08-5442-cv
Andrew Slayton v. American Express
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
_______________
August Term, 2009
(Argued: October 19, 2009 Decided: May 18, 2010)
Docket No. 08-5442-cv
_______________
ANDREW KEITH SLAYTON , on behalf of himself and all others similarly situated, GLICKENHAUS
& COMPANY , ADAM CRAIG SLAYTON , on behalf of himself and all others similarly situated,
ADAM CRAIG ,
Plaintiffs-Appellants,
ATLAS EQUITIES, LORETTO ARZU , CHARLES HOVANESIAN , SAM WIETSXHNER , SHIRAZ SIDI,
WILLIAM M. PALESE , SCOTT BARRENTINE , YVETTE YEIDMAN , MALKA RUBIN , JULIE DROSS,
BROWN FAMILY TRUST,
Consolidated-Plaintiffs,
—v.—
AMERICAN EXPRESS COMPANY , KENNETH CHENAULT, HARVEY GOLUB , DAVID R. HUBERS,
JAMES M. CRACCHIOLO ,
Defendants-Appellees.*
_______________
Before:
CALABRESI and KATZMANN , Circuit Judges.**
*
The Clerk of the Court is directed to amend the caption as set forth above.
**
Judge Jon O. Newman, originally a member of the panel, recused himself from
consideration of this matter after oral argument took place and did not participate in this
decision. This appeal is being decided by the remaining members of the panel, who are in
agreement. See 2d Cir. R. 0.14.
_______________
Appeal from a judgment of the United States District Court for the Southern District of
New York (William H. Pauley, Judge) entered October 9, 2008, dismissing the plaintiffs’ second
amended complaint. In the second amended complaint, the plaintiffs alleged violations of
sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. On
appeal, they limit their case to one allegedly misleading statement made in the defendants’ May
15, 2001 quarterly report. We hold that the alleged misleading statement is a forward-looking
statement that is protected by the safe harbor of the Private Securities Litigation Reform Act.
We accordingly affirm the judgment of the district court.
_______________
KENT A. BRONSON (Sanford P. Dumain, Arthur R. Miller, of counsel),
Milberg LLP, New York, NY; Christopher Lovell and Imtiaz A. Siddiqui,
Lovell Stewart Halebian LLP, New York, NY; Law Offices of Lawrence
G. Soicher, New York, NY, for Plaintiffs-Appellants.
ROBERT E. ZIMET (Susan Saltzstein, Christopher P. Malloy, William F.
Clarke, Jr., Irene M. Ten Cate, Daniel M. Gonen, of counsel), Skadden,
Arps, Slate, Meagher & Flom LLP, New York, NY, for Defendants-
Appellees.
MICHAEL A. CONLEY , Deputy Solicitor (Mark D. Cahn, Deputy General
Counsel, Jacob H. Stillman, Solicitor, Dominick V. Freda, Senior
Counsel, of counsel), Securities and Exchange Commission, Washington,
DC, for amicus curiae Securities and Exchange Commission.
_______________
KATZMANN , Circuit Judge:
This case requires us to decide whether an allegedly misleading statement made in one of
defendant American Express’s regulatory disclosure documents is protected by the safe harbor
provision of the Private Securities Litigation Reform Act (“PSLRA”). In the course of our
2
analysis, we interpret Congress’s provision that a defendant shall not be liable for a forward-
looking statement if it is “identified as a forward-looking statement, and . . . accompanied by
meaningful cautionary statements identifying important factors that could cause actual results to
differ materially from those in the forward-looking statement,” or if “the plaintiff fails to prove
that the forward-looking statement . . . was . . . made or approved by [an executive] officer with
actual knowledge by that officer that the statement was false or misleading.” 15 U.S.C. § 78u-
5(c).
The plaintiffs appeal from the October 9, 2008 judgment of the United States District
Court for the Southern District of New York (Pauley, J.) dismissing their Second Amended
Complaint. We determine that the defendants are not entitled to safe harbor protection under the
meaningful cautionary language prong of the safe harbor at this stage of the litigation because
their cautionary language is vague. We conclude, however, that the defendants’ allegedly
misleading statement is protected by the actual knowledge prong of the safe harbor because the
plaintiffs did not plead facts demonstrating that the statement was made “with actual knowledge .
. . that the statement was false or misleading,” id. Accordingly, we affirm the judgment of the
district court.
I
The plaintiffs are investors who purchased American Express stock between July 26,
1999 and July 17, 2001.1 The defendants are American Express Company (“American Express”
1
Because the plaintiffs have narrowed their claim on appeal, they state that if this case
were remanded, they would seek a class period of May 15, 2001 through July 18, 2001.
3
or the “Company”); Harvey Golub, Chairman and CEO of American Express until late 2000;
Kenneth Chenault, President, COO and successor to Golub as Chairman and CEO at the
Company; David Hubers, President and Chief Executive of Company subsidiary American
Express Financial Advisors (“AEFA”); and James M. Cracchiolo, Chairman and CEO of AEFA.
According to the plaintiffs’ Second Amended Complaint (“SAC”), starting in the 1990s,
American Express began an over-investment in high-yield debt securities. These investments
included junk bonds and collateralized debt obligations (“CDOs”). While peer companies
limited high-yield debt investments to seven percent of their portfolios, ten to twelve percent of
AEFA’s portfolio was made up of these investments. Ultimately, this overinvestment resulted in
American Express losing hundreds of millions of dollars in 2000 and 2001.
This appeal regards a statement that American Express made in a quarterly report filed
with the Securities and Exchange Commission (“SEC”) in May 2001. In that filing, the
Company stated, in essence, that while it had lost $182 million from its high-yield debt
investments in the first quarter of 2001, it expected further losses from those investments to be
substantially lower for the remainder of 2001. The plaintiffs allege that the defendants violated
the Securities Exchange Act of 1934 when they made this statement because at the time they
made it, the defendants knew it was misleading.
The source of the plaintiffs’ allegations is a Wall Street Journal Asia article that the
plaintiffs attached to their SAC, and the following account is taken from that article.2 In early
2
On a motion to dismiss, we may consider “statements or documents incorporated into
the complaint by reference, legally required public disclosure documents filed with the SEC, and
documents possessed by or known to the plaintiff and upon which it relied in bringing the suit.”
ATSI Comm’ns. Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007).
