#MeToo Breaks New Ground for Corporate Liability Under Federal Securities Laws
The legal landscape has changed dramatically since the commencement of the #MeToo movement. Companies’ potential exposure to employment law liability has significantly increased, but now employment claims are not the only ones requiring the attention of the corporate world.
A new ground for liability against corporations and their high-level executives has emerged under the federal securities laws in the wake of #MeToo. These securities claims have not been brought by employees or victims of harassment and discrimination. Instead, they have been lodged by corporate shareholders alleging fraud and misrepresentation in codes of conduct and other internal, written procedures and as part of other corporate compliance efforts.
In the last several months, two New York federal courts have squarely addressed these federal securities law claims, and a third case recently settled for $240 million. These recent cases make two things clear: (i) courts are taking these claims seriously and are scrutinizing the statements of companies and their executives, and (ii) these claims are becoming more common and certainly expose the company and its executives to significant financial liability.
In re Liberty Tax, Inc. Securities Litigation
In January 2020, the federal district court in the Eastern District of New York granted defendants’ motion to dismiss the complaint in In re Liberty Tax Securities Litigation. In this action, a group of shareholders filed a putative class action alleging the company, Liberty Tax, Inc., and its officers violated federal securities laws by making false and misleading statements in SEC filings and other public communications relating to Liberty’s compliance efforts, disclosure procedures and internal controls, in an effort to cover up the CEO’s sexual harassment and misconduct.
Plaintiffs alleged that while the CEO was engaging in sexual harassment and misconduct, the defendants made an SEC filing stating that Liberty’s “disclosure controls and procedures were effective” and that Liberty implemented a “remediation plan [that] consisted of modifications and improvements to [Liberty’s] internal controls in the areas of staffing, policies and procedures, and training”; and that the CEO publicly stated that the “compliance task force was very successful in analyzing, reviewing and evaluating the work of [Liberty’s] compliance department and taking appropriate action to ensure that the standards of the Liberty brand are upheld and that those who do not uphold Liberty standards are exited from the Liberty system.” The court found that the plaintiffs did not adequately allege an actionable misrepresentation but that they merely contended that the task force could not have been effective since it failed to detect the CEO’s misconduct. As a result, the court found that the ‘compliance task force’ statement was a “simple and generic assertion about the success of the task force” and, along with the other statements, was mere “puffery,” and dismissed the complaint.
Construction Laborers Pension Trust for Southern California v. CBS Corporation
Also in January 2020, the federal district court in the Southern District of New York decided Construction Laborers Pension Trust for Southern California v. CBS Corporation, and this time, allowed a securities fraud claim to survive. In this action, a pension fund brought a putative class action on behalf of shareholders against CBS and its executives, alleging fraud in violation of federal securities laws relating to the alleged misconduct of its CEO. The court explained that corporate codes of conduct are “generally incapable of forming the basis” of a federal securities law claim because they are “general statements about reputation, integrity, and compliance with ethical norms” that equate to “immaterial puffery”. The court went on to explain that while rare, a claim will survive a motion to dismiss if the company was “wielding its code of conduct” to reassure investors that the company does not have internal issues, or if statements made by the company are “sufficiently concrete” for a reasonable investor to rely on them.
Plaintiffs alleged that CBS made various false or misleading statements, including that CBS “believes in an environment that is free from workplace bullying[,]” “CBS has a ‘zero tolerance’ policy for sexual harassment[,]” and “[CBS] will not tolerate retaliation against any person who makes a good faith report of misconduct[,]” among others. The court found that these statements were not false or misleading because they were “far too general and aspirational to invite reasonable reliance” and were not made to reassure investors that the CBS executives were not susceptible to sexual harassment claims. The court did find that two statements came “close” to being actionable, but ultimately found that those statements did not guarantee any specific steps would be taken by the company and did not provide assurance that CBS’s high-level executives would not be subject to a “#MeToo moment.”
The court, however, did determine that the plaintiffs had a claim arising out of the CEO’s public statement made at a Variety Magazine event that “[#MeToo] is a watershed moment. . . . It’s important that a company’s culture will not allow for this. And that’s the thing that’s far-reaching. There’s a lot we’re learning. There’s a lot we didn’t know.” The court explained that the CEO’s statement was material and misleading because it implied that the CEO had not known about sexual harassment reports within CBS when, at the time the statement was made, the CEO was “actively seeking to conceal his own past sexual misconduct from CBS and the public.” The court concluded that a reasonable investor could rely on the statement as an assurance that CBS did not have exposure to the #MeToo movement. Thus, the court permitted the claim to survive and the litigation now continues.
In re Signet Jewelers Ltd. Securities Litigation
In In re Signet Jewelers Ltd. Securities Litigation, the plaintiffs, who were shareholders of the company, sued Signet Jewelers Limited, and certain executives, alleging fraud in violation of federal securities laws based on Signet’s alleged misrepresentations that it made employment decisions “solely” on the basis of merit and that it had “confidential and anonymous mechanisms for reporting concerns.” The court denied defendants’ motion to dismiss, finding defendants’ statements were actionable because they were “directly contravened” by allegations in the complaint that the company conditioned employment decisions on whether female employees acceded to sexual misconduct and harassment. Subsequently, the court denied the defendants’ motion for judgment on the pleadings and found that in the face of accusations of “rampant sexual harassment” the company denied the accusations in SEC filings and “point[ed] to their corporate policies” to “reassure the investing public that Signet did not, in fact, have a toxic workplace[,]” and that a reasonable investor would rely on those statements.
In March 2020, the parties reached a settlement and filed papers requesting confirmation of a $240 million settlement.
While there has been uncertainty as to how courts will determine securities claims arising out of #MeToo, the two most recent decisions in 2020 in New York have provided some important guidance. When analyzing securities claims, courts will determine whether the statements are material statements of fact that a reasonable investor would rely on, or are merely general statements relating to the company’s compliance efforts that equate to no more than “immaterial puffery.” If the statements are at all concrete, or if a company points to internal policies as reassurance of the lack of sexual harassment allegations, courts very well may allow a claim to survive.
The most recent decisions, and particularly the In re Signet settlement of $240 million, should serve as cautionary tales to all companies. While securities fraud plaintiffs still have multiple burdens to overcome, with the spotlight of #MeToo and similar movements bringing stronger focus on sexual harassment and other discrimination claims, companies are potentially facing even greater risk of being a party to a securities fraud claim by perhaps hundreds or thousands of potential plaintiffs, seeking significant damages.
Companies should conduct proper due diligence to ascertain their potential exposure, taking all appropriate steps possible, such as:
- Ensure that they are not only implementing policies and training programs to proactively avoid sexual harassment and discrimination claims, but engage counsel to review their codes of conduct, internal procedures and other compliance efforts to assess their exposure to employment-related securities fraud claims.
- Exercise care with all of their public statements, including any statements made on public filings, and also those made through different avenues, such as at social events, on social media accounts, in articles, on websites and the like, to protect themselves against securities claims and the prospect of expensive judgments or settlements. As highlighted in the Construction Laborers case, courts will even go so far as to allow claims for fraud arising from public statements made in less formal scenarios, such as at a social event.
- Comply with anti-harassment and anti-discrimination policies, as that remains the best panacea to the securities fraud claims discussed in this alert.
If you have any questions about these types of securities laws claims or training programs for management and employees, please reach out to the litigation team at Kleinberg Kaplan for assistance.