Securities Regulation Daily Claim that CBS misled investors about impact of #MeToo movement may proceed
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Friday, January 17, 2020

Claim that CBS misled investors about impact of #MeToo movement may proceed

By John M. Jascob, J.D., LL.M.

A securities fraud claim may go forward against CBS Corporation and its former CEO Leslie Moonves for concealing the risks presented by the executive’s alleged history of sexual misconduct.

The federal district court in Manhattan has allowed a securities class action to go forward against CBS Corporation and former CEO Leslie Moonves for alleged misstatements to the media concerning the company’s efforts to address workplace sexual misconduct. Judge Valerie Caproni ruled that the complaint adequately alleged that Moonves’s statements regarding the company’s response to the #MeToo movement at a Variety magazine event were materially misleading in light of his own alleged wrongdoing. She dismissed other securities fraud claims against CBS, Moonves, and certain officers and directors, however, holding that the statements underpinning those claims were either immaterial or not adequately alleged to be false or misleading (Construction Laborers Pension Trust for Southern California v. CBS Corp., January 15, 2020, Caproni, V.).

The complaint alleges that Moonves—who was heralded as the architect of CBS’s success while overseeing a dramatic rise in share price during his more than 20-year tenure at the firm—concealed a dark history of sexual misconduct and fostered a hostile workplace culture that posed material business risks to the company. According to the plaintiffs, the defendants allegedly failed to disclose the risk that journalists would uncover and expose Moonves’s misconduct and force Moonves out, all the while paying lip service to the company’s purported anti-harassment ethical standards. CBS ultimately terminated Moonves for cause in December 2018 after the New York Times published the details of a draft report from an independent investigation by CBS that described previously unreported acts of sexual misconduct by Moonves.

Risk of #MeToo revelations. The court observed that a single theory of securities fraud underpinned the complaint, namely that the advent of the #MeToo movement’s revelations of sexual assault carried out by media and entertainment power brokers increased the risk that CBS would lose Moonves to sexual scandal. Despite this, the theory posits, the defendants failed to disclose that risk even as they touted CBS’s ethical culture and Moonves’s importance to the company’s financial performance.

The court first rejected claims that statements from CBS's business conduct statement that were incorporated into its proxies from 2016 to 2018 were false or misleading. The court observed that language in the business conduct statement stating that CBS “believes in an environment that is free from workplace bullying” and “CBS has a ‘zero tolerance’ policy for sexual harassment” were far too general and aspirational to invite reasonable reliance by investors. These statements were not made to reassure investors that no CBS executive was susceptible to being the target of accusations of sexual harassment, the court opined, nor did they describe concrete steps taken by CBS to ensure compliance with internal policy or the law. Accordingly, most statements in the business conduct statements were mere puffery, the court found.

The court also rejected claims that various risk disclosures by CBS in its Forms 10-K and 10-Q regarding Moonves’s importance to the company were false and misleading. Although the plaintiffs argued that the risk disclosures were misleading because CBS failed to disclose the risk that Moonves would be ousted due to accusations of sexual misconduct, the court disagreed. The disclosures stated simply that Moonves was important to CBS, the court observed. They did not state or suggest that Moonves had always behaved appropriately, nor did they purport to assess the likelihood that he would leave the company.

The court next turned to claims that CBS and certain individual defendants misstated material facts to various news outlets when commenting on the #MeToo movement and on CBS’s efforts to address workplace sexual misconduct in the wake of correspondent Charlie Rose’s firing by CBS News in late 2017. The court first found that statements by CBS News President David Rhodes that CBS had “worked to strengthen existing systems to ensure a safe environment where everyone can do their best work” and “we take swift action when we learn of unacceptable behavior” were generic puffery. They did not state or imply that Moonves, or any other CBS executive, had not engaged in misconduct or would not be swept up in the #MeToo movement.

The court did find, however, that the complaint adequately alleged that remarks by Moonves at the Innovate Summit hosted by Variety magazine in November 2017 constituted a misleading statement of material fact. At that event, Moonves had said: "[#MeToo] is a watershed moment. 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." Although it was a close call, the court held that it was barely plausible that a reasonable investor would construe Moonves’s statement as implicitly representing that he was just learning of problems with workplace sexual harassment at CBS. The statement implied that he had not known of these problems previously, even though, in truth, he was at that time actively seeking to conceal his own past sexual misconduct from CBS and the public.

The misleading aspect of Moonves’s statement was also adequately alleged to be material, the court held. The court reasoned that a reasonable investor could have understood Moonves’s 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’s continued success, would not be compromised by the #MeToo Movement. Thus, a reasonable investor could rely upon his statement as reflecting Moonves’s own—and thus CBS’s—lack of high-level exposure to the #MeToo movement.

Finally, the complaint adequately pleaded scienter against CBS and Moonves. Although it was again a close call, the plaintiffs sufficiently alleged that Moonves was consciously reckless when he made his statement to the Variety audience. The complaint included extensive and specific allegations that Moonves had 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 court reasoned. The plaintiffs’ allegations gave rise to a strong inference that Moonves knew at the time he made his statement that his remarks and their implications were not truthful or that, at a minimum, he was highly unreasonable in failing to appreciate that possibility.

The plaintiffs also adequately pleaded corporate scienter because the complaint alleged facts supporting a conclusion that, when he spoke at the Variety event, Moonves was acting as CBS’s agent under its control and within the scope of his authority. Moonves allegedly spoke on behalf of CBS as its CEO and chairman to articulate the company’s stance on the #MeToo movement. Because that was not a fraud against CBS, Moonves’s scienter could be imputed to CBS, the court held.

The case is No. 18-CV-7796 (VEC).

Attorneys: David Avi Rosenfeld (Robbins Geller Rudman & Dowd LLP) for Construction Laborers Pension Trust For Southern California. Mary Jane Eaton (Willkie Farr & Gallagher LLP) for CBS Corp.

Companies: Construction Laborers Pension Trust For Southern California; CBS Corp.

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