An Uninterpretive Interpretive Release: Expanding Liability for Third Party Misstatements (Part 3)

We are discussing the much awaited  interpretive release from the SEC containing guidance on the use of company websites. 

The release discusses the issue of hyperlinks and the problem of adopting third party statements linked to the company's web site.  The general rule is that companies are not liable for third party statements.  To the extent they "adopt" them, however, the company will be treated as having made the statement and potentially liable for any inaccuracies.  The issue arises in the Internet context most severely where a company links third party statements, whether analyst reports or media commentary, on a selective basis.  This creates the appearance that the company is linking only to content that it approves.   As the release noted:

• While the use of "exit notices" or "intermediate screens" helps to  avoid confusion as to the source of the third-party information, no one type of "exit notice" or "intermediate screen" will absolve companies from antifraud liability for third party hyperlinked information. For example, if there is only one analyst report out of many that provides a positive outlook on the company's prospects, and the company provides a hyperlink to the one positive analyst report and to no other, and does not mention the fact that all the other analyst reports are negative on the company's prospects, then even the use of an "exit notice" or "intermediate screen" or explanatory language may not be sufficient to avoid the inference that the company has approved or endorsed the one positive analyst's report.

Sound advice, although even mentioning that there are other reports that disagree will probably not insulate the link from successful allegations that the company approved the one positive report.  To avoid this, the traditional advice (other than don't do it, particularly with respect to links to analyst reports), is to have the company link to all materials within a classification, good or bad (along with a relevant legend or "exit notice"), whether all articles on the company or all analyst reports.  The key is to have the selection of material that will be linked to the page not be in any way influenced by the contents.   The release repeats this advice. 

• "[I]f a company has a media page and simply provides hyperlinks ot recent news articles, both positive and negative, about a company, the risk that a company may have liability regarding a particular article or that it endorsed or approves of each and every news article may be reduced."

All straightforward enough except that the release also notes that "a company would not be shielded from the antifraud liability for hyperlinks to information it knows, or is reckless in not knowing is materially false or misleading." 

This is true even if the company "uses a disclaimer and/or other features designed to indicate that it has not adopted the false or misleading information to which it has provided the hyperlink."  

Presumably officials in the company read all articles and analyst reports linked to the page.  As a result, they know if there are any inaccuracies.  The release seems to say that if they know, the company will be treated as having approved the false statement.  The approach squarely contradicts the advice that  companies can post all materials within a category, irrespective of the content.  If means that companies must delete or remove materials because of their contents.  Said another way, the SEC is effectively stating that companies must vouch for the contents of the material linked to its page.

Assume, therefore, that a company links to all analyst reports.  If one of the analyst reports falsely states that the company has had a breakthrough in its product development (assuming the information came from sources outside the company), the release suggests that the company may be deemed to have adopted the statement.  Similarly, what if an analyst report contains a projection that the company knows is lacking in a reasonable basis.  Perhaps the company is liable for these as well, assuming they know (which they will). 

There is no question that conveying false information to the market through the medium of third parties can violate the antifraud requirements.  Linking to false information can constitute fraud where the company somehow suggests that it has approved the contents.  But linking to all publications, consistently over time, without editorial comment, in a neutral matter, is effectively a disclaimer at any effort to approve or disapprove the contents.  In those circumstances, it is hard to see why or how a company would be liable for inaccurate information in the third party statement, even if it knows of the inaccuracy. 

The SEC's statement is too blunt.  It in fact may well have the effect of discouraging links to third party information, even if done in a neutral and comprehensive way.