NEW NINTH CIRCUIT CASE – PLAINTIFF CANNOT BRING A SECURITIES CASE FOR BREACH OF THE CORPORATE CODE OF ETHICS . . . WELL, NOT SO FAST . . . .

On January 19, 2017, the Ninth Circuit dismissed a securities fraud case holding that the claim could not legally be brought where shareholders of Hewlett-Packard Company (“HP”) alleged that the Company CEO and Chairman violated Hewlett-Packard’s Corporate Code of Ethics after publicly touting the Company’s high standards for ethics and compliance while at the same time himself violating the provisions in the Code of Ethics. The case is Retail Wholesale & Department Store Union Local 338 Retirement Fund v. Hewlett-Packard Co. and Mark A. Hurd, Ninth Circuit Case No. 14-16433 and District Court Case No. 3:12-cv-04115-JST (Northern District of California) and you can view the case at http://cdn.ca9.uscourts.gov/datastore/opinions/2017/01/19/14-16433.pdf.

Plaintiffs’ claim was brought under §10 and Rule 10–b of the Securities Exchange Act of 1934. The Court’s decision is helpful from a defense viewpoint, but the decision shouldn’t be viewed too broadly. In summary, the Court held as follows (note: the below quotes from the case are not necessarily in the exact order in which they appeared in the Court’s decision):

“Retail Wholesale argues that the SBC [HP’s Standards of Business Conduct], bolstered by Defendants’ express promotion of corporate ethics, gives rise to a finding of material misrepresentation. Its claim is based in three factual allegations: (1) HP and Hurd actively promoted the SBC and stated that HP had zero tolerance for SBC violations; (2) Hurd’s SBC violations led to his resignation; and (3) Hurd’s resignation caused HP’s stock price to drop. The Court cannot agree that, under the facts alleged in the complaint, Defendants’ representations about ethics were materially misleading.”

“Defendants made no objectively verifiable statements during the Class Period. As one court has aptly written, a code of conduct is “inherently aspirational.” Andropolis, 505 F. Supp. 2d at 686. Such a code expresses opinions as to what actions are preferable, as opposed to implying that all staff, directors, and officers always adhere to its aspirations. See id.”

“Similarly, Hurd’s comments prefacing the SBC are not objectively verifiable. In the 2008 preface to the SBC, Hurd stated, in part,

We want to be a company known for its ethical leadership . . . .

We know actions speak louder than words. We must make decisions and behave in ways that we can be proud of, that reflect our commitment to doing the right thing . . . .

. . . . Let us commit together, as individuals and as a company, to build trust in everything we do by living our values and conducting business consistent with the high ethical standards within our SBC.”

“The aspirational nature of these statements is evident. They emphasize a desire to commit to certain “shared values” outlined in the SBC and provide a “vague statement[] of optimism,” not capable of objective verification. See Or. Pub. Emps., 774 F.3d at 606. A contrary interpretation—that statements such as, for example, the SBC’s “we make ethical decisions,” or Hurd’s prefatory statements, can be measured for compliance—is simply untenable, as it could turn all corporate wrongdoing into securities fraud.”

However, and equally important, the Court also stated:

“We note that the case may have been closer had Hurd’s sexual harassment and false expenses scandal involved facts remotely similar to those presented by the 2006 scandal [i.e., an earlier unrelated ethics problem at HP in which “A few years earlier, in 2006, a major scandal erupted when a whistleblower informed several government agencies that HP had hired detectives to monitor the phone records and email accounts of HP directors, HP employees, and journalists to find the sources of leaks of company information to the press”], as the ethical code could then have been understood as at least promising specifically not to do what had been done in 2006. Here, however, the context does not make HP’s promotion of business ethics any less subjective or vague. Further, Retail Wholesale cites to no case law suggesting that context may operate to allow a plaintiff to import an out-of-Class-Period statement into the Class Period. The strongest statement alleged in the complaint—the suggestion of a zero tolerance policy for SBC violations—was made outside of the Class Period.”

“In sum, we conclude that as there was no statement during the Class Period that was capable of being objectively false, there was no affirmative misrepresentation.”

