In re Burlington Coat Factory Securities Litigation

Brief Fact Summary.

Burlington Coat Factory Warehouse Corporation’s (BCF) (Defendant) year-end profits and income results for 1994 were lower than market expectancies. Investors (Plaintiff) alleged that BCF had a duty to correct an expression of comfort with specialists’ predictions that BCF had prepared in November 1993.

Synopsis of Rule of Law.

The intentional revelation of regular income prediction fails to elicit any duty to update.

Facts.

In September 1994 BCF broadcast its fourth quarter and full fiscal year-end profits and income results for the year, which were lower than the market’s expectancies and BCF’s stock plummeted, reporting losses of 30% in one day. A few days later, BCF attempted to explain itself and stock fell even lower. Investors brought suit, alleging that BCF had a duty to correct an expression of comfort with specialists’ predictions that BCF had prepared in late 1993. For instance, in early 1994, BCF’s CEO had declined to comment on specialists’ income predictions for both the third quarter of 94 and the entire year. The district court dismissed for not stating claims where relief could be granted and for not pleading those claims with ample accuracy. The court of appeals granted review.

Issue.

Is there a duty to revise after the intentional revelation of regular income predictions?

Held.

(Alito, J.) No. There is no duty to revise after the intentional revelation of regular income predictions. A duty to update and a duty to correct are very different claims and the investors appear to be emphasizing both. The duty to correct necessitates a business fix previous substantial statements that were true when created but have since become false due to ensuing events. In this case, the error(s) that were said to be present in the 1993 prediction were never alleged in any detail by the investors, they never stated how, what or when the errors were found. So, the investors are lacking in sufficiently pleading their duty to correct claims. Regardless, the claims are more properly described as “duty to update†claims. 
  The duty to update involves statements that were plausible when made but become deceiving in light of ensuing events. The new idea here is if there is a duty to update, regular, everyday predictions, like the income estimation seen here. The investors’ contention appears to be that BCF has a constant duty to reveal information following the 1993 “comfort†statement as BCF acquired it due to the magnitude of it altering the income prediction for fiscal 1994. To decide if such a duty exists, it must be determined what a reasonable investor would expect of the federal securities regulatory arrangement, of which there are three relevant elements: (1) there is no universal duty to inform the public of all substantial information, save for certain reporting period obligations; (2) there is no duty to update the public as to how a quarter is progressing due to reports of past success do not include depictions that the trend will persist;
(3) and the present regulatory arrangement encourages businesses to prepare and reveal internal projections by defending them from liability for revealing those projections, regardless of whether they turn out to be false. So, to raise the requirements connected with revealing sensibly created internal projections will probably dissuade businesses from supplying such material, which contradicts the third element. Referencing elements one and two, regular income predictions fails to include an implied depiction by said company that continuously update the public with all material in connection with the prediction. Due to the federal securities laws wanting to support revealing of business projections, it is illogical to construct a rule that creates a duty of constant revelation of all substantial information for fear it would hinder such revelations. So, under the present regulatory structure, the investors’ revelations theory has to fail. Affirmed.

Discussion.

The courts are still at odds over if a firm has a duty to update a statement that was factual when created but after ensuing events became false, as evident in this case. Finding that this duty fails to exist under Rule 10b-5 for forward-looking statements seems to be the inclination of the courts as of late.