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I think most securities lawyers are a little paranoid when it comes to their public company clients’ interactions with securities analysts.  After all, the 2nd Cir. famously compared these interactions to “a fencing match conducted on a tightrope” in SEC v. Bausch & Lomb, (2d. Cir. 9/77), and we’ve become accustomed to advising clients of the parade of horribles that can result when a discussion with securities analysts goes awry. However, a recent 4th Cir. decision provides a refreshing reminder that a company isn’t always on the hook for the spin that analysts put on its management’s remarks to them.

Boykin v. K12 Inc., (4th Cir. 11/22), arose out of statements made by a public company’s CEO concerning a potentially lucrative business relationship with the Miami-Dade School District. These comments were characterized by analysts as the CEO essentially confirming the existence of a “signed contract” between the parties. The potential deal subsequently unraveled, and the plaintiffs sued the company alleging that its CEO had made material misstatements about the status of the business deal.  The Court disagreed, and this excerpt from the 10b-5 Daily’s blog on the decision explains the court’s reasoning:

On appeal from the district court’s dismissal of the complaint, the Fourth Circuit found that the company’s statements about the Miami-Dade deal “could well have factored into the run-up of K12 shares during the summer of 2020.” As to the falsity of the statements and the defendants’ scienter (i.e., fraudulent intent), however, the court was less convinced.

First, the falsity element is based on a reasonable investor’s view of the company’s statements, “not any individual investor’s reaction.” If the analysts believed that the CEO had confirmed the existence of a done deal, they were simply incorrect given that the CEO never “attested unambiguously to having a signed agreement.” And to the extent that the CEO “was gesturing to an extensive working relationship between K12 and Miami-Dade,” that was factually accurate at the time. Indeed, Miami-Dade’s superintendent even signed the completed contract in mid-August, but it was never returned to K12.

The Court also concluded that the plaintiffs’ failed to adequately allege scienter, noting both that the timeline was consistent with the CEO’s “anticipation in mid-August of a consummated deal with Miami-Dade” and that if the CEO’s goal had been to inflate K12’s stock price, “he could have chosen far less ambiguous language than he did.”

While this case’s result is somewhat reassuring, I suppose it’s still a bit of a cautionary tale about the risks of letting analysts’ mischaracterizations of management comments go unaddressed.  After all, the company only got to this outcome after a couple of years of litigation involving a not insignificant amount of expense and distraction.

– John Jenkins