With a picture painted of a pliant board of directors and senior executives in the face of a steamroller chairman-CEO, claimed ignorance of misconduct did not get individual defendants off the hook.
The Middle District of Tennessee allowed most Exchange Act claims to proceed against Nissan and several senior executives, finding that the plaintiffs had adequately alleged that former Nissan chief Carlos Ghosn had improperly padded his own compensation by millions of dollars while concealing this fact and that other defendants had gone along with the scheme, causing Nissan to overstate its operating income (Jackson County Employees Retirement System v. Ghosn, December 29, 2020, Campbell, W.).
Compensation scheme. Nissan is a multinational automobile manufacturer with its international headquarters in Japan. During the class period of 2014 to 2018, Ghosn was Nissan’s president, CEO, a representative director, and chairman of Nissan’s board of directors. Other former and current company officers and directors were also named in the complaint.
According to the complaint, Ghosn substantially decided compensation amounts for individual directors and top line management all on his own. This unilateral authority allowed Ghosn to allegedly engage in an unlawful scheme to increase his own pay by approving billions of yen in deferred compensation. Year after year, Ghosn’s reported pay grew only slightly, but he increased the deferred portion more rapidly without telling fellow board members, ultimately awarding himself more than $80 million in deferred compensation. The defendants also allegedly made false and misleading statements regarding executive compensation in Nissan’s annual financial reports. As a result, the defendants allegedly understated the company’s compensation expenses and overstated its operating income throughout the class period.
The plaintiffs also allege that the defendants made false and misleading statements regarding Nissan’s corporate governance and internal controls, compliance with applicable laws and regulations, and commitment to ethical conduct in Nissan’s other mandatory disclosure documents.
In 2019, Nissan and Ghosn settled SEC charges relating to the alleged misconduct. Nissan agreed to pay a $15 million civil penalty, and Ghosn agreed to a $1 million civil penalty and a 10-year officer-and-director bar to settle the court case. In addition, former director Greg Kelly agreed to a $100,000 civil penalty, five-year officer-and-director bar, and a five-year suspension from practicing or appearing before the SEC as an attorney.
Material misrepresentations. The court first concluded that the plaintiffs had adequately alleged that statements about ethics and compliance were misleading, including that Nissan aimed "to conduct fair, impartial and efficient business activities by adhering to the applicable laws and corporate rules." The court found allegations sufficient that Ghosn and Kelly engaged in "serious misconduct" by underreporting Ghosn’s compensation and its Special Committee found "facts sufficient to suspect violations of laws and regulations."
The court next found that statements about corporate governance were also adequately alleged to be misleading. The complaint pleaded multiple specific, detailed factual allegations that, when taken as true, demonstrated, at least as to Ghosn’s compensation, there was no "supervision by the Board of Directors" at all. The plaintiffs alleged that Ghosn determined his own compensation, that board meetings lasted an average of twenty minutes, and that Nissan’s Special Committee found that the Board operated in an atmosphere where it was not possible to ask questions about or give opinions on the agenda
The court found that at this stage of the litigation, the statements concerning corporate governance and internal controls, legal compliance, and ethics were material misrepresentations.
"Making" a statement. The court rejected Ghosn’s contention that he did not "make" alleged misstatements in Nissan press releases announcing Nissan’s financial results for 2014 to 2016 or annual and sustainability reports. Under Janus, the key to Section 10(b) liability is whether a party has control over a statement's content and whether and how to communicate it.
Ghosn was the only individual quoted in the press releases, and was alleged to have led press conferences the day after each release where he delivered the statements in the press releases himself. Further, Ghosn was Nissan’s CEO and chairman and alleged to have exercised total control over all aspects of the company’s governance and internal management. The court also found that Kelly had sufficient authority and control that he "made" statements in annual reports.
Scienter. The court found scienter as to Kelly and two other officials. Although a representative director and later CEO argued that he was deceived by Ghosn and Kelly, as a member of Nissan’s board of directors, he was responsible for supervision, and as a representative director, he was specifically supposed to consult with respect to director compensation. Accordingly, his claimed ignorance supported the plaintiff’s allegation of recklessness. Similarly, a CFO was responsible for overseeing Nissan’s finance’s controls and compliance with corporate governance practice, and his claimed ignorance supported an allegation of recklessness.
The court further found that Kelly and the other two officials were sufficiently alleged to be control persons for purposes of Section 20(a). The court also found personal jurisdiction over most defendants, but dismissed claims against one individual who had not been a long-standing officer at Nissan.
The case is No. 3:18-cv-01368.
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