United States: The Bespeaks Caution Doctrine - A Useful Tool For Early Dismissal Of Securities

Last Updated: August 29 1997
Federal courts have increasingly used the "bespeaks caution" doctrine to dismiss securities fraud cases at the outset. The doctrine holds that optimistic forecasts or projections in a prospectus are not fraudulent when accompanied by specific disclaimers or warnings of the risks associated with the investment. Recently, courts have expanded the doctrine beyond forecasts or projections to render a variety of alleged misrepresentations or omissions non-actionable where investors received suitable risk disclosures or cautionary language. The doctrine also is no longer limited to prospectuses or offering memoranda, but has been applied to press releases, interviews, speeches, annual reports and other disclosures that suitably warn investors of potential risks. Given the high stakes in securities litigation, particularly once burdensome and expansive discovery begins, the "bespeaks caution" doctrine has become an important weapon in securities defendants' arsenals.

The bespeaks caution doctrine is rooted in the requirement that an alleged misrepresentation or omission must be material to be actionable under Section 10(b) of the Securities Exchange Act of 1934, Section 12(2) of the Securities Act of 1933, and similar statutes. In Basic v. Levinson, 485 U.S. 224 (1988), for example, the Supreme Court reasoned that certain information could well be of "dubious significance" to the reasonable investor, and that to hold a defendant liable for securities fraud, the misrepresented or omitted information must be of the kind that "would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available."

Courts for years have recognized that where an investor is fully informed of the material risks of an investment, he assumes the risk and cannot later claim fraud if those disclosed risks materialize. E.g., Luce v. Edelstein. 802 F.2d 49 (2d Cir. 1986). Early applications of the bespeaks caution doctrine simply extended this principle to forward looking statements about the investment, but only after protracted discovery and expensive motion practice. In In re Worlds of Wonder Securities Litigation, 814 F. Supp. 850 (N.D. Cal. 1993), aff'd, 35 F.3d 1407 (9th Cir. (1994), for example, the parties had produced numerous documents and deposed many witnesses before the district court finally granted summary judgment for defendants on the basis of the risk disclosures in the offering materials.

Over the past two years, however, courts have applied the bespeaks caution doctrine to grant motions to dismiss complaints pursuant to Fed. R. Civ. P. 12(b)(6). These courts appropriately considered the offering documents at the outset of the litigation, on the theory that they were incorporated by reference into the complaint or under the evidentiary "doctrine of completeness". Thus, courts will now evaluate the materiality of an alleged representation or omission early in the litigation in the context of the "total mix" of information available to the reasonable investor.

That "total mix" invariably includes the offering documents drafted by the issuer and issuer's counsel and reviewed by the SEC. Courts reason that if a plaintiff receive the prospectus or other offering material, he is assumed to have read it in its entirety, and cannot selectively rely on optimistic language to the exclusion of other, cautionary statements. The warnings must be specific and tailored to the particular risks of the investment; however, boilerplate warnings about the riskiness of investing are not sufficient to counter allegations of misleading projections. See Rubinstein v. Collins, 20 F.3d 160 (5th Cir. 1994).

In one of the leading bespeaks caution cases, In re Donald J. Trump Casino Securities Litigation, 7 F.3d 357 (3d Cir. 1993), cert. denied, 114 S. Ct. 1219 (1994), for example, the United States Court of Appeals for the Third Circuit affirmed dismissal of a suit alleging that a prospectus for an issue of junk bonds misled investors by not adequately disclosing the risks involved in financing the Taj Mahal Casino in Atlantic City. Plaintiffs challenged a statement in the prospectus that "[t]he Partnership believes that funds generated from the operations of the Taj Mahal will be sufficient to cover all of its debt service (interest and principal.)" The prospectus for the offering, expressly warned investors that the Partnership might not be able to service its debt and that a foreclosure on the Taj Mahal would preclude payment of the principal and accrued interest on the bonds. After a careful reading of these and other risk disclosures included in the prospectus, the court concluded that a reasonable investor was well aware of the specific risks of the investment, and that, in this context, managements' optimistic projections failed to state a claim for securities fraud.

