Nacchio and the Supreme Court (The Case of Discouraging Disclosure)

The brief for certiorari also trots out the position that the 10th Circuit decision will result in less disclosure, discouraging the use of projections.

• It will also seriously discourage companies from issuing projections at all. Nacchio’s inside information was supposedly “material” here only because Qwest had first made public projections. Supra 13, 20-21. If making a projection can render internal forecasts and interim results “material,” and subject executives to criminal liability, without reasonable safeguards like those applied in Shaw and Wielgos, companies will not do it.

There are several responses to this. 

First, as most securities lawyers already know, the issuance of projections is already fraught with risk.  Projections must have a reasonable basis and, when proven wrong, are open to allegations of fraud.  Once issued, most securities lawyers likewise know that projections may require updating if ultimately they cease to be accurate.  That there may be liability for issuing projections and then trading on information that suggests the projections are no longer valid is already widely known and unlikely to be altered by anything in the Nacchio decision.

Second, the argument that companies may restrict disclosure is an old one, soundly rejected by the Supreme Court in Basic.  As the Court noted in that case:

• The final justification offered in support of the agreement-in-principle test seems to be directed solely at the comfort of corporate managers. A bright-line rule indeed is easier to follow than a standard that requires the exercise of judgment in the light of all the circumstances. But ease of application alone is not an excuse for ignoring the purposes of the securities acts and Congress' policy decisions.

Basic, 485 US at 236.

Finally, it is a strange argument to suggest that it was the internal forecasts that subjected Nacchio to criminal liability.  It was his trading that did that.  Had he not traded or traded after the information was disclosed, there would have been no criminal liability.