A federal judge is allowing a group of CBS shareholders to pursue a lawsuit over what investors were told about sexual misconduct allegations at the company. Although sharply narrowing the focus of the suit that was filed in the wake of a New Yorker exposé about ex-chairman Leslie Moonves, the legal action will nevertheless proceed. On Wednesday, U.S. District Court Judge Valerie Caproni issued a 48-page decision on CBS’ motion to dismiss.
The suit focuses on top executives including Moonves who allegedly sexually harassed women behind the scenes for years. The plaintiffs are alleging that amidst the #MeToo movement, the risk of CBS losing its key leaders was high, yet the company and its board of directors failed to disclose risks tied to a hostile workplace and issued misleading statements suggesting all was fine at CBS.
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The judge isn’t impressed that certain statements from CBS and its leaders rise to securities violations. Caproni dismisses claims tied to ethical standards promulgated in proxy statements as well as disclosures contained in a press release announcing CBS’ financial results. She doesn’t think it is conceivable that a statement in a code of conduct could be deemed factual and finds other statements including what the company announced after the Charlie Rose departure to be “generic puffery.”
But the judge does identify something that Moonves expressed during a Variety event in 2017 to be potentially actionable.
“#MeToo is a watershed moment,” said Moonves at the time. “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.”
Remarks Caproni, “Although it is a very close case, it is barely 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. His statement 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.”
The opinion (read in full here) adds that the misleading aspect of Moonves’ statement has been adequately alleged to be material.
“Stated at an industry summit, Moonves’s statement could be construed as a representation that he had personally engaged in no sexual misconduct that could be a liability ‘during a time of concern’ when media executives were being scrutinized,” writes the judge. “A reasonable investor could have understood Moonves’s statement to mean that he did not have exposure to sexual misconduct allegations, thus providing reassurance that Moonves, the one executive that the Company and analysts viewed as crucial to CBS’s continued success, would not be compromised by the #MeToo Movement. Thus, a reasonable investor could rely upon his statement as reflecting Moonves’s own — and thus CBS’s — lack of high-level exposure to the #MeToo movement.”
Although CBS scores wins in the decision such as Caproni’s conclusion that SEC regulations don’t impose affirmative duties on corporations to disclose executives’ sexual misconduct, CBS must continue to face the lawsuit upon the judge’s decision that an amended complaint adequately pleads scienter as to Moonves and CBS — that is, that they had a state of mind embracing an intent to deceive.
“The Amended Complaint includes extensive and specific allegations that Moonves sexually harassed and assaulted employees and non-employees — precisely the sort of behavior that #MeToo reporting was ferreting out and precisely the conduct that his Variety statement impliedly distanced himself from,” explains the opinion. “Moonves knew of his own prior misconduct and knew that it left him in a precarious position in a post-#MeToo world; nonetheless, he impliedly disclaimed knowledge and sought to fortify his position by stating to the Variety audience: ‘There’s a lot we’re learning. There’s a lot we didn’t know.'”
Moonves’ conscious recklessness then gets imputed to CBS. Other defendants, though, including controlling shareholder Shari Redstone and Joe Ianniello, escape the case.
The opinion finishes by detailing the next steps. Although the shareholders are denied an opportunity to immediately bring an amended complaint, they may nonetheless attempt a new motion to get stuff kicked out of the suit back into play. In the meantime, discovery continues to be paused. Regardless, the lawsuit will continue with pretrial hearings scheduled in February.