The bespeaks caution has been particularly useful in the mutual fund context, where disgruntled investors have sued for securities fraud when their funds did not perform as anticipated. In Tabankin v. Kemper Short-Term Global Income Fund, No. 93-C5231, 1994 U.S. Dist. LEXIS 965 (N.D. Ill. Feb. 1, 1994) and 1994 U.S. Dist. LEXIS 8498 (N.D. Ill. June 22, 1994), the court dismissed securities fraud claims against a short-term global bond fund and its advisers because the fund's prospectus specifically warned about the risk of a decline in investment value resulting from currency devaluation. Similarly, in In re Hyperion Securities Litigation, 1995 WL 422480 (S.D.N.Y. July 12, 1995), the court held that the offering documents for a mortgage-backed securities fund provided investors with "enough information to discern" the risks of an investment because the prospectuses warned investors that "[n]o assurance can be given that the Trust will achieve its investment objectives" and "[c]hanges in interest rates will also lead to changes in the Trust's net asset value." And, in Krouner v. American Heritage Fund, Inc., 1995 WL 548501 (S.D.N.Y. Sept. 11, 1995), the court dismissed claims that a mutual fund failed to disclose its intention to invest in certain risky securities, where the prospectus stated that the fund would invest in securities of bankrupt companies and entailed "greater than average risks." The court explained:

In our view, plaintiff's ... claims have as much merit as a claim made by an Atlantic City gambler who had lost some money at a black jack table that the casino owner had defrauded him by not specifically mentioning in its promotional literature that the casino maintained that particular gambling device.

Although the bespeaks caution doctrine has its origins in cases involving warnings in offering documents, courts have applied it to other kinds of statements as well. See, e.g., Raab v. General Physics Corp., 4 F.3d 286 (4th Cir. 1994) (affirming dismissal of a complaint where the company disclosed risks of a slowdown in government contracts in a press release); Rand v. Starter Corp., 1995 WL 322024 (S.D.N.Y. May 30, 1995) (cautionary statements in press release); Pache v. Wallace, [Current Tr. Binder] Fed. Sec. L. Rep. (CCH) " 98,643 (E.D. Pa. Mar. 20, 1995) (cautionary disclosures in a Form 10-K and three Form 10-Qs); In re Seagate II Sec. Litig., [1994-1995 Tr. Binder] Fed. Sec. L. Rep. (CCH) " 98,530, at 91,587 (N.D. Cal. Feb. 8, 1995) (speech by CEO); In re Philip Morris Sec. Litig., 872 F. Supp. 97, 101 (S.D.N.Y. 1995) (annual report, press releases, and press interviews).

A prospectus or other document that contains specific cautionary language also may defeat claims of misleading oral statements or deceptive sales practices. Where the prospectus "bespeaks caution" about an investment, and contradicts "oral assurances by brokers," the "total mix" of information available is deemed accurate, and alleged misrepresentations in oral statements or sales brochures have been found nonactionable. E.g., In re Hyperion Securities Litigation, 1995 WL 422480 (S.D.N.Y. July 12, 1995); Eckstein v. Balcor Film Investors, Fed. Sec. L. Rep. (CCH) " 97,712 (7th Cir. 1993), cert. denied 114 S. Ct. 883 (1994).

In sum, the message of the bespeaks caution doctrine is that carefully drafted disclosure documents that specifically describe the risks of an investment may be an insurance policy against securities fraud claims brought by plaintiffs if that investment - with the benefit of hindsight - proves unfavorable. The likelihood that plaintiffs can extract strike suit settlements is greatly reduced when the federal courts are willing to consider at the pleading stage the extensive array of warnings and disclaimers contained in those disclosures.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For further information contact Rogers & Wells at 200 Park Avenue, New York, NY 10166 on Tel: 0012128788000 or Fax: 0012128788375 or enter a text search 'Rogers & Wells' and 'Business Monitor'.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions