Defense of PSLRA Safe Harbor

The Private Securities Litigation Reform Act gives companies a safe harbor to make predictions on corporate performance as forward-looking statements without having to worry about suffering litigation if their statements do not pan out. While I can appreciate criticism of the PSLRA, the benefits to companies and the free market far outweigh the risks.

While companies do have the luxury of the safe harbor, there are numerous policies the Securities Exchange Act of 1934 put into place to keep investors apprised of the actions of companies and maintain transparency of publicly traded organizations. Among these are the necessity of companies to publish annual reports, timely disclosure of pertinent events that could affect securities and banning of selective disclosure and insider trading (Gower, 54-58). Furthermore, the act explicitly states “any… course of business which operates… as a fraud or deceit upon any person, in connection with the purchase or sale of any security” is prohibited (Gower, 55).

Aside from the Securities Exchange Act, there is the Sarbanes-Oxley Act which was specifically put in place to make “corporate and accounting fraud harder to get away with” by requiring companies to disclose to the public “in plain English, material changes in the company’s financial condition or operations,” (Gower, 58).

In other words, thanks to situations like the collapse of the banking industry, the DOT-com bubble and Enron, there are already a multitude of protections in place for stockholders. It would behoove savvy investors to keep track of all of the filings companies make in order to be able to judge for themselves whether a company’s forward-looking statements hold any water. If a company is blatantly lying or glossing over the truth on projections, it should be evident based on their previous public filings. Furthermore, if a company lies about something material, it should be easy to find the evidence against them to bring a class action suit.

All of that said, the PSLRA is necessary for businesses. They must be able to make predictions in order to be competitive in the free market. If predictions do not pan out and a person loses money on an investment, that is the risk he or she accepted when they invested. Companies cannot and should not be held responsible if forward-looking statements do not come to fruition. That is like arguing that a racetrack is responsible for reimbursing gamblers if the horse that had been predicted to win lost. That is exactly what investments and the stock market are: a gamble.

Much like predicting the winner of a horse race, it is beyond reality to accurately predict even three months ahead of time what could happen to your business. All sorts of contributing factors can affect the success of a company (e.g. strikes, product malfunctions, market collapse, production delays, natural disasters, demand decline, etcetera). These external forces that can affect business are beyond the liability of a company making sales or other kinds of predictions. All companies can use to predict the future is what happened in the past. As long as companies are being truthful about the past, a reasonable investor should be able to gauge for themselves whether the forward-looking statement is worth anything.

The main purpose of the PSLRA, according to Michael E. Baughman and Amber Schuknecht Martin, is to protect companies making “optimistic statements concerning future prospects or earnings that failed to materialize” from “abusive securities litigation,” (Baughman & Martin, Recent Dismissals Under PSLRA Safe Harbor Reaffirm Benefit of Meaningful Risk Disclosure). I would argue the PSLRA does that very well.

I would also argue that between the various disclosures required and investor protection in place in the Securities Exchange Act and the Sarbanes-Oxley Act and the publishing of forward-looking statements, public confidence in corporate speech is advancing. Thanks to the various acts and the safe harbor established by PSLRA, it makes companies more comfortable to be open about their failures and successes. If corporations were worried about being sued every time they made a prediction, I can guarantee they would put forth the minimum amount of information required by law and that is it. The more information, analysis and opinions investors have, the more confidence they can have in their decisions and corporate speech. Therefore, the PSLRA has created a climate of more confidence in corporate speech.

Especially with the advent of the Internet, analyses of corporations’ forward-looking statements are widely available. If companies were afraid to publish them, there would be no analyses. Prudent investors should use all of the information made available to them to make their decisions and not rely on litigation to make up for poor investing.

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