Important Warning or Dangerous Misdirection: Rethinking Cautions Accompanying Investment Predictions

Franklin A. Gevurtz

We are constantly bombarded with cautions warning us of dangers to our health or wellbeing. Sometimes, however, cautions increase the danger. This Article addresses one example: cautions warning investors of the risks that predictions regarding corporate performance will not pan out.

Here, the danger is investors falling prey to trumped up predictions of corporate performance, the result of which is to misallocate resources, increase the cost of capital for honest businesses, and create a drag on the overall economy. This Article shows how the typical cautions accompanying predictions of corporate performance facilitate rather than avoid this danger by misdirecting both investors and courts from looking at what they should: the credibility of the speaker in giving the prediction.

To solve this problem, this Article introduces a radically different approach to determining the legal impact of cautions accompanying predictions of corporate performance. This is to distinguish between cautions alerting investors to problems with the speaker’s credibility in giving the prediction (“credibility cautions”) versus those that simply list various risks that might lead the prediction to not pan out (“contingency cautions”). Only the former should provide a defense to claims of securities fraud based upon a failed prediction.