Recent media reports say that certain parties associated with Fox News have been subpoenaed by federal prosecutors to obtain testimony and information about allegations that Fox may have quietly settled a series of sexual harassment cases brought by Fox employees against former Chairman Roger Ailes. This is all far too sketchy and preliminary to draw any inferences about actual violations of law, especially as the reports came out in the course of nasty private litigation. But the news is a timely reminder to lawyers and compliance officials of how treacherous the waters are for anyone caught up in this kind of narrative—one where a key company official (often the one sitting on the corporate throne) may have engaged in serious unethical or unlawful behavior, with a strong desire in-house that the troublesome allegations never become public.
There are two dimensions to matters like this. First, obviously, is the possibility of the illegality itself (here harassment and hostile work environment, but it could just as easily be auto safety (GM), emissions controls (Volkswagen), bank customer protection regulations (Wells Fargo) or the like). That is familiar compliance territory. Second, especially for public companies, there is a disclosure piece—does the company have a securities law obligation to reveal what has happened and/or the risk of liability? The latter appears to be the subject of the Fox subpoenas, with the added possibility that the payments may have been mischaracterized in order to bury them. For good reasons, the company and its managers (even apart from the ones directly implicated) will want no part of publicity, which can easily become a self-fulfilling prophecy of scandal, reputational tarnish, investigations and further lawsuits regards of what actually happened. So the pressure to delay or avoid full disclosure is intense.
Under the circumstances, lawyers look hard to see if there are colorable grounds for silence. And the law offers many tempting opportunities. One might think that if the cumulative amount of settlement payments in a case like Fox was only in the tens of million dollars, that sum is far too small to be financially material, especially at the parent company level. But that’s not necessarily dispositive. More important is the foreseeable financial impact of what might arise from these facts, be it potential fines, or the loss of one or more key executives. And materiality is sometimes also said to have a qualitative dimension, if what is concealed goes to management integrity. These are often tough judgment calls.
Nor is there any per se duty to reveal even material evidence of wrongdoing. SEC disclosure rules require disclosure of material lawsuits and threatened government litigation, plus an open-ended MD&A mandate, but nothing explicitly about revealing the wrongdoing itself. Self-flagellation is not required, according to the case law. But however tempting it might be to rest nondisclosure on a narrow legalistic reading of the rules, that is risky, too. The SEC and the courts stress the need to be complete in whatever is said, whether in filings or day-to-day publicity. To omit a fact necessary to make statements made not misleading is a half-truth, a form of fraud. While the law here is highly unsettled (the Ninth Circuit, for example, recently said that allegedly inappropriate sexual behavior by a corporate executive need not be disclosed simply because it may have violated the “aspirational” company code of ethics), prosecutors, judges and juries may well see a deceptive cover-up in a failure to reveal legally troubling behaviors, especially if a contrary impression about compliance had been the norm in company publicity, or there is too much “artful paltering.” (Settlement payments on behalf of a senior executive could also involve compensation disclosure requirements.) In the course of this disclosure analysis, of course, the lawyer must keep in mind his or her professional obligations to the company, not its individual managers, and potential duties to “report up” troubling facts as far as the board of directors if not resolved appropriately at the management level.
Good, experienced lawyers and compliance officials know the treachery of these waters, and how to steel themselves against the internal pressures to endorse nondisclosure if the facts and circumstances point the other way. But high level circumstances like these don’t arise all that often, thankfully, and some officials in authority on disclosure matters may be in over their heads, willing to grasp at whatever rationalizations can justify silence. The psychology here is potent: the heavier the pressure and the motivations, the easier it is to find a rationale for the preferred outcome in the face of murky duties and standards. To be a team player, believing the accused, not the accusers. To rationalize the delay of disclosure, to get a better handle on the facts. But then it becomes all the easier to delay again tomorrow for even longer, risking a predictable slide down the slippery slope. Before long, the whiff of a cover-up starts, locking in the behavior even more to avoid the now much harsher consequences of being discovered once it appears there was something to the allegations all along. Best always keep in mind the adage that the cover-up is often worse than the crime.
High quality corporate governance, compliance and internal disclosure controls are designed to help avoid this all-too-human backsliding. A truly independent, experienced audit committee of the board of directors should be readily accessible for tough disclosure calls, with independent legal counsel at hand when needed. But the quality of governance and controls varies considerably among public companies.
As to Fox, we simply don’t know. Subpoenas are a far step from culpability. The parent company has plenty of possible defenses with respect to SEC disclosure, and neither Fox nor Ailes may have done anything culpably wrong. But if it is later determined that Fox did mislead, we will have one more reminder of how internal corporate cultures can undermine candor and, perhaps, how even faithful legal and compliance officials can get sucked under in unexpectedly deep waters.
 Retail Wholesale & Department Store Union v. Hewlett-Packard, 845 F.3d 1268 (9th Cir. 2017). I would not count on other courts necessarily agreeing with this analysis.
Donald C. Langevoort is the Thomas Aquinas Reynolds Professor of Law at Georgetown University Law Center and author of Selling Hope, Selling Risk: Corporations, Wall Street and the Dilemmas of Investor Protection.
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