As I have noted in prior posts, one of the noteworthy aspects of the whole #MeToo movement has been that the accountability efforts have included not only claims against the wrongdoers themselves, but also against the wrongdoers’ companies and company executives for enabling the misconduct or turning a blind eye. In the latest of these kinds of sexual misconduct-related lawsuit, a CBS shareholder has filed a securities class action lawsuit against CBS Corporation based on revelations that the company’s CEO, Leslie Moonves, allegedly engaged in sexual harassment at the company. The lawsuit underscores the fact that revelations of sexual misconduct represent an emerging area of corporate liability.

 

Background

As has been the case with several of the misconduct accounts, the allegations surrounding Moonves first came to light in an article in The New Yorker written by Ronan Farrow. The Moonves article, entitled “Les Moonves and CBS Face Allegations of Sexual Misconduct” (here), appeared in the magazine’s August 6, 2018 issue, although news of the story’s details began circulating several days before that.

 

The article, which referred to Moonves as “one of the most powerful media executives in America” and also as “one of the most highly paid corporate executives in the world” reported that six women had accused Moonves of sexual harassment and many more accused him of abuse.  The six women who allege they were harassed claim Moonves retaliated against them when his approaches were rebuffed. The article also contained the ironic note that late last year after revelations of others’ misconduct Moonves had become a prominent voice in the #MeToo movement in Hollywood. On July 27, 2018, the first day that news of the forthcoming article began circulating, the company’s share price declined approximately 6%.

 

Following the article’s publication, news circulated that the company’s Board was holding meetings to discuss whether or not Moonves should step aside pending investigation of the allegations. Shortly after that, there were media reports that the company had hired two law firms to investigate the allegations. Media reports also noted that this was not the first time that CBS had been caught up in #MeToo allegations; last year, Charlie Rose, a CBS host, resigned after allegations of sexual misconduct.

 

The Lawsuit

On August 27, 2018, a CBS shareholder filed a purported securities class action in the Southern District of New York against the company; Moonves; and Joseph Ianniello, the company’s Chief Operating Officer. The plaintiff’s complaint can be found here. According to the plaintiff’s lawyers’ August 27, 2018 press release (here), the complaint alleges that the defendants made false and misleading statements or failed to disclose that “(i) CBS executives, including the Company’s Chairman and Chief Executive Officer, Leslie “Les” Moonves, had engaged in widespread workplace sexual harassment at CBS; (ii) CBS’s enforcement of its own purported policies was inadequate to prevent the foregoing conduct; (iii) the foregoing conduct, when revealed, would foreseeably subject CBS to heightened legal liability and impede the ability of key CBS personnel to execute the Company’s business strategy; and (iv) as a result, CBS’s public statements were materially false and misleading at all relevant times.”

 

Discussion

I have to say it did not come as a surprise to me that this lawsuit was filed, although it did come as a bit of surprise that there was a several week delay between the revelations and the stock price drop, on the one hand, and the lawsuit being filed, on the other hand. I started looking for the lawsuit almost as soon as I first hear the news that there was going to be a Ronan Farrow article in the New Yorker about Moonves. That is where we are now, we have gotten to the point that with revelations of this kind, we now expect to see this kind of lawsuit.

 

The securities suit against CBS follows a now growing list of companies that have been hit with D&O lawsuits following revelations of sexual misconduct by one of the firm’s executives. Earlier this summer, National Beverage Corp. was hit with a securities suit following allegations that its CEO had sexually harassed company employees (as discussed here). Earlier suits have arisen involving Wynn Resorts (discussed here) and 21st Century Fox (here).

 

At this point, it is increasingly clear that the accountability process arising out of revelations of sexual misconduct are likely to include not only efforts to hold the alleged wrongdoer responsible, but will also include efforts to hold executives at the wrongdoer’s organization accountable as well, either for facilitating the misconduct or turning a blind eye.

 

I will say that reading the complaint the plaintiff’s claims read a lot more like mismanagement claims or even failure to supervise claims than a securities lawsuit. The alleged misrepresentation on which the securities law claims rest are business conduct statements in the company’s securities filings in which the company stated the standards for ethical conduct expected for all company directors and employees. The statement contains a zero tolerance policy for unwelcome sexual advances, request for sexual favors and other physical or verbal conduct of a sexual nature.

 

The accusations in the New Yorker article, according to the complaint, link Mooves to a broader culture of sexual harassment at the company, making the company’s prior representations about its ethical and conduct standards false and misleading. The complaint also alleges that the company failed to disclose Moonves’ alleged misconduct; that the company’s enforcement of its policies was inadequate; and that the alleged misconduct would expose the company to “heightened legal liability” that would affect the company’s business strategy.

 

The complaint has only just been filed and it remains to be seen how it will fare. The one thing that seems clear is that we likely are going to continue to see revelations of sexual misconduct. Just this summer, in addition to the news about Moonves and CBS, there was a front page Wall Street Journal article about sexual harassment at law firms and there was a Washington Post report about sexual misconduct in the classical music world. Sadly, we probably are going to see more stories like this. And it is likely that in at least some cases the revelations will lead to D&O claims involving executives at the wrongdoer’s organization.

 

The bottom line is that 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.