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Boca Raton Pension Fund Class Action Against Manufacturer Proceeds

Publicly traded companies may not make false or misleading statements in order to manipulate their stock price. Federal securities law prohibits “any manipulative or deceptive device or contrivance.” U.S. Securities and Exchange Commission regulations more specifically ban “any untrue statement of a material fact” or any omission of material facts which render a company’s public statement “misleading.”

But the SEC rules also provide a “safe harbor” whereby public companies are not liable for any “forward-looking” statements. That is to say, it is not illegal for a company, or one of its officers, to talk about anticipated events or expected future performance, provided such information is accompanied by “meaningful cautionary statements.” Such cautionary statements must identify “important material factors” which may “cause actual results to differ materially from those in the forward-looking statement.”

Harman International Securities Litigation

Institutional investors, such as municipal pension funds, often rely on corporate statements when deciding where to invest billions in retirement savings. Not surprisingly, when such funds feel they have been lied to by corporate executives, they seek redress in court. For instance, the pension fund representing employees of the City of Boca Raton is part of a multi-state class action against Harman International, a well-known manufacturer of personal navigation devices (PNDs), over alleged misstatements by the company’s top executives.

At issue are three statements. The first came during a 2007 conference call with Harman Chief Executive Officer Sidney Harman, who discussed the company’s forecast for European sales. The class action complaint alleges Harman “knew or recklessly disregarded” those sales would not meet their projected targets, and in fact would lead to a decline in operating income.

The second statement involved Harman’s 2007 fiscal year annual report to the SEC, which the class action claims failed to disclose the company’s “growing inventory of obsolete PNDs” and missed sales targets for the previous year. The third statement came in September 2007, when Harman Chief Financial Officer Kevin Brown discussed the company’s sales for the first quarter of the 2008 fiscal year. Brown said Harman would “continue the growth and expansion” of European PND sales. The class action argues this was false and misleading due to the available “historical evidence of growing inventory, widespread obsolescence, and stagnant sales.”

A federal judge in Washington initially dismissed the class action, holding the three challenged statements were “forward-looking” and fell within the SEC’s safe harbor. But in a June 23 decision, the U.S. Court of Appeals for the District of Columbia Circuit reversed. Although Harman made “boilerplate” disclaimers in connection with the challenged statements, the appeals court said the law requires more tailored disclosures in order to fall within the “meaningful cautionary statements” safe harbor. In particular, the class action alleges Harman failed to “disclose historical facts that could have affected the success” of their plans to sell older—and obsolete—PNDs in Europe. Indeed, Harman continued to make specific projections about European sales even as evidence mounted those units were obsolete and would need to be sold at a substantial discount.

Demanding the Truth

The D.C. Circuit did not rule on the merits of the class action, only that the plaintiffs made sufficient allegations to proceed with their case. But this decision does send an important message to companies and investors alike. Companies cannot rely on perfunctory, boilerplate language to meet their obligations under federal securities law, and investors must be aggressive in demanding the truth from corporate executives. If you have been misled by a company’s inadequate disclosures or if you have any questions regarding your investments, contact experienced Florida securities fraud attorney Gregory Tendrich, P.A., today.

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