Statements About [The Absence of] Gender Discrimination Can Constitute Securities Fraud
ATTORNEY: EMMA GILMORE
POMERANTZ MONITOR JULY/AUGUST 2019
With the emergence of the #MeToo movement, courts have seen an increasing number of securities fraud class actions based on allegations involving sexual discrimination, harassment and other types of sexual misconduct. Such misconduct by itself does not constitute securities fraud. The added element that makes it a fraud is some public statement by the company to the effect that it does not engage in such conduct.
When securities fraud actions involve allegations of sexual misconduct, the claims asserted typically involve public statements issued by a company about corporate values, integrity, and adherence to ethical standards, which are alleged to be false and misleading in light of actual misconduct known inside the company. That is exactly what happened at Signet Corporation.
The company had gone out of its way to portray itself as harassment-free in its securities filings and other public statements. It highlighted its Code of Conduct, which said that Signet “made employment decisions ‘solely’ on the basis of merit”; that it was “committed to a workplace that is free from sexual, racial, or other unlawful harassment” and does not tolerate “[a]busive, harassing, or other offensive conduct ... whether verbal, physical, or visual”; that it has “[c]onfidential and anonymous mechanisms for reporting concerns”; that it disciplines “[t]hose who violate the standards in this Code”; and that it requires its senior officials to“[e]ngage in and promote honest and ethical conduct.” In its Form 20-F, filed with the SEC, Signet represented that adherence to the Codes, including by senior executives, was of “vital importance.” It represented that, in adopting both the Code of Ethics and the Code of Conduct, the company has “recognized the vital importance to the Company of conducting its business subject to high ethical standards and in full compliance with all applicable laws and, even where not required by law, with integrity and honesty.” It said that it was committed to disciplining misconduct in its ranks and providing employees with a means to report sexual harassment without fear of reprisal.
According to the securities class action complaint, reality was far different. The alleged sexual misconduct at Signet was at the heart of an arbitration proceeding (the “Jock” action) brought by approximately 200 allegedly victimized employees. Although the Jock proceeding was supposed to be confidential, some details about the experiences of these employees became public in February 2017 and were published in the Washington Post. Many female employees had accused the company of discriminatory pay and promotion practices based on their gender. There were also credible accusations in the Jock proceeding that Signet had a culture of rampant sexual harassment – including, but not limited to, conditioning subordinate female employees’ promotions to their acceding to the sexual demands of their male supervisors (even those who held the highest positions in the company), and retaliating against those who reported this misconduct. Women alleged that sexual harassment routinely occurred at the company’s “Managers’ Meetings,” where male executives “sexually prey[ed]” on female subordinates.
As discussed in the previous article in this issue, the recent decision in the Signet securities litigation forcefully rejected defendants’ argument, based on the Second Circuit’s decision in Singh v. Cigna Corp., that descriptions of codes of conduct are always inherently puffery that investors cannot take seriously. Archetypal examples of puffery include “statements [that] are explicitly aspirational,” “general statements about reputation, integrity, and compliance with ethical norms,” “mere[] generalizations regarding [a company’s] business practices,” and generalized expressions of “optimis[m].” As with the general standard governing materiality, determining whether certain statements constitute puffery entails looking at “context,” including the “specific[ity]” of the statements and whether the statements are “clearly designed to distinguish the company” to the investing public in some meaningful way. Finding that Signet’s statements about its code of conduct were very specific and went well beyond vague generalizations, the court in Signet refused to dismiss the action.
Because gender issues involving corporate management have moved center stage, in recent years many companies have adopted codes of conduct prohibiting this kind of misconduct, and have discussed those codes in their securities filings and elsewhere. While that is certainly a step in the right direction, it is now clear that systematic violations of those codes can lead to securities claims.
It is concerning to note that Signet’s egregious misconduct might never have become public, because the employees’ complaints were forced into secret arbitration proceedings. It was only by chance that the claims came to light and were picked up by the Washington Post. Mandatory arbitration clauses, a common business practice requiring workers and customers to waive their right to sue the company in court, have kept sexual harassment complaints (such as those in the Jock action) hidden from the public.
For some time, Democrats have introduced bills to ban or limit arbitration clauses. There now appears to be some bipartisan agreement that such practice raises concerns. Republican Senator Lindsey Graham, the chair of the House Judiciary Committee, recently scheduled a hearing on the topic, saying “in 2019, I want to look long and hard on how the system works; are there any changes we can make?”