4
2001, after the Company reported losses of $123 million in 2000 from its high-yield debt
investments, Chenault belatedly ordered a “very hard look” at the Company’s high-yield debt
portfolio. By late February 2001, defendant Chenault and Gary Crittenden, then American
Express’s CFO, received an e-mail from AEFA CFO Stuart Sedlacek that “set a huge alarm
ringing” concerning the rapid deterioration of AEFA’s high-yield debt portfolio. Joint Appendix
(“J.A.”) at 1671. On April 2, 2001, the Company announced an additional $182 million in first
quarter 2001 high-yield write-downs. “The Company was quick to add, though, that the worst of
the problem was behind it and that no further surprises were expected.” Id. A press release
stated that “[t]otal losses on these investments for the remainder of 2001 are expected to be
substantially lower than in the first quarter.” J.A. at 142-43.
According to the article, in early May 2001, Cracchiolo received a fax from Sedlacek
“advising him that American Express was facing additional losses on its high-yield debt
investments beyond those already booked.” J.A. at 1671. Chenault was advised of the situation
the next day, during a visit to AEFA’s Minneapolis headquarters. There, he was told that the
deterioration of the high-yield debt portfolio was so bad that “even the investment-grade CDOs
held by American Express showed potential deterioration” because defaults on the underlying
bonds had risen so sharply. Id. Chenault asked, “What are we talking about here?” Id.
Cracchiolo replied, “We really don’t know enough to even give you a range.” Id. “Didn’t we
look at this in the first quarter?” Chenault queried, “What happened?” Id. Hoping to find an
answer, American Express brought in Walter Berman, a former American Express treasurer who
had rejoined the firm at the start of that year. “He and David Yowan, the Company’s senior vice
president of risk management in New York, began crunching numbers.” Id.
5
In the meantime, on May 15, 2001, American Express filed its quarterly report (Form
10-Q) for the first quarter of 2001. In it, the Company reported the $182 million in first quarter
losses from AEFA’s high-yield debt portfolio. The Company explained, “[t]he high yield losses
reflect the continued deterioration of the high-yield portfolio and losses associated with selling
certain bonds.” J.A. at 1616. Importantly, it added that “[t]otal losses on these investments for
the remainder of 2001 are expected to be substantially lower than in the first quarter.” Id.
According to the SAC, American Express made this statement (“the May 15 statement”) despite
the fact that “Defendant[] Chenault . . . had been expressly informed in early May 2001 that the
$182 million first quarter write-down did not reflect the true magnitude of the deterioration of
AEFA’s high-yield debt portfolio.” J.A. at 224. The plaintiffs allege that the “[d]efendants were
aware that they had no reasonable basis upon which to continue to make this representation.”
J.A. at 220.
The Form 10-Q also contained a caution. Several pages after the statement that losses for
the remainder of 2001 were expected to be substantially lower, the Form 10-Q warned that it
“contain[ed] forward-looking statements, which are subject to risks and uncertainties.” It added
that “[f]actors that could cause actual results to differ materially from these forward-looking
statements include . . . potential deterioration in the high-yield sector, which could result in
further losses in AEFA’s investment portfolio.” J.A. at 1624.
The Wall Street Journal Asia article reported that in early July 2001, Berman and Yowan
completed their review of AEFA’s high-yield debt portfolio. American Express had previously
relied in large part “on the reports generated by outside CDO managers to evaluate the health
and performance of the investment-grade [CDOs],” and it was not until Berman and Yowan’s
6
review that “the company began to draw its own conclusions about all [of the] bonds that
underpinned the securities.” J.A. at 1671-72. When Chenault sat down in the conference room
to hear the results, he had no idea what to expect and hoped that the situation would be
manageable. He was “stunned” by Berman and Yowan’s estimate of $400 million in losses, and
“began firing questions at his team.” J.A. at 1672. The $400 million figure resulted from the
fact that “[i]nstead of adopting the optimistic view . . . that defaults already were peaking, the
company decided to use the current default rate of 8% to 9%, and assumed it would stay constant
for the next 18 months”—a very conservative assumption. J.A. at 1672.
On July 18, 2001, American Express issued a press release announcing that it would be
taking an $826 million loss due to “additional write-downs in the high-yield debt portfolio at
[AEFA] and losses associated with rebalancing the portfolio towards lower-risk securities.” J.A.
at 225. This amount included the $403 million loss related to the investment-grade CDOs
reported by Berman and Yowan, as well as other losses from planned sales of high-yield bonds
and lower-grade CDOs.
On July 17, 2002, the plaintiffs filed this action, bringing claims under sections 10(b) and
20(a) of the Securities Exchange Act of 1934. The defendants moved to dismiss the complaint.
The district court granted the motion on March 31, 2004, holding that two of the plaintiffs’
claims were time-barred and the remaining claims failed to state a claim upon which relief could
be granted. In re Am. Express Co. Secs. Litig., No. 02 Civ. 5533, 2004 WL 632750 (S.D.N.Y.
2004). We vacated the decision, holding that the claims were not time-barred, and remanded for
further consideration by the district court, expressing no view on the merits of any of the claims.
See Slayton v. Am. Express Co., 460 F.3d 215, 230-31 (2d Cir. 2006).
7
On January 11, 2007, the plaintiffs filed the SAC, alleging, among other things, that
when the defendants made the May 15 statement that losses for the remainder of 2001 were
expected to be substantially lower, they knew that they had no reasonable basis upon which to
make it. The defendants again moved to dismiss, and the district court granted the motion by
memorandum and order dated September 26, 2008. In re Am. Express Co. Secs. Litig., No. 02
Civ. 5533, 2008 WL 4501928 (S.D.N.Y. September 26, 2008). With regard to the May 15
statement at issue in this appeal, the district court found that:
The information [Cracchiolo] and Chenault received in May 2001 could support
an inference of scienter because it suggests that they had access to information
indicating that the May 15, 2001 statement was no longer accurate. However, in
light of the fact that Defendants immediately put together a team to analyze all of
AEFA’s High Yield Debt and then announced the results of the analysis in July
2001, the more compelling inference is that Defendants were not acting with an
intent to deceive, but rather attempting to quantify the extent of the problem
before disclosing it to the market.
Id. at *8. The district court therefore held that the plaintiffs failed to state a claim with respect to
the May 15 statement. The plaintiffs appeal only this part of the district court’s
decision—contending that the defendants’ May 15 statement that “[t]otal losses on these
investments for the remainder of 2001 are expected to be substantially lower than in the first
quarter [of 2001]” violated the Securities Exchange Act.