It could be easy to read the case too broadly, and to conclude that a securities fraud claim cannot be brought for violation of the company’s code of ethics. Whether such a claim can be brought really depends on the facts and circumstances of the case. Further, and depending on the facts of each case, it might be possible that such a claim could be brought under a different legal theory such as, for example, the Foreign Corrupt Practices Act.

Thus, companies, and their officers, managing agents and directors still must be advised to know the company’s Code of Ethics, to follow the Code, and to be careful about making specific representations about following, satisfying or complying with the Code.

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Important – SEC v. United – Administrative Proceeding Relating to United’s Internal Accounting Controls to Prevent Violation of United’s Policies

On December 2, 2016, the SEC issued an Accounting and Auditing Enforcement, Administrative Proceeding Order against United Continental Holdings, Inc. Here is a link to the Order, CLICK HERE

Why is this Order important – because the SEC found that “United failed to design and maintain a system of internal accounting controls that was sufficient to prevent its officers from approving the use of United’s assets in connection with the South Carolina Route in violation of United’s Policies, which prohibited the use of assets for corrupt purposes.” This isn’t a Foreign Corrupt Practices Act case – the alleged corruption or impropriety occurred in the United States. The SEC alleged that United “instituted the South Carolina Route following pressure from David Samson (“Samson”), then the Chairman of he Board of Commissioners of the Port Authority of New York and New Jersey (“Port Authority”). The route provided Samson – who exercised authority and influence as a Port Authority official in matters affecting United’s business interests – with a more direct route to his house in South Carolina.”

The scenario in this case could occur at any time that a public company (1) allegedly acts improperly, and (2) it is alleged that the act was allowed or able to occur because of insufficient internal controls (resulting in a violation of the books and records and internal accounting controls provisions of the Securities Exchange Act, which is automatically alleged in a great number of cases because it is easy in most situations to allege that something unexpected occurred because of inadequate internal controls), and (3) the alleged improper act also allegedly violates some policy or procedure of the public company (i.e., in this case to not use corporate assets for an allegedly corrupt or improper purpose).

What can a company (and the audit committee) do about these possible situations? Review the company’s policies and procedures, and adopt and enact sufficient internal controls, monitored and updated regularly, to ensure that the policies and procedures are followed. But, of course, it is difficult and probably impossible to ensure 100% compliance. I have previously written that the books and records and internal accounting controls provision in the Securities Exchange Act should be amended to include a standard of conduct provision (such as negligence) because it is unreasonable to expect that internal controls, no matter how good, will stop all alleged wrongful conduct.

Below is a screenshot of some of the SEC v. United Order, providing a summary of some of the facts, and I have also included below a link to Tate’s Excellent Audit Committee Guide. Dave Tate, Esq., San Francisco and California

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The following is a link to Tate’s Excellent Audit Committee Guide (updated October 20, 2016), Click Here

The following is a link to my trust, estate, conservatorship and elder abuse litigation blog, http://californiaestatetrust.com

Audit Committee 5 Lines of Defense 07182016

 

Why do so many practitioners misunderstand risk? Forwarding post by Norman Marks

The following is a link to a new post by Norman Marks, https://normanmarks.wordpress.com/2016/11/26/why-do-so-many-practitioners-misunderstand-risk/ , Why do so many practitioners misunderstand risk? See also the link to “A Revolution in Risk Management” which is provided in Norman’s post. This is a good, i.e., worthwhile, post and discussion – the point being, I believe, is to not be too singularly focused in your evaluation of risks and risk management. I also like Norman’s use of the tree to visually demonstrate the discussion.

Best to you, Dave Tate, Esq., San Francisco and California. Link for Tate’s Excellent Audit Committee Guide http://wp.me/p75iWX-6z

EEOC sues for alleged unequal female – male pay for the same employment position

Below is a screenshot from the EEOC website for a recent press release, and the EEOC’s announcement about a new lawsuit over alleged unequal female v. male pay for the same employment position. As you might well imagine, the opportunities for this type of lawsuit truly could be very numerous. Is your board or audit committee, or a director member, overseeing, to any extent, HR, employer and employee matters, including, for example, liability exposure and asset protection (trade secrets, etc.)? It’s worth some consideration. And this holds true for public companies, private companies, and nonprofits.

eeoc-sues-for-alleged-unequal-female-male-pay-for-the-same-employment-position