One of the things that has happened in the wake of revelations of high-profile sexual misconduct as part of the #MeToo movement has been the rise of D&O litigation following after the revelations. However, this type of sexual misconduct follow-on litigation didn’t start with the rise of the #MeToo movement. Even before the #MeToo movement there were D&O lawsuits arising from sexual misconduct allegations. One of these earlier cases involved the retail jewelry chain Signet Jewelers. On November 26, 2018, Southern District of New York Judge Colleen McMahaon denied the defendants’ motion to dismiss in the case, in a ruling that may provide an interesting perspective on the many subsequent #MeToo follow on lawsuits. The November 26, 2018 opinion in the case can be found here.
Signet Jewelers is in the retail jewelry business, selling jewelry through several different branded stores, including its Kay Jewelers, Jared the Galleries of Jewelry Stores, Zales the Diamond Stores brands. On August 25, 2016, a plaintiff shareholder first filed a securities class action lawsuit in the Southern District of New York against Signet Jewelers and certain of its directors and officers, as discussed here.
In a subsequent amended consolidated complaint (here), the plaintiffs asserted their claims against the defendants relating to two sets of alleged misrepresentations. The amended complaint alleges that Signet made material misrepresentations or omissions relating to the health and management of its credit portfolio and with respect to Signet’s alleged corporate culture of sexual harassment. The defendants filed a motion to dismiss the plaintiffs’ complaint.
The Underlying Allegations of Sexual Misconduct and the Allegedly Misleading Company Disclosures
With respect to the allegations based on the alleged culture of sexual harassment, the plaintiffs allegations related to the company alleged disclosures concerning an underlying employment practices class action lawsuit that previously and separately been filed against the company in the Southern District of New York. This prior litigation is referred to as the Jock litigation (in reference to the name of the first-named plaintiff in the lawsuit).
The complaint alleges that Signet first disclosed the Jock litigation in an SEC filing in March 2008, in which the company said that the lawsuit is based on the allegations of 15 former and current employees. In subsequent disclosures, the company said that the lawsuit alleged store-level employment practices that allegedly were discriminator as to compensation and promotional activities.
Initially, the allegations in the Jock lawsuit were not publicly available due to court-required redactions and a seal of the court record. However, when the plaintiffs moved for class certification in the Jock lawsuit and the more than 250 declarations of more than 200 company employees became available in the public record, as least in part, it first became apparent that the lawsuit included allegations of sexual harassment, which, rather than being confined to store-level employees, was “rampant at Signet at all levels, including among senior executives.”
A February 27, 2018 Washington Post article (here) detailed the newly revealed allegations in the employees’ declarations, including allegations that the ranks of Signet’s executives were filed with “womanizers,” “playboys,” and serial sexual harrassers who “preyed” on female employees. Among other things, the declarations alleged that female employees were proposition to engage in sexual behavior in exchange for employment advancement; those who did so were rewarded with promotions, but those who declined or reported the activity were retaliated against. Specific allegations of sexual misconduct were alleged against the company’s then-CEO.
The November 26, 2018 Opinion
In his November 26, 2018 opinion, Judge McMahon denied the defendants’ motion to dismiss as to both sets of allegations.
With respect to the plaintiffs’ allegations regarding Signet’s credit portfolio, Judge McMahon concluded that the plaintiffs had sufficiently alleged that the company’s statements about its credit portfolio were misleading. He also held that the plaintiffs had sufficiently alleged scienter and loss causation.
In ruling on the sexual misconduct disclosure allegations, Judge McMahon said that the defendants were obligated under their reporting duties to provide a brief but accurate “description of the factual basis alleged to underlie the claims” in the Jock litigation. He said that the plaintiffs had “adequately alleged that Defendants did not do that.”
Judge McMahon specifically noted that the company had said in its SEC reports that the Jock litigation involved store-level alleged misconduct involved alleged discrimination in compensation and promotional opportunities, whereas, the plaintiffs had alleged, the allegations in Jock were about “pervasive sexual harassment that reached the highest offices in the company.” These allegations, Judge McMahon said, “suffice to state a claim that Signet’s public disclosures regarding the Jock litigation were false or misleading.”
Judge McMahon also found that the plaintiffs’ allegations based on the company’s disclosures relating to its Code of Ethics were also sufficient, noting that “statements contained in a code of conduct are actionable where they are directly at odds with the conduct alleged in the complaint.”
