This article originally appeared in Goldberg Segalla’s Professional Liability Matters. Read the issue here.

On February 13, 2019, lead plaintiff Construction Pension Trust for Southern California filed suit in the U.S. District Court for the Southern District of New York. The nature of the suit was a putative securities class action on behalf of all purchasers of CBS Class A and Class B common stock between September 26, 2016, and December 4, 2018, against CBS, certain of its senior executives, and certain current and former members of CBS’s Board of Directors, asserting violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10(b-5) promulgated there under. Section 10(b) of the Securities and Exchange Act makes it unlawful to “use or employ, in connection with the sale of any security … any manipulative or deceptive devise or contrivance of such rules and regulations as the Commissions may prescribe.” 15 U.S.C. §78j(b). Implementing Rule 10 b-5 prohibits the making of “ … any untrue statement of a material fact” and further makes unlawful to “omit to state a material fact necessary in order to make the statement made, in light of the circumstances under which they are made, not misleading.”

The amended complaint described the nature of the action as follows:

This case concerns defendants’ failure to disclose that CBS was beset by a company-wide pattern and practice of sexual harassment, creating a ‘culture of fear’ and hostile work environment that exposed the company to significant reputational risk, and the potential loss of key executives, including, most notably, CEO, President and Chairman of the Board, Defendant Leslie Moonves.

The amended complaint is underpinned by a New Yorker article by Ronan Farrow unearthing alleged sexual harassment and misconduct concerning Leslie Moonves and CBS, as well as subsequent articles published in the New York Times.

On January 15, 2020, U. S. District Judge Valerie Caproni granted in part and denied in part motions the defendants had made to dismiss the amended complaint for failing to state a cause of action under Federal Rules of Civil Procedure 12(b)(6). Constr. Laborers Pension Tr. for S. California v CBS Corp., 18-CV-7796 (VEC), 2020 WL 248729 [SDNY Jan. 15, 2020]. The court succinctly stated in its order concerning the background of the case that:

The facts in the case center on Moonves’ allegedly unique value to the company and on accusations of sexual misconduct made against Moonves and other non-Defendant executives at CBS that were reported by the New Yorker and other news organizations.

The court recited key allegations of the amended complaint, including that Moonves’ leadership was instrumental to CBS and that the events which unfolded caused Moonves and CBS to face a #MeToo reckoning. This included a draft 59-page report leaked from CBS’ independent investigation of Moonves that was published by the New York Times. The court noted that:

After reviewing the findings of the investigations, which included interviews with approximately 350 people, CBS’s Board decided to terminate Moonves for cause due to his willful misfeasance.

The draft report found that Moonves’ behavior “arguably constitutes willful misfeasance and violation of the company’s sexual harassment policy” and “the company’s historical policies, practices, and structures have not reflected a high institutional priority on preventing harassment and retaliation.”

Also included in the court’s order is a recitation of defendants’ public statements alleged in the amended complaint, including CBS’s proxy statements from 2016–18 which incorporated CBS’s “Business Conduct Statement” (BCS). The court noted that the proxies provided that the purpose of the BCS was to address “[t]he company’s commitment to providing … a bias-free harassment-free workplace environment.” The BCS provided that “CBS has a ‘zero tolerance’ policy for sexual harassment.” The court also noted a statement that Moonves made to an audience at Variety Magazine’s Innovative Summit that the #MeToo movement was “a watershed movement” and that “it’s important that a company’s culture will not allow for this. … There’s a lot we’re learning, there’s a lot we didn’t know.”

The court’s order sets forth the amended complaint’s allegations regarding CBS’s stock fluctuation and trading activities by executives. Specifically:

Following the July 27, 2018, publication of sexual assault allegations involving Moonves, CBS Class A and Class B stock prices fell about 6 percent from $57.85 to $54.27 per share and $57.53 to $54.01 per share respectively.

And, “…by the next trading day, the stock prices had each fallen about 10 percent total.” While the stock prices recovered slightly, they dropped again once the New York Times article appeared concerning the leak of the CBS draft investigation report.

Finally, the court took note of the amended complaint’s allegations that before the sexual harassment allegations became public, Moonves and CBS’s executives collectively sold 3.4 million shares of CBS stock. In the analysis of the subject motions, Judge Caproni treated three broad categories1 of misleading statements alleged in the Amended Complaint:

  1. The BCS, ethics code, and various related statements
  2. Disclosures about the importance to CBS of key personnel and Moonves, in particular
  3. Management statements to news media made by Moonves, CBS President David Rhodes, and CBS News

With respect to the first category, the court found that the BCS, ethics code, and related statements were neither material nor false and misleading, reasoning that only in rare circumstances have courts allowed statements in a code of conduct to survive a motion to dismiss: “…corporate codes of conduct tend to be general statements about reputation, integrity, and compliance with ethical norms [that] are inactionable puffery, as opposed to being statements of facts and, therefore, generally incapable of forming the basis for a Section 10(b) claim (citing Singh v. Cigna Corp. 918 f.3d 57 (2d Cir. 2019)).”

