Opinion ID: 152706
Heading Depth: 5
Heading Rank: 1

Heading: Statutory Definition of Forward-Looking Statement

Text: 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]