Lonnie, the following was pm'd to me and is an excellent article which hopefully will be read by investors in other stocks.
SECURITIES AND COMMODITIES LITIGATION
Safe Harbors in Cyberspace
BY LISA KLEIN WAGER
New York Law Journal
August 20, 1998
AS COUNSEL for a publicly traded corporation, you carefully review all draft press releases and other investor-related communications. You advise your client to rehearse carefully for interviews,
road shows and analyst calls and you help the client implement policies and procedures relating to such communications. But have you considered whether the company has adequate clearance policies and
disclosure procedures for posting information on the Internet?
Most companies now have a home page on the World Wide Web, usually containing basic corporate, investor and product information. The corporate Web site is a useful vehicle for
communicating with current and potential customers and shareholders and for disseminating marketing information and financial results. It is easy and inexpensive to update and equally accessible to small
and large companies.
Compliance Issues
Of course, facilitating investors' access to relevant information is a good thing. But this new technology raises subsequent compliance issues:
Who is reviewing the information posted on your client's Web site?
Are they posting only positive press releases and filing negative ones in the circular file?
Have they posted summaries or transcripts of analyst conference calls or interviews?
Have they created hyperlinks to favorable analyst reports or posted third parties' forecasts?
Have they created written material specifically for the Web site and, if so, who approved its
content?
Absent comprehensive policies and procedures for Web-site maintenance, the company's Web site can become a black hole -- a repository of dated information that can invite securities class action litigation, unwittingly create a duty to update and complicate a company's efforts to extricate itself from pending litigation. All too often, decisions as to whether information should be posted on a company's Web site are made by public relations or information systems personnel without full consideration of the potential legal consequences.
Related problems arise when employees have regular access to the Internet, an increasingly common practice. Without consistent use of good monitoring procedures, Internet forays by company
insiders may be fraught with danger. Participation in on-line chat room discussions or bulletin board postings without consideration of disclosure policies can expose the company to a variety of legal risks. Avenues for two-way communication may invite investor or analyst communication with employees who are neither authorized nor suitable to speak for the company.
This article highlights some of the common pitfalls facing public companies that maintain Web sites and recommends some basic policies and procedures that should be implemented by any publicly
held company that communicates with investors on the Internet.
Internet Review
A company should subject its Internet postings to the same scrutiny as a press release or SEC filing. It should adopt procedures to ensure that financial and other information placed on the
company's Web page goes through meaningful internal review. A designated individual, familiar with the legal risks involved in public disclosures, should oversee all phases of this review and approve the Web page information. The accuracy of all factual representations should be confirmed, and any excessive or overly positive statements should be removed.
As a general policy, only documents that a company has released previously or contemporaneously should be posted on its investor relations site. All postings should be dated. If a
company must restate its financials, business takes a negative turn, and in other situations that increase a company's vulnerability to shareholder litigation, it is especially important that materials posted on the Web site be reviewed from that perspective. Due diligence conducted in connection with potential
acquisitions or similar transactions should include a review of Web sites and any relevant Internet bulletin boards.
Invoking Safe Harbor
The Private Securities Litigation Reform Act of 19951 (Reform Act) provides a safe harbor for certain forward-looking statements.2 The safe harbor provision was intended to encourage issuers to
publicly disclose relevant forward-looking information without fear of incurring liability to investors if their expectations were not fulfilled.3 Used correctly, the safe harbor can be a very effective tool in a company's arsenal against shareholder litigation.4
Unfortunately, however, many companies do not yet take full advantage of the protections offered by the safe harbor. Too often, press releases that include forward-looking statements either
contain no safe harbor language or contain language that is not likely to be effective against litigation. The continuous reissuance of such press releases on a company's Web site only exacerbates the
problem.
To invoke the safe harbor, written forward-looking statements must explicitly be identified as forward-looking.5 The legislative history of the Reform Act makes clear that boilerplate or generic
identification of forward-looking statements, such as "all statements that are not historic are forward-looking" or simply "this document may contain forward-looking statements" will not be sufficient to meet its mandate that forward-looking statements be identified.6 The SEC recently echoed this sentiment in its interpretive guidance relating to the application of the safe harbor to Year 2000
disclosures.7
The text of a document should state explicitly that particular statements or statements concerning certain subjects are forward-looking and subject to risk, or forward-looking statements
should be marked with an asterisk or other identifying mechanism and marked statements identified in a footnote. It may be helpful to identify the kinds of words and introductory phrases that are used in
making forward looking statements -- such as "believes, anticipates, plans, may, hopes, can, will, expects, is designed to, with the intent, and potential" -- while noting that the absence of such words
does not mean that a statement is not forward-looking.