II
The plaintiffs bring their claims under sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, 15 U.S.C. § 78a et seq. Section 10(b) makes it unlawful to “use or
employ, in connection with the purchase or sale of any security . . . any manipulative or
deceptive device or contrivance in contravention of such rules and regulations as the
Commission may prescribe.” 15 U.S.C. § 78j(b). SEC Rule 10b-5 states that it “shall be
8
unlawful for any person . . . [t]o make any untrue statement of a material fact or to omit to state
a material fact necessary in order to make the statements made, in the light of the circumstances
under which they were made, not misleading.” 17 C.F.R. § 240.10b-5(b). Under the law of this
Circuit, to state a claim under Rule 10b-5, a plaintiff must allege that, in connection with the
purchase or sale of securities, the defendant made material misstatements or omissions of
material fact, with scienter, and that the plaintiff’s reliance on the defendant’s actions caused
injury to the plaintiff. Ganino v. Citizens Utils. Co., 228 F.3d 154, 161 (2d Cir. 2000). Section
20(a) of the Act establishes joint and several liability subject to a good faith exception for every
person who, directly or indirectly, controls any person liable under any provision of the Act. 15
U.S.C. § 78t(a).
The Securities Exchange Act of 1934 was amended by the PSLRA in 1995. Pub. L. No.
104-67, 109 Stat. 737 (Dec. 22, 1995). The PSLRA established a statutory safe-harbor for
forward-looking statements. With certain exceptions discussed further below, where a “private
action . . . is based on an untrue statement of a material fact or omission of a material fact
necessary to make the statement not misleading,” a defendant “shall not be liable with respect to
any forward-looking statement . . . if and to the extent that—
(A) the forward-looking statement is—
(i) identified as a forward-looking statement, and is accompanied by
meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those in the forward-looking
statement; or
(ii) immaterial; or
(B) the plaintiff fails to prove that the forward-looking statement— . . .
(ii) if made by a business entity; was—
(I) made by or with the approval of an executive officer of that
entity; and
9
(II) made or approved by such officer with actual knowledge by
that officer that the statement was false or misleading.
15 U.S.C. § 78u-5(c). The safe harbor is written in the disjunctive; that is, a defendant is not
liable if the forward-looking statement is identified and accompanied by meaningful cautionary
language or is immaterial or the plaintiff fails to prove that it was made with actual knowledge
that it was false or misleading. See Southland Secs. Corp. v. INSpire Ins. Solutions, Inc., 365
F.3d 353, 371-72 (5th Cir. 2004).
III
We review a district court’s ruling on a motion to dismiss a complaint pursuant to
Federal Rule of Civil Procedure 12(b)(6) de novo. Teamsters Local 445 Freight Div. Pension
Fund v. Dynex Capital Inc., 531 F.3d 190, 194 (2d Cir. 2008). In considering a motion to
dismiss a 10(b) action, we must accept all factual allegations in the complaint as true and must
consider the complaint in its entirety. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308,
322 (2007). A complaint alleging securities fraud must satisfy the heightened pleading
requirements of the PSLRA and Federal Rule of Civil Procedure 9(b) by stating with
particularity the circumstances constituting fraud. See 15 U.S.C. § 78u-4(b)(1); see also ECA
&Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 196
(2d Cir. 2009). Under the PSLRA, where proof of scienter is a required element, as it is in the
actual knowledge prong of the statutory safe harbor, a complaint must “state with particularity
facts giving rise to a strong inference that the defendant acted with the required state of mind.”
15 U.S.C. § 78u-4(b)(2).
10
Under this heightened pleading standard for scienter, a “complaint will survive . . . only
if a reasonable person would deem the inference of scienter cogent and at least as compelling as
any opposing inference one could draw from the facts alleged.” Tellabs, Inc., 551 U.S. at 324.
In determining whether a strong inference exists, the allegations are not to be reviewed
independently or in isolation, but the facts alleged must be “taken collectively.” Id. at 323. The
“strong inference” standard is met when the inference of fraud is at least as likely as any
non-culpable explanations offered. Id. at 324.
The parties dispute whether the statutory safe harbor applies in this case. The defendants
assert that they are entitled to safe harbor protection because the May 15 statement was a
forward-looking statement that was accompanied by meaningful cautionary language and
because the plaintiffs have not alleged facts supporting a strong inference that the defendants
actually knew that the May 15 statement was misleading.3 The plaintiffs respond that the May
15 statement is statutorily excluded from the safe harbor, and that even if it is not, the statutory
safe harbor does not protect it. We first address whether the May 15 statement is statutorily
excluded from the safe harbor, and after concluding that it is not, we turn to whether it is
protected under either the meaningful cautionary language or the actual knowledge prong of the
safe harbor.
As an initial matter, we conclude that the statement at issue in this case is a forward-
looking statement as defined by the PSLRA. The PSLRA includes several definitions of a
forward-looking statement, including “a statement containing a projection of . . . income
3
The defendants do not assert that the May 15 statement is entitled to safe harbor
protection because it is immaterial.
11
(including income loss), earnings (including earnings loss) per share, . . . or other financial
items” and “a statement of future economic performance, including any such statement contained
in a discussion and analysis of financial condition by the management . . . .” 15 U.S.C. § 78u-
5(i)(1)(A) & (C). The defendants’ statement, that “[t]otal losses on these investments for the
remainder of 2001 are expected to be substantially lower than in the first quarter,” in the
Managers’ Discussion and Analysis (“MD&A”) portion of its Form 10-Q, fits comfortably
within both of these definitions.
A. The May 15 Statement Was Not Included in a Financial Statement and Therefore Is
Not Statutorily Excluded From the Safe Harbor.
The parties first dispute whether the May 15 statement is excluded from the statutory safe
harbor, which excludes forward-looking statements “included in a financial statement prepared
in accordance with generally accepted accounting principles [“GAAP”].” 15 U.S.C. § 78u-
5(b)(2)(A). The statement at issue here was contained in American Express’s May 15, 2001
Form 10-Q filed with the SEC. The Form 10-Q contained several parts, including “Consolidated
Statements of Income,” “Consolidated Balance Sheets,” “Consolidated Statements of Cash
Flows,” “Notes to Consolidated Financial Statements,” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations [“MD&A”].” J.A. at 1569-1607.
The statement was included in the MD&A part in a subsection titled “American Express
Financial Advisors.” Id. at 1616.
We conclude that the May 15 statement, contained in the MD&A, was not included in a
financial statement prepared in accordance with GAAP. That Congress understood financial
statements and MD&As to be distinct is apparent from the text of the PSLRA. Congress
explicitly included “a statement of future economic performance . . . contained in a discussion
12
and analysis of financial condition by the management” in its definition of a forward-looking
statement, 15 U.S.C. § 78u-5(i)(1)(C), and then excluded “a forward-looking statement . . . that
is . . . included in a financial statement prepared in accordance with [GAAP].” Id. § 78u-
5(b)(2)(A). The plaintiffs assert that the exclusion logically highlights the reasonable
expectation that representations made in SEC filings will be more closely scrutinized and more
heavily relied upon by investors, and that it would be irrational to allow issuers to gain safe
harbor protection merely by placing a statement in the MD&A portion of a filing. But the
legislative history of this provision makes plain that a statement may receive safe harbor
protection even where it is in an MD&A that is part of a required disclosure to the SEC. See
H.R. Conf. Rep. 104-369, at 45-46 (1995), as reprinted in 1995 U.S.C.C.A.N. 730, 744-45
(hereinafter “Conference Report”) (including in the definition of a forward-looking statement
“certain statements made in SEC required disclosures, including management’s discussion and
analysis”). Moreover, drawing a distinction between the financial statement portion of the Form
10-Q and the MD&A section is not irrational, as the plaintiffs suggest. While the financial
statement lays out the firm’s income, balance sheets and cash flows, the purpose of the MD&A
is to present the company’s business “as seen through the eyes of those who manage [it].”
