Overly Optimistic Earnings Projections Not Securities Fraud
Description Appeals court affirmed dismissal of suit brought by investors in a company that saw its stock price fall after the company announced that its earlier projected earnings were too high due to a change in federal law affecting payments the company would receive. There was no evidence of intent to mislead.
Topic Securities Law
Key Words Fraud; Misstatements; Safe Harbor
C A S E   S U M M A R Y
Facts Vencor, a health care provider, and its officers were sued by a group of investors for securities fraud. Its stock had been trading for about $42 a share when the company announced that its fourth quarter earnings would be about $0.40 per share rather than the earlier projection of $0.60 per share. The company asserted that lower earnings were due to changes in federal policy regarding health care payments. At the time suit was filed, share price had fallen to about $25. The investors claimed the earlier statements about earnings projections were false and misleading statements. The trial judge dismissed the suit; investors appealed.
Decision Affirmed. The suit does not meet the standards set by the Private Securities Litigation Reform Act of 1995. It "does not allege sufficient facts to establish either (1) the falsity or the misleading characteristics of the defendants' statements or, (2) a strong inference that the defendants had the state of mind required by the statute." The act provides a safe harbor for forward-looking statements and other statements containing "soft information" about potential earnings and growth.
Citation Helwig v. Vencor, Inc., 210 F.3d 612 (6th Cir., 2000)

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