Drawing the Line Between Harmless Puffing and Securities Fraud

There is sometimes a fine line between the Silicon Valley entrepreneur who “fakes it till they make it” by engaging in fraud and the disruptive visionary taking on the established order with unwavering optimism. Legally speaking, one of the fault lines separating the two is the difference between garden-variety optimism that no reasonable person would use to guide an investment—often called “puffery” in applicable case law—and knowingly false statements. But when do rosy statements cross the line from immaterial puffery to actionable securities fraud under the law?

In the Ninth Circuit, staying onside between “puffing” and “fraud” involves “expressing an opinion” that is not “capable of objective verification.” Macomb Cty. Emps.’ Ret. Sys. v. Align Tech., Inc., 39 F.4th 1092 (9th Cir. 2022). Non-actionable puffery is usually found based on vague statements of optimism such as “good,” “well-regarded,” or other “feel good monikers”; professional (and often amateur) investors know how to devalue the optimism of corporate executives. But when even generalized optimism overreaches by contradicting known facts, statements may ripen from puffery to fraud.

Two recent Ninth Circuit decisions stake out helpful guideposts. The first case is Macomb County Employees’ Retirement System v. Align Technology, Inc., in which the Ninth Circuit agreed that misstatements about the growth potential in the Chinese market were non-actionable puffery. There, the defendant was accused of securities fraud for wrongly describing China as “a great growth market,” “a huge market opportunity,” “a market that’s growing significantly for us,” and possessing “really good” “dynamics,” and describing its performance as “tremendous” and “great.” Because these characterizations were not “objectively verifiable,” the Ninth Circuit held that they were not the “kind of precise information on which investors rely when valuing corporations.” Significantly, the company’s sales were still growing in China (albeit at a diminished rate), so the descriptions did not “affirmatively create an impression of a state of affairs that differed in a material way from the one that actually existed.”

But our second case shows that even “general statements of optimism, when taken in context, may form a basis for a securities fraud claim.” Glazer Capital Mgmt., L.P. v. Forescout Techs., Inc., No. 21-16876 (9th Cir. 2023). In Glazer Capital Management, a cybersecurity firm allegedly made false statements in response to sensitive questions about sales performance on an earnings call. In particular, the cybersecurity firm said that (1) its sales representative numbers were “tracking very well against our sales productivity” and (2) it had “a very large pipeline” of potential deals that would likely close by the end of the year. While these statements may have been general, they contradicted the allegedly true facts that (1) the number of experienced sales representatives was shrinking below acceptable levels and (2) the company pressured sales representatives to inflate the number of deals in the pipeline that were likely to close. The context of these statements also mattered: They were made on earning calls in response to specific questions by financial analysts about disappointing financial results. These contradictions elevated the statements from harmless puffery to actionable fraud.

Illustrating that even federal judges may differ in distinguishing between securities fraud and puffery, Glazer Capital Management includes a dissenting opinion. Disagreeing that the alleged puffery amounted to fraud, the dissenting judge saw the complaint as rather reflecting “business judgments and opinions about the timing of deals and the underlying causes of missing second quarter forecasts.” The complaint merely “reflect[ed] a difference of opinion between the [witnesses] and upper management as to when to characterize a deal as a ‘tech win’ or ‘committed,’ and how much time to allot to closing such deals when including them in earnings forecasts.”

One final lesson to take from both Macomb County and Glazer Capital Management is that courts considering the puffery defense do not analyze the alleged statements in a vacuum. Regardless of how anodyne a statement may seem on its face, courts may turn to the objective truth or falsity of the statement as framed in the complaint when dismissing or upholding the securities fraud claims. This should put management notice to take extreme care when communicating with investors about business performance and other objectively verifiable metrics.