The #MeToo movement has had an enormous impact on corporate America. Workplace harassment and sexual misconduct are not new concepts and have been the focus of litigation for many years. However, the power of the #MeToo has created new theories of liability extending beyond the usual employment claims of negligent retention and supervision and/or workplace discrimination typically brought by the alleged victim.
A recent development stemming from #MeToo now allows improper workplace conduct to become the gravamen of new claims against the corporation. Notably, these claims are not brought by the victim, but by the corporation's shareholders.
A New Trend?
"Event-driven" securities litigation -- where negative events, instead of financial misstatements or omissions, trigger the filing of securities class actions or shareholder derivative lawsuits -- is not a new concept. However, the "events" giving rise to such claims has expanded with the advancement of the #MeToo movement, suggesting a trend worthy of note.1 These suits fall into two categories: (1) derivative claims that corporate mismanagement of #MeToo issues caused a decrease of corporate value; or (2) securities fraud claims where a company's stock price dropped as a result of the corporation's conduct in dealing with #MeToo allegations and the accompanying negative publicity. Event-driven litigation, such as the #MeToo cases, have contributed to the overall recent increase in securities filings.
The first category of shareholders' #MeToo actions allege a corporation's value was diminished due to corporate mismanagement of #MeToo allegations. What kind of corporate mismanagement is out there? Allegations include a company ignoring misconduct, a company's failure to sanction misconduct, and a failure to initiate appropriate safeguards against misconduct, all of which allowed a hostile work environment to thrive. Similarly, paying victims to remain silent through the use of nondisclosure agreements ("NDA's), or approving generous severance packages to make wrongdoers go away quietly, may also be alleged as corporate mismanagement. Shareholders allege that when this corporate malfeasance is disclosed, the corporation experiences reputational harm and its stock loses value, giving rise to a derivative claim.
The second category of shareholders' #MeToo actions, securities fraud cases, are framed a little differently. These claims are brought under Section 10(b) of the Securities Exchange Act and rule 10(b)-5 promulgated thereunder and allege the company made materially false and misleading statements to the investing public. These lawsuits tend to follow a particular pattern: asserting that the corporation engaged in a cover up of the abuse, failed to take adequate steps when faced with allegations of abuse by key personnel, or failed to truthfully disclose what steps it did or did not take to deter, investigate or curb abuse after allegations of abuse became public. Alternatively, these lawsuits may allege that a company professed it had integrity, high ethical standards and sound internal policies, including a no tolerance policy for sexual misconduct, but did not uphold such standards. These cases allege that subsequent disclosure of the true facts, including that the company's purported ethical standards were not as rigorous as asserted, or that the officers and directors knew of such misconduct and did not take action, led to a stock price decline.2
As a result, public companies now find themselves, their boards and their senior management, as defendants in securities class actions or derivative actions. These claims are being filed with increasing frequency, and courts are letting them proceed.
The Problems At CBS
Take for example the putative class action for securities fraud brought by CBS shareholders against CBS and certain of its executives, including ex-CEO Leslie Moonves. The amended complaint, ("AC") filed in February, received significant media attention.3
The AC alleges misrepresentations by CBS and its executives relating to their efforts to quash sexual harassment in the workplace. Add to that the allegations that Moonves, Joseph Iannelli the Chief Operating Officer, Lawrence Liding the Chief Accounting Officer, and Communications Director Guild Schwartz, collectively sold over 3.4 million shares of CBS stock, valued in excess of $200 million, to an unsuspecting public during the class period. Plaintiffs allege that the executives sold because they knew what the investors did not: that the allegations against Moonves were mounting. The AC further alleges that the failure to disclose these facts violated the antifraud provisions of the Securities Exchange Act. Specifically, it alleges that these top executives misrepresented compliance with internal anti-harassment policies, and hid the severity of the allegations against Moonves, TV journalist Charlie Rose, and others, which artificially inflated the value of CBS stock and caused investors to lose money when the stock price dropped as various allegations became public.
