For sailors, a “safe harbor” might be a calm bay after choppy open waters.
For public companies, a “safe harbor” also is a shelter — a legal one should their good-faith projections about the future not pan out, explains Christine Sgarlata Chung, an assistant professor at Albany Law School.
What got me interested in learning more about that kind of safe harbor was the slew of class-action lawsuits filed during the spring and summer against Delcath Systems Inc. of Queensbury.
The company is seeking U.S. Food and Drug Administration approval for a medical device that delivers high doses of chemotherapy to fight liver cancer, known as the Melblez Kit.
But an OK has been elusive. In fact, the agency just sent Delcath back to square one, deciding not to approve the kit in its current form and asking the company to schedule new clinical trials to demonstrate that the product’s benefits outweigh the risks.
Even before that development, shareholders were up in arms. Their class-action lawsuits allege the company “made false and/or misleading statements, as well as failed to disclose material adverse facts about the company’s business, operations and prospects,” which hurt their investments.
Company spokesman John Carter declined to discuss the litigation, in particular whether it had a hand in Delcath’s firing of CEO Eamonn Hobbs earlier this month.
According to the lawsuits, the value of Delcath shares dropped precipitously between April 2010 and May of this year, seemingly each time the FDA found fault with some aspect of the Melblez Kit. From a price of about $16 per share three years ago, the stock was trading at 46 cents in May; shares are down to about 30 cents this week.
One of the lawsuits specifically cites the safe-harbor provisions of securities law and contends they’re not applicable to Delcath, alleging the company made so-called “forward-looking statements” that it knew to be false.
U.S. securities law was refined by Congress in 1995 to encourage public companies to be more open about their operations by shielding them from lawsuits when forward-looking statements — projections on earning or revenue, for instance — proved wrong.
Prior to the changes, companies steered clear of such pronouncements, said Albany Law’s Chung, describing a race-to-the-courthouse environment that existed as shareholders and law firms looked to make money off companies with volatile stock.
Indeed, the congressional conference committee that hammered out the Private Securities Litigation Reform Act of 1995 talked of “frivolous” lawsuits and “abusive litigation” as the reasons behind the need to create a safe harbor.
Chung worked in the enforcement division of the U.S. Securities and Exchange Commission early in her career and later was a partner at a big-city firm, where she focused on securities and white-collar crime.
She said the reforms were intended as a balance point between the interests of companies and shareholders. “We want more information, not less” to be released, she said, but “we want predictions made in good faith.” The safe harbor offers “a safe space to make these statements,” she added — as long as the rules for doing so are followed.
That’s why you’ll see in releases from publicly traded firms line after line of apparent boilerplate on the use of terms like “believe” and “intend” and how “certain risks and uncertainties … could cause actual results to differ materially from … our present expectations or projections.”
It’s not gobbledygook after all, but a carefully selected port from storm.
Marlene Kennedy is a freelance columnist. Opinions expressed in her column are her own and not necessarily the newspaper’s. Reach her at email@example.com.