In early May 2001, American Express Fihinancial Advisors (AEFA) CEO James Cracchiolo received a fax from AEFA CFO Stuart Sedlacek advising him that AEFA was facing additional losses on its highyield debt investments beyond those already booked. American Express Company (AMEX) COO Kenneth Chenault was advised of the situation the next day. He was told that the deterioration of the high-yield debt portfolio was so bad that “even the investment-grade CDOs [collateralized debt obligations] held by American Express showed potential deterioration” because defaults on the underlying bonds had risen so sharply. Chenault asked, “What are we talking about here?” Cracchiolo replied, “We really don’t know enough to even give you a range.” 

In the meantime, on May 15, 2001, AMEX filed its quarterly report (Form 10-Q) for the first quarter of 2001. In it, the company reported the $182 million in first-quarter losses from AEFA’s high-yield debt portfolio. The company explained, “The high-yield losses reflect the continued deterioration of the high-yield portfolio and losses associated with selling certain bonds.” Importantly, it added, “Total losses on these investments for the remainder of 2001 are expected to be substantially lower than in the first quarter.” 

In July 2001, however, AMEX recognized that losses from the debt portfolio would be $400 million. Investors who purchased AMEX stock between the 10-Q filing and the disclosure of the actual losses sued AMEX and certain officers under Securities Act Rule 10b–5 for making erroneous forward-looking statements. Were the investors successful?