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Securities Fraud in the #MeToo Era: An Additional Source of Liability

A recent decision out of the Southern District of New York highlights a potential source of liability for companies and their directors in the #MeToo era. In addition to criminal liability and sunken profits, corporations and their executives and directors now face possible action under federal securities laws when they find themselves embroiled in a #MeToo scandal.

As detailed in the complaint, in November of 2017, allegations of sexual misconduct emerged against CBS-correspondent Charlie Rose. Speaking about the allegations and the #MeToo movement in general, Leslie Moonves, CBS’s CEO and chairman of the board of directors, told an audience at Variety magazine’s Innovative Summit that the #MeToo movement was “a watershed moment” and said that “it’s important that a company’s culture will not allow for this…. There’s a lot we’re learning. There’s a lot we didn’t know.” Additionally, CBS issued a number of proxy statements before and after the allegations against Rose surfaced that detailed the company’s anti-harassment policies.

As further detailed in the complaint, in July of 2018, The New Yorker published an article detailing allegations of sexual harassment against Moonves. According to the complaint, the article and the allegations did not come as a surprise to Moonves or CBS – Moonves learned in 2017 of allegations made against him by actress Bobbie Phillips and the possibility that they would be published. Additionally, CBS conducted an internal investigation in early 2018 after learning of the allegations and concluded that “there was nothing to worry about.” This conclusion proved to be inaccurate and Moonves was terminated from CBS with cause in December of 2018 due to his “willful and material misfeasance,” violation of company policies, and breach of his employment contract based on the allegations against him, and lack of cooperation with an internal investigation.

In 2019, a group of purchasers of CBS stock brought suit against CBS, Moonves, and the board of directors, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). According to the complaint, the defendants violated federal securities laws by failing to disclose the risk that CBS would lose Moonves, its star executive, as a result of allegations of sexual harassment. In particular, the plaintiffs pointed to CBS’s Business Conduct Statement (the “BCS”), incorporated into the proxy statements, which stated that “CBS has a ‘zero tolerance’ policy for sexual harassment,” as well as Moonves’s statements at the Variety event relating to the importance of the #MeToo movement and how a company’s culture should not tolerate sexual harassment, as evidence of materially false and misleading statements that served as violations of the Exchange Act.

The court dismissed the claims related to the BCS, holding that these statements were “mere puffery” and “far too general and aspirational to invite reasonable reliance.”1 The court also found that statements regarding the steps CBS was taking to prevent workplace sexual harassment after it terminated Rose were similarly “generic puffery.”2

However, the court concluded that Moonves’s statement at the Variety event constituted a potentially false or misleading statement. Acknowledging that the issue was close, the court concluded that it was “plausible that a reasonable investor would construe his statement as implicitly representing that he was just learning of problems with workplace sexual harassment at CBS,” and “implied that he had not known of these problems previously, even though, in truth, he was at that time actively seeking to conceal his own past sexual misconduct from CBS and the public.”3 Additionally, the court held that Moonves, knowledgeable of his own prior misconduct and what it could mean for him in the #MeToo era, was consciously reckless when he made the statement at the Variety event. Because Moonves was an officer and director of CBS, the court considered him to be acting as CBS’s agent since he was under its control and the statements that he made at the Variety event were within the scope of his authority. As a result, Moonves’s state of mind could be imputed to CBS.

The court further held that the plaintiffs adequately pleaded a Section 20(a) claim against CBS. Section 20(a) of the Exchange Act creates separate liability for anyone who “controls” any person found to violate another provision of the Exchange Act.4 Because of the existence of the principal-agent relationship between CBS and Moonves, and because Moonves’s state of mind could be imputed to CBS, the plaintiffs had adequately pleaded a Section 20(a) claim against CBS based on Moonves’s alleged 10(b) violation.

There are no shortage of reasons for companies to address issues of workplace harassment by investigating allegations and holding abusers accountable. In its decision, the Southern District of New York added yet another reason by creating a pathway for investors to sue for securities violations when #MeToo allegations surface against a company’s executive. Regardless of whether the plaintiffs’ lawsuit ultimately succeeds, it serves as an important reminder that criminal liability is not the only consequence of workplace harassment.

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1 Construction Laborers Pension Trust for Southern California v. CBS Corporation, 2020 WL 248729, at *8 (S.D.N.Y. Jan. 15, 2020).

2 Id. at *12.

3 Id. at *13.

4 15 U.S.C. § 78t(a) (1994).

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.