In a development with interesting implications, the video gaming company Activision Blizzard has agreed to pay $35 million to settle an SEC enforcement action based on allegations that the company lacked controls and procedures to ensure that disclosures about the company’s workforce were adequate. The SEC’s allegations also pertained to alleged whistleblower violations at the company. The enforcement action, underscores the agency’s willingness to use its authority, as one law firm memo put it, to transform workplace misconduct allegations into securities law violations. The SEC’s February 3, 2023, Press Release about the settlement can be found here. The SEC’s Order relating to the allegations can be found here.
Allegations of workplace misconduct have swirled around Activision in recent years. Among other things, the company has been the target of a California regulatory agency action based on allegations gender-based discrimination and harassment. In addition, the workplace misconduct allegations also gave rise to a separate private securities class action lawsuit; as discussed here, the court in the securities suit granted the defendants’ motion to dismiss.
SEC Allegations and Settlement
In addition, the SEC separately but relatedly alleged that Activision failed to maintain controls and procedures to ensure that its periodic disclosures were accurate. The SEC’s allegations relate to the company’s statements in its SEC filings during the period 2017 through 2021 that the company’s failure to attract, retain, and motivate key personnel was a material risk that could affect the company’s performance.
The SEC alleged company lacked internal controls and procedures “designed to ensure that information related to employee complaints of workplace misconduct would be communicated to Activision Blizzard’s disclosure personnel to allow for timely assessment on its disclosures.” The SEC alleged further that that as a result of these shortcomings, Activision Blizzard’s management “lacked sufficient information to understand the volume and substance of employee complaints of workplace misconduct” and was unable to “assess related risks to the company’s business, whether material issues existed that warranted disclosure to investors, or whether the disclosures it made to investors in connection with those risks were fulsome and accurate.”
The SEC’s allegations also included alleged whistleblower allegations. The SEC alleged that Activision used separation agreements that required departing employees to notify the company before speaking to an administrative agency regarding a report or complaint. The SEC alleged that this disclosure requirement impeded former employees from communicating with the agency about possible securities law violations.
Commissioner Hester Pierce dissented from the SEC’s order, saying that the order did not identify any securities law violations, noting in particular that the SEC’s Order did not find that the company’s risk disclosures were misleading or incomplete.
The SEC’s enforcement action against Activision Blizzard in interesting and has important implications. For starters, as the Akin Gump law firm put it in its memo about the SEC’s action, the action “indicates that the SEC views its ESG mandate to include the ‘S’ as well as the ‘E’”. The Katten Muchin firm, in its memo about the case, said that the action not only represents an “exceptionally broad interpretation” of the securities laws, but it also shows the agency’s “increasing willingness to investigate and charge alleged violations of all ‘ESG’ elements, not just the environmental disclosures that have attracted the most public scrutiny.”
The resolution of this case, as the Akin Gump memo puts it, “marks the first time the SEC has imposed disclosure control violations on a public company that are related entirely to workplace-specific issues.” Moreover, the size of the settlement, at $35 million, sends a “clear signal” that the SEC is taking an “aggressive approach to enforcing workplace-related disclosures.”
The enforcement action also seems to broaden the “categories of information that public companies may need to gather” for disclosure purposes, which could significantly expand public company disclosure burdens. Indeed, as the Paul Weiss law firm noted in its memo about the SEC’s action, the workplace issues that are the subject of the Activision action may be “only one of any number of topics as to which the SEC may in hindsight alleged that a company’s management ‘lacked sufficient information to understand.”
The SEC’s Activision enforcement action is only the latest development showing that human capital disclosures are an increasing area of focus. Indeed in June 2022, a Working Group on Human Capital Accounting disclosure submitted a petition requesting the SEC to “develop rules to require public companies to disclosure sufficient information to allow investors to asses the extent to which the firms invest in their workforce.” As the Paul Weiss memo puts, after noting that SEC Chair Gensler has indicated his intent to act on the petition, “human capital is likely to remain a hot button area for SEC enforcement activity and rulemaking.”
The SEC’s enforcement action is also the latest of several recent developments in which alleged workplace employment conduct violations have been transformed into D&O claims. As I noted in a recent post (here), the Delaware Chancery Court, in ruling that extended the duty to monitor to corporate officers as well as corporate directors, held that corporate offices oversight duties included the duty to monitor possible employment practices violations, and also expressly held that an officer’s employment practices violations could represent a breach of the officer’s duty of loyalty.
It may or may not be true as Bloomberg columnist Matt Levine famously put it that everything everywhere is securities fraud, but increasingly it seems to be the case that workplace misconduct allegations not only represent potential employment practices violations but also may also give rise to a D&O claim. In any event, human capital controls and disclosures seem likely to remain a source of litigation and regulatory and enforcement focus.