Appeal from a judgment of the United States District Court for the Southern District of New York (William H. Pauley, Judge) entered October 9, 2008, dismissing the plaintiffs' second amended complaint. In the second amended complaint, the plaintiffs alleged violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. On appeal, they limit their case to one allegedly misleading statement made in the defendants' May 15, 2001 quarterly report. We hold that the alleged misleading statement is a forward-looking statement that is protected by the safe harbor of the Private Securities Litigation Reform Act. We accordingly affirm the judgment of the district court.
The opinion of the court was delivered by: Katzmann, Circuit Judge
Before CALABRESI and KATZMANN, Circuit Judges.*fn2
This case requires us to decide whether an allegedly misleading statement made in one of defendant American Express's regulatory disclosure documents is protected by the safe harbor provision of the Private Securities Litigation Reform Act ("PSLRA"). In the course of our analysis, we interpret Congress's provision that a defendant shall not be liable for a forward-looking statement if it is "identified as a forward-looking statement, and . . . accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement," or if "the plaintiff fails to prove that the forward-looking statement . . . was . . . made or approved by [an executive] officer with actual knowledge by that officer that the statement was false or misleading." 15 U.S.C. § 78u-5(c).
The plaintiffs appeal from the October 9, 2008 judgment of the United States District Court for the Southern District of New York (Pauley, J.) dismissing their Second Amended Complaint. We determine that the defendants are not entitled to safe harbor protection under the meaningful cautionary language prong of the safe harbor at this stage of the litigation because their cautionary language is vague. We conclude, however, that the defendants' allegedly misleading statement is protected by the actual knowledge prong of the safe harbor because the plaintiffs did not plead facts demonstrating that the statement was made "with actual knowledge . . . that the statement was false or misleading," id. Accordingly, we affirm the judgment of the district court.
The plaintiffs are investors who purchased American Express stock between July 26, 1999 and July 17, 2001.*fn3 The defendants are American Express Company ("American Express" or the "Company"); Harvey Golub, Chairman and CEO of American Express until late 2000; Kenneth Chenault, President, COO and successor to Golub as Chairman and CEO at the Company; David Hubers, President and Chief Executive of Company subsidiary American Express Financial Advisors ("AEFA"); and James M. Cracchiolo, Chairman and CEO of AEFA.
According to the plaintiffs' Second Amended Complaint ("SAC"), starting in the 1990s, American Express began an over-investment in high-yield debt securities. These investments included junk bonds and collateralized debt obligations ("CDOs"). While peer companies limited high-yield debt investments to seven percent of their portfolios, ten to twelve percent of AEFA's portfolio was made up of these investments. Ultimately, this overinvestment resulted in American Express losing hundreds of millions of dollars in 2000 and 2001.
This appeal regards a statement that American Express made in a quarterly report filed with the Securities and Exchange Commission ("SEC") in May 2001. In that filing, the Company stated, in essence, that while it had lost $182 million from its high-yield debt investments in the first quarter of 2001, it expected further losses from those investments to be substantially lower for the remainder of 2001. The plaintiffs allege that the defendants violated the Securities Exchange Act of 1934 when they made this statement because at the time they made it, the defendants knew it was misleading.
The source of the plaintiffs' allegations is a Wall Street Journal Asia article that the plaintiffs attached to their SAC, and the following account is taken from that article.*fn4 In early 2001, after the Company reported losses of $123 million in 2000 from its high-yield debt investments, Chenault belatedly ordered a "very hard look" at the Company's high-yield debt portfolio. By late February 2001, defendant Chenault and Gary Crittenden, then American Express's CFO, received an e-mail from AEFA CFO Stuart Sedlacek that "set a huge alarm ringing" concerning the rapid deterioration of AEFA's high-yield debt portfolio. Joint Appendix ("J.A.") at 1671. On April 2, 2001, the Company announced an additional $182 million in first quarter 2001 high-yield write-downs. "The Company was quick to add, though, that the worst of the problem was behind it and that no further surprises were expected." Id. A press release stated that "[t]otal losses on these investments for the remainder of 2001 are expected to be substantially lower than in the first quarter." J.A. at 142-43.
According to the article, in early May 2001, Cracchiolo received a fax from Sedlacek "advising him that American Express was facing additional losses on its high-yield debt investments beyond those already booked." J.A. at 1671.Chenault was advised of the situation the next day, during a visit to AEFA's Minneapolis headquarters. There, he was told that the deterioration of the high-yield debt portfolio was so bad that "even the investment-grade CDOs held by American Express showed potential deterioration" because defaults on the underlying bonds had risen so sharply. Id. Chenault asked, "What are we talking about here?" Id.Cracchiolo replied, "We really don't know enough to even give you a range." Id."Didn't we look at this in the first quarter?" Chenault queried, "What happened?" Id. Hoping to find an answer, American Express brought in Walter Berman, a former American Express treasurer who had rejoined the firm at the start of that year. "He and David Yowan, the Company's senior vice president of risk management in New York, began crunching numbers." Id.
