The #MeToo movement, trigged by revelations in 2017 about film director Harvey Weinstein, has quietly opened a second front in the campaign to end sexual harassment in the workplace.

While much attention has been focused on the behaviour of individual executives and corporate culture, shareholders have begun using laws governing corporate disclosures to hold companies to account.

Three recent cases in US courts have seen shareholders use securities law to claim companies made “false and misleading” statements in statutory filings about “codes of conduct” and other policies to convince investors that all was well.

One shareholder claim was dismissed, another has proved partially successful, while a third—against Signet Jewelers, the $6.5bn group that owns H Samuel and Ernest Jones—resulted in a $240m settlement.

According to Marc Rosen, a partner with New York law firm Kleinberg Kaplan, shareholder moves to sue companies using securities law signals the arrival of a huge new source of risk.

“While securities fraud plaintiffs still have multiple burdens to overcome—with the spotlight of #MeToo and similar movements bringing stronger focus on sexual harassment and other discrimination claims—companies are potentially facing even greater risk of being a party to a securities fraud claim by perhaps hundreds or thousands of potential plaintiffs seeking significant damages,” said Rosen.

The #MeToo movement emerged following allegations about Harvey Weinstein in the New York times in October, 2017 by a number of women, including actors Rose McGowan and Ashley Judd. The scandal that followed prompted a slew of allegations against a number of senior figures in the entertainment industry and corporate America, as well as many in the UK, and a renewed campaign for gender equality. In March, Weinstein was sentenced to 23 years in prison for rape and sexual assault.

Recent claims

Not all claims under securities law have been successful. Rosen points out that judges dismissed one claim against Liberty Tax Inc. The case boiled down to shareholders alleging that in making various statements to US regulators about compliance efforts, procedures and internal controls, the company had mounted an effort to gloss over the behaviour of its chief executive. However, the court ruled the disclosures were “generic” and “puffery” and did not amount to actionable misrepresentation.

In January judges ruled that pension fund trustees could continue a case against media giant CBS Corporation—broadcaster of shows such as 60 Minutes and The Big Bang Theory—in relation to the behaviour of former chief executive Leslie Moonves. In one strand of their argument, the pension fund claimed “false” or “misleading” statements were made in policy disclosures, such as “CBS has zero tolerance policy for sexual harassment”. However, the court found these “too general and aspirational” to constitute a targeted cover-up.

What the court did accept was that the chief executive’s own statements at a press conference in November 2017 were material and could form the basis of a claim. His remarks, they ruled, suggested he was unaware of sexual harassment claims at the company when he was, “at that time actively seeking to conceal his own past sexual misconduct from CBS and the public”. A “reasonable” investor, the court concluded, could take those public statements as assurance that CBS faced no exposure to #MeToo issues. Moonves stepped down in the autumn of 2018 following allegations from six women.

In the Signet case, the court took issue with regulatory filings that included a statement insisting employment decisions were made “solely” on merit and that it had confidential processes for reporting concerns. In the end the court decided that SEC filings on corporate policies were used to convince investors that Signet did not have a “toxic” workplace and were, therefore, material.

‘Investors deserve to know’

US companies are required to make disclosures with the SEC if there have material information that may affect stock prices. Companies are also required to provide processes for reporting misconduct direct to audit committees.

According to Laurie Girand, president of I’m With Them, a not-for-profit that aids employees subjected to sexual harassment at work, not all corporates are frank in their disclosures about the behaviour of senior managers.  But, she said, companies can now expect a shareholder lawsuit. If a company’s behaviour errs from its own disclosures, and in the process creates additional risk for themselves, “investors deserve to know”, she said.

“Unfortunately, some companies have made a habit of burying information about executive misconduct, which has a material impact on the financial health of the company for multiple reasons: settlements can be costly; executive departures can be disruptive; bad publicity can taint the stock; and executives who feel entitled to violate social norms, corporate policy or even criminal laws are suboptimal candidates for managing multi-million or even trillion dollar budgets.”

The CBS case continues to be litigated. It’s possible more shareholders will take up the baton in support of #MeToo. The campaign to redress past behaviour is not over yet.