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In re Oracle Corp. Derivative Litigation11/24/2004
ss, the SEC, and the federal courts have continually sought to strike an appropriate balance regarding the appropriate disclosure policy towards forward-looking information such as projections. Wishing to encourage responsible forward-looking disclosure, Congress created a safe harbor for projections and other forward-looking statements in the Private Securities Litigation Reform Act of 1995. In general, that safe harbor insulates an issuer of securities for liability for a forward-looking statement if it: a) was accompanied by meaningful cautionary language, b) was immaterial, or c) was made without scienter. That is, the safe harbor represented a codification of concerns that motivated judicial recognition of the "bespeaks caution" doctrine, a doctrine that raised the bar for plaintiffs in securities cases premised on the failure of companies to perform in accordance with past predictions when those predictions had been accompanied by meaningful cautionary statements. Because, by their very nature, predictions of the future are less certain than statements about past events, courts have been less apt to find forward-looking statements material and have been more dubious of claims that it was reasonable for investors to rely upon such statements in making trading decisions. At the same time, neither statutory nor judge-made federal disclosure law has insulated defendants absolutely from any liability for making forward-looking statements to the market, recognizing that a blank-check of that kind could injure investors and promote less than optimally careful forward-looking disclosures.
This case, of course, involves a slightly, but importantly, different question than is presented when plaintiffs seek damages by alleging that a forward-looking statement was itself materially misleading. Here, the plaintiffs allege that Henley and Ellison injured Oracle, not by making the original Market Estimates, but by selling stock while they possessed information suggesting that Oracle would miss those Estimates. That is, this case falls into the category of cases that arise when companies or their insiders, having no general obligation to update their quarterly estimates, engage in market activity that invokes the so-called "disclose or abstain" rule requiring companies and their insiders to either disclose new information or to abstain from market transactions in the companies' shares.
A well-reasoned decision addressing a case of that kind is Shaw v. Digital Equipment Co., which was issued by the United States Court of Appeals for the First Circuit. In Shaw, the plaintiffs had bought preferred shares of Digital Equipment Corp. or "DEC" during a mid-quarter offering. In their complaint, the plaintiffs alleged that "DEC had in its possession as of the March 21 offering date nonpublic information concerning the company's ongoing quarter-to-date performance, indicating that the company would suffer unexpectedly large losses for that quarter." Despite allegedly possessing that information, DEC "failed, in connection with the March public offering, to disclose [these] material factual developments foreboding disastrous quarter-end results." Notably, the prospectus for the offering was filed only 11 days before the end of the quarter that ended so poorly.
In addressing the plaintiffs' appeal of the dismissal of their claim under Section 11 of the Securities Act of 1933 - which imposes liability when a registration statement, among other things, omits material facts - the Court of Appeals found it "helpful to conceptualize DEC (the corporate issuer) as an individual insider transacting in the company's securities, and to examine the disclosure obligations that would then arise." A central purpose of the
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