In the latest example of a D&O lawsuit arising in the wake of allegations against a corporate executive of sexual misconduct, a shareholder has filed a securities class action lawsuit against National Beverage Corp. and certain of its executives following news reports that the company’s Chairman and CEO allegedly had inappropriately touched company pilots while traveling on the Chairman’s business jet. (National Beverage manufactures the ubiquitous LaCroix brand mineral water, with which the author of this blog has absolutely no connection.) The complaint, a copy of which can be found here, also contains separate allegations relating to allegedly misleading financial disclosures. This new lawsuit, like the prior D&O lawsuits filed following revelations of sexual misconduct allegations, underscores the fact as corporate executives are called out for alleged misbehavior, the accountability process may extend not only the alleged wrongdoers themselves, but may also extend to their company and other executives.
The complaint relies heavily on two Wall Street Journal articles about National Beverage. The first of the two articles, entitled, to my personal horror and irritation, “The SEC Has Had Its Own Questions About LaCroix,” appeared in the Wall Street Journal on June 26, 2018. The article reported that the SEC had requested that the company provide further information about performance metrics the company had referenced in two May 2017 press releases. Among other things, the company press releases had quoted its Chairman and CEO Nick Caporella as saying that the company had “magnified” two proprietary sales metrics to create “growth never thought possible.” The Journal article reported that the company had declined to provide the requested information, asserting that the information “is a secretive as the formals of our beverages and should not be disclosed to our competition. “ The Journal also reported that the SEC had later completed its review of the matter.
On July 3, 2018, the Wall Street Journal published a separate article about the company (but not about this blog’s author) entitled “Billionaire Behind LaCroix Accused of Improper Touching by Two Pilots” (here). The article reported that two pilots employed by the aviation company that operated National Beverage’s business jet had separately filed sexual harassment complaints against Caporella and National Beverage alleging that he had inappropriately touched them on multiple trips while they were flying with him in the jet’s cockpit. The two pilots, both of whom are men, allege that the unwanted touching occurred on more than 30 trips from 2014 to 2016.
Both Caporella and the company denied that any inappropriate touching occurred. One of the two lawsuits has been settled for an amount that the company’s spokesman described to the Journal as “de minimis.” The Journal article also reported that as part of the settlement the plaintiff had withdrawn all of his allegations as “factually unsupportable.” The second lawsuit remains pending. Following the online publication of the Journal article, the company issued a statement saying that “There is no truth to the allegations and nothing remotely akin to the alleged events occurred.”
On July 17, 2018, a National Beverage shareholder filed a securities class action lawsuit in the Southern District of Florida against the company, Caporella, and George Bracken, the company’s Executive Vice President for Finance. The complaint alleges that the defendants made false or misleading statements, or failed to disclose that: “(i) National Beverage’s sales claims and the supposed underlying ‘proprietary techniques’ lacked a verifiable basis; (ii) National Beverage’s Chairman and Chief Executive Officer (‘CEO’), Defendant Nick A. Caproella (‘Caporella’) engaged in a pattern of sexual misconduct between 20014 and 2016; and (iii) as result, National Beverage’s public statements were materially false and misleading at all relevant times.”
The complaint seeks the recovery of damages allegedly suffered by a class of shareholders who purchased shares of the company between July 17, 2014 and July 3, 2018. The complaint alleges that following publication of the June 2018 Journal article, the company’s share price fell about 8.8%, after the company’s share price had previously fallen about 10.5% when a securities analyst raised many of the same questions as the SEC later did. The complaint also alleges that the company’s share price declined 2.6% in the two trading days following publication of the second of the two Journal article.
The new lawsuit has only just been filed. It remains to be seen how it will fare. The allegations in the complaint based on the sexual harassment allegations against Caporella are not exactly the strongest allegations I have ever seen. For starters, it is not enough that that the kinds of allegations might have been raised to establish a securities law claim; there has to be an allegation that investors were somehow misled. The complaint’s misrepresentation allegations relating to the alleged sexual harassment are thin and seem to consist solely of references to the company’s Code of Ethics, which is available on the company’s website, and which, among other things, states that “Any type of harassment, whether of a racial, sexual, ethnic, or other nature, is absolutely prohibited.”
The fact that one of the two accusers has, as part of the settlement of his sexual harassment claim, withdrawn all of his allegations as “factually unsupportable,” would seem to even further weaken the plaintiff’s claims in new securities suit. The negligible stock drop following the Journal’s disclosure of the sexual harrasment allegations even further underscores the weakness of the claims.
Whatever the merits of the securities class action lawsuit complaint, it does represent the latest example of a D&O lawsuit arising following revelations of alleged sexual harassment by a corporate executive. As I noted in connection with the recent lawsuit and settlement involving allegations of sexual misconduct at the Fox News affiliate of 21st Century Fox, this lawsuit represents a statement that the current, ongoing revelations of sexual misconduct will mean not only that the individual who allegedly committed the misconduct will be held accountable, but also that corporate executives and companies that allegedly permitted the alleged behavior or who allegedly turned a blind eye may also be called to account as well.
Other examples of this phenomenon include the lawsuits filed against Wynn Resorts (about which refer here), as well as against the Weinstein companies. The lawsuits filed against the Weinstein Companies, and the lawsuits and massive settlement involving Michigan State University, belong in a slightly different category, as these lawsuits were filed by the alleged victims, rather than by investors.
The new lawsuit filed against National Beverage also represents something of a variation on the theme, as it relates to underlying allegations of same-sex sexual harassment. However, the new lawsuit is not the first example of a D&O lawsuit arising out of allegations of same-sex sexual harassment. In May 2018, the New York Metropolitan Opera filed a lawsuit against its former conductor and music director James Levine alleging that the opera suffered significant reputational and economic harm as a result of publicity from revelations that Levine allegedly had engaged in unwanted sexual misbehavior involving several opera employees and job applicants over many years. (The Met lawsuit, which is described here, was filed as a countersuit to Levine’s prior lawsuit against the opera for defamation and breach of contract.)
In any event, the significance of this lawsuit and the others of its type that have gone before is that the current wave of sexual harassment revelations represents more than just a vulnerability of the alleged bad actor individuals to having their misconduct exposed; the ongoing revelations also represents a potential liability exposure for the alleged bad actors’ companies and the companies’ executives. Sadly, I expect that we will see more revelations of this type, as well as further D&O lawsuits arising in the wake of the revelations.