Corporate Governance

Nacchio and the Supreme Court: The Cert Petition (Liability for Excessive Disclosure)

By J. Robert Brown

The oddest position taken in the brief is that had Nacchio disclosed internal projections that he would might have been liable.

• Finally, in at least the Seventh and Ninth Circuits an internal projection cannot be released unless it is 'reasonably certain,' a standard plainly not met here.  The Tenth Circuit is sending Nacchio to prison for selling stock without disclosing conflicting predictions (worries, really) by his employees that other circuits would regard as misleading and punish him for disclosing. This is terribly unfair, particularly when criminal conviction requires proof that the defendant knew the information was material, App.147a, and vividly illustrates the depth of confusion in the lower courts.

There are so many things to say about this statement.  The brief cites two cases, one from 1980 and one from 1981.  That alone should suggest that the proposition warrants careful examination.  Both, for example, predate Basic, the Supreme Court's most relevant exposition of materiality.  In that case, the Supreme Court expressly rejected this rational.  See Basic, 485 U.S. at 234 ("Disclosure, and not paternalistic withholding of accurate information, is the policy chosen and expressed by Congress.").

Second, the cases hardly provide meaningful support for the proposition.  The primary case, Panter v. Marshall Field & Co., 646 F.2d 271, 292 (7th Cir. 1981), contained one critical sentence in what would have to be described as dicta.  See Id.  ("However, projections, estimates, and other information must be reasonably certain before management may release them to the public.").  The case was not dealing with liability for disclosure but liability for non-disclosure.  In other words, the sentence was at best an imprecisely drafted phrase indicating that internal projections did not have to be disclosed unless reasonably certain, not a sentence imposing on a company liability for disclosing such information. 

Third, and most importantly, the proposition conflicts with basic principles of securities laws.  The federal securities laws are built around the notion of accurate and complete disclosure, not merit review.  The cert petition suggests that there are some categories of information that are absolutely prohibited from disclosure.  This is simply wrong.  Companies can disclose information, even if highly tentative and speculative (they do it all the time) if accurately characterized.  Thus, if projections were disclosed that were not "substantially certain," a company could disclose the information but make very clear the tentative and preliminary nature of the information.

In other words, in this case, when Nacchio had repeatedly made forecasts to the market, the brief suggests that once he learned that the forecasts might not be achievable, the company might have been liable had it disclosed this negative information to the market.  Surely no serious securities lawyer would tell a client that it would be liable for revealing to the market that published forecasts no longer might be valid, even if the basis was tentative.

Finally, the approach entirely ignores the safe harbor for projections inserted into the PSLRA. Under the Act, there will not be liablility for inaccurate projections where the 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, . . . or . . . the plaintiff fail to prove that the forward-looking statement . . . [if made on behalf of a business entity by or with the approval of an executive officer was] made . . . with actual knowledge by that officer that the statement was false or misleading.

15 USC 78u-5(c)(1).  In other words, the provision codifies the traditional approach by insulating the  disclosure of projections from liability (unless made with "actual knowledge" that they were false) so long as they are accompanied by meaningful cautionary language.

The brief raises some interesting issues involving the interpretation of the federal securities laws.  But this argument takes away from the entire credibility of the brief.

The brief is posted on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on March 26, 2009 (boomark / email).