Commission Guidance Regarding Management’s Discussion and Analysis of Financial
Condition and Results of Operations, 68 Fed. Reg. 75,056, 75,056 (Dec. 29, 2003).
Our conclusion finds support in the SEC’s different treatment of financial statements and
MD&A sections. SEC Regulation S-X sets forth “the form and content of and requirements for
financial statements,” 17 C.F.R. § 210.1-01, and requires interim financial statements in Form
10-Qs to include interim balance sheets, statements of income, and statements of cash flow, see
13
id. § 210.10-01. SEC Regulation S-K sets forth “the requirements applicable to the content of
the non-financial statement portions” of certain filings, including MD&As. Id. § 229.10
(emphasis added). That regulation requires the MD&A section of a Form 10-Q to “[d]iscuss
registrant’s financial condition, changes in financial condition and results of operations.” Id. §
229.303. These regulations suggest that the SEC views the financial statement and the MD&A
as wholly different; there is no suggestion that the MD&A is viewed as a subset of a financial
statement. This view also draws support from the Form 10-Q itself, which lists “Financial
Statements” and “Management’s Discussion and Analysis of Financial Condition and Results
and Operations” as separate required items, see SEC Form 10-Q, available at
http://www.sec.gov/about/forms/form10-q.pdf, belying an assertion that the MD&A is “included
in [the] financial statement,” and so excluded from the safe harbor, see 15 U.S.C. §
78u-5(b)(2)(A).4
Accordingly, we conclude that forward-looking statements contained in a separate
MD&A discussion in a Form 10-Q, such as the May 15 statement at issue here, are not excluded
from the statutory safe harbor under 15 U.S.C. § 78u-5(b)(2)(A). We next turn to whether the
4
Our conclusion is also in line with both the SEC’s argument in its amicus curiae brief
in this case and its stated view that “[w]hile the statutory safe harbors by their terms do not apply
to forward-looking statements included in financial statements prepared in accordance with U.S.
GAAP, they do cover MD&A disclosures.” Disclosure in Management’s Discussion and
Analysis About Off-Balance Sheet Arrangements and Aggregate Contractual Obligations, 68
Fed. Reg. 5,982, 5,993 n.146 (Feb. 5, 2003). This statement was contained in the preamble to a
2003 rule promulgated in response to the Sarbanes-Oxley Act, which included an identical safe
harbor provision for the disclosure of forward-looking information required by that Act. 68 Fed.
Reg. at 5,992-93. The defendants urge us to defer to the SEC’s view pursuant to Chevron
U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), as this view has been
articulated by the SEC in a formal release—the preamble to the 2003 rule. However, we need
not determine whether the SEC’s view should be granted Chevron deference, because we would
reach the same conclusion regardless of whether we afforded deference.
14
May 15 statement is protected under either the meaningful cautionary language prong or actual
knowledge prong of the safe harbor.
B. The May 15 Statement Was Not Accompanied by Meaningful Cautionary Language.
Under the PSLRA, the defendants are not liable if the allegedly false or misleading
statement is “identified as a forward-looking statement, and is accompanied by meaningful
cautionary statements identifying important factors that could cause actual results to differ
materially from those in the forward-looking statement . . . .” 15 U.S.C. § 78u-5(c)(1)(A)(i).
The parties dispute both whether the May 15 statement was adequately identified as a forward-
looking statement and whether it was accompanied by meaningful cautionary language.
The May 15 statement indicated that following AEFA’s first quarter loss of $182 million,
“[t]otal losses on [AEFA’s high-yield] investments for the remainder of 2001 are expected to be
substantially lower than in the first quarter.” J.A. at 1616. Several pages later, the Form 10-Q
warned that it “contain[ed] forward-looking statements, which are subject to risks and
uncertainties.” J.A. at 1624. The Company wrote, “[t]he words ‘believe’, ‘expect’, ‘anticipate’,
‘optimistic’, ‘intend’, ‘aim’, ‘will’, ‘should’ and similar expressions are intended to identify such
forward-looking statements.” Id. It added that “[f]actors that could cause actual results to differ
materially from these forward-looking statements include . . . potential deterioration in the high-
yield sector, which could result in further losses in AEFA’s investment portfolio.” Id.
The plaintiffs first contend that the defendants failed to adequately identify the May 15
statement as forward-looking. They argue that in order to be adequately identified as forward-
looking, forward-looking statements must either be included in a discrete section clearly marked
“Forward-Looking Statements” or specifically labeled as “forward-looking.” The SEC
15
disagrees, asserting that the facts and circumstances of the language used in a particular report
will determine whether a statement is adequately identified. It opines that “[t]he use of linguistic
cues like ‘we expect’ or ‘we believe,’ when combined with an explanatory description of the
company’s intention to thereby designate a statement as forward-looking, generally should be
sufficient to put the reader on notice that the company is making a forward-looking statement.”
The defendants join the SEC’s argument on this point. We agree with the SEC.
Nothing in the statute indicates that to be adequately identified, a forward-looking
statement must be contained in a separate section or specifically labeled, and we decline to write
in such a requirement. We agree with the SEC that the facts and circumstances of the language
used in a particular report will determine whether a statement is adequately identified as
forward-looking. The May 15 statement is plainly forward-looking—it projects results in the
future. It is also accompanied by a statement of the common-sense proposition that words such
as “expect” identify forward-looking statements. See Harris v. Ivax Corp., 182 F.3d 799, 804-
806 (11th Cir. 1999) (holding that the statement “we expect reserves for returns and inventory
writeoffs to be well above typical quarters,” was a forward-looking statement protected by the
cautionary language prong of the statutory safe harbor). Under these circumstances, we
conclude that the May 15 statement was adequately “identified as a forward-looking statement.”
See 15 U.S.C. § 78u-5(c)(1)(A)(i).
