Investors did not satisfy the court that a casino company had misled them about CEO Stephen Wynn’s sexual harassment of employees, but they were allowed to amend their complaint.
Reasonable investors would not take literally the statements in a casino’s code of conduct that harassment would not be tolerated and reports of violations would be promptly investigated, a court in the District of Nevada concluded. In a suit alleging that Wynn Resorts concealed and misrepresented sexual harassment and assault by founder and CEO Stephen Wynn, the court found that the statements were "merely aspirational" and did not imply that staff, directors, or officers would actually follow the code. Further, the company did not have a duty to disclose the illegal sexual misconduct or lack of investigation of harassment claims in order to make statements about compliance with the law not misleading (Ferris v. Wynn Resorts Limited, May 27, 2020, Navarro, G.).
CEO’s alleged sexual harassment and assault. In January 2018, the Wall Street Journal reported allegations of sexual misconduct by Stephen Wynn, founder, CEO, and chairman of Wynn Resorts, a casino chain based in Las Vegas. The article detailed a $7.5 million payment to an employee who alleged that Wynn had raped her in 2005, as well as additional sexual misconduct allegations by other employees. Wynn denied the reports but resigned a month later. Shortly thereafter, the Las Vegas Metropolitan Police Department revealed that two women had recently filed reports against Wynn alleging that he had sexually assaulted them in the 1970s.
The Nevada Gaming Control Board (NGCB) then filed and settled a disciplinary complaint against the company, citing the alleged 2005 rape and eight instances of sexual harassment claims by female employees against Wynn that were not investigated. The respondents admitted nearly all the allegations in the NGCB complaint, and the company was fined $20 million for failing to investigate claims of sexual misconduct.
An investor class action alleged that Wynn Resorts and certain directors and executive officers had misrepresented and concealed Wynn’s alleged sexual misconduct, causing the company’s securities to trade at inflated prices and resulting in economic loss when the stock price dropped after the truth emerged.
Code of conduct "aspirational." The court dismantled the plaintiffs’ claims of misleading statements and omissions. First, some challenged statements were deemed inactionable because they would not be relied on by reasonable investors. Statements in the company’s code of conduct that "all reported violations will be taken very seriously and promptly investigated" and "harassment or discrimination of any sort will not be tolerated" were found to be "inherently aspirational." According to the court, the code of conduct merely indicated what actions were preferable, and did not imply that all staff, directors, and officers always adhered to its aspirations.
Puffery. Other statements were similarly dismissed as statements not to be taken seriously by reasonable investors. Statements in a press release denying allegations by Wynn’s ex-wife were found to be puffery, including that Wynn Resorts prided itself on "transparency and full disclosure to regulators and shareholders." Also deemed puffery were statements by Wynn about the company’s financial picture, as well as cultural statements regarding the company’s commitment to diversity and employee job security.
No disclosure duty. Statements that disclosed regulatory risks were found not misleading because they related specifically to gaming regulations. Even assuming the directors and officers were aware of the sexual misconduct accusations, the defendants did not have a duty to disclose them because none of the statements suggested there would be no misconduct by Wynn or anyone else. For example, a statement about the risk that any person "found unsuitable" who continued to hold beneficial ownership could be guilty of a criminal offense was not misleading, because it did not affirmatively intimate that Wynn had never been accused of sexual misconduct by a Wynn Resorts employee.
Statements not misleading. Statements indicating that "the company believes it is in full compliance with all applicable laws" were found not misleading. The court noted that the statements immediately followed discussions of alleged violations of the Foreign Corrupt Practices Act. In context, no reasonable investor would either: (1) infer from the statements that Wynn had not engaged in sexual misconduct; or (2) construe the statements as an assurance regarding Wynn’s suitability under gaming regulations, said the court.
Finally, it was not misleading to omit mention of the alleged misconduct in statements emphasizing Wynn’s managerial skills and warning of his possible departure from the company. The omission did not make untrue statements that Wynn Resorts relied on Wynn’s skill and expertise or that he provided a "distinct advantage over other gaming enterprises." The PSLRA safe harbor protected statements about Wynn’s possible departure were forward-looking statements hedged by meaningful cautionary language, which included "The loss of Stephen A. Wynn could significantly harm our business."
The case is No. 2:18-cv-00479-GMN-DJA.
Cases: Discrimination SexualHarassment CoverageLiability GCNNews NevadaNews
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