Forward-looking statements contained in lengthy documents, such as SEC filings, can be identified in a section of the document dedicated to risk disclosure. Whenever forward-looking
statements are identified in a separate section of a document than that in which the statements appear, however, special care should be taken to ensure that the safe harbor language is as apparent as the
forward-looking statements to which it relates. The font of the safe harbor language should be the same size as that of the corresponding forward-looking statement. It may even be italicized or
highlighted for emphasis.
Those sections of the document that contain forward-looking statements should explicitly cross-reference the safe harbor language and vice-versa. In general, cautionary language should be
placed as close as is practicable to the forward-looking statements it is intended to protect.
In reviewing documents to identify forward-looking statements, counsel should not limit their analysis to financial forecasts and concrete projections. In fact, one recent case has suggested there is
a question as to whether the safe harbor protects "hard" forecasts at all, or only "soft" forward-looking statements.8 Statements that are phrased in the present tense but have forward-looking implications
should not be overlooked. Such statements may be entitled to safe harbor protection,9 but only if they are explicitly identified.
Review of Statements
Generally speaking, counsel should review all statements made by the company. The review of SEC filings should include not only Management's Discussions & Analysis, but also Legal Proceedings,
Material Contracts, Risk Factor Disclosures and Description of Business sections. Special attention should be paid to discussions of the anticipated adequacy of available capital, future costs, new
products, market position, trends or comparisons, growth strategies, timetables, policies relating to debt-equity ratios and, of course, Year 2000 issues.10
The Second Circuit's recent holding that a pharmaceutical company's allegedly false advertising in a sophisticated medical journal could subject it to liability under the federal securities laws11 teaches that materials not traditionally thought of as investor-related must be reviewed.
To invoke the safe harbor, written forward-looking statements must be "accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ
materially from those projected in the forward-looking statement."12 The key words are "accompanied by" and "meaningful." The practice of cross-referencing SEC filings for lists of relevant risk factors is
one of the most common deficiencies seen in press releases seeking to invoke the safe harbor. Such cross-referencing, without more, is not likely to satisfy the requirement to invoke the safe harbor, that
risk disclosures "accompany" written forward-looking statements.
To be "meaningful," the disclosure of risks relevant to a written forward-looking statement in press releases and other Web postings must not only accompany the statement, but should be tailored
to the important risks relevant to its particular subject matter. Generic lists of risks that could apply to virtually any company are not likely to offer protection.13 Likewise, reprinting the same risk disclosure word-for-word in successive documents -- a common practice fueled in part by fears that plaintiffs'
lawyers will seize on variances among a company's risk disclosures as evidencing deliberate concealment -- may dilute its effectiveness.
A risk disclosure made in connection with a forward-looking statement is more likely to be deemed "meaningful" if it is drafted to identify the risks that seem most relevant to the subjects of the
statement that is accompanies, than if uniformity is viewed as an end in itself. The statute protects forward-looking statements accompanied by cautionary statements identifying "important" risk factors;
it does not require disclosures of all risk factors.14
Notwithstanding the foregoing, including a comprehensive discussion of all risk factors facing the company's business in its SEC filings and ensuring that the most recent version of that discussion (and the date it was last updated) is prominently displayed on the company's home page is a good practice from a "bespeaking caution" and "total mix" perspective.
In deciding what risks must be identified in connection with particular forward-looking statements to ensure the disclosures are "meaningful," consideration should be given to
contemporaneous disclosures, as well as board of director informational materials and other internal documents that may relate to the disclosure at issue. The emergence of non-identified risks is not a problem per se; but failure to identify risks that are known and discussed in other contemporaneous documents as relevant to the subject of a forward-looking statement could be very problematic.
Past Problems
If press releases have been issued without effective safe harbor language, the problem should not be compounded by posting or maintaining them on the company's Web site without addressing this
deficiency. Steps can and should be taken in connection with the Web posting of such statements to provide them some level of protection on a going-forward basis. Forward-looking statements in press
releases or other documents posted on the Web can be highlighted for identification, and hyperlinks can be provided from such highlighted statements to relevant risk disclosures.
