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Posted: January 7, 2014

PSLRA’s Safe Harbor

In In re Symbol Techs., Inc. Securities Litigation, 05 CV 3923 (E.D.N.Y. Dec. 5, 2013), Judge Denis Hurley denied defendants’ motion to dismiss the consolidated amended class action complaint.  The case involves Symbol Technologies, a manufacturer of inventory management products that was the subject of a government investigation into “systematic accounting fraud, including the manipulation of inventory levels to artificially inflate reported revenues” prior to the class period.  That government investigation led several former executives to plead guilty to criminal charges and the company to agree to consent decrees enjoining future violations of the antifraud provisions of federal securities laws.

At issue in the case were statements by the company and its senior executives to the effect that the company had put its financial improprieties behind it.  According to the complaint, those statements misrepresented Symbol’s financial results, the efficiency of its internal controls, and improvements in its corporate governance, which led to an inflation of Symbol’s stock price that damaged plaintiffs when the truth emerged.  Judge Hurley had little trouble concluding that the consolidated amended complaint sufficiently alleged the necessary elements of a securities fraud claim:  misrepresentations by defendants, materiality, falsity, scienter, and loss causation.

Of interest to us was his analysis of defendants’ claim that the Private Securities Litigation Reform Act’s “safe harbor” provision applied to defendants’ revenue projections.  The lead plaintiff argued that the safe harbor provision did not apply because of an exclusion for issuers who had “been the subject of a judicial or administrative decree or order.”  In short, plaintiff asserted that Symbol’s consent decrees deprived the company of safe harbor protection while defendants asserted that the consent decrees did not constitute a “judicial or administrative decree or order.”  In a case of first impression—neither the parties nor the Court found direct support for either side’s position—Judge Hurley found defendants’ argument to be a “distinction without a difference” and held the exclusion to apply.

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