The Questionable Use of Free Speech Defenses in Securities Litigation

POMERANTZ MONITOR | JULY AUGUST 2023

By Villi Shteyn

Corporate actors trying to evade liability for fraud have used some questionable defenses, but the least credible may be trying to hide behind the First Amendment of the United States Constitution under the banner of free speech. The Supreme Court has stated that “the First Amendment does not shield fraud,” but that has not stopped companies from trying. This sets the backdrop for Massachusetts Attorney General Maury Healey’s suit against ExxonMobil Corp. (“Exxon”) brought in Massachusetts State Court back in October 2019.

The suit included claims that oil giant Exxon lied to consumers by marketing its products as environmentally friendly and, importantly, that Exxon misled investors by downplaying any climate-driven financial risks to its bottom-line financials. Specifically, the suit alleged that in the past, Exxon’s former CEO stated that the scientific evidence on climate change is inconclusive, as part of a campaign by Exxon to deceive consumers and investors despite decades-long internal knowledge to the contrary. The suit claims that Exxon more recently tells investors that climate change risks are a management priority, but its financial projections continue to deceive investors by asserting that virtually none of Exxon’s fossil fuel assets will be at risk. The complaint details how Exxon has internally analyzed and known these risks for over forty years but has failed to disclose them to investors. Instead, while publicly stating that the company accounted for climate change-related risks in its business planning, Exxon actually grossly undercounted such risks in its financials.

Exxon tried to claim that these statements, rather than being targeted to investors, were merely Exxon’s participation in the public discourse on a controversial issue of public concern and were directed at lawmakers or the public. This is despite the fact that examples included the statement that Exxon will “face virtually no meaningful transition risks from climate change.”

In a ruling issued last year, the Massachusetts Supreme Judicial Court rejected Exxon’s First Amendment defense to Attorney General Healey’s suit. The Court largely ignored the substance of the argument and simply found that Massachusetts’ anti-Strategic Lawsuit Against Public Participation (“anti-SLAPP”) law did not apply to civil enforcement proceedings brought by the state’s Attorney General, and that it was instead meant to block lawsuits brought by private actors. This ruling may leave private securities litigants wanting, but the Court did specify that the legislative history for the anti-SLAPP statute was meant “especially” for developers attempting to prevent local opposition to zoning approval.

Also, in positive news for investors, recent developments in the case law have shown courts to be highly skeptical and unconvinced by First Amendment defenses.

Ohio-based electrical utility company FirstEnergy Corp. also tried an extremely craven First Amendment defense in an investor class action. In a 2022 opinion, Chief Judge Marbley of the Southern District of Ohio found FirstEnergy’s First Amendment defense to strain[] credibility.” FirstEnergy attempted to argue, in a manner similar to Exxon, that corporations have a First Amendment right to speak on issues of public importance. But in this case, the supposedly protected statements were bribes. Specifically, this argument was made in the face of allegations of political contributions through the use of 501(c)(4) entities that were bribes to corrupt politicians and regulators. The court rejected this nonsensical argument and found that the bribery payments and deception of investors about the nature of the political activity undertaken by the company were not protected speech.

Similar First Amendment challenges have also failed in other securities fraud class actions, such as in a 2021 opinion in Pomerantz’s action in the Altria and JUUL securities fraud litigation in the Eastern District of Virginia. There, the court rejected use of the Noerr-Pennington doctrine for protections of petitioning activity because “the First Amendment offers no protection when petitioning activity ... is a mere sham to cover an attempt to violate federal law[,]” and fraud allegations under the Exchange Act raise this sham exception. A 2020 Northern District of California Court found similarly, despite the speech in question being a letter to Congress.

Judge Liman of the Southern District of New York issued a 2022 opinion equally unconvinced of this type of defense. In 2018, Tesla CEO Elon Musk agreed to a consent decree with the Securities and Exchange Commission (“SEC”) in the wake of settling charges by the SEC under the Exchange Act for false and misleading statements. The consent decree prevents him from communicating about Tesla without pre-approval by Tesla, to ensure the accuracy of the statements and consistency with what Tesla reports. In an attempt to terminate the consent decree, Musk argued that his First Amendment rights were intruded upon. However, Judge Liman found this argument wholly unconvincing and stated that Musk’s free speech rights do not allow him to engage in speech that is fraudulent or otherwise violates the securities laws. Judge Liman further found that the consent decree waived any First Amendment rights implicated. This decision was appealed to the Second Circuit of Appeals. The Second Circuit was no more receptive to the First Amendment argument and affirmed Judge Liman’s decision in a summary order.

Pomerantz has also had success in litigating a case involving statements relating to climate preparedness. In Vataj v. Johnson, settled favorably on behalf of defrauded investors in 2021, plaintiffs alleged false and misleading statements regarding a utility’s preparation and risk-minimization for wildfires.

            Thus, courts still view these dishonest First Amendment protections for what they are: pretextual rationalizations to try to evade liability for deceiving investors. It is well-settled law that the First Amendment does not protect fraud, and courts are unlikely to prevent investors from enforcing their rights to be protected from false and misleading statements under the false guise of free speech. While securities fraud defendants will certainly continue to use questionable tactics to attempt to shield themselves from liability for false or misleading statements, courts’ patience with these attempts, especially with the attempted use of the First Amendment, is wearing thin.