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2nd Circuit Court of Appeals: “[A] projection is not a magic wand that immunizes all statements that relate to that projection”
Quick Summary:
I. Introduction
Pursuing claims under Section 10(b) of the Exchange Act for allegedly fraudulent financial projections can be difficult as financial projections are forward-looking statements of opinion and often subject to the protections of the Private Securities Litigation Reform Act’s (“PSLRA”) safe harbor provisions.[i] E.g., In re Turquoise Hill Res. Ltd. Sec. Litig., 625 F. Supp. 3d 164, 211 (S.D.N.Y. 2022) (“The PSLRA says that projections are protected unless they are both (a) actually known to be false and (b) not accompanied by meaningful cautionary language.”) (citing Slayton v. Am. Exp. Co., 604 F.3d 758, 766 (2d Cir. 2010) (noting that the “safe harbor is written in the disjunctive”)).
However, even if projections themselves are not actionable, defrauded investors may seek relief by pleading that a defendant’s statements and omissions misled investors about the bases of the projections. A recent decision in the Second Circuit Court of Appeals, In Re Shanda Games Limited Securities Litigation, illustrates several types of statements and omissions about financial projections that can be independently actionable. In Re Shanda Games Ltd. Sec. Litig., 128 F.4th 26, 47 (2d Cir. 2025).[ii] See also Baum v. Harman Int'l. Indus., Inc., 408 F. Supp. 3d 70, 86 (D. Conn. 2019) (statement about projections was not protected by the PSLRA safe harbor where the statement was an “assessment of the Management Projections, rather than an assumption on which the Management Projections were based”); In re AppHarvest Sec. Litig., 684 F. Supp. 3d 201, 253 (S.D.N.Y. 2023) (a statement, even when made in connection with forward-looking guidance, may be “a severable statement of past performance that is not subject to the PSLRA”).
II. Background
Shanda Games Limited (“Shanda”) was a video game company registered in the Cayman Islands whose American Depository Shares (“ADS”) began trading on NASDAQ in 2009. One of Shanda’s primary assets was the right to market a multiplayer online game, Mir II, in China. Mir II had been very successful, generating billions of dollars of revenue. To expand its business into the mobile gaming market, Shanda developed Mir II Mobile (“MIIM”) which was first announced during a July 28, 2013 conference call and would eventually launch in August 2015. Shanda spent several years developing MIIM and management expected MIIM to be highly successful. But before the launch of MIIM, Shanda’s board members authorized a merger, announcing on April 3, 2015 that Shanda had entered an agreement that would take the company private. While the group seeking to take Shanda private had enough control to guarantee the transaction would be consummated, minority shareholders could choose to exercise their appraisal rights and have an independent authority determine the value of their shares.
Under the relevant rules, Shanda was required to file initial and final proxy statements to inform shareholders of the details of the transaction to enable shareholders to make informed decisions. The Initial Proxy was filed on May 5, 2015 and contained financial projections that purportedly “summarize[d] the financial projections provided by management” to Merrill Lynch and the buyers in March 2014 and March 2015. But there were at least two issues with the financial projections published in the proxy statements: first, the projections omitted an entire year of data and thus did not “summarize” all of what had been provided by management to Merrill Lynch and the buyer; second, the projections were developed using a method of depreciation that was not generally accepted and, moreover, was contrary to the method Shanda had used in the past. The Final Proxy, filed in October 2015 after the August launch of MIIM, contained the same financial projection summaries and failed to disclose that the financial performance of the recently released MIIM dramatically improved the company’s financial prospects. Notably, however, the Final Proxy disclosed that the forecasts had not been updated since the original filing.
After the merger was completed, the massive success of MIIM became apparent and the former stockholders learned that their stake in the company had been worth much more than the $7.10 they had received for each ADS. In a separate appraisal suit, a judge concluded the fair value of Shanda’s stock was $16.68 per ADS at the time of the merger. Shanda’s own expert in the appraisal case recognized the depreciation method used in developing the forecasts was not an accepted accounting method. Subsequent to the appraisal suit, plaintiffs brought suit against Shanda and other defendants, alleging violations of the federal securities laws under Section 10(b) of the Exchange Act for false and misleading statements and omissions relating to the forecasts, among other claims. On a Rule 12(b)(6) motion to dismiss for failure to state a claim, the district court dismissed some of the claims against some of the defendants. Plaintiffs appealed.