To be protected under the first prong of the safe harbor, however, a forward-looking
statement must be both identified as such and “accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to differ materially from
those in the forward-looking statement . . . .” Id. The SEC asserts that the May 15 statement
16
was not accompanied by meaningful cautionary language because the cautionary language itself
was misleading in light of historical fact. By historical fact, the SEC means the facts that were
established at the time the statement was made. Looking to the facts alleged by the plaintiffs, the
SEC concludes that at the same time the defendants warned of potential deterioration in the
high-yield sector, they knew of actual deterioration in that sector. The plaintiffs agree, and
further point out that despite the additional knowledge gained by the defendants in early May
2001, the cautionary language contained in the May 15, 2001 Form 10-Q did not differ from the
cautionary language the Company had used from at least January 2001 onwards.
The defendants respond that while they agree that misleading cautionary language is not
meaningful, their cautionary language was not misleading. The defendants contend that the
plaintiffs have not pleaded with the necessary particularity facts giving rise to a strong inference
that they knew that the high-yield market would deteriorate further in the second quarter of 2001.
Instead, pointing to the Wall Street Journal Asia article’s statements that “more losses could still
be lurking,” and that the “investment grade CDOs . . . showed potential deterioration,” the
defendants contend that the plaintiffs have only shown that the defendants were aware of
potential deterioration—the precise risk of which they cautioned.
We agree with the SEC and the parties that cautionary language that is misleading in
light of historical fact cannot be meaningful,5 but we do not think that proposition applies in this
5
Such a proposition is supported by our case law. In applying the judicially-created
bespeaks caution doctrine, on which the cautionary language prong of the PSLRA is based in
part, see Conference Report at 43, 1995 U.S.C.C.A.N. at 742, we have held that cautionary
language that is misleading in light of historical fact cannot be meaningful. See Rombach v.
Chang, 355 F.3d 164, 173 (2d Cir. 2004) (holding that “[c]autionary words about future risk
cannot insulate from liability the failure to disclose that the risk has transpired”). It is also
supported by the Conference Committee’s report. See Conference Report at 44, 1995
17
case. As the defendants correctly assert, the facts alleged by the plaintiffs and supported by the
Wall Street Journal Asia article do not demonstrate that the defendants misstated a historical
fact—that the risk of which they warned, deterioration in the high-yield market that could cause
further losses in AEFA’s portfolio beyond those projected, had already transpired. Instead they
demonstrate that the defendants knew that AEFA’s portfolio would very likely deteriorate due to
rising defaults on the bonds underlying the investment-grade CDOs, a future projection that was
not a historical fact.6
Instead, we think this case presents a different challenge. What strikes us as the problem
here is not that the defendants misstated a historical fact, but that they knew of the major and
specific risk that rising defaults on the bonds underlying AEFA’s investment-grade CDOs would
cause deterioration in AEFA’s portfolio at the time of the May 15 statement, and yet did not
warn of it. By directing us not to inquire into a defendants’ state of mind, however, Congress
may have foreclosed any inquiry into this problem.
The safe harbor protects forward-looking statements that are “accompanied by
meaningful cautionary statements identifying important factors that could cause actual results to
differ materially from those in the forward-looking statement.” 15 U.S.C. § 78u-5(c)(1)(A)(i).
U.S.C.C.A.N. at 743.
6
This case is quite different from the level of certainty that has been present in cases in
which courts have concluded that a cautionary statement misstated historical fact. See Lormand,
565 F.3d at 247 (“These warnings did not disclose that the defendants knew from past
experience that the sub-prime subscriber programs and US Unwired’s loss of control of customer
care, billings and service posed an imminent threat of business and financial ruin and that some
damage from these risks had already materialized.”); Dolphin & Bradbury, Inc. v. SEC, 512 F.3d
634, 640 (D.C. Cir. 2008) (“Bradbury’s cautionary language only disclosed a risk that tenants
might leave Forum Place—not his knowledge that PennDOT actually planned to do so in the
near future.”).
18
The question we face here is what Congress meant by “important.” The statute itself does not
define the term, and we find it ambiguous. Thus, while our analysis begins with the statutory
text itself, where we find ambiguity we may delve into other sources, including the legislative
history, to discern Congress’s meaning. SEC v. Dorozhko, 574 F.3d 42, 46 (2d Cir. 2009). The
conference report “is generally the most reliable evidence in legislative history of congressional
intent because it represents the final statement of the terms agreed to by both houses.” Auburn
Hous. Auth. v. Martinez, 277 F.3d 138, 147 (2d Cir. 2002).
The Conference Report accompanying the PSLRA explains that “[u]nder this first prong
of the safe harbor, boilerplate warnings will not suffice . . . . The cautionary statements must
convey substantive information about factors that realistically could cause results to differ
materially from those projected in the forward-looking statement, such as, for example,
information about the issuer’s business.” Conference Report at 43, 1995 U.S.C.C.A.N. at 742.
While the Conference Committee expected that “cautionary statements identify important factors
that could cause results to differ materially,” it did not expect them to identify all factors. Id. at
44, 1995 U.S.C.C.A.N. at 743. Importantly, the Conference Committee directed that “[t]he use
of the words ‘meaningful’ and ‘important factors’ are [sic] intended to provide a standard for the
types of cautionary statements upon which a court may, where appropriate, decide a motion to
dismiss, without examining the state of mind of the defendant.” Id. The Conference Committee
explicitly advised that its requirement that the cautionary statement identify important facts is
not intended to provide “an opportunity for plaintiff counsel to conduct discovery on what
factors were known to the issuer” at the time the statement was made. Id. It stressed that
“[c]ourts should not examine the state of mind of the person making the statement.” Id.
19
We find Congress’s directions difficult to apply in this case. On the one hand, the
Conference Report makes quite plain that it does not want courts to inquire into a defendant’s
state of mind, i.e., a defendant’s knowledge of the risks at the time he made the statements.7 At
the same time, however, the Conference Report requires cautionary statements to convey
substantive information about factors that realistically could cause results to differ materially
from projections. In order to assess whether an issuer has identified the factors that realistically
could cause results to differ, we must have some reference by which to judge what the realistic
factors were at the time the statement was made. We think that the most sensible reference is the
major factors that the defendants faced at the time the statement was made. But this requires an
inquiry into what the defendants knew because in order to determine what risks the defendants
faced, we must ask of what risks were they aware.8
Congress may wish to give further direction on how to resolve this tension, and in
7
The Eleventh and Sixth Circuits have held that courts may not inquire into a
defendant’s state of mind. See Edward J. Goodman Life Income Trust v. Jabil Circuit, Inc., 594
F.3d 783, 795 (11th Cir. 2010) (“So long as the language accompanying the projections is
meaningfully cautionary, the law requires us to be unconcerned with the speaker’s state of mind
at the time he makes the projections.”); Miller v. Champion Enters., Inc., 346 F.3d 660, 678 (6th
Cir. 2003) (“No investigation of defendants’ state of mind is required.”).
