by  John Joy

According to one survey, almost half (42%) of U.S. workers have encountered discrimination in the workplace. When it comes to issues of discrimination, most companies are prohibited from discriminating on the basis of race, color, religion or sex by Title VII of the Civil Rights Act of 1964. In addition, most states have anti-discrimination laws that go beyond Title VII protections and many major cities also have anti-discrimination laws that apply on top of these.

Even with multiple layers of legal protections, victims of discrimination and racism can often find themselves facing an uphill battle when it comes to enforcing legal rights against a major corporation. These difficulties can be particularly acute if the victim has experienced discrimination at the hands of a publicly traded company.

Public companies are the driving force of the U.S. economy. Not only do they employ up to one third of the non-farm workers in the U.S., they comprise some of the largest, most profitable and most visible brands in the U.S. It’s no surprise that for most private companies and start-ups, the ultimate goal and measure of success is to ‘go public.’

When it comes to discrimination at public companies, victims can avail of all the anti-discrimination laws mentioned above. However, federal securities laws applicable to public companies may provide an additional and alternative way for anti-discrimination advocates to hold corporations to account.

Why Use Securities Laws?

Securities laws are a square peg when it comes to combatting discrimination and racism. The laws are limited in their application and do not have a specific mechanism to offer victims compensation or restitution of their jobs. They were primarily designed to protect investors, not victims of discrimination. Nevertheless, there are two important dynamics which give securities laws the potential to be useful for anti-discrimination advocates.

First, the central tenet of securities laws (in particular, section 10(b) of the Securities Exchange Act of 1934) is that companies must make truthful statements about their business. This is not confined to corporate accounting; it applies to statements about strategy, business plans and internal operations, all of which could involve discrimination.

Second, when companies are faced with scandals or embarrassing allegations, they often engage in a PR strategy to protect a company’s image rather than tackling the underlying issues. This has been well documented when it comes to environmental issues, where many companies have been accused of  green-washing in the wake of scandals.

As companies have faced criticism from anti-discrimination advocates and victims, some have rushed to issue public statements touting their anti-discrimination accolades in an effort to calm customers and investors alike. If these statements are false, then it could mean the company has violated securities laws.

Section 10(b) Of The Securities Exchange Act Of 1934

Section 10(b) of the Securities Exchange Act of 1934 is one of the most frequently litigated provisions of federal securities laws. In a nutshell, section 10(b) provides that if a public company knowingly makes a false or misleading statement, investors who relied on that statement when purchasing stock can sue the company for damages. This means that if a public company or its executives make statements about anti-discrimination initiatives, when in fact the company engages in discriminatory conduct, investors may be able to sue the company under section 10(b).

In addition to providing an avenue to legal liability, there are practical benefits of using securities laws to hold companies to account. Securities laws allow almost any investor in the company to bring suit, meaning that the potential pool of plaintiffs could include thousands of individual investors, as well as powerful institutional investors. In addition, securities laws violations can be reported directly to the SEC for investigation and enforcement, meaning advocates could initiate prosecution of a securities law violation without ever having to file a lawsuit.

Lessons From Prior Social Justice Movements

A key issue when determining whether a company has violated securities laws is understanding that not every statement a company makes is actionable. High-level and general statements, particularly those contained in company policies, are often considered too vague to be relied upon (called ‘puffery’).
The issue of which statements are actionable, and which are ‘puffery’ will be a fact specific inquiry. However, there is guidance on this issue from a series of cases that were filed in the wake of the #metoo movement:

• In November 2017, allegations of sexual misconduct emerged against CBS correspondent Charlie Rose. In the wake of the scandal, CBS’s CEO, Les Moonves, made public statements regarding the company’s culture and its anti-harassment policies. Less than a year later, Moonves himself became the subject of sexual harassment allegations and was terminated for violation of company policies. In August 2018, shareholders of CBS filed a securities class action against CBS alleging that the company’s statements on its “zero tolerance policy for sexual harassment,” were materially false and misleading, as the CEO himself was violating those policies. While the Southern District of New York found that most of the general statements made by CBS regarding its policies were “mere puffery” and “far too general and aspirational” to be relied upon, the court found that specific statements made by the CEO himself regarding the company’s culture could be misleading and relied upon by investors. As a result, the lawsuit was substantially trimmed down, but survived dismissal. Ultimately, CBS settled the suit for almost $15 million.
•  In Signet Jewelers Ltd. Securities Litigation, shareholders of Signet Jewelers sued the company after Signet stated that it made employment decisions “solely” on the basis of merit and that it had “confidential and anonymous mechanisms for reporting concerns.” Contradicting this, allegations surfaced that there was “rampant sexual harassment” and a “toxic” work environment for women within the company. Signet moved to dismiss the suit, but the court denied the motion to dismiss. The court found that that Signet’s statements were actionable under securities laws because they were “directly contravened” by allegations that the company conditioned employment decisions on whether female employees acceded to sexual misconduct and harassment. In March 2020, the parties reached a $240 million settlement.

The cases highlight a theme that is well-known among securities laws lawyers: When the statements made by the company are precise and specific, courts are more inclined to allow cases survive a motion to dismiss. When statements are vague or simply reiterate policies, courts are more likely to view them as ‘puffery.’ 

SEC Whistleblower Program

Filing a putative securities class action, even with a group of plaintiffs, can still be costly. This is where another benefit of securities laws can come into play:  Violations can be reported directly to the SEC through the SEC’s whistleblower program.  The SEC runs a whistleblower program that allows anyone to submit information about securities violations anonymously. 

If the staff at the SEC believe there is credible evidence of a securities law violation, it can refer the information to its enforcement division for investigation and potentially prosecution. The SEC’s whistleblower program has a number of benefits as it allows people to submit information anonymously without hiring expensive counsel and the program allows the whistleblower to remain anonymous.  In addition, the SEC even offers a reward to whistleblowers if their information leads to a successful enforcement action.

The Upshot

With institutional investors earmarking funds specifically for socially responsible investment, there is a growing temptation for corporations to tout their commitment to anti-discrimination initiatives. While legitimate commitment to these initiatives is a good thing, disingenuous public statements can be salt in the wound for victims of discrimination. Precedent suggests that companies who don’t practice what they preach may find themselves facing a securities class action, or worse still, a knock on the door from the Enforcement Division of the SEC.

 

John Joy is the Managing Attorney at FTI Law.

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