TheCorporateCounsel.net

Over on The10b-5 Daily, Lyle Roberts recently blogged about the Third Circuit’s decision in City of Warren Police & Fire v. Prudential Financial, (3rd. Cir.; 6/23). One aspect of the Court’s opinion addressed whether the defendants could be liable for comments of its CEO that were paraphrased in an analyst’s report. This excerpt discusses the Court’s analysis:

In its Janus decision, the Supreme Court held that for a person or entity to have “made” a false statement that can lead to Rule 10b-5 liability, that person or entity must have “ultimate authority over the statement, including its content and whether and how to communicate it.” The attribution of a statement “is strong evidence that a statement was made by – and only by – the party to whom it is attributed.” But how does this analytical framework apply to a paraphrased statement from a corporate officer contained in an analyst report?

The Third Circuit held, contrary to the district court’s decision, that the corporate officer could still be deemed a “maker” of the statement. Even though the statement was indirect (paraphrased) and contained in a non-corporate document (analyst report), the court found that “because the report attributed the statement to the [corporate officer] and the context of the statement indicates that he exercised control over its content and the decision to communicate it to the [analyst], the statement cannot, at least at the pleading stage, be considered to have been ‘made’ by [the analyst] for purposes of Rule 10b-5.” In other words, the corporate officer had “ultimate authority” to speak about the topic on behalf of the company, so he was still the “maker” of the statement even though it was republished by the analyst.

This decision illustrates the fine distinctions that courts sometimes draw in these cases. The Third Circuit held that a company could be liable for its CEO’s “paraphrased” statements in an analyst report, while in another recent decision the Fourth Circuit declined to impose liability on a company for the way that an analyst “characterized” a CEO’s comments. I’m not exactly sure what the distinction is between characterizing and paraphrasing, but it looks like it might matter.

To be fair, the two decisions aren’t necessarily inconsistent – the Fourth Circuit focused on the “falsity” of the CEO’s statements while the Third Circuit focused on whether the CEO could be regarded as the “maker” of the challenged statements – but they do show the kind of thicket companies and executives confront when dealing with cases alleging that a company is responsible for information in analyst’s reports.

– John Jenkins