8
This view is supported by the Seventh Circuit’s rule that in order to be protected by the
cautionary language prong of the safe harbor, an issuer must have disclosed the “major risks [the
issuer] objectively faced when it made its forecasts.” Asher v. Baxter International Inc., 377
F.3d 727, 734 (7th Cir. 2004). Such a rule is necessary, according to that court, because
otherwise “any issuer could list its lines of business, say ‘we could have problems in any of
these,’ and avoid liability for statements implying that no such problems were on the horizon
even if a precipice was in sight.” Id. at 733. And that is our fear here as well. Accepting the
facts in the SAC as true, prior to making the May 15 statement, the defendants were presented
with the major and specific risk that due to rising defaults in the underlying bonds, AEFA’s own
high-yield portfolio—including the investment-grade slices that, up to that point, American
Express had assumed were solid—was very likely deteriorating, but they did not warn of it.
20
particular, the reference point by which we should judge whether an issuer has identified the
factors that realistically could cause results to differ from projections. May an issuer be
protected by the meaningful cautionary language prong of the safe harbor even where his
cautionary statement omitted a major risk that he knew about at the time he made the statement?
In this case, however, we need not decide that thorny issue because we conclude that at any rate
the cautionary statement the defendants point to here was vague.
To avail themselves of safe harbor protection under the meaningful cautionary language
prong, defendants must demonstrate that their cautionary language was not boilerplate and
conveyed substantive information. See Conference Report at 43, 1995 U.S.C.C.A.N. at 742.
The Third Circuit has interpreted this direction to mean that:
Cautionary language must be extensive and specific. A vague or blanket
(boilerplate) disclaimer which merely warns the reader that the investment has
risks will ordinarily be inadequate to prevent misinformation. To suffice, the
cautionary statements must be substantive and tailored to the specific future
projections, estimates or opinions in the prospectus which the plaintiffs challenge.
Inst. Investors Group v. Avaya, Inc., 564 F.3d 242, 256 (3d Cir. 2009) (quotation marks,
citations, and alterations omitted). Similarly, the Fifth Circuit has held that “[t]he requirement
for ‘meaningful’ cautions calls for ‘substantive’ company-specific warnings based on a realistic
description of the risks applicable to the particular circumstances, not merely a boilerplate litany
of generally applicable risk factors.” Southland Secs. Corp., 365 F.3d at 372; see also Lormand
v. US Unwired, Inc., 565 F.3d 228, 246-47 (5th Cir. 2009) (concluding that cautionary language
was not meaningful where the warning was “very vague and general” and did not “disclose the
specific risks and their magnitude”).
Here, all that the defendants point to in support of their argument that they are protected
21
by the cautionary meaningful language prong is the statement in the Form 10-Q that “potential
deterioration in the high-yield sector . . . could result in further losses in AEFA’s portfolio.” See
J.A. at 1624. The defendants argue that by including this language, they warned of the exact risk
that caused their projection to miss the mark. But they did not. The defendants’ caution,
referencing the deterioration in the high-yield sector generally, is vague, and the pleaded facts do
not support the defendants’ assertion that this is the exact risk that materialized. Instead, the
pleaded facts support a conclusion that the risk that materialized was that rising defaults on the
bonds underlying AEFA’s own investment-grade CDOs would cause deterioration in AEFA’s
portfolio. Moreover, even if we read the defendants’ caution to warn of potential deterioration in
AEFA’s own portfolio, it verges on the mere boilerplate, essentially warning that “if our
portfolio deteriorates, then there will be losses in our portfolio.”
Our conclusion is bolstered by the fact that the defendants’ cautionary language
remained the same even while the problem changed. The same cautionary language that
appeared in the May 15, 2001 Form 10-Q was included by the defendants in numerous reports as
early as January 2001, and appeared both before and after the defendants reported the $182
million loss and received the early May 2001 communications. The consistency of the
defendants’ language over time despite the new information they received in early May 2001
belies any contention that the cautionary language was “tailored to the specific future
projection,” Avaya, Inc., 564 F.3d at 256. See Asher, 377 F.3d at 734 (“Moreover, the
cautionary language remained fixed even as the risks changed.”); Helwig v. Vencor, Inc., 251
F.3d 540, 559 (6th Cir. 2001) (en banc) (noting that “as the Budget Act neared enactment and as
the warning signs flared, Vencor’s precautions grew more cursory and abstract” and that
22
“[s]ubstantially similar language” appeared in defendant’s filings over the course of several
years), abrogated on other grounds by Tellabs, Inc., 551 U.S. 308.
Of course, the cautionary statement we focus on here was only one of many cautionary
statements in the Form 10-Q. We recognize that the Conference Committee specifically stated
that a defendant need not include the particular factor that ultimately causes its projection not to
come true in order to be protected by the meaningful cautionary language prong of the safe
harbor, Conference Report at 44, 1995 U.S.C.C.A.N. at 743, and we do not hold to the contrary.
The defendants, however, carry the burden of demonstrating that they are protected by the
meaningful cautionary language prong of the safe harbor, and they have not argued that the other
factors they identified were important factors that could realistically cause results to differ
materially. Absent such argument, we have no way of knowing if they were. Accordingly, we
conclude that the defendants have failed to demonstrate that the May 15 statement is protected
by the cautionary meaningful language prong of the statutory safe harbor.
C. The Plaintiffs Have Not Shown that the May 15 Statement Was Made with Actual
Knowledge that It Was Misleading.
The safe harbor provision also requires dismissal if the plaintiffs do not “prove that the
forward-looking statement . . . was . . . made or approved by [an executive officer] with actual
knowledge by that officer that the statement was false or misleading.” 15 U.S.C. § 78u-
5(c)(1)(B) (emphasis added). To do so, the plaintiffs must “state with particularity both the facts
constituting the alleged violation, and the facts evidencing scienter, i.e., the defendant’s intention
‘to deceive, manipulate, or defraud.’” Tellabs, Inc., 551 U.S. at 313 (quoting Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 194 & n.12 (1976)). Under this heightened pleading standard, a
plaintiff must plead facts to support a strong inference of scienter, 15 U.S.C. § 78u-4(b)(2), that
23
is, the “inference of scienter must be more than merely plausible or reasonable—it must be
cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Tellabs,
Inc., 551 U.S. at 314. Moreover, because the safe harbor specifies an “actual knowledge”
standard for forward-looking statements, “the scienter requirement for forward-looking
statements is stricter than for statements of current fact. Whereas liability for the latter requires a
showing of either knowing falsity or recklessness, liability for the former attaches only upon
proof of knowing falsity.” Avaya, Inc., 564 F.3d at 274.
