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An allegation of sexual misconduct against a corporate leader in the #MeToo era can sink a company’s share price. Do corporations have obligations to shareholders to disclose such allegations? CBS and Leslie Moonves may be at odds over whether the former leader of the media company is entitled to a $120 million severance payment, but both do agree that under securities rules, there is no such obligation.
The positions of CBS and Moonves came on Friday in response to a shareholder lawsuit that accuses CBS, its board of directors, and Moonves himself of fraud by not only failing to disclose information in proxy statements that would have a material effect on its business, but also via allegedly misleading statements how CBS was committed to zero-tolerance on the sexual misconduct front. In February, the Construction Laborers Pension Trust for Southern California — the shareholder leading the suit — also amended the complaint with word of $200 million in insider stock sales as evidence of a fraud. (The defendants say the stock sales were pre-planned.)
Now comes two motions to dismiss. One is on behalf of CBS and current and former officers with the exception of Moonves. The other is on behalf of Moonves in what amounts to his first substantive public legal brief since being forced out of CBS after several women came forward to tell The New Yorker‘s Ronan Farrow of unwanted sexual advances.
CBS’ brief (read here) recounts the history of allegations of sexual impropriety against both Moonves and former morning news anchor Charlie Rose. The memorandum mostly relies on news reports in detailing how Shari Redstone and other CBS directors responded to “rumors” and the genesis of an investigation where prominent outside law firms were hired to get to the bottom of these reports. Should the lawsuit proceed past a motion to dismiss, there could be discovery conducted on who learned what when — and how everyone responded to the unfolding crisis.
In the meantime, the defendants are confronting several challenged statements in the time leading up to Farrow’s exposé about Moonves. These include risk factors identified in annual reports about how the loss of key personnel could disrupt company operations. The statements include CBS’ promulgated ethics code. And finally, the statements include what Moonves himself said publicly about the #MeToo movement.
CBS, citing legal precedent, says omissions are not actionable under securities law, and that the relevant question here is not whether a reasonable investor would have liked to have known about the sexual misconduct allegations, but rather whether CBS had any duty for disclosure.
The shareholders point to Item 303 of SEC Regulation S-K whereby public corporations must describe known trends or uncertainties reasonably expected to have a material favorable or unfavorable impact on the company’s financials.
CBS responds that “alleged sexual misconduct is not the type of information that must be disclosed under Item 303,” that courts have rejected arguments otherwise and that there’s no allegation in the suit that CBS had a basis “to assess what impact disclosure of the Sexual Misconduct Allegations might have on net sales or revenues or on income from continuing operations.”
The brief adds that even if allegations against Moonves had been substantiated, there would still be no disclosure obligation.
CBS points to Supreme Court guidance that federal securities laws do not seek to regulate internal corporate mismanagement, and while the high court hasn’t ever addressed sexual misconduct in this context, CBS adds, “Application of these time-honored precepts does not turn on the type of internal misconduct or mismanagement alleged, or the degree of social opprobrium such misconduct or mismanagement might attract or warrant: there is no ‘freestanding legal duty’ to disclose internal misconduct ‘no matter how unseemly the scandal was and no matter how significant the scandal would have been to the market.’ Were it otherwise, a corporation would have a higher duty to disclose allegations that its CEO was guilty of sexual misconduct than allegations that its CEO was involved in an unlawful bribery scheme, which plainly is not the law.”
The eight white shoe law firms participating in the drafting of this memo then go about taking on each of the specific statements to argue they were hardly misleading. If that doesn’t work, the defendants attack scienter, meaning knowledge of wrongdoing. If there was something false or misleading about saying CBS had “zero tolerance” for sexual harassment, for instance, it’s argued that the plaintiffs have failed to show through alleged facts or inference that the company knew of factual inaccuracies at the time the statement was made.
Then, there are Moonves’ #MeToo comments in the wake of the Harvey Weinstein scandal.
For instance on Nov. 29, 2017, Moonves commented, “It’s a watershed moment. … It’s important that a company’s culture will not allow for this. And that’s the thing that’s far-reaching. There’s a lot we’re learning. There’s a lot we didn’t know.”
CBS characterizes this as puffery, while Moonves in his own brief (read here) states the plaintiff “ignores the innocuous context of these statements.”
Moonves also argues there’s nothing actionable from an “aspirational” letter introducing a code of conduct for CBS that included a “commitment to providing equal employment opportunities and a bias-free and harassment- free workplace environment.”
He also knocks scienter with a particular spin.
“Not only is it implausible that Moonves could have foreseen his departure from CBS at the time of the alleged statements, but this argument relies on Moonves’s supposed knowledge of mere allegations of past wrongdoing, largely unconnected to CBS,” states the memorandum. “As the Amended Complaint establishes, Moonves maintains that the allegations against him of misconduct more than a decade ago are not true and that he did not act improperly. Thus, at the time of Moonves’s statements, he had no reason to believe his departure was imminent and, in fact, he believed the truth of his statements.”
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