In several recent conversations, I have been asked whether I thought that the whole #MeToo movement might have more or less played out, and that we might not be seeing as many, or even any, more D&O claims based on underlying allegations of sexual misconduct. In response, I said that I didn’t think the phenomenon had played out but I did suggest that I thought that the phenomenon might be shifting and that the kinds of underlying allegations would change. Although it does not represent exactly the kind of thing I had in mind, a new securities class action lawsuit filed against Teladoc Health and based on alleged misconduct of one of its senior executives does at least represent a variant on the kinds of D&O claims following in the wake of allegations of sexual misconduct.
Teladoc Health, Inc. provides telehealth services worldwide. Its shares trade on the New York Stock Exchange. On December 5, 2018, Southern Investigative Reporting Foundation (a non-profit investigative journalism organization supported by donations) issued a report describing alleged misconduct between one of Teladoc’s male senior executives and a female subordinate. The executive in question is Mark Hirschhorn, the company’s Executive Vice President, Chief Operating Officer, and Chief Financial Officer. Hirschhorn reportedly is now 54 and married; the female subordinate, a single mother of two, is now 30. The two reportedly struck up what the report calls a “standard office romance” involving emails, dinners, and supposedly even a trip together to Las Vegas.
There were some unusual and arguably problematic features to their relationship that struck others as “unfair.” Among other things, the two allegedly liked to trade their Teladoc stock together. When the young woman “received a stock grant, Hirschhorn would tell her when he thought there were good opportunities to sell some shares. His track record, she proudly told colleagues, was pretty good.” Company employees reportedly complained about this to another company executive, Amy McKay. McKay apparently wrote up a memo about the couple’s relationship and submitted the memo to the company’s HR department. The company hired an outside law firm to investigate the allegations in the memo.
Following the investigation, Hirschhorn was required to enter an amended employment contract that, among other things, prohibited him from violating the company handbook and that suspended vesting of his company shares for one year. Otherwise, Hirschhorn continued to prosper at the company. However, McKay, the executive who submitted the report to HR, was terminated from employment at the company. The young woman who allegedly was in the relationship with Hirschhorn left the company; under the terms of her severance agreement, she is prohibited from talking about the relationship or the circumstances surrounding her departure from the company.
On December 12, 2018, a plaintiff shareholder filed a securities class action lawsuit against Teladoc in the Southern District of New York. The complaint, a copy of which can be found here, names as defendants the company, Hirschhorn, and the company’s CEO. The complaint purports to be filed on behalf of investors who purchased shares of the company between March 3, 2016 and December 5, 2018. The complaint refers to the December 5, 2018 Southern Investigative Reporting Foundation report.
The complaint alleges that the defendants made false and misleading statements or failed to disclose that “(i) Hirschhorn was engaged in an inappropriate sexual relationship with a subordinate; (ii) Hirschhorn and this subordinate engaged in insider trading to provide themselves with undue benefits; (iii) Hirschhorn caused the subordinate to receive promotions for which she was unqualified, thereby negatively impacting the company operations; (iv) the Company’s enforcement of its own purported employment and trading policies were inadequate to prevent the forgoing conduct; and (iv) as a result, the Company’s public statements were materially false and misleading at all relevant times.”
The complaint alleges that following the publication of the December 5 report, the company’s stock price fell “sharply,” by 6.69%. The complaint seeks to recover investors’ alleged damages based on alleged violations of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934.
In many ways, the allegations in this lawsuit are very different from the kinds of allegations that have been raised in the many D&O lawsuits that have been filed in the wake of revelations of sexual misconduct as part of the whole #MeToo phenomenon. For starters, it appears that the relationship was consensual. (I will stipulate that in a work environment, the relationship between a supervisor and a subordinate may be such as to make the use of the term “consensual” questionable.) As far as I can tell, the young women involved did not file any claims against the company or Hirschhorn – although the suggestion in the report that she obtained a severance agreement as a result of which she is prevented from speaking does suggest that she reached some kind of financial settlement with the company.
In many way, the underlying situation would be nothing more than a particularly messy personnel matter – albeit one fraught with the possibilities for employment practices claims — were it not for the suggestion that Hirschhorn was not only giving the young woman insider trading tips, but (inferentially, at least) that he himself was timing his trading to take advantage of inside information. However, reading the media article as a whole, it does look as if Hirschhorn’s trading was undertaken pursuant to a Rule 105-1 trading plan, which, if true, would undercut the suggestion that he was timing his trading in company shares based on inside information. Even if Hirschhorn himself was not engaging insider trading, the suggestion that he was supplying a women with whom he allegedly was having an affair with tips on when to trade based on inside information is a problem.
So there are some troublesome things here. It remains to be seen whether or not these troublesome things add up to a violation of the federal securities laws. The question here is not whether or not Hirschhorn did anything wrong, the question is whether investors were misled. The alleged misrepresentations referenced in the complaint consist basically of references to the company’s references in its public statements to its ethics code and insider trading policy. Whether Hirschhorn even violated the code and policy is one question. But that is a different question of whether the company’s representations about the code and policy were misleading. In any event, allegations of scienter are scarce.
The sensationalized way the report came to light apparently had an impact on the company’s share price. So in came the lawsuit. The one thing this case clearly is not is a lawsuit about financial or accounting misrepresentations. It does seems that we have reached the point that anything bad that happens at a company – anything at all – is now likely to draw a securities lawsuit.
It is probably worth noting here that the law firm that filed this complaint is the same one that is responsible for most of the event-driven lawsuits I have described in prior blog posts.