Monthly Archives: January 2017

Can shareholders bring a claim for securities fraud when a corporate official violates the company’s code of conduct after publicly touting the business’s high standards for ethics and compliance?  According to the U.S. Court of Appeals for the Ninth Circuit, merely touting the business’s high standards – without having warranted compliance – is not enough to support such a claim.

In Retail Wholesale & Department Store Union Local 338 Retirement Fund v.
Hewlett–Packard Co., et al., 2017 WL 218026 (9th Cir. Jan. 19, 2017), the court considered whether an undisclosed sexual harassment scandal involving the CEO, which admittedly violated the company’s code of conduct, could form the basis for a securities class action.  The court concluded that the defendants had not made any material misstatements or omissions.

First, the defendants did not make any affirmative misstatements because a code of conduct “expresses opinions as to which actions are preferable, as opposed to implying that all staff, directors, and officers always adhere to its aspirations.”  Any other interpretation “is simply untenable, as it could turn all corporate wrongdoing into securities fraud.”

Second, the SEC required the company to have and publish a code of conduct.  Under these circumstances, the code of conduct was not material, as “[i]t simply cannot be that a reasonable investor’s decision would conceivably have been affected by HP’s compliance with SEC regulations requiring publication of ethics standards.”

Finally, the failure to disclose the sexual harassment scandal did not render the code of conduct misleading.  The code of conduct and the company’s statements promoting it “were transparently aspirational” and “did not reasonably suggest that there would be no violations of [the code of conduct] by the CEO or anyone else.”

Holding: Dismissal of claims affirmed.

The federal securities laws have statutes of repose that bar a suit after a fixed number of years from the time the defendant acts in some way.  There is an appellate split, however, over whether the existence of a class action tolls the applicable statute of repose for individual class members.

Under what is known as American Pipe tolling, “the commencement of a class action suspends the applicable statute of limitations as to all asserted members of the class who would have been parties had the suit been permitted to continue as a class action.” American Pipe & Construction Co. v. Utah, 414 U.S. 538, 554 (1974). The Supreme Court found that its rule was “consistent both with the procedures of [Federal Rule of Civil Procedure] 23 and with the proper function of limitations statutes.” Id. at 555. In a later case, however, the Supreme Court also found that federal statutes of repose are not subject to equitable tolling. Lampf, Pleva, Lipkind, Prupis & Pettigrow v. Gilbertson, 501 U.S. 350, 364 (1991).

In attempting to reconcile these two cases, the federal appellate courts have come to different conclusions.  The Tenth Circuit has held that American Pipe tolling is a type of legal tolling and, as a result, Lampf is not applicable.  In contrast, the Second, Sixth, and Eleventh Circuits have held that statutes of repose create a substantive right to be free from liability after a legislatively-determined period of time.  Whether the asserted tolling is equitable or legal, it cannot modify that substantive right.

The Supreme Court has granted cert in California Public Employees’ Retirement v. ANZ Securities, Inc., et al.  (Second Circuit) to address this circuit split.  (In 2014,the Court agreed to hear a case presenting the same question, but ultimately dismissed the writ of cert as improvidently granted.)

The official question presented is: “Does the filing of a putative class action serve, under the American Pipe rule, to satisfy the three-year time limitation in Section 13 of the Securities Act with respect to the claims of putative class members?”

The case should be heard this spring with a decision issued by June 2017.