In the meantime, on May 15, 2001, American Express filed its quarterly report (Form 10-Q) for the first quarter of 2001. In it, the Company reported the $182 million in first quarter losses from AEFA's high-yield debt portfolio. The Company explained, "[t]he high yield losses reflect the continued deterioration of the high-yield portfolio and losses associated with selling certain bonds." J.A. at 1616. Importantly, it added that "[t]otal losses on these investments for the remainder of 2001 are expected to be substantially lower than in the first quarter." Id.According to the SAC, American Express made this statement ("the May 15 statement") despite the fact that "Defendant Chenault . . . had been expressly informed in early May 2001 that the $182 million first quarter write-down did not reflect the true magnitude of the deterioration of AEFA's high-yield debt portfolio." J.A. at 224. The plaintiffs allege that the "[d]efendants were aware that they had no reasonable basis upon which to continue to make this representation."
The Form 10-Q also contained a caution. Several pages after the statement that losses for the remainder of 2001 were expected to be substantially lower, the Form 10-Q warned that it "contain[ed] forward-looking statements, which are subject to risks and uncertainties."It added that "[f]actors that could cause actual results to differ materially from these forward-looking statements include . . . potential deterioration in the high-yield sector, which could result in further losses in AEFA's investment portfolio." J.A. at 1624.
The Wall Street Journal Asia article reported that in early July 2001, Berman and Yowan completed their review of AEFA's high-yield debt portfolio. American Express had previously relied in large part "on the reports generated by outside CDO managers to evaluate the health and performance of the investment-grade [CDOs]," and it was not until Berman and Yowan's review that "the company began to draw its own conclusions about all [of the] bonds that underpinned the securities." J.A. at 1671-72. When Chenault sat down in the conference room to hear the results, he had no idea what to expect and hoped that the situation would be manageable.He was "stunned" by Berman and Yowan's estimate of $400 million in losses, and "began firing questions at his team." J.A. at 1672.The $400 million figure resulted from the fact that "[i]nstead of adopting the optimistic view . . . that defaults already were peaking, the company decided to use the current default rate of 8% to 9%, and assumed it would stay constant for the next 18 months"-a very conservative assumption. J.A. at 1672.
On July 18, 2001, American Express issued a press release announcing that it would be taking an $826 million loss due to "additional write-downs in the high-yield debt portfolio at [AEFA] and losses associated with rebalancing the portfolio towards lower-risk securities."J.A. at 225. This amount included the $403 million loss related to the investment-grade CDOs reported by Berman and Yowan, as well as other losses from planned sales of high-yield bonds and lower-grade CDOs.
On July 17, 2002, the plaintiffs filed this action, bringing claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The defendants moved to dismiss the complaint. The district court granted the motion on March 31, 2004, holding that two of the plaintiffs' claims were time-barred and the remaining claims failed to state a claim upon which relief could be granted. In re Am. Express Co. Secs. Litig., No. 02 Civ. 5533, 2004 WL 632750 (S.D.N.Y. 2004). We vacated the decision, holding that the claims were not time-barred, and remanded for further consideration by the district court, expressing no view on the merits of any of the claims. See Slayton v. Am. Express Co., 460 F.3d 215, 230-31 (2d Cir. 2006).
On January 11, 2007, the plaintiffs filed the SAC, alleging, among other things, that when the defendants made the May 15 statement that losses for the remainder of 2001 were expected to be substantially lower, they knew that they had no reasonable basis upon which to make it. The defendants again moved to dismiss, and the district court granted the motion by memorandum and order dated September 26, 2008. In re Am. Express Co. Secs. Litig., No. 02 Civ. 5533, 2008 WL 4501928 (S.D.N.Y. September 26, 2008). With regard to the May 15 statement at issue in this appeal, the district court found that:
The information [Cracchiolo] and Chenault received in May 2001 could support an inference of scienter because it suggests that they had access to information indicating that the May 15, 2001 statement was no longer accurate. However, in light of the fact that Defendants immediately put together a team to analyze all of AEFA's High Yield Debt and then announced the results of the analysis in July 2001, the more compelling inference is that Defendants were not acting with an intent to deceive, but rather attempting to quantify the extent of the problem before disclosing it to the market.
Id. at *8. The district court therefore held that the plaintiffs failed to state a claim with respect to the May 15 statement. The plaintiffs appeal only this part of the district court's decision-contending that the defendants' May 15 statement that "[t]otal losses on these investments for the remainder of 2001 are expected to be substantially lower than in the first quarter [of 2001]" violated the Securities Exchange Act.
The plaintiffs bring their claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. Section 10(b) makes it unlawful to "use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe." 15 U.S.C. § 78j(b). SEC Rule 10b-5 states that it "shall be unlawful for any person . . . [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5(b). Under the law of this Circuit, to state a claim under Rule 10b-5, a plaintiff must allege that, in connection with the purchase or sale of securities, the defendant made material misstatements or omissions of material fact, with scienter, and that the plaintiff's reliance on the defendant's actions caused injury to the plaintiff. Ganino v. Citizens Utils. Co., 228 F.3d 154, 161 (2d Cir. 2000). Section 20(a) of the Act establishes joint and several liability subject to a good faith exception for every person who, directly or indirectly, controls any person liable under any provision of the Act. 15 U.S.C. § 78t(a).
The Securities Exchange Act of 1934 was amended by the PSLRA in 1995. Pub. L. No. 104-67, 109 Stat. 737 (Dec. 22, 1995). The PSLRA established a statutory safe-harbor for forward-looking statements. With certain exceptions discussed further below, where a "private action . . . is based on an untrue statement of a material fact or omission of a material fact necessary to make the statement not misleading," a ...