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False Financial Guidance

Companies routinely publish financial guidance. Such guidance (or forecasts) include predictions of future net income, revenue, or costs, as well as many other financial and non-financial measures. The securities laws forbid companies from publishing false or misleading financial guidance.

Because guidance is (in part) a prediction of future events, and claims about future events are, by nature, typically indeterminate, the securities laws provides special protection for companies and additional hurdles for plaintiffs alleging that the company published false or misleading guidance. The special protection is referred to as the “forward-looking statements safe harbor.” In order to overcome the protections of the safe harbor, plaintiffs are forced to satisfy heightened pleading standards. As such, forecasts may considered false or misleading if company insiders knew that the company would not achieve them. Guidance may also be false or misleading if, though achievable, it was based on knowingly false assumptions.

For example, suppose a company publishes guidance that its fiscal year end revenue will be $100 million, and that $50 million of that revenue will be attributable to a contract with a large customer. If the customer informs the company that it will probably not go through with the contract, or that the customer intends to push the contract into the next fiscal year, then the important assumption underlying the $100 million revenue guidance—that the contract would be executed in the present fiscal year—would be false. In such a case, the company may be held liable to investor for losses associated with the share price decline when the company finally announced that its fiscal year revenue would be only $50 million, rather than $100 million.

The special protections to companies afforded by the forward-looking statement safe harbor, in addition to the legal challenges that accompany all securities fraud claims, require the skill of an experienced investment lawyer. The securities fraud attorneys at GPM possess the skill and experience necessary to effectively prosecute such cases.

If you believe a company has issued false or misleading financial guidance, please contact GPM.

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