Although the efficacy of hyperlinks to meet the Reform Act's "accompanied by" requirement has not been approved by the SEC or tested in court, this alternative is somewhat less cumbersome
and may be more aesthetically pleasing than attaching statements to the end of each press release posted to identify which aspects of the release are forward looking and the factors that may affect
their reliability.
Whatever mechanism is adopted to gain or maintain safe harbor protection for forward-looking statements posted on the company's Web site, the top of each Web site segment containing such
statements should include a notice that forward-looking statements contained in the segment are subject to risk. The notice should clearly explain the mechanism that has been adopted to enable
readers to identify such statements and understand relevant risks.
Many companies have placed comprehensive disclosure of the important risk factors facing the company's business generally on their Web site's home page and at the top of each Web site segment
containing forward looking statements. Some companies provide a hyperlink to "important risks facing the company's business" on every page of their sites.
These practices are highly recommended and should add an additional layer of "bespeaking caution" and "total mix" protection. Unless such language clearly identifies which statements in the
companies' press releases and other documents are forward-looking, however, and enumerates or provides links to important risks relevant to those statements (as opposed to merely cross-referencing
SEC filings), they may not suffice to invoke the safe harbor.
Avoiding New Problems
Companies seeking to maximize the mileage they get from scripts and other materials prepared for conference calls, road shows and other oral presentations may want to post such materials on their
Web sites. Special care must be taken to observe the differences between the Reform Act's requirements for application of the safe harbor to oral and written statements.
To invoke the safe harbor for oral statements, the speaker need only state that the statement is a forward-looking statement and that actual results could differ and direct the listener to a readily
available document (usually an SEC filing) that contains a description of the risks that could cause actual results to differ.15
There is a risk that the safe harbor governing oral statements will be lost if they are converted to written statements (such as transcripts of speeches) that are posted on the Web page without being
"accompanied by" explicit disclosure of relevant risk factors. Likewise, materials used to accompany oral presentations, such as slides containing projections and goals, should not be posted without
modification to invoke the safe harbor.
A company posting transcripts of oral statements on its Web page can highlight forward-looking statements to identify them as such and insert hyperlinks to the relevant portions of the written
cautionary disclosures to which the original oral statements referred. A company can avoid this problem, and the risk that hyperlinks may be deemed not to satisfy the "accompanied by" requirement,
by posting an audio or video clip of an oral presentation on the Web site in its original format.
'Duty to Update'
Because material on the World Wide Web remains posted indefinitely, it is, in effect, continuously reissued. There is a risk that this continuous republication of stale information will be
deemed to give rise to a duty to correct.16 To minimize this risk, companies should date all postings, implement and maintain a centralized procedure for reviewing and updating information posted on their Web pages and remove inaccurate or stale forward-looking information.
It is a good practice to divide Web site areas containing press releases, SEC filings, and other investor information into "current" and "archival" sections. The "current" sections should be regularly
reviewed to ensure they do not contain outdated or stale information. Archival sections may include older information, but should contain a conspicuous notice stating that (i) the information contained in
the section is out of date and provided only for historical purposes, and (ii) the information should not be relied upon for investment decisions.
All Web sites containing forward-looking information should contain a prominent disclaimer stating that while the company believes the material disclosed is accurate as of the posted date, and
may post new information from time to time, it does not assume any obligation to update or correct such information and explicitly disclaims any duty to do so. While the effectiveness of such a
disclaimer may be challenged, and it will not negate a duty to correct any disclosures that were made erroneously, it will help to reduce the risk of liability for failing to update historic projections contained
in documents published on a company's Web site when circumstances change.
Third Parties' Forecasts
Another potential source of securities liability occurs when analysts' reports are posted on a company Web site or "hyperlinked" to its Web page. Some companies' Web sites post articles about
the company or provide hyperlinks to enable visitors to "search the news" for the company's name. These practices are inherently dangerous. They expose the company to the risk that they will be held
responsible for the content of third parties' statements.17 This is particularly dangerous when forecasts or other forward-looking statements are involved, as information that emanates from a source other than the issuer is unlikely to be accompanied by safe harbor language.
An issuer's safest course is simply to post a list of all firms that cover the company, together with disclaimers that: (i) the company makes no representations whatsoever about the opinions of any
analyst or other third party that is identified on its site; (ii) the company neither regularly monitors nor has control over the content of third parties' statements or Web sites; and (iii) the company does not
endorse or accept any responsibility for the content or the use of such firms' Web sites.
