Transparently Aspirational

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.

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