However, he said, the plaintiffs had not adequately alleged that the defendants’ generalized statements touting the importance of Signet’s relationship with its employees were materially false and misleading; these statements, he said, are the sort of “broad, aspirational and vague puffery statements that no reasonable investor could possibly consider in making investment decisions.”
Finally, Judge McMahon concluded with respect to the sexual misconduct disclosure allegations that the plaintiffs had adequately pled scienter and loss causation.
With respect to scienter, Judge McMahon noted that senior management, including one of the named defendants, were implicated in the very sexual misconduct alleged in the Jock case. Judge McMahon said that the plaintiffs had adequately alleged that the defendants “either had present knowledge or were reckless at the misleading nature of their disclosures regarding Jock and their corporate policy against sexual harassment.” He added that the inference of scienter “is at least as compelling as the one that Defendants offer – that their disclosures were in good faith.”
One specific thing Judge McMahon said at the outset of her opinion is worth highlighting here. She opened her opinion by saying the securities lawsuit against Signet “is a garden variety securities fraud lawsuit.”
I believe this is important and worth emphasizing because I think some D&O underwriters and even some insurance company claims representatives get confused about these kinds of cases. They look at the underlying employment practice misconduct allegations and think that these cases are EPL cases. To be sure, the underlying lawsuit here (the so-called Jock litigation) is indeed an EPL lawsuit. But the securities lawsuit is not an EPL lawsuit, it is a “garden variety” disclosure lawsuit, the very kind of lawsuit that a public company D&O insurance policy is designed to address.
As I noted above, this lawsuit was first filed before the #MeToo phenomenon really got going, but even though it predated the phenomenon, it is very much a part of the same sensation. There are a couple of things that are important to note in that regard.
While some of the #MeToo follow-on D&O lawsuits have been filed as shareholder derivative lawsuits, others have been filed as securities class action lawsuits (refer, for example, here). Judge McMahon’s ruling shows that plaintiff shareholders can in fact plead a misrepresentation lawsuit based on underlying allegations of sexual misconduct. In other words, these kinds of lawsuits are not merely mismanagement lawsuit; they can in fact be misrepresentation lawsuit, as this case establishes.
The allegations against the company and its executives that have come to light in the Jock lawsuit are indeed troubling, if true. But it is not those allegations alone that allowed the plaintiff shareholders’ securities lawsuit to survive the motion to dismiss. It is not what is alleged in the Jock lawsuit that allowed the plaintiffs here to avoid dismissal; it is what the company itself said in its SEC filings about the Jock lawsuit that allowed the motion to dismiss to be denied.
As is so often the case, the way the company deals with bad news can itself be the source of securities liability. In essence, the plaintiff shareholders allege that the company tried to soft-pedal the seriousness of the allegations in the Jock lawsuit, and that, the plaintiffs allege, is what harmed their investment interests when the alleged truth later came to light. All of which is a reminder of the importance for companies of the way in which they communicate with the investment public regarding negative developments involving the company.
The bottom line for the claimants in other securities class action lawsuits that have been filed on the bases on allegations involving underlying alleged sexual misconduct is that, as this case shows, it is possible to establish a viable securities misrepresentation claim based on company disclosures relating to the alleged misconduct.
The claimants in the other cases may find Judge McMahon’s statements about the plaintiffs’ allegations here based on the company’s code of conduct particularly helpful. Many of the securities suits based in reliance on allegations of underlying sexual misconduct include allegations based on supposed misrepresentation in the company’s disclosures about its code of conduct. Judge McMahon specifically held that these kinds of allegations can be sufficient to state a claim. Claimants in other cases will find Judge McMahon’s conclusion that statements in a code of conduct can be actionable where they are directly at odds with the conduct alleged in the complaint to be helpful.
In a recent conversation, I was asked whether I think the #MeToo phenomenon had run its course, and whether we would see fewer of these kinds of D&O claims in the future as a result. I happen to think that, unfortunately, we will continue to see high-profile allegations of misconduct. However, I think the direction of the phenomenon and the kinds of misconduct alleged may change.
The one thing I know for sure is that the #MeToo movement has been very empowering for many women, particularly younger women. The message that women can do something when they are treated improperly is powerful. I believe that the kind of issues that women will challenge will move on from sexual misconduct to issues of gender equity, including in particular gender pay disparity. And so, no, I don’t think the #MeToo phenomenon has run its course, I just think the nature of the revelations and of the follow-on D&O litigation will change.