III. The 2nd Circuit’s Analysis of Statements and Omissions About the Forecast
a. Statements That Projections Are a “Summary” of Data Can Be Misleading When the Projections Omit An Entire Year of Data
On appeal, the Second Circuit Court of Appeals agreed with the district court that the plaintiff had adequately pleaded a claim arising from the defendants’ statement that the financial projections published in the proxy statement were a “summary” of the data that had been provided to Merrill Lynch and the buyers to evaluate the transaction. While Merrill Lynch and the buyers had been provided with five years of projections, the proxy statements only included four. The Court explained that “[w]ith one out of five years of data excluded, the March 2015 Projections do not constitute an accurate summary of the material provided to Merrill Lynch and to the Buyer Group.” In Re Shanda Games Ltd. Sec. Litig., 128 F.4th 26, 47 (2d Cir. 2025). “The question is thus not whether it is misleading to describe the reduction of some amount of information in a condensed presentation as a summary, but whether it is misleading to describe the exclusion of one-fifth of the relevant data underlying a projection as a summary. As to this latter question, we conclude that it is.” Id. The defendants argued that they were entitled to exercise their discretion and judgment in deciding whether the inclusion of all of the data in the proxy statement was important, but the Court explained that once Defendants provided all five years of data to Merrill Lynch and the buyers, defendants could not mislead plaintiffs about what data had been provided by publishing only four years of data in the proxy statement and describing it as a summary of the data that had been provided. Id.
b. Statements Describing the Process for Developing Projections as “Reasonable” Can Be Misleading When the Projections Are Prepared With Accounting Methods That Are Not Generally Accepted
The Second Circuit Court of Appeals also agreed with the district court in concluding that the plaintiff had adequately pleaded a claim arising from the defendants’ statement that the process for developing the financial projections had been “reasonable” and based on the “best available estimates.” The Court of Appeals explained that “a reasonable investor assured by Shanda that the Projections were reasonably prepared would infer that basic accounting principles were followed.” In Re Shanda Games Ltd. Sec. Litig., 128 F.4th 26, 45 (2d Cir. 2025). Thus, because the projections had been prepared using a deprecation method that was not generally accepted, the representation that the process for developing the projections was “reasonable” was misleading.
c. Statements of Opinion Describing a Transaction as Fair Can Be Misleading When the Speaker Has Information that Does Not Align with the Opinion
The Second Circuit vacated the district court’s determination finding Shanda’s opinion that the transaction was fair was not actionable. The Court explained that a fairness statement is an opinion that must be analyzed like any other opinion. In Re Shanda Games Ltd. Sec. Litig., 128 F.4th 26, 49 (2d Cir. 2025). Thus, if the defendants possessed information that did not align with their stated opinion that the transaction was fair, the opinion may be actionable. Defendants argued that because the projections were purportedly protected by the PSLRA’s safe harbor provisions, the plaintiff could not rely upon the alleged falsity of the projections to dispute the fairness opinion. The Court rejected this argument, explaining that forward-looking statements made in connection with a going-private transaction are outside of the scope of the PSLRA’s safe harbor, and added: “But more importantly, a projection is not a magic wand that immunizes all statements that relate to that projection.” In Re Shanda Games Ltd. Sec. Litig., 128 F.4th 26, 49 (2d Cir. 2025). In other words, even if financial projections are protected by the PSLRA’s safe harbor provisions, as they often will be, the safe harbor does not necessarily immunize other statements relating to those financial projections from liability. The Court further explained that the plaintiff adequately alleged that the fairness statement was misleading because, by the time the final proxy statement was published, “MIIM had launched and the game’s initial success was such that the Defendants “could not possibly have believed the Buyout was fair.”” Id. at 49. Thus, even though the defendants disclaimed the projections as not being up to date and had no duty to provide updated financial projections, the fairness statement was actionable because defendants possessed information at the time that did not align with the opinion.
IV. CONCLUSION
Financial projections are forward-looking statements of opinion and thus are often protected by the PSLRA’s safe harbor provisions, making it hard for defrauded investors to state a claim. However, even if projections themselves are not actionable, defrauded investors may seek relief by pleading that a defendant’s statements and omissions misled investors about the bases of the projections.
[i] The PSLRA’s safe harbor provisions do not protect all forward-looking statements. Excluded from the safe harbor are forward-looking statements made by an issuer in connection with a going-private transaction. 15 U.S. Code § 78u–5(b)(1)(E).
[ii] In In re Shanda Games, the plaintiffs also alleged the projections, themselves, were false. In finding plaintiffs adequately alleged falsity, the court found that while the projections were forward-looking, since they were made in connection with a going-private transaction, they were not protected by the PSLRA’s safe harbor provisions and were, thus, actionable. However, the purpose of this article is to illustrate how statements concerning financial projections—as opposed to the projections themselves—can be actionable.
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