The Supreme Court has laid out a three-part prescription for carrying out this inquiry.
First, as with any motion to dismiss, we must accept all factual allegations in the SAC as true.
Tellabs, Inc., 551 U.S. at 322. Second, we must consider the SAC, along with documents
incorporated into the SAC, in their entirety. Id. “The inquiry . . . is whether all of the facts
alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual
allegation, scrutinized in isolation, meets that standard.” Id. at 322-23. Third, “in determining
whether the pleaded facts give rise to a ‘strong’ inference of scienter, [we] must take into
account plausible opposing inferences.” Id. at 323. This is because “[t]he strength of an
inference cannot be decided in a vacuum[;]” it “is inherently comparative: How likely is it that
one conclusion, as compared to others, follows from the underlying facts?” Id. “A complaint
will survive . . . only if a reasonable person would deem the inference of scienter cogent and at
least as compelling as any opposing inference one could draw from the facts alleged.” Id. at 324.
The SEC explains that the May 15 statement contained three implicit factual
assertions—“(i) that the statement is genuinely believed; (ii) that there is a reasonable basis for
that belief; and (iii) that the speaker is not aware of any undisclosed facts tending to seriously
24
undermine the accuracy of the statement.” Brief for SEC as Amicus Curiae at 11. It asserts that
“a forward looking statement is misleading if the speaker actually knows that one or more of
these implicit factual representations is not true.” Id. at 12; see In re Apple Computer Secs.
Litig., 886 F.2d 1109, 1113 (9th Cir. 1989). The parties agree with this statement of the
standard.
Pointing to the Sedlacek fax warning of losses, the Minneapolis briefing, at which
AEFA’s CFO said he could not even give a range of potential losses, and the immediate
formation of an investigative team to ascertain the extent of losses, the plaintiffs contend that the
defendants had no reasonable basis upon which to issue the May 15 statement. The plaintiffs
emphasize that while Cracchiolo told Chenault that “[w]e really don’t even know enough to give
you a range,” the May 15 statement projected that very range—that future losses would be
“substantially lower.” The defendants disagree. They argue that the facts contained in the Wall
Street Journal Asia article suggest that the defendants first learned that additional losses would
likely be higher in July 2001, several weeks after the May 15 statement was made, when
Chenault was “stunned” by Berman and Yowan’s estimate. This new estimate was the result of
conservative assumptions, and there is nothing in the SAC to indicate that these more
conservative assumptions had been adopted prior to the May 15 statement, according to the
defendants. Moreover, the defendants contend that American Express’s history of disclosures
about its high-yield portfolio, and commencement of an investigation and prompt disclosure of
its findings must be counted against any inference of fraudulent intent. The defendants urge that
the plaintiffs do not provide any reason why the defendants would knowingly make a false
prediction, in deviation from their usual practice of prompt disclosure, even though the truth
25
would inevitably come to light within a few weeks.
The defendants have not contested that the plaintiffs adequately specified each statement
alleged to have been misleading, see 15 U.S.C. § 78u-4(b)(1); Tellabs, Inc., 551 U.S. at 321, and
we conclude that they have been adequately specified. The question before us is whether the
plaintiffs have stated with particularity facts giving rise to a strong inference that the defendants
made the May 15 statement with actual knowledge that it was false or misleading. See 15 U.S.C.
§ 78u-4(b)(2); Tellabs, Inc., 551 U.S. at 321. In other words, we must determine whether a
reasonable person would, based on the facts alleged in the SAC and contained in the Wall Street
Journal Asia article upon which the SAC exclusively relies, deem an inference that the
defendants (1) did not genuinely believe the May 15 statement, (2) actually knew that they had
no reasonable basis for making the statement, or (3) were aware of undisclosed facts tending to
seriously undermine the accuracy of the statement, “cogent and at least as compelling as any
opposing inference.” Tellabs, Inc., 551 U.S. at 323; see Apple Computer Secs. Litig., 886 F.2d at
1113. While we find this question close, we conclude that a reasonable person would not.
Our analysis is case-specific. See Avaya, Inc., 564 F.3d at 269. Our “job is not to
scrutinize each allegation in isolation but to assess all of the allegations holistically.” Tellabs,
Inc., 551 U.S. at 326. We rest our conclusion “not on the presence or absence of certain types of
allegations, but on a practical judgment about whether, accepting the whole factual picture
painted by the Complaint, it is at least as likely as not that defendants acted with scienter.”
Avaya, Inc., 564 F.3d at 269. “Just as facts innocent in themselves may appear more suspicious
in the company of other facts, so too can a fact that seems damning when presented alone
sometimes be explained away by reference to other circumstances.” Id. at 273 n.46.
26
We first consider the facts in the SAC that support an inference of scienter. See S.
Cherry St., LLC v. Hennessee Group LLC, 573 F.3d 98, 111 (2d Cir. 2009). As we have already
explained, the facts support a conclusion that the defendants were presented with the highly
likely risk that AEFA’s high-yield portfolio would deteriorate due to rising defaults in the
underlying debts in early May. The plaintiffs’ facts also support an inference that the defendants
did not know the extent of the likely deterioration. Specifically, at the early May meeting, after
being told that even the investment-grade CDO’s, which had been wrongly thought to be solid,
showed potential for deterioration, defendant Chenault asked, “What are we talking about here?”
Defendant Cracchiolo responded, “We really don’t know enough to give you a range.”
Thereafter, the defendants brought in Berman and Yowan to find an answer to Chenault’s
question. These alleged facts support an inference that the defendants actually knew that they
did not know the extent of the deterioration and therefore had no reasonable basis for predicting
that very range by stating that “[t]otal losses on these investments for the remainder of 2001 are
expected to be substantially lower than in the first quarter.” The many warnings and “red flags,”
such as the “huge alarm ringing,” J.A. at 1671, described in the Wall Street Journal Asia article
further support this inference, see Matrix Capital Mgmt. Fund, LP v. BearingPoint, Inc., 576
F.3d 172, 188 (4th Cir. 2009), which we find plausible.
We next consider “whether [the] inference of scienter is at least as compelling as any
opposing inference of nonfraudulent . . . intent,” S. Cherry St., 573 F.3d at 111, bearing in mind
that we cannot “scrutinize each allegation in isolation but [must] assess all the allegations
holistically.” Tellabs, Inc., 551 U.S. at 326. The opposing nonfraudulent inference is that while
the defendants knew that their high-yield portfolio was likely deteriorating, and that they did not
27
know the extent of the deterioration, they subjectively believed that the extent of the
deterioration would lead to losses that would be substantially less than $182 million. The fact
that Chenault was “stunned” by the $400 million figure in July supports such an inference.
