As the various stories and revelations came to light during the peak of the #MeToo movement, there were also a number of D&O lawsuits filed against companies whose executives were the target of the stories. Among these lawsuits was the #MeToo-related securities class action lawsuit filed against CBS. On January 15, 2020, in a lengthy and detailed opinion, Southern District of New York Judge Valerie Caproni largely granted the defendants’ motion to dismiss the lawsuit, although the lawsuit did survive as to one set of allegations involved alleged statements by former CBS executive Leslie Moonves. The court’s ruling underscores the difficulty for plaintiffs in trying to translate sexual misconduct allegations into securities claims.
As detailed in a prior post (here), on August 2018, Moonves was the subject of a lengthy article in The New Yorker magazine in which he was accused of sexual misconduct involving at least six women. The article contained the ironic note that in late 2017 after revelations of others’ misconduct Moonves had become a prominent voice in the #MeToo movement in Hollywood. On the first day that news of the forthcoming article began circulating, the company’s share price declined approximately 6%. The news was soon followed by the filing of a securities class action lawsuit.
In their amended complaint (here), the plaintiffs raised a number of allegations. Among other things, the plaintiffs alleged that the defendants had on numerous occasions stated that the company maintained the highest standards for ethics and appropriate business actions, and that the company had a zero tolerance policy for sexual harassment, while in fact the company had a pervasive culture of sexual misconduct; that the company’s culture created an undisclosed risk that Moonves would have to leave the company; and that after the #MeToo story first began to emerge the defendants – and Moonves in particular—made a number of reassuring statements about the company and its practices, which the plaintiffs allege were misleading. The complaint further alleges that a number of CBS executives, including Moonves, sold millions of dollars’ worth of their personal holding in company stock in advance of the revelations about Moonves.
The defendants filed motions to dismiss.
The January 15, 2020 Opinion
In a detailed 48-page opinion (here), Judge Caproni largely granted the defendants’ motions to dismiss, although she denied the motion with respect to statements Moonves made in an interview with Variety magazine in the early stages of the #MeToo story.
With respect to the company’s various statements about its ethical codes and business practices, Judge Caproni held that the statements were far too “general and aspirational” to be actionable. The statements, Judge Caproni, were not made to reassure investors that no CBS executive would ever be the target of misconduct allegations, nor did the subsequent revelations suggest that the company had none of the stated aspirations. The statements were, in short, “mere puffery.” Judge Caproni also found that the complaint failed to establish that the statements were false and misleading.
As for the plaintiffs’ allegations that the defendants had failed to disclose the risk that Moonves misconduct would lead to his termination, Judge Caproni found that the plaintiffs had failed to establish that Moonves’ departure was imminent until shortly before it actually happened. In any event, Judge Caproni said that the statements on which the plaintiffs sought to rely were not misleading, as they established only that Moonves was important to the company; the statements, she found, had nothing to do with Moonves’ alleged misconduct.
Finally, with respect to the various allegedly reassuring the company allegedly made with respect to the various revelations concerning the #MeToo movement, Judge Caproni found that the plaintiff had failed to establish that the statements would be material to investors.
However, Judge Caproni did find one statement that Moonves himself had made to Variety magazine to be false and misleading. Moonves had said that the #MeToo movement was a “watershed event,” adding that “It’s important that a company’s culture will not allow for this. And that’s the thing that is far-reaching. There’s a lot we’re learning. There’s a lot we didn’t know.” Judge Caproni found, taking the allegations in the light most favorable to the plaintiffs, that this statement was — “just barely” — false and misleading, as it implied that Moonves was just learning for the first time about this kinds of allegations when he was at the time actively seeking to conceal his own misconduct. The statement also falsely implied that he was not personally at risk himself.
With respect to all of the alleged misstatements other than Moonves’ statements to Variety, Judge Caproni found that the plaintiffs had failed to sufficiently plead scienter. Judge Caproni found that all of the various insider trades on which the plaintiffs sought to rely had been made pursuant to pre-established Rule 10b5-1 trading plans that were put in motion before the allegations of sexual misconduct had arisen. Judge Caproni also found that the plaintiffs had failed to establish that any of the trades were suspicious.
However, Judge Caproni did conclude that the plaintiffs’ amended complaint did sufficiently allege – again, “just barely” – that Moonves was “consciously reckless” when he made his statements to Variety. His statements disclaimed awareness of misconduct at a time when he was aware of his own precariousness and vulnerability. The plaintiffs’ allegations, Judge Caproni, were sufficient to establish that Moonves made the statements with awareness of their untruth or with reckless indifference to their truthfulness or falsity. Judge Caproni found that these statements were also sufficient to establish corporate scienter, as Moonves was speaking as the CEO of CBS at the time he made the statements.
Finally, while openly questioning whether plaintiffs will ultimately be able to prove loss causation, Judge Caproni found that the plaintiffs’ loss causation allegations were sufficient as well, with respect to Moonves’ statements to Variety.
While the plaintiffs’ amended did complaint did in one specific respect survive defendants’ dismissal motions, the outcome of the dismissal motions shows as a general matter how difficult it is for plaintiffs to try to transform allegations of sexual misconduct involving one corporate executive into a securities claim against the executive’s company or other company officials. To be sure, these kinds of allegations might serve as a basis of a mismanagement claim or a failure to supervise claim, but these plaintiffs chose to assert a securities claim, which as Judge Caproni’s ruling shows, can be a difficult task in this context.
The fact that there was one category of allegations that did survive the dismissal motion, and that those allegations related to Moonves’ own statements is interesting. Clearly, Moonves would have been better off if he had said nothing at all or refused to give the interview. In effect, the allegations that survived the dismissal motion amount to the contention that Moonves was deceptively trying to cover-up his own culpability and misconduct. It is a cliché but it is also true that the cover-up often is the cause of problems.
One aspect of this case that I found to be particularly interesting was Judge Caproni’s analysis with respect to scienter. Her conclusion that the plaintiffs could not rely on the defendants’ millions of dollars’ worth of insider trades to support allegations of scienter because the trades were made pursuant to pre-established trading plans is interesting and reinforces the value for executives of having these types of plans in place and of only trading pursuant to plans. Judge Caproni’s conclusion shows that these kinds of plans can in fact provide exactly the kind of protection that they are intended to provide.
Though I do think that this case does show how difficult it is for plaintiffs to try to translate allegations of corporate executives’ sexual misconduct into securities claims, the fact is that a portion of the plaintiffs’ claims here did survive the defendants’ motions to dismiss, even if only “just barely.” The name of the game for plaintiffs in these kinds of cases is to get past the dismissal motion, even if just barely, which is what the plaintiffs managed to do here. How the case ultimately will play out remains to be seen, although general statistics and patterns suggest that the likeliest outcome will be a settlement of some kind.
In any event, regardless of the ultimate outcome, the fact that the plaintiffs in this case were able to get past the dismissal, even if only with respect to one small part of their allegations, does show that it is possible for plaintiffs to survive the initial pleading hurdles in these kinds of cases, which could be relevant to other prospective claimants thinking of pursuing these kinds of claims.
Special thanks to a loyal reader for providing me with a copy of Judge Caproni’s opinion.