Internet Policies
Companies with publicly traded securities should be aware of the existence of bulletin board postings and Internet chat rooms. These allow investors to exchange comments and compare notes on
companies, stocks, and industries. They also can be misused by short-sellers and others to post false or misleading statements and artificially affect a stock price.
There are many reasons why a company may want to keep itself apprised of investor discussions on the Internet. Awareness of these communications can help the company keep abreast of investors' concerns, decide whether to make a public statement about price movements or short activity, and detect Internet-based stock manipulation activity.
On the other hand, statements made by persons who do not have the knowledge or training to speak for the company may lend fuel to shareholder actions. E-mail communications with analysts or
the press could be a gold mine for a plaintiff in discovery, and could even advance allegations of "entanglement" in third parties' statements.
Companies whose employees can access the Internet should implement policies regarding permissible and impermissible subjects of comment and communication, take steps to communicate
those policies to employees and monitor Internet activity to ensure that employees are complying with such policies.
Conclusion
As companies use the Internet more to communicate with investors, statements posted on Web sites will increasingly become subjects of shareholder class actions. Implementing the policies and
guidelines discussed in this article can reduce the likelihood of litigation and increase the chances of
prevailing should a suit be filed.
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Notes
(1) 15 USC §;§;77z-2, 78u-5.
(2) The safe harbors provided by the Reform Act apply only in private actions in federal court, subject to
pending legislation and do not apply to disclosures in financial footnotes, IPOs, tender offers and certain other
excluded types of filings.
(3) Joint Explanatory Statement of the Committee of Conference on Private Securities Litigation Reform
Act of 1995 (Committee Report), H.R. Conf. Rep. No. 104-369 at 32 (1995).
(4) See, e.g., Harris v. IVAX Corp., 998 F. Supp. 1449 (S.D. Fla. 1998) (granting defendants' motion to
dismiss); accord, Rasheedi v. Cree Research Inc., Nos. 1:96CV00890 and 1:96CV01069, 1997 WL 785720, *1-*2
(M.D. N.C. Oct. 17, 1997).
(5) See Blum v. Semiconductor Packaging, C.A. No. 97-7078, 1998 U.S. Dist. Lexis 6868 at *5, n.2 (E.D. Pa.
May 5, 1998) (holding safe harbor unavailable where statement was not identified as forward-looking, but
dismissing complaint on other grounds).
(6) Committee Report, supra n. 4. at 43-44.
(7) See July 29, 1998, SEC, Release (SEC Release) at 13 and 16, n. 20.
(8) See Queen Uno Ltd. Partnership v. Coeur D'Alene Mines Corp., 97 WL 1431 CB, 1998 U.S. Dist. Lexis
5698 (D. Col. April 13, 1998).
(9) See, e.g. IVAX Corp., 998 F. Supp. 1449 (statement that company believed certain challenges were
behind it recognized as forward-looking in nature).
(10) See SEC Release, n. 8, supra for specific guidance relating to disclosure of Year 2000 issues.
(11) In re Carter Wallace Securities Litigation, No. 97-7345 (2d Cir. July 13, 1998).
(12) 15 USC §;§;77z-2(c)(1)(A)(i), 78u-5(c)(1)(A)(i).
(13) See Committee Report at 43-44.
(14) Id.; see, e.g., Ivax Corp., 998 F. Supp. at 1454 (holding issuer's failure to identify every factor that had
caused results to differ did not remove statements accompanied by meaningful warnings from safe harbor);
Rasheedi, 1997 WL 785720, *1-*2 (rejecting plaintiffs' contention that defendants had to caution against "every
conceivable factor" that could cause results to differ).
(15) 15 USC §;§;77z-2(c)(2), 78u-5(c)(2).
(16) A general discussion of the recent case law relating to the purported duty to update can be found in
Myers, Wager & Vassos, "Is There A Duty to Update Forward Looking Statements?" Vol. 5 No. 2 Sec. Reform
Act Lit. Rep. May 1998.
(17) See generally, In re Syntex Corp. Sec. Litig., 95 F3d 922 (9th Cir. 1996); Elkind v. Liggett & Myers
Inc., 635 F2d 156, 163 (2d Cir. 1980).
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Lisa Klein Wager is a member of Morgan, Lewis & Bockius LLP. She periodically co-authors
this column with her partner John F.X. Peloso, who will return to the column when it is next
published. Michelle C. Dickey, a law student at Georgetown University Law Center and a
summer associate at the firm, assisted in the preparation of this article.
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