In In re Harman Int’l Indus. Sec. Litig., No. 14-7017, 2015 BL 199009 (D.C. Cir. June 23, 2015), the United States Court of Appeals for the District of Columbia reversed and remanded the dismissal of Arkansas Public Employees' Retirement System’s ("Plaintiff") complaint alleging Harman International Industries, Inc. (“Harman”) violated Section 10(b) of the Securities Exchange Act of 1934 (the “Act”), Rule 10b-5 thereunder, and Section 20(a) of the Act. The court held the complaint stated a plausible claim of securities fraud with respect to three alleged statements and, thus, survived Harman’s motion to dismiss. 

According to the allegations in the complaint, Harman manufactured high-quality audio equipment. Following an announcement of its potential acquisition, the company’s stock price rose markedly. Upon abandonment of acquisition plans, however, share price fell by more than 24%, and fell further in early 2008 when Harman projected lower earnings per share due in part to a major change in its personal navigational device (“PND”) business. 

Plaintiff filed suit alleging Harman and three of officers made materially false and misleading statements and failed to disclose material adverse facts regarding Harman’s financial condition in annual reports and during conference calls. The complaint asserted that the company characterized PND sales as strong despite having missed sales targets and having made sales at substantial discounts due to obsolescence. The United States District Court for the District of Columbia granted Harman’s motion to dismiss for failure to state a claim, holding two of the statements fell within the statutory safe harbor for forward-looking statements and treating the third statement as “puffery” and, thus, not actionable.

To prove securities fraud, a plaintiff must show the following: (1) a material misrepresentation or omission in connection with the sale or purchase of a security; (2) scienter; (3) reliance; (4) economic loss; and (5) loss causation. To qualify for the safe harbor, meaningful statements of caution must accompany forward-looking statements. These statements of caution must identify factors that may materially affect outcomes represented in the forward-looking statements and must include information that is specific to the company’s status at a specific time. 

The DC Circuit held that two of the allegedly false forecasts were not entitled to safe-harbor protection because they were not accompanied by meaningful cautionary statements. Specifically, the court found Harman’s use of boilerplate phrases, such as, “[t]his is a forward-looking statement” and “not guarantees of future performance” inadequate, because they were not tailored to the specific circumstances. Moreover, because shareholders alleged that Harman and the officers knew the company’s PND inventory was obsolete and did not disclose that the obsolescence “had already materialized,” the statements did not qualify for safe harbor protection.   

Next, the court held the reference to “very strong” sales was not puffery, finding that a statement cannot be puffery if a reasonable investor might understand the statement as an account of historical fact rather than pure corporate optimism. The court noted statements constituting puffery employed general terms of optimism so unconnected to anything capable of measurement that a reasonable person would not consider such terms important to an investment decision. The court held that because the statement related to a specific product and time period, it might be understood as a statement regarding Harman’s recent financial performance and, thus, did not constitute puffery.

Accordingly, the court reversed the dismissal of the complaint for failure to state a claim and remanded the case for further proceedings.

Primary materials for this case may be found on the DU Corporate Governance website.