On April 21, 2021, Judge Virginia M. Kendall of the United States District Court for the Northern District of Illinois denied a motion to dismiss a putative securities class action against a large Illinois-based electric company (the “Company) for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as Items 105 and 303 of Regulation S-K.  Flynn v. Exelon Corp., No. 19-C-8209 (N.D. Ill. April 21, 2021).  Plaintiff alleged that the Company made false and misleading statements and omissions about an eight-year scheme to bribe Illinois state lawmakers, which, when finally disclosed to the market, caused substantial losses to investors.  The Court denied the motion to dismiss with respect to most claims.  Significantly, although the Court recognized that the Seventh Circuit has not held that Items 105 and 303 impose a general duty to disclose regulatory non-compliance, the Court nevertheless found that the Company violated Items 105 and 303 because it knew of and attempted to conceal the bribery scheme, all while making public statements that it was in compliance with its internal anti-bribery guidelines.   

From 2011 to 2019, the Company allegedly made $1.3 million in payments to an Illinois state legislator, with whom the Company had a historically poor relationship, to influence him and his political allies to pass legislation favorable to the Company.  The Company also made payments to a law firm favored by the lawmaker, appointed a board member favored by the lawmaker, and hired interns related to the lawmaker.  Plaintiff alleged that the bribery scheme was successful and that the Illinois legislature passed legislation that resulted in the Company receiving billions in subsidies, rate increases, and other benefits.  In 2019, the Company disclosed it was under investigation by the DOJ and SEC for its lobbying activities.  In 2019, the Company’s subsidiary entered into a deferred prosecution agreement (the “DPA”), in which it admitted that it bribed the Illinois lawmaker to gain the passage of favorable legislation.  Under the DPA, the subsidiary agreed to pay $200 million in penalties.  The DPA also acknowledged that the subsidiary’s senior executives knew of and concealed the bribery scheme.    

The Court held that the Company violated Items 105 and 303 by failing to disclose the bribery scheme.  The Court first emphasized that the Company “did not have a free-standing legal duty to disclose the bribery scandal, no matter how unseemly the scandal was and no matter how significant the scandal would have been in the market.”  (quoting In re Braskem S.A. Sec. Litig., 246 F. Supp. 3d 731, 752, 759-61 (S.D.N.Y. 2017)).  The Court held, however, that the Company violated Items 105 and 303 because it was “aware of the bribery scheme, but represented otherwise,” making its statements materially misleading when made.  Specifically, the Court focused on “unqualified statements regarding the Company’s conduct” concerning political contributions and anti-bribery guidelines.  For example, despite its alleged awareness of the ongoing bribery scheme, the Company’s Code of Conduct stated that Company employees “never request, offer or accept any form of payment or incentive intended to improperly influence a decision,” and the Company’s Corporate Political Contribution Guidelines stated that “no contributions were to be made . . . in return for any Official Act.” 

With respect to the majority of the remaining claims, the Court held that plaintiff had adequately alleged an actionable misrepresentation and therefore denied the Company’s motion to dismiss.