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'Safe Harbor' Is Just That for Humana in Securities Class Action
The American Lawyer
June 25, 2009
With a few exceptions, the spring of 2009 wasn't a particularly happy time for securities class action plaintiffs. And a ruling on Tuesday that invokes the safe harbor provisions of the Private Securities Litigation Reform Act suggests the summer is off to an equally gloomy start.
On Tuesday, Kentucky federal district court Judge Joseph McKinley dismissed a class action against Humana Inc., ruling that the cautionary language included in Humana's earnings forecasts insulated it from liability when the company later issued restatements after discovering accounting problems. As Securities Docket noted in a post on Tuesday, the Humana ruling follows the June 9 dismissal of a securities fraud suit against Aetna Inc. In that case, Philadelphia federal district court Judge Thomas O'Neill found that Aetna's allegedly false statements were protected by its "meaningful cautionary" statements.
The two-pronged PSLRA's safe harbor provision absolves issuers of liability for omissions or misstatements in forward-looking statements if the statements are identified as forward-looking and are accompanied by "meaningful cautionary language." It also provides protection unless plaintiffs can prove that issuers knew that their forward-looking statements were false or misleading. In the past, says the 10b-5 Daily blog, judges have sometimes resisted dismissing cases purely on the basis of the first prong if there was evidence that the issuer knew its statements were or might be false.
The plaintiffs in the Humana case, represented by lead counsel Coughlin Stoia Geller Rudman & Robbins, argued that the company's cautionary statements were not sufficient to invoke the PSLRA's safe harbor protection because Humana knew that its accounting methods were suspect. But Judge McKinley, citing an earlier ruling, wrote in his opinion that "plaintiffs' allegation that the defendants had actual knowledge of the internal control problems 'does not save the claim because the existence of the meaningful cautionary statement renders the issuer's state of mind irrelevant.'"
Are the courts moving toward a more defense-friendly interpretation of the safe harbor provision? Humana's lead lawyer, William McGuinness of Fried, Frank, Harris, Shriver & Jacobson, told the Litigation Daily that he didn't want to make any sweeping statements about ongoing litigation, but he was clearly pleased with the decision."This appears to be part of a growing trend among the courts to analyze closely the quality of cautionary statements and then to give substantial credit to issuers who make meaningful cautionary statements with respect to forward-looking disclosures," he said.
Fried Frank's David Hennes also worked on the Humana case. Coughlin Stoia's David Rosenfeld did not return a call for comment.
This article first appeared on The Am Law Litigation Daily blog on AmericanLawyer.com.
