The COVID-19 pandemic has already prompted a wave of litigation, including nearly three dozen securities lawsuits. In an effort to protect businesses from what it characterizes as “unjustified COVID-19 lawsuits,” the U.S. Chamber of Commerce recently filed a rulemaking petition with the SEC seeking to enhance protections against pandemic-related securities claims. Here’s an excerpt from Kevin Lacroix’s D&O Diary blog:
On October 30, 2020, the U.S. Chamber Institute for Legal Reform and the Chamber’s Center for Capital Markets Competitiveness filed a petition with the Securities Exchange Commission, pursuant to Rule 192(a) of the Commission’s Rules of Practice. (Rule 192(a) provides that “Any person desiring the issuance, amendment or repeal of a rule of general application may file a petition therefore with the Secretary” of the SEC.) The petition urges that the SEC should exercise the authority given to the agency in the PSLRA an “act without delay to place reasonable limits on securities litigation arising out of the COVID-19 pandemic.”
The Chamber’s petition asks the SEC to consider several specific actions. These include:
– Using its authority under the PSLRA to “bar liability for statements about a company’s plans or prospects for getting back to business, resuming sales or profitability, or other statements about the impacts of COVID-19, whether forward-looking or not—as long as suitable warnings were attached.”
– Alternatively, limiting liability for all such statements to circumstances in which the plaintiff can prove that the speaker had actual knowledge of their falsity (which would have the effect of treating all such statements as “opinions” for purposes of the securities laws).
– Requiring financial statements – which aren’t protected by the PSLRA safe harbors – to include language reminding users that a number of the elements of those statements “are determined on the basis of projections of future business or market conditions or by applying “mark to market” standards and stating that due to the tremendous uncertainties flowing from the pandemic and its effect on the economy, there is a greater possibility of variation than in the past.” Liability for pandemic-related misstatements in financial statements that include these warnings would be barred or, or alternatively, treated as the equivalent of opinions requiring proof that the company subjectively knew they were false in order for them to be actionable.
Kevin’s blog reviews the petition in detail, as well as some of the impediments to any quick action by the SEC on it. He also provides additional context for the concerns about a potential explosion in COVID-19-related securities litigation in light of the rise of “event driven” securities class actions in recent years.
-John Jenkins, TheCorporateCounsel.net November 11, 2020
