A federal district judge has denied the defendants’ motion to dismiss in a securities class action lawsuit arising out of an electric utility’s eight-year involvement in a domestic bribery scheme. The court’s ruling has several interesting features relating to the securities litigation exposures from domestic corruption. Northern District of Illinois Judge Virginia M. Kendall’s April 21, 2021 opinion in the Exelon Corporation securities suit can be found here. An April 28, 2021 memo about the ruling from the Shearman & Sterling law firm can be found here.



Commonwealth Edison Company (ComEd), one of the country’s largest electrical utilities, is a controlled subsidiary of Exelon Corporation. In July 2020, Exelon and ComEd filed an 8-K in which they disclosed that they had entered a Deferred Prosecution Agreement (DPA) with the United States Attorney for the Northern District of Illinois. In the DPA, the companies admitted that from 2011 to 2019 they had participated in a bribery scheme involving a number of payments to the Speaker of the House of the Illinois House of Representatives and his allies, made in order to secure the passage of legislation favorable to the companies. The DPA specifically stated that certain officials at the companies knew of and participated in the bribery scheme. The value of the benefits to the companies under the favorable legislation was greater than $150 million. The DPA required ComEd to pay $200 million and to institute various remedial programs.


The Lawsuit

As discussed here, in December 2019, a plaintiff shareholder filed a securities class action lawsuit in the Northern District of Illinois against Exelon and certain of its directors and officers. The complaint alleged that the defendants had made several false and misleading statements and omissions in which they allegedly concealed the reason for the company’s legislative successes. The defendants also misrepresented the companies legal and regulatory compliance and specifically misrepresented that the policy was strictly applying and pursuing its anti-corruption policies. The complaint alleges that the misrepresentations caused Exelon shares to trade at inflated prices and alleges further that when the truth was revealed the price of Exelon shares to fall.


The plaintiff alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint seeks to recover damages on behalf of a class of Exelon investors who purchased the company’s shares between February 8, 2019 and October 31, 2019. The defendants moved to dismiss the plaintiffs’ complaint.


The April 21, 2021 Order

In her April 21, 2021 Order, Judge Kendall largely denied the defendants’ motions to dismiss, except as to one individual defendant with respect to whom Judge Kendall found that the plaintiff had not sufficiently alleged that the individual had made or participated in misrepresentations.


The plaintiff alleged that Items 105 and 3030 of SEC Regulation S-K imposes a duty on companies to disclose regulatory non-compliance. Judge Kendall noted that although the Seventh Circuit has not yet ruled on the issue, several recent N.D. Ill decisions had held that Items 105 and 3030 impose a duty to impose regulatory noncompliance. Judge Kendall specifically found that the plaintiff had “sufficiently alleged that Defendants had a duty to disclose their alleged bribery scheme under Items 105 and 3030 and that they had failed to do so.”


Judge Kendall specifically noted that the plaintiff “was not arguing Defendants were required to accuse themselves of wrongdoing.” Rather, she said, the plaintiff “pleads throughout the Complaint that Defendants were making misleading statements and engaging in fraudulent behavior because they were aware of the bribery scheme but representing otherwise.”


Among the specific instances Judge Kendall cited were, for example, the “unqualified statements” regarding the company’s conduct in its Code of Conduct, where the company had stated “we never request, offer or accept any form of payment or incentive intended to improperly influence a decision.” Similarly, the company’s Corporate Political Contribution Guidelines stated that “no contributions were to be made … in return for any Official Act.”  Judge Kendall said that these kinds of statements take the Code of Conduct and the Contribution Guidelines “out of the realm of nonactionable aspirational statements and into the realm of statements regarding the Company’s conduct and implies compliance.”



In numerous prior posts, I have noted how allegations of bribery and corrupt conduct can give rise to securities class action litigation. While there have been many prior securities suits involving bribery allegations what makes this case particularly interesting is that it does not involve corrupt activities in foreign countries. Rather, this lawsuit involved domestic corruption, underscoring the point that the kind of corrupt behavior that can give rise to securities litigation is not limited just to corruption involving foreign officials and foreign misconduct.


The observation that securities litigation exposure can rise out of corrupt domestic activities is not limited to just this one case. Indeed, as I noted in a blog post at the time, in July 2020, shareholders of Ohio electricity utility First Energy filed a securities class action lawsuit against the company and certain of its executives after the arrest of the Speaker of the Ohio House of Representatives for accepting bribes from the energy company in order to get the Speaker’s support for legislation favorable to the utility. The circumstances involved in the First Energy lawsuit have a number of disturbing parallels with the underlying events in the Exelon case. As these cases highlight, securities litigation exposure can arise out of domestic corruption activities.


There is one other feature of the Exelon ruling that interests me, and that is the fact that Judge Kendall found that the company’s statements in its Code of Conduct and Political Contribution Guidelines could give rise to securities litigation liability. It is not uncommon for plaintiffs to try to rely on these types of corporate statements in order to try to show that the company involved had made misrepresentations. Courts frequently reject these arguments, holding that these kinds of “aspirational” statements are nonactionable.


However, in this case, Judge Kendall specifically found that the unqualified nature of the corporate statements took the statements out of the realm of nonactionable aspirational statements. Judge Kendall’s ruling that these kinds of statements could constitute actionable misrepresentations is interesting and potentially significant for other companies alleged to have made misleading statements about their state of regulatory compliance.