TheCorporateCounsel.net

I hate to add to the things that keep you up at night, but so it goes. In a recent post on The10b-5 Daily, Lyle Roberts recently warned us of the risk inherent in using a common phrase when describing pending legal matters — “without merit.”  In City of Fort Lauderdale Police and Firefighters’ Retirement Sys. v. Pegasystems, Inc. (D. Mass. 7/23), Pegasystems used this phrase in its public disclosure to describe a claim that it willfully misappropriated trade secrets. When the company was ultimately required to pay $2 billion in connection with the litigation, the stock price dropped and a shareholder filed a securities class action lawsuit. The district court denied the motion to dismiss as to two of the defendants.

As to the opinion that the trade secrets litigation was “without merit,” the court found that the statement did not “fairly align” with the CEO’s “awareness of, involvement in, and direction of Pega’s espionage campaign.”  Moreover, “a reasonable investor could justifiably have understood [the CEO’s] message that [the] claims were ‘without merit’ as a denial of the facts underlying [the] claims – as opposed to a mere statement that Pega had legal defenses against those claims.”

Over on the D&O Diary, Kevin LaCroix added more color on the case. Here’s an excerpt from his blog regarding disclosure alternatives to saying “without merit” when it may not be appropriate to use that phrase:

This conclusion does not mean, as Judge Young put it, that companies must “confess to wrongdoing.” Companies may, Judge Young said, “legitimately oppose a claim against it.” Companies may state, without being misleading, that they intend to “oppose” the allegations. Companies may also say, for example, that the company believes it has “substantial defenses” against a claim if it reasonably believes that to be true. An issuer may not, Judge Young said, make misleading substantive declarations regarding its beliefes about the merits of the litigation.

– Meredith Ervine