In reviewing the statements in the BCS, the court concluded that they did not invite reasonable reliance as they were “…far too general and inspirational.” For example, “CBS believes in an environment that is free from workplace bullying.” “CBS has a zero tolerance policy for sexual harassment,” and “[w]e will take reports of violation or suspected violation of these policies very seriously.”

In concluding that these and other statements were mere puffery, the court articulated that “These statements were not made to reassure investors that no CBS executive, or its CEO specifically, was susceptible to being the target of accusations of sexual harassment.” The court pointed out that the amended complaint had not alleged that the alleged misconduct was so pervasive “…that CBS, in fact, held none of its asserted aspirations.”

Interestingly, the court determined that two sets of statements in the BCS came close to being statements of fact, but concluded that “…no reasonable investor would rely on these statements as assurance that CBS had no high level executive who was vulnerable to a #MeToo moment.” Those statements concern allegations in the complaint that “CBS represented that it will take all steps and remedial action to stop sexual harassment and protect the workplace environment,” and second, that CBS represented that there “are several different methods for making an anonymous report” and “That CBS will promptly and thoroughly investigate allegations of sexual harassment and those who report sexual harassment will not be retaliated against.” In a further finding that the above statements could not survive beyond the pleading state, the court reasoned that they “…do not guarantee compliance or make any commitment to take concrete steps to address sexual harassment complaints.”

As to CBS’s description of its BCS and ethics code in the proxy, Judge Caproni found that the amended complaint did not allege that the statements “…were made to reassure investors or suggest that allegations of sexual misconduct would not damage the company.” Here, the court also found the amended complaint lacking in any allegations that “…the company highlighted its BCS in the wake of revelations about workplace sexual harassment to reassure investors that CBS would not be rocked by similar allegations against its executives.” The court opined that “…no reasonable investor would have relied on the BCS statements to reassure him or herself that the company was immune to losing key executives due to allegations of sexual misconduct.”

The amended complaint was further found to be deficient in that even if the alleged statements were material, the amended complaint did not allege them to be false. To the contrary, the amended complaint contained allegations reflective that CBS acted in accordance with the BCS, including allegations that CBS producer “[Brad] Kern was ousted after a third investigation.” On the issue of falsity, Judge Caproni distinguished In re Signet Jewelers Ltd. Sec. Litig., No 16-cv-6728, 2018 WL 6167889, at *17 (S.D.N.Y. Nov. 26, 2018), on which plaintiffs heavily relied. In Signet, the plaintiff alleged that the company “took no action at all in the face of blatant and pervasive violations…” Similarly, the court found that the complaint did not allege that statements in the ethics code or in the proxy statement were false or misleading.

Turning to the key personnel and critical risk disclosures, the court found them not to be misleading. As alleged in the complaint, the “key personnel disclosure” (made in 10K annual reports and 10Q quarterly reports), stated that “Company’s business depends upon the continued efforts, abilities, and expertise of its chief executive officer and other key employees.” The court’s opinion, which included an analysis of the law against half-truths with respect to risk disclosures, concluded that “The Amended Complaint does not allege that Defendants knew that the risk of Moonves’ termination for sexual harassment had ‘already materialized’ at the time the company made the risk disclosures,” relying upon well-established precedent that “[a]n earlier statement is not somehow made misleading simply because it failed to foretell a … problem which later materialized.” Panther Partners Inc. v. Ikanos Comm’s Inc., 538 F. Supp. 2d 662, 672 (S.D.N.Y. 2008). Finally, with respect to the risk disclosures, they were not misleading as they “stated simply that Moonves was important to CBS and had “nothing to do with Moonves’ alleged misconduct.”

Turning to CBS President David Rhodes and CBS News’ statements to news media after Charlie Rose was terminated from CBS, the court held they were “…mere generic puffery” and that such statements did “…not state or imply that Moonves, or any other executive, had not engaged in misconduct or would not be swept up in the #MeToo movement.” Importantly, the amended complaint did not allege that the statements were false and misleading. While the complaint also alleges that “…On May 3, 2018, Rhodes also denied that he or CBS News had prior knowledge of Rose’s sexual misconduct,” the amended complaint did not allege that statement to be false or misleading.

The court then examined Moonves’ statement on November 29, 2017, at an industry event hosted by Variety that “[#MeToo] is a watershed movement. It’s important that a company’s culture will not allow for this and that’s the thing that’s far-reaching. There’s a lot we’re learning. There’s a lot we didn’t know.” Significantly, Judge Caproni held that “The Amended Complaint, read in light most favorable to plaintiffs, adequately—though barely—alleges that this was a misleading statement of material facts.” Thus, the court held that the amended complaint adequately alleged that Moonves’ statement was “misleading.” Specifically, “Although it is very close, it is barely plausible that a reasonable investor would construe his statement as implicitly representing that he was just learning of problems with workplace harassment at CBS.” The court further found that “…the misleading aspect of Moonves’ statement is also adequately pled to be material.”

