There have been some major developments in federal and state securities law in the past year. One of the developments has been the Ninth Circuit’s interpretation of the Private Securities Litigation Reform Act (PSLRA) regarding the safe harbor clause for forward-looking statements in the case of Wochos v. Tesla, Inc.
An examination of the PSLRA and the purpose of the safe harbor statement will bring clarity to this controversial securities law subject.
What is the PSLRA?
In 1995, Congress passed the safe harbor provisions of the PSLRA that will allow companies to make forward-looking statements of success, even if the success doesn’t happen, as long as the statement includes cautionary language. The cautionary language should include important factors that could cause different results than what was forecasted in the statement. Those important factors can include,
- Factors affecting operations
- Increased competition
- Regulatory factors
- Economic conditions
- Changing market conditions
The words that should be included to indicate that it is a forward-looking statement are words like,
What is the purpose of providing safe harbor?
The purpose of the safe harbor is to protect companies, when making forward-looking statements, from litigation. It protects the company from frivolous lawsuits from anybody who may lose money on any security that was bought based on a forward-looking statement.
Another purpose of the safe harbor is to encourage the disclosure of potentially important investor information. If a safe harbor for these statements was not in place, this may deter companies from giving such information as,
- Financial projections
- Future plans and objectives
- Future economic performance
Wochos v. Tesla, Inc.
In this case, Gregory Wochos filed a class-action suit against Tesla, Elon Musk, and two other executives claiming that they’d made “materially false and misleading statements”. The issue was that Tesla and Musk promised that the company could manufacture 5000 Model 3 electric cars in a week. However, Tesla reported later in the year that they had only manufactured 260 Model 3s in the third quarter of the year due to production bottlenecks.
The Northern District of California court ruled against Wochos saying that the statement was cautious enough and that “federal securities laws do not punish companies for failing to achieve their targets”. Wochos filed an appeal with the 9th Circuit Court of Appeals, and in 2021, the appellate court agreed with the District court’s decision against Wochos.