SEC Hears Proposals for Forecast Liability Protection

The Securities and Exchange Commission should widen liability protection for companies so they can make forecasts without falling prey to shareholder lawsuits, experts at an SEC hearing said Monday.

A Cabinet secretary and several Wall Street executives, academicians, lawyers and lobby groups sounded the call, saying the current SEC rule deters companies from issuing forward-looking statements because of fear of being sued should results not meet forecasts.

The proposals varied widely, from rewriting the rule to make it clear when a private lawsuit could be filed to giving companies absolute protection, even if the statement they issue “is irrelevant and unintentionally or intentionally false or misleading.”

The calls for reform come amid burgeoning lawsuits by shareholders. According to one industry survey, corporations paid about $1.55 billion to settle shareholder class-action suits in 1993, up from $324 million in 1988.

Many companies complain that to avoid lengthy litigation, they prefer to settle. Still another study noted that such settlements notwithstanding, the average shareholder lawsuit takes 1,055 hours of management time and $692,000 in legal fees.

In opening the hearings, SEC Chairman Arthur Levitt acknowledged that “issuers cannot be expected to make perfect predictions.”

“When an issuer discloses good-faith projections, our standard of liability must allow for all the accidents that turn today’s reasonable expectation into tomorrow’s disappointment,” he said.

Proponents of shareholders’ rights argue that investors must have protection against faulty forecasts because they can lose money when the statements turn out to be wrong.

Under SEC’s “safe harbor,” known as Rule 175, a forward-looking statement is not considered fraudulent unless it is made without reasonable basis or disclosed in bad faith. However, the rule only covers information included in filings with the agency. Many shareholder lawsuits are based not on filings but on company statements or comments by company officials.

“We believe that the current safe harbor is insufficient,” said Joseph Hardiman, president and chief executive of the Nasdaq stock market.