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October 14, 2003

Mother Always Said, Don't Brag

The exuberance and assertiveness of marketing people can make enormous contributions to a company. They can also put the company in a deep hole. Here's an example of the latter: Some not-atypical, faintly boastful language in a company's press releases language, of a kind your marketing people might well have used themselves, kept the company mired in a securities class-action lawsuit, when the lawsuit might otherwise have been dismissed.

A Sad but Familiar Tale

Log On America (LOA) was a Rhode Island-based Internet access provider for residential and commercial customers. From 1992 to early 1999, LOA grew into a company with nine full-time employees and revenues of just under $760,000, but it never once turned a profit.

Despite this decidedly less-than-stellar track record, LOA decided to go public. In April 1999 it went out at $10, the price spiked to $37 on the first day of trading, and closed at $35 per share. LOA went on a buying spree, using its capital and its publicly-traded "currency" (shares) to acquire various New England internet service providers, growing its customer base from 1,000 to over 30,000.

The Fateful Press Releases

During those exhilerating days, LOA issued press releases and interviews that would come back to haunt them in the subsequent securities class-action lawsuit. The company said, for example, that:

  • LOA was the "premier provider of high-speed DSL services in the Northeast corridor";
  • LOA was "a Northeast Regional [CLEC] and Information Internet Service Provider (IISP) providing local dial-tone, in- state toll, long distance, high speed Internet access and cable programming solutions . . . to residential and commercial customers through the Northeast";
  • LOA was "one of New England's leading providers of bundled communications services";
  • LOA was "in a dominant position in the market for integrated data and voice services" and "a dominant super regional communications player."
(Emphasis added.)

The Lawsuit

In an all-too-familiar story, LOA's rapid post-IPO expansion resulted in exploding net losses, which in turn caused the stock price to drop. And then, in early 2000, the tech bubble burst. LOA's stock dropped even more, down to a low of $0.10 per share. NASDAQ eventually delisted the stock.

As night follows day, the securities class-action lawyers found their way to LOA. They filed the usual lawsuit accusing LOA's CEO and CFO of securities fraud, alleging that those two officers had engaged in "a massive fraudulent scheme to deceive investors into thinking [LOA] was a successful 'dominant' telecommunications company, when in actuality it was not."

The LOA officers did they usual thing: they filed a motion to dismiss the lawsuit. The judge granted some portions of their motion, but also kept other, significant portions of the lawsuit alive. Why? Because, the judge concluded, some of the statements in LOA's press releases and interviews might well have been material misstatements:

The representation that LOA was the "premier provider of high-speed DSL services in the Northeast corridor," as it was described in a May 17, 1999 press release, is much more than mere puffery: it is a statement of LOA's present status and capabilities, and connotes that LOA is comparatively superior to all other high-speed DSL service providers in the Northeast corridor.

Likewise, the statements that LOA's transaction with Nortel would "help further solidify [LOA's] dominant position in the market for integrated data and voice services," and that LOA's "proven early market entry strategy is positioning it as a dominant super regional communications player," are both actionable: they clearly imply a comparison to competitors and suggest that activities undertaken by LOA as of December 17, 1999 or February 10, 2000 had made or were making it "dominant" over all other competitors in its field.

The same is true for the statement that, by October 28, 1999, LOA had become "one of New England's leading providers of bundled communications services." Assuming that the substance of the statement is untrue (as Plaintiffs have alleged, and as Defendants have conceded for purposes of this motion), this statement is material, as it connotes superiority over the vast majority of other bundled communications services providers.

(Paragraphing supplied.)

Moreover, LOA apparently was never able to offer cable services, even though they had described themselves as a cable-programming provider.

(Scritchfield v. Paolo, 274 F. Supp. 2d 163 (D.R.I. 2003).)

Some Possible Lessons

  • Think carefully before using superlatives like "premier provider" and "dominant player" to describe your business. The judge and jury might view such statements as non-actionable puffery, or they might regard them as false statements. (Indeed, the Scritchfield judge said that the mere fact that the defendants made a puffery argument was a concession that the statements were not true.)

    I'm not a marketing guy. But my personal belief is that superlative language of this kind seldom does you much good in the marketplace. I think customers and investors tend to discount such language. It therefore provides you with little or no benefit, while still increasing your potential vulnerability to a securities class-action lawsuit. Talk about the worst of both worlds.

  • There's another reason that using pharases like "dominant player" is a bad idea. Someday you may want to acquire, or be acquired by, another company. You might have to do a Hart-Scott-Rodino antitrust filing to get government approval for the acquisition. That filing may have to contain your press releases. You really don't want the government's antitrust reviewer to see your own press releases describing you as the "dominant player" in any particular market or submarket -- at the very least, it likely would complicate the approval process.

Thanks to Securities Litigation Watch for the pointer to this story.

October 14, 2003 in Communications, Litigation, Marketing, Securities law, SEC regs / actions | Permalink

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Comments

Well done, thank you.

Posted by: Bruce Carton at Oct 15, 2003 12:25:43 PM

Yes, good stuff. Welcome to the blawg world.

Posted by: TPB, Esq. at Oct 15, 2003 1:07:18 PM

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