I am sure many readers were as surprised as I was by the news last week that the New York Court of Appeals had overturned the disgraced former movie producer Harvey Weinstein’s sexual misconduct-related criminal convictions, apparently due to evidentiary decisions the trial court made. With the #MeToo phenomenon as a result back in our consciousness again, it somehow seems more than coincidental that on Friday a plaintiff shareholder filed a securities class action lawsuit against UK-based pharmaceutical development company Exscientia, P.L.C., after its CEO was terminated following revelations of allegedly improper relationship between the executive and two company employees. A copy of the April 26, 2024, complaint can be found here.
Background
Exscientia is an AI-driven pharma-tech company engaged in the design and development of medicines. In a February 13, 2024, press release, the company announced that its board had “decided to terminate” its CEO, Andrew Hopkins, and remove him as an Executive Director of the company, “in each case for cause and effective immediately.”
The press release stated that the board’s decision followed an investigation in which it was found that Hopkins “had engaged in relationships with two employees that the Board determined were in appropriate and inconsistent with the Company’s standards and values.” The press release went on to state that the board’s nominating committee was instituting a search for a new CEO and emphasized that Hopkins’s conduct did not affect the company’s financial statements and is unrelated to the company’s operational and financial performance.
The press release further stated that in the course of the investigation, the board had learned that the Chair of the company’s board of directors, David Nicholson, had “prior knowledge of the existence of the earlier of Dr. Hopkins’ relationships and had addressed the situation directly, with the involvement of other outside counsel, rather than in consultation with the Board,” and “following discussions with the Board, on February 12, 2024 Dr. Nicholson tendered his resignation from his positions with the Company.”
According to the subsequently filed securities lawsuit complaint, the company’s shares fell almost 23% on this news.
The Lawsuit
On April 26, 2024, a plaintiff shareholder filed a securities class action lawsuit in the District of New Jersey against the company; Hopkins; and Nicholson. The complaint purports to be filed on behalf of a class of investors who purchased the company’s securities between March 23, 2022, and February 12, 2024.
The complaint alleges that during the class period the defendants made false or misleading statements or failed to disclose that: “(i) Defendant Hopkins had engaged in improper relationships with employees that were inconsistent with the Company’s standards and values; (ii) Defendant Nicholson had prior knowledge of Defendant Hopkins’s relationships and had improperly addressed Hopkins’s misconduct without consulting the Board; (iii) the Company’s maintenance and enforcement of its Code of Business Conduct and Ethics was inadequate to safeguard against the foregoing conduct; (iv) the foregoing failures subjected the Company to a heightened risk of disruptive leadership transitions and/or reputational harm; and (v) as a result, Defendants’ public statements were materially false and/or misleading at all relevant times.”
The complaint 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 the plaintiff class.
Discussion
It has been some time since the whole #MeToo movement first went viral following Ronan Farrow’s blockbuster October 2017 article in the New Yorker article about Harvey Weinstein (although, to be sure, the #MeToo movement predated the article). Readers will recall that at that time there was a series of revelations of misconduct involving a number of corporate executives and other figures. In many instances, corporate and securities lawsuits followed in the wake of these revelations. At the time, I was tracking the lawsuits, in the same way that in later periods I have tracked, for example, COVID-related securities suits or SPAC-related securities suits.
Like many viral movements, the #MeToo story had its moment, but as a result of the short attention spans that the social media world produces, the focus soon moved elsewhere. This new lawsuit is an unfortunate reminder that though the world may have moved on to other topics, the problems underlying the #MeToo movement apparently have not gone away. This lawsuit is a reminder that the kinds of improper relationships all too often revealed as part of the #MeToo movement are not only harmful for the victims of the misconduct, but harmful to the companies and firms that the perpetrators are involved with.
Though there was a time when there were enough #MeToo-related securities suits for me to count and track, the litigation phenomenon died down a few years ago, just as the viral #MeToo movement itself did as well. The incidence of this new lawsuit based on allegations of improper conduct is a reminder that even though the social media world’s attention may have moved on to other things, the underlying problem has not gone away, and, as this case shows, it still represents a form of corporate and securities liability exposure, as well.
For some readers, the allegations in this lawsuit may be reminiscent of the circumstances involved in the lawsuit that McDonald’s filed in 2020 against its former CEO Stephen Easterbrook. Indeed, both situations involved allegations that the company’s CEO engaged in improper relations with company employees.
However, as discussed here, the crux of the lawsuit McDonald’s filed against Easterbrook was the allegation that Easterbrook had lied to investigators about his relationships, which had resulted in his being terminated “without cause.” The company contended that further investigation had revealed that it had clear grounds for termination “with cause.” The lawsuit settled with Easterbrook agreeing to return equity grants and cash with a total value of $105 million (which he would have forfeit if he had been terminated with cause). So the McDonald’s situation was similar to this one in that both circumstances involved improper relations between the company CEO and employees. Otherwise the situations are quite a bit different.
It is nonetheless interesting to reflect on the allegations in this latest lawsuit. This would be a very different lawsuit if the full board investigation had followed the first alleged instance of misconduct – that is, if the Board chair had engaged the entire board, rather than trying to handle it, as he apparently did, on the q.t and by himself. The fact that the board chair kept the prior incident quiet and tried to handle it on his own without the rest of the board’s involvement arguably makes this a different lawsuit – although it remains to be seen if what is alleged here amounts to securities fraud, rather than a species of mismanagement. In that regard, it will be interesting to see what the court ultimately makes of the question whether the plaintiff can sustain his burden of establishing falsehood and scienter.
As readers know, I view my role to try to track trends as they develop; for example, as noted above, I have tracked COVID-related cases and SPAC-related cases. When it was relevant, I also #MeToo cases. This case shows that not all cases (in fact, arguably not even most cases) match up to a current trend. And sometimes apparent trends are a reflection of perennial factors, rather than related developments within a given time frame.
One further observation about trend-spotting and reporting. It piqued my interest about this case to learn that this company describes itself as “an artificial intelligence (AI) driven Pharma-tech company that engages in the design and development of differentiated medicines for diseases with high unmet patient needs.” The AI hook grabbed my attention. In the end, however, this case had nothing to do with this company’s AI-based business strategy. The AI-related hook does not make this case itself an “AI-related” case, and I have not counted it as such. I emphasize this point because I anticipate that in coming months there will be much discussion of AI-related litigation and AI-related risks.
My point is that the mere fact that a company involved in a corporate or securities lawsuit has an AI-based business strategy does not make the lawsuit AI-related; in my view, the case doesn’t “count” as AI-related unless the allegations in the lawsuit related specifically to the AI business strategy. In this case, because the allegations in this lawsuit had nothing to do with the company’s AI-based business strategy, it does not “count” as AI-related. I will, however, be watching closely as cases come in, as I anticipate there will be further (perhaps many) lawsuits in the months ahead that do involve the defendant company’s AI-related business strategy.
It is probably worth noting that while there were a number of #MeToo-related securities lawsuit filed after the movement had gone viral, many of the cases did not fare particularly well (refer, for example, here and here). To be sure, the securities suit filed against Signet Jewelers that was at least in part #MeToo-related did settle for $240 million, but that lawsuit encompassed a variety of different allegations including allegations of financial misrepresentations. The #MeToo lawsuit that was filed against CBS, which “barely” survived dismissal, settled for $14.75 billion. The overall record in these kinds of cases is, at best, mixed.