The plaintiffs claim that CBS held itself out to have "the highest standards of ethical and appropriate business actions", a "zero tolerance policy for sexual harassment" and a prohibition on "discriminatory treatment including sexual harassment". Yet, after touting these values, allegations about Moonves' proclivities and CBS's alleged widespread culture of harassment were exposed in detail over a period of months. The AC also references other examples of wrongdoing, including that CBS and its executives fostered a company-wide pattern of harassment and hostile work environment--one which was diametrically opposed to the company's public statements. Moreover, the company allegedly did not disclose the risk that Moonves would step down as CEO as the claims mounted against him, where he was represented to be a "key executive". The AC further alleges that the company also failed to disclose significant settlements with female employees that had complained about mistreatment. These, and other alleged material omissions, came to light at various junctures over the class period leading to lawsuits. The alleged loss of stock value occurred after July 27th media reports that the New Yorker would publish an exposé discussing sexual misconduct by Moonves, an August 6, 2018 disclosure revealing more details of "Moonves and CBS' sexual misconduct," and another New Yorker exposé on September 9, 2018, where CBS announced that Moonves would be stepping down as the company's chairman and CEO, and its stock took another tumble.4
CBS and the individual defendants filed a motion to dismiss on April 12, 2019. They argue, inter alia, that CBS did not make any material misrepresentation or omissions, that allegations of "company-wide" harassment are too vague and conclusory to be actionable, that rumor and innuendo about Moonves are not statements of material fact and thus not violative of federal securities laws, nor that there is any statute or regulation "expressly requiring the disclosures that plaintiffs claim defendants were obligated to make." They also argue failure to adequately allege scienter, as there are no plausible allegations of a motive to defraud, and a failure to adequately allege loss causation. Plaintiffs are yet to file an opposition brief.
What Should a Company Do Now to Avoid a Similar Fate?
Sophisticated plaintiffs lawyers now know that cases stemming from a #MeToo event can present a new basis to assert claims, and will utilize the precedent from cases that have survived motions to dismiss to draft new complaints. Knowing this, what steps should you consider doing to protect your company now?
Company Considerations. What is the company disclosing and how can it be challenged? Simply, if the company is making public statements about its comprehensive policies and procedures as to sexual misconduct in the workplace, it needs to strictly enforce them. If the company will not, it is better to say nothing at all about its corporate culture.
Board Considerations. Consider the board's role in preventing and responding to sexual harassment allegations. How and when does it become involved? Are its responses independent and reasonable, or a mere rubber stamp of management's actions? Is the board promptly advised of significant issues of misconduct, and if so, do they take decisive action to ensure the company is protected against the type of claims shareholders now can file when allegations of sexual abuse become known?
Compliance Programs. Look at company guidance. The company's compliance program must be reviewed regularly, updated as necessary, distributed at regular intervals, and enforced from the top down. Corporate counsel needs to ensure awareness of, and compliance with, federal and state laws, and with best practices generally. As new program requirements are rolled out, training should follow. Attention is needed to keep compliance documents contemporary and relevant.
Internal Investigations. Consider conducting an internal investigation to identify not only actual allegations of sexual harassment, but also the less obvious rumors and innuendo, so as to identify and remedy these issues before lawsuits and reputational harms occur. At the very least, companies should conduct a fulsome investigation in response to all complaints of abuse or other red flags.
Nondisclosure Agreements. In some jurisdictions, such as New York, New Jersey and California, the use of NDAs in settlements pertaining to sexual harassment and discrimination is restricted. Where they are permitted, carefully consider NDAs or confidentiality provisions, recognizing that such provisions may be perceived as buying silence of the alleged victim, and shielding the alleged perpetrator. It is prudent to review the law in your jurisdiction.
It will be interesting to see if, and how, event driven litigation relating to #MeToo makes its way through the Courts, but taking defensive measures now, to guard against whatever that eventuality might be, is a step in the right direction.
1. These claims are often filed quickly after the event, with less investigation and witness involvement than the more traditional financial fraud cases. This haste may result in an inability to adequately allege scienter, resulting in successful motions to dismiss filed by defendants.
2. Both derivative claims and securities fraud claims have pleading challenges. Derivative claims need to plead demand futility with particularity. Claims under Rule 10(b)-5 must also be pled with particularity under Rule 9(b) and the PSLRA's heightened pleading standard. Companies are often successful in defending derivative claims on the basis of the pre-suit demand requirements and the business judgment rule. Companies are defending these securities class actions by claiming that their representations regarding the existence of good corporate governance are non-actionable puffery, do not impact the "total mix" of information available to investors, and that, in any event, there is no duty to disclose the alleged wrongdoing.
3. See, Amended Class Action Complaint Samit v. CBS Corp., No. 1:18-CV-07796 (S.D.N.Y) filed February 13, 2019.
4. Other publicly traded companies, including news organizations, have experienced a similar plight of securities litigation stemming from #MeToo allegations. For example, on December 11, 2017, the shareholders of Liberty Tax, Inc. filed a derivative action in Delaware Chancery Court against the company and its former CEO alleging the CEO breached his fiduciary duties by diverting company assets to further his sexual relationships with female employees. As another example, on July 17, 2018, the shareholders of National Beverage Corporation, the company responsible for LaCroix sparkling water, filed a derivative action in the Southern District Court of Florida alleging the company made false and misleading statements regarding the former CEO's sexual harassment of pilots on corporate jets.
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