Last June, we wrote a Legal Update on Recent Developments in Securities Litigation: The "Event Driven" #MeToo Lawsuit. Event driven securities litigation is where negative events, instead of financial misstatements or omissions, trigger the filing of securities class actions. While event driven cases are not new, they have recently expanded into the #MeToo movement, evidencing a trend worthy of note. As an example of this development, the June alert discussed the then recently filed securities class action brought by shareholders against CBS and certain of its executives, including ex-CEO Leslie Moonves. We reviewed the allegations in detail and analyzed the motions to dismiss filed on their collective behalf. The case received significant media attention at the time.
The class action Complaint, as amended (“the Complaint”), alleged misrepresentations by CBS and its executives relating to their efforts to quash sexual harassment in the workplace. Plaintiffs claimed 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’ alleged widespread culture of harassment were exposed in detail over a period of months. The Complaint also referenced 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, but instead, represented him to be a “key executive” who was important to the business.
The plaintiffs alleged that, in reality, the company and CEO Leslie Moonves concealed a dark history of sexual misconduct and fostered a hostile culture in the workplace, which posed material business risks to the company. The Complaint alleged that the defendants failed to disclose these risks, hid the fact that “key employee” Moonves engaged in sexual misconduct of his own and failed to disclose that, with the advent of the #MeToo movement, the risk of Moonves being forced to step down increased as suspicions against Moonves mounted. CBS allegedly further misrepresented compliance with their internal policies and ethical standards.
The motions to dismiss filed by CBS and the individual defendants argued, inter alia, that CBS did not make any material misrepresentations or omissions as to its corporate culture or ethics, that allegations of a “company-wide” climate of harassment were too vague and conclusory to be actionable and that rumor and innuendo about Moonves’ standing were not statements of material fact and thus not violative of federal securities laws. CBS further argued that there was any statute or regulation “expressly requiring the disclosures that plaintiffs claim defendants were obligated to make.”
On January 15, 2020, Judge Valerie Caproni (SDNY) issued an Opinion and Order on the motion to dismiss. See Construction Laborers Pension Trust for S. California v. CBS Corp, 18-CV-7796 (VEC), Dkt. No. 108 (S.D.N.Y. Jan. 15, 2020) (the “Order”). It is instructive as to how executives, and the companies they lead, should conduct themselves as they navigate the unchartered waters of the #MeToo era.
Largely accepting CBS’ arguments, Judge Caproni dismissed every claim in the Complaint, save for one. The Court concluded that statements about CBS’ corporate code of conduct, and compliance with ethical norms, whether to the media or in their proxy statements, are “inactionable puffery” as opposed to statements of fact and thus generally incapable of forming the basis for a Section 10(b) claim. Order at 15. She further concluded that CBS’ public statements that Moonves was a key employee and a critical link to CBS’ success, “the loss of which could have a material adverse effect on the Company,” without disclosing the likelihood of his ouster, were not misleading, because the risk of him stepping down had not yet materialized at the time the statements were made. Id. at 21-22. She noted that failure to disclose certain risks in public filings can be actionable “half truths,” but only when a risk has materialized and is not disclosed. Id. at 20. Based on the chronology set forth in the Complaint, she concluded, it would have been “speculative” to assume as true rumors that his departure was imminent, when, in fact, Moonves did not resign until four months after the last risk disclosure in its 10-Q filing. Id. at 22.
However, while narrowing the case significantly, Judge Caproni did not give Moonves or CBS an outright win. She found one of Moonves’ statements to be potentially actionable and that the statement could be imputed to CBS based on Moonves’ prominent role in the company. Id. at 26-27, 42-43. With that ruling, Moonves and CBS are now forced to engage in what may be protracted discovery and to fund the continued costs of litigation.
What Did the Court View as Potentially Actionable?
In 2017 Moonves spoke to an audience at Variety’s “Innovate Summit” and stated:
#MeToo is a “watershed moment.” It is important that a company’s culture will not allow for this. And that’s the thing that’s far reaching. There is a lot we are learning. There is a lot we didn’t know. Complaint ¶ 125.
Noting that it was a “very close case,” Judge Caproni nonetheless concluded that “it is barely plausible that a reasonable investor would construe his statement as implicitly representing that he was just learning of workplace sexual harassment at CBS.” Id. at 26. The Court found Moonves’ statement could signal to investors that the company, under Moonves’ leadership, did not face similar issues while “in truth, [Moonves] was at the time actively seeking to conceal his own past sexual misconduct from CBS and the public.” Id. In addition, the statement “falsely implied that he was not personally at risk of a forced resignation . . . based on accusations of sexual harassment being levied against him.” Id. at 26-27. This provided false reassurance that Moonves would not be compromised by #MeToo allegations. Id. at 27. Further, based on the important implications of the statement, the Court deemed the materiality of Moonves’ statement to be adequately pled but noted that issues of materiality are “a fact-intensive inquiry more appropriate for summary judgment or trial.” Id. As such, there is no doubt the defense will focus on materiality as the case goes forward.
Thus, while the Judge sharply narrowed the potential misstatements giving rise to the securities fraud claims against the defendants, she also signaled that when a CEO says something that could be misconstrued and which relates to conduct he is accused of, such comments may not be protected as mere corporate puffery or viewed as immaterial. Meanwhile, lawyers for Moonves reacted to the Order with confidence that the Court will ultimately determine the statement does not support a claim, and that the case will ultimately be dismissed as baseless.
Fortunately for CBS and Moonves, plaintiffs made the strategic call to leave well enough alone and did not seek permission to amend or submit a second amended Complaint by the January 29th Court ordered deadline. The case will now move forward on the basis of one actionable statement: five simple sentences, uttered prior to the time people even knew what the enormous consequences of #MeToo would be, or how it would forever define Moonves and the institution he led.