forecast health care and other benefit costs, detect changes in these costs, and achieve appropriate pricing affects our profitability. We continue to be vigilant in our pricing and have increased our premiums for new and renewal business in 2006. Premiums in the health business are generally fixed for one-year periods. Accordingly, future cost increases in excess of medical cost projections reflected in pricing cannot be recovered in the contract year through higher premiums. As a result, the Company's results are particularly sensitive to the price increases it projects in advance of renewal of the business. There can be no assurance regarding the accuracy of medical cost projections assumed for pricing purposes, and if the rate of increase in medical costs in 2006 were to exceed the levels projected for pricing purposes, our results would be materially adversely affected. This language provides clear warning to investors that the accuracy of medical costs cannot be assured, actual medical costs may exceed projections assumed for purposes of setting premiums, medical costs in excess of projections cannot be recovered through higher premiums, and inaccurate medical cost projections can have a materially negative effect on profitability. We find this language adequate under 15 U.S.C. § 78u-5(c)(1)(A)(i) because it provided meaningful, extensive, and specific caution directly related to the statements concerning disciplined pricing.
The safe harbor applies to forward-looking statements that are not material. 15 U.S.C. § 78u-5(c)(1)(A)(ii). A statement or omission is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to [act]. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976). See Basic Inc. v. Levinson, 485 U.S. 224, 232, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988) (expressly adopt[ing] the TSC Industries standard of materiality for the § 10(b) and Rule 10b-5 context). A material misrepresentation or omission is actionable if it significantly altered the `total mix' of information made available.' Basic, at 231-32, 108 S.Ct. 978 (quoting TSC Industries, 426 U.S. at 449, 96 S.Ct. 2126). Material representations must be contrasted with statements of subjective analysis or extrapolations, such as opinions, motives and intentions, or general statements of optimism.... EP Medsystems, Inc., 235 F.3d at 872. Such statements `constitute no more than `puffery' and are understood by reasonable investors as such.' In re Advanta Corp. Sec. Litig., 180 F.3d at 538 (quoting In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1428 n. 14 (3d Cir.1997)). A representation is immaterial if the statement at issue is too vague to be actionable. In re Burlington Coat Factory Sec. Litig., 114 F.3d at 1428 (statement that the company `believed [it could] continue to grow net earnings at a faster rate than sales' was too vague). [A]lthough questions of materiality have traditionally been viewed as particularly appropriate for the trier of fact, complaints alleging securities fraud often contain claims of omissions or misstatements that are obviously so unimportant that courts can rule them immaterial as a matter of law at the pleading stage. Id. at 1426. In In re Advanta Corp. Securities Litigation, shareholders alleged a theory of fraud similar to the one alleged here regarding Aetna's disciplined pricing policy. There, shareholders claimed that Advanta, a credit card company, publicly touted its strong financial health and risk-adjusted pricing strategy, which targeted customers with good credit. 180 F.3d 525, 537. In its annual report, Advanta stated, While we added substantially to our account base, our credit quality remained excellent. Our emphasis on gold cards and targeting of better quality customershelps us maintain an enviable credit quality profile. Id. Shareholders alleged that, contrary to those representations, Advanta had secretly relaxed its underwriting and monitoring procedures by offering introductory teaser rates to new customers with poor credit. Id. Advanta's positive portrayals ultimately proved wrong when the new customers defaulted, causing a $20 million quarterly loss. Id. at 528. We held that Advanta's positive portrayals were vague, and even if arguably misleading, do not give rise to a federal securities claim because they are not material.... Id. at 538. We expressed doubt that reasonable investors would make investment decisions based on the positive portrayals. Id. at 539. Here, the District Court applied Advanta and found defendants' statements about disciplined pricing to be immaterial and not actionable because they are puffery, vague and non-specific expressions of corporate optimism on which reasonable investors would not have relied. On appeal, plaintiffs contend that the disciplined pricing statements are not vague because they related specific information about Aetna's current pricing policy and falsely implied that MCR would remain stable. Plaintiffs argue that defendants' statements about disciplined pricing are far more concrete than the vague and general adjectives in Advanta.  We disagree. The statements identified by plaintiffs contain oblique references to Aetna's pricing policy; such references are too vague to ascertain anything on which a reasonable investor might rely. For example, plaintiffs claim Williams misled investors regarding Aetna's underpricing and its effect on higher first quarter MCR by stating the following on a May 1, 2006 conference call with analysts: This is solid and balanced growth that is representative of our dedication to disciplined pricing ... I will end my comments by reaffirming to you my personal commitment to continue to maintain discipline and rigor in everything we do at Aetna. However, immediately before those remarks, Williams made other relevant statements about MCR and pricing which plaintiffs omit from the complaint: The customer markets, both geographical and by customer type, are very dynamic and vary greatly in terms of cost, premium levels, competitors and complexity. We talk in terms of aggregated consolidated results, but there are always markets or specific customers that are functioning better or worse than others or versus expectation.    [O]ur ... book of business is constantly evolving and changing. As new business is written, cases get renewed and other cases lapse. (A303.) These remarks, while broad and vague, at a minimum convey the complexity of Aetna's business, diversity of its customers, and variable nature of its portfolio of insurance contracts. They describe the difficulty of accurately predicting MCR and the heterogeneous nature of Aetna's products, services, customers, and pricing. When read in context, no reasonable investor could infer that dedication to disciplined pricing, a vague and subjective statement, meant Aetna had applied (or failed to apply) a static, across-the-board formula to determine the price of premiums charged for all products and services. General statements about the company's dedication to disciplined pricing and commitment to discipline and rigor could not have meaningfully altered the total mix of information available to the investing public. We therefore find the statements immaterial as a matter of law. We note that the state of the record renders our task of evaluating materiality a difficult one. Plaintiffs direct our attention to nine allegedly misleading statements made on analyst conference calls. [11] Quotations from those conference calls appear on the face of the complaint and form the basis of plaintiffs' claims. However, plaintiffs did not submit transcripts of those conference calls to the District Court, and the excerpted transcripts submitted by defendants omit seven of the nine statements we are called upon to review. The record only contains transcripts of Rowe's statement on October 27, 2005, and Williams' statement on May 1, 2006. This omission precludes our full consideration of the context in which the statements were made, an obvious impediment to our evaluation of materiality. [12]
The safe harbor applies to statements made without actual knowledge that the statement was false or misleading. 15 U.S.C. § 78u-5(c)(1)(B). The District Court considered the allegations concerning defendants' state of mind and found the complaint failed to plead actual knowledge of the purported underpricing. Because we find defendants' statements too vague to contain an actionable falsity, we need not consider defendants' state of mind.