How many times have you been at a conference and seen a corporate investor presentation that begins something like this:
“Good morning. I’m Joe Terrific, CEO of Godzilla Industries, and I’m here to bring you up to date on all the great things we’re doing. (Pause while he moves rapidly from the title slide, past the safe harbor slide to the beginning slide describing the business.) Here at Godzilla Industries…”
In other words, the safe harbor statement slide is up on the screen fleetingly, but not referred to verbally. The thinking being that they’ve shown the disclaimer about forward-looking statements, all the investors in the room are sophisticated institutional investors and know that when a company makes projections and statements about the future things don’t always turn out the way the company thinks they will. The requirements of the Private Securities Litigation Act of 1995 have been met, right?
Well, maybe not.
A recent ruling by a federal trial court for the Western District of Washington has underlined the need for companies to make sure they verbally reference the safe harbor disclaimer. The case is In re Coinstar Securities Litigation, Case No. C11-133 MJP (W.D. Washington Oct. 6, 2011) and all practitioners of investor relations should take notice of it.
The case involved allegations that on various occasions the management of Coinstar made projections and statements about future expectations that did not come to fruition. As happens in these cases, the lawyers for Coinstar made a motion to dismiss the complaint. This is a motion made early in the proceedings that has the effect of cutting off the litigation before the really big legal bills start to pile up. It is done before pre-trial discovery takes place, which is when a plaintiff can drive a company to distraction by forcing it to produce thousands of pages of documents and produce members of management for time-consuming depositions. Once discovery starts, the chances of the plaintiff wringing a settlement out of the company go way up, as it is often cheaper to settle than to pay hefty lawyers fees for several years running while lawyers pore over boxcar loads of documents in the hope of turning up a smoking gun, with the Russian roulette of a jury trial lurking in the background.
In the Coinstar case, one of the allegations made in the complaint was that forward- looking statements made by company management at an investor conference were false or misleading. In making the allegation, the plaintiffs relied upon a transcript of the presentation, and because the transcript contained no reference to the cautionary language on the company’s presentation slides, the court ruled that for purposes of a motion to dismiss, they could not take notice of something that wasn’t in the record and therefore the lawsuit could proceed on those allegations.
This does not mean that Coinstar lost the lawsuit, but it does mean that the lawsuit can continue and move into the pretrial discovery phase, which is almost as bad as losing. Coinstar did not accompany their safe harbor slide with a simple statement such as, “Statements made in the course of today’s presentation may contain forward-looking information and actual results may differ materially from what we are presenting today. The slide you now see gives you more information on the assumptions and factors we consider in making those forward looking statements and where to go to get more information on our risk factors.” As a result, they have subjected themselves to, at a minimum, additional and unnecessary legal bills, and at worst, the potential of a large settlement or jury award.
So today’s lesson is, just because the safe harbor slide is in every presentation, and everyone has heard it dozens of times before, doesn’t mean that a trial judge will assume investors have heard about it. Practice safe presentations - always refer to the safe harbor statement and slide.