While the defendants’ prediction that losses would be substantially lower does give us pause,
nothing in the Wall Street Journal Asia article, on which the plaintiffs exclusively rely, directly
supports the plaintiffs’ contention that the defendants had reason to believe that the scope of the
expected losses would be comparably large, i.e. that they had no basis to believe that the extent
of the losses would be substantially lower than $182 million. Such “omissions and ambiguities
count against inferring scienter.” Id. That the losses eventually reported in July greatly
exceeded $182 million likewise does not undermine the nonfraudulent inference because the
plaintiffs may not plead fraud by hindsight. See Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124,
1129 (2d. Cir. 1994).9
Importantly, the plaintiffs have not alleged any theory as to why the defendants would
knowingly mislead investors. The plaintiffs have not pleaded any facts supporting a motive to
deceive. While “the absence of a motive allegation is not fatal,” motive can be a relevant factor,
and “personal financial gain may weigh heavily in favor of a scienter inference.” Tellabs, Inc.,
551 U.S. at 325. “[T]he significance that can be ascribed to an allegation of motive, or lack
9
We emphasize that under this prong of the statutory safe harbor, the plaintiffs must
show more than recklessness—an objective inquiry—they must show actual subjective
knowledge. Therefore, even if we were to conclude, based on the alleged facts, that the risk that
losses would exceed $182 million was “so obvious that . . . defendant[s] must have been aware
of it,” see Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 47 (2d Cir. 1978) (quoting Sanders
v. John Nuveen & Co., 554 F.2d 790, 793 (7th Cir. 1977)), this would not avail the plaintiffs.
See Avaya, Inc., 564 F.3d at 274 (“In the case of the forward-looking statements, however, an
inference of recklessness does not avail plaintiffs—that is, it must be placed on the nonculpable-
explanation side of the balance when we weigh competing inferences.”).
28
thereof, depends on the entirety of the complaint.” Id.; see Teamsters Local 445, 531 F.3d at 197
(noting that because the plaintiffs “failed to allege that anyone at Dynex or Merit had a
compelling motive to mislead investors . . . a number of competing inferences regarding scienter
arise”). In evaluating scienter under a recklessness standard outside the context of the safe
harbor, where the plaintiffs need only demonstrate that the defendants acted recklessly, we have
stated that where the plaintiffs cannot make a motive showing, to raise a strong inference of
scienter, their circumstantial evidence of fraud must be correspondingly greater. ECA & Local
134 IBEW Joint Pension Trust of Chicago, 553 F.3d at 198-99. While here we do not apply the
same test that we apply where the requisite scienter is recklessness, see id. at 198; see generally
Novak v. Kasaks, 216 F.3d 300, 308-09 (2d Cir. 2000), we likewise conclude that where the
plaintiffs do not allege facts supporting a motive, under our holistic review, their circumstantial
evidence of actual knowledge must be correspondingly greater. Here, the plaintiffs
circumstantial evidence of actual knowledge is not adequate.
Instead, when the facts contained in the Wall Street Journal Asia article are examined in
their entirety, the circumstantial evidence supporting an inference of non-fraudulent intent is
more compelling. See Tellabs, Inc., 552 U.S. at 326. Rather than suggesting an intent to deceive
investors, the facts contained in that article exhibit the defendants engaging in a good-faith
process to inform themselves and the public of the risks. According to the article, following a
disclosure that American Express lost $182 million in its high-yield debt investments in the first
quarter, and after learning that there was potential deterioration in even the investment-grade
CDOs, Chenault asked Berman and Yowan to crunch the numbers using a conservative set of
assumptions. Working with in-house analysts, American Express was able to draw its own
29
conclusions about the bonds underlying their securities instead of relying on reports generated by
outside CDO managers as they had previously. Shortly after Berman and Yowan reported the
results, American Express formally announced an $826 million write-down.
These facts do not support an inference that American Express was trying to hide
anything from its investors. Rather, they suggest that American Express had disclosed its losses
in 2000 and in the first quarter of 2001, and that it was endeavoring in good faith to ascertain and
disclose future losses. See BearingPoint, Inc., 576 F.3d at 187 (“Later disclosures that timely
raised questions about the reliability of financial information . . . lend weight to an inference that
contemporaneous financial statements were made in good faith.”); ACA Fin. Guar. Corp. v.
Advest, Inc., 512 F.3d 46, 66 (1st Cir. 2008) (concluding that the plaintiffs’ inference of scienter
was not as strong as the nonfraudulent inference because the defendants’ statements “candidly
laid out the sorry financial history of the college”). Ordering an investigation as soon as they
learned that the investment-grade CDOs might be deteriorating, and directing Berman and
Yowan to use conservative assumptions, was “a prudent course of action that weakens rather
than strengthens an inference of scienter.” Horizon Asset Mgmt. Inc. v. H&R Block, Inc., 580
F.3d 755, 763 (8th Cir. 2009); see Higginbotham v. Baxter Int’l Inc., 495 F.3d 753, 761 (7th Cir.
2007) (“Taking the time necessary to get things right is both proper and lawful. Managers
cannot tell lies but are entitled to investigate for a reasonable time, until they have a full story to
reveal.”).
Moreover, the losses reported in July were the product of using different assumptions,
representing the first time American Express drew its own conclusions rather than relying on
reports generated by outside CDO managers, and also of the Company’s subsequent business
30
decision to reduce the level of its high-yield portfolio. These new assumptions and decisions
undermine any inference that the defendants suspected the magnitude of losses reported in July
when they made the May 15 statement. See Advest, Inc., 512 F.3d at 66 (concluding that fact
that the “defendants may have been operating under a different set of assumptions” supported an
inference that they did not set a target that they knew they could not achieve).
While we find the inference of fraudulent intent plausible, and consider this to be a close
case, when we examine the record as a whole, we conclude that the inference of fraudulent intent
is not “at least as compelling as any opposing inference one could draw from the facts alleged.”
See Tellabs, Inc., 551 U.S. at 324. Accordingly, the May 15 statement is protected under the
statutory safe harbor and the district court correctly dismissed the plaintiffs’ claim under section
10(b) of the Securities Exchange Act of 1934.
Because “[i]n order to establish a prima facie case of liability under § 20(a), a plaintiff
must show . . . a primary violation by a controlled person,” Boguslavsky v. Kaplan, 159 F.3d
715, 720 (2d Cir. 1998), the district court also correctly dismissed the plaintiffs’ claim under
section 20(a) of the Securities Exchange Act of 1934.
IV
For the foregoing reasons, we AFFIRM the district court’s judgment.
31