(The news featured below is a selection from the news covered in Federal Securities Law Reporter, which is distributed to subscribers of Federal Securities Law Reporter.)

Statements on Anticipated Growth Could be Actionable

A securities class action against a fast food restaurant company and its senior officers survived a motion to dismiss. According to a federal district court (ND Ill), investor claims that the company made optimistic predictions of future economic growth, despite internal doubts about actual growth prospects, and manipulated financial results in order to meet analyst expectations were sufficient.

Much of the complaint was based on information derived from a confidential source and confidential internal forecasts that were challenged by the corporation as lacking reliability. While the court found that the complaint's description of the confidential source pleaded sufficient facts to support the probability that the witness had first hand knowledge to support the allegations, it acknowledged that the confidential internal forecasts were not described with the necessary particularity. Nevertheless, it allowed allegations supplied by the confidential source, which were based on these forecasts, to be considered, reasoning that to require the confidential source to give details of the internal forecasts that could essentially "out" him was not "in-line with the policy considerations underlying the PSLRA."

In denying the motion to dismiss, the court held that the earnings projections made by company officers were not absolutely protected by the Private Securities Litigation Reform Act's safe-harbor for forward-looking statements. The allegations that the statements were made with knowledge that internal forecasts projected declining system-wide sales growth sufficiently pleaded facts to support the claim that the projections were misleading.

Finally, the claims that the corporation did not follow proper accounting standards were allowed to move forward. Given "the complex and ambiguous nature" of the pertinent accounting standards in expensing costs associated with research and development of an internal computer system, valuing long-term assets and reporting accruals and loss reserves, the court decided that it was improper to determine whether they were properly accounted for at the pleadings stage.