The court opined that in response to Moonves’ statement made at an industry summit, “[a] reasonable investor could have understood Moonves’ statement to mean that he did not have exposure to sexual misconduct allegations, thus providing reassurance that Moonves, the one executive that the company and analysts viewed as crucial to CBS’ continued success, would not be compromised by the #MeToo movement. … Thus, a reasonable investor could rely upon his statement as reflecting Moonves’ own—and thus CBS’—lack of high-level exposure to the #MeToo movement.”

Concerning the element of scienter (a mental state embracing intent to deceive, manipulate, or defraud2) necessary to support a Section 10(b) claim, the court opined that the amended complaint sufficiently plead scienter as to Moonves and CBS. The scienter allegation in the amended complaint consists of allegations that defendants:

  1. Disregarded open and pervasive sexual harassment at the company, including Moonves’ problematic post
  2. Sold stock during the putative class period
  3. With respect to Moonves only, engaged in sexual harassment

Plaintiff’s amended complaint asserted that individual defendants concealed the sexual harassment issues at CBS in order to sell their shares before problems were discovered. The court referenced that Moonves and CBS then-COO, now-CEO Joseph Ianniello (with one exception) “…made all of their alleged trades pursuant to public, periodic, and preset 10(b5-1) trading plans” and found “these sorts of trades do not give rise to a strong inference of scienter.” In Re Lululemon, Sec. Litig. 14 F. Supp. 3d, 553, 585 (S.D.N.Y. 2014) aff’d 604 F App’x 62 , (2dCir 2015). Taking judicial notice of the trading plans, the court found that they “…were adopted months before the New Yorker article about Harvey Weinstein, and trading values followed a consistent pattern from early 2017 through early 2018.”

The court thought significant that “…the Amended Complaint does not allege that the trading plans were altered or adopted after the New Yorker article was published.” What’s more, the court found the amended complaint was “…sorely deficient in alleging that any trades … were suspicious.”

Concerning the plaintiff’s theory of conscious misbehavior or recklessness, the court held that the allegations of the amended complaint fell short as to all defendants except Moonves, relying upon precedent holding “absent concrete allegations as to Defendants’ knowledge the [Amended Complaint] cannot generate a strong inference of scienter.” In Re Arantuna Therapeutics Inc., Sec. Litig. 315 F. Supp. 3d, 737, 745 (S.D.N.Y. 2018).

The court determined that the fact of an emergency board meeting called and then cancelled in 2018 regarding the public airing of allegations against Moonves “serious enough to suspend him” was insufficient to support a strong inference of scienter. Other individual defendants who, the complaint alleged, upon learning of rumors, urged an internal investigation of Moonves, and/or retained a law firm to investigate Moonves (the investigation concluded there was “…nothing to worry about”) also had such allegations dismissed for lacking sufficiency with respect to the element of scienter. The court cited precedent that such allegations “…suggest a prudent cause of action that weakens rather than strengthens an inference of scienter.” Slayton v. Am. Express Co., 604 F. 3d 758, 771 (2d Cir. 2010) (quotation omitted).

Judge Caproni did find that “the Amended Complaint did adequately—though again barely—allege that Moonves was consciously reckless when he made his statement at the Variety Innovative Summit.” Specifically, the court found that “the Amended Complaint, including extensive and specific allegations that Moonves sexually harassed and assaulted employees and non-employees, precisely the sort of behavior that #MeToo reporting was ferreting out and precisely the conduct that his Variety statement impliedly distanced himself from.” The allegations of the amended complaint, which on a motion to dismiss the court had to accept as true, sufficiently set forth that “Moonves knew of his own prior misconduct and knew that it left him in a precarious position in a post #MeToo world; nonetheless, he impliedly disclaimed knowledge and sought to portray his position by stating to the Variety audience, ‘There’s a lot we’re learning. There’s a lot we didn’t know.’”

In addition to finding that the amended complaint adequately pleaded a strong inference of scienter with respect to Moonves, Judge Caproni also determined that Moonves’ alleged state of mind was attributable to CBS, and that the plaintiff’s amended complaint sufficiently pleaded corporate scienter.

Concerning the element of loss causation, CBS contested that it was pleaded. Judge Caproni disagreed, opining, “Although the court has to wonder whether plaintiffs will be able to prove it, they have adequately plead loss causation. CBS’ stock declined immediately after each of the alleged corrective disclosures (the July 27 New Yorker article and the December New York Times article), evincing (at least for purposes of deciding a motion to dismiss) the new information in the disclosures caused the decline.”

The court concluded that the amended complaint states a Section 20(a) claim against CBS (a Section 20(a) establishes a secondary liability for controlling persons).

Lastly, the court denied the plaintiff’s motion for leave to amend the complaint without prejudice.