On June 11, 2019, Judge Colleen McMahon of the United States District Court for the Southern District of New York denied defendants' motion for judgment on the pleadings in a putative securities class action asserting violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") against a jewelry retailer (the "Company") and certain of its senior executives. In re Signet Jewelers Limited Sec. Litig., No. 16-cv-6728, 2019 WL 2428529 at *1 (S.D.N.Y. Nov. 26, 2018). Plaintiff alleged that certain declarations filed in connection with a separate gender discrimination case rendered false and misleading the Company's public statements about its commitment to preventing gender discrimination. Rejecting defendants' argument that the Company's statements were inactionable puffery, the Court ruled that plaintiff had adequately pleaded that the statements were material because, among other things, they appeared to be directly and specifically at odds with the conduct alleged in the complaint.
Plaintiff alleged that, in connection with a gender discrimination class action filed against the Company, nearly 200 employees filed declarations detailing their experiences of gender discrimination at the Company, including conditioning subordinate female employees' promotions to their acceding to the sexual demands of their male supervisors and retaliating against those who reported the misconduct. When these declarations were unsealed and reported in the media, the Company's stock declined by 8.3%. Following the price decline, plaintiff filed a securities class action, alleging that defendants' public statements regarding its corporate culture and commitment to preventing gender discrimination were false and misleading. In support of this allegation, plaintiff pointed to statements in the Company's Code of Conduct and Code of Ethics (the "Code"), which stated, inter alia, that the Company made employment decisions solely based upon merit, was committed to a workplace free of harassment, and disciplined employees for misconduct. The Code was adopted annually, by the Company's board of directors, published online and incorporated by reference in its SEC filings.
Defendants moved to dismiss the complaint, claiming that the Code was inactionable puffery. The Court denied defendants' motion to dismiss. (See our prior post about this decision). Defendants subsequently moved for judgment on the pleadings pursuant to Rule 12(c) of the Federal Rules of Civil Procedure and argued that the Second Circuit's recent decision in Singh v. Cigna Corp., 918 F.3d 57 (2d Cir. 2019) ("Cigna") clarified that code statements are non-actionable because they are too general to cause a reasonable investor to rely on them.
The Court rejected defendants' argument and ruled that Cigna did not announce a per se rule regarding the materiality of corporate codes of conduct. According to the Court, the Second Circuit in Cigna, instead, confirmed the principle that "general statements about reputation, integrity, and compliance with ethical norms are inactionable puffery" because a reasonable investor would not consider the statements important in deciding whether to buy or sell shares of stock. The Second Circuit emphasized, however, that "context" matters in determining whether the statements contained in a corporate code of conduct are material. Unlike in Cigna where the company's code of conduct was found to be inactionable because it was "vague and aspirational," here, the Court found, the Company's Code was specific and directly at odds with the conduct alleged in the complaint. Specifically, in the face of sworn and numerous accusations that the Company had tolerated rampant sexual harassment, the Court found that the Company had sought to reassure investors by pointing to its corporate policies affirming the Company's commitment to "making hiring decisions solely on the basis of merit, disciplining misconduct in its ranks, and providing employees with a means to report sexual harassment without fear of reprisal." The Court ruled that because defendants affirmatively pointed to those statements in response to credible accusations in another lawsuit, plaintiff had adequately alleged that such statements were material and not mere puffery.
While it remains to be seen how other district judges interpret and apply Cigna, the impression given by the Signet decision is that sharpness of the alleged conflict between the Company's code of conduct and evidence of its corporate conduct, coupled with the Company's use of its policies as a shield in public statements, was sufficient to differentiate Signet.
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