On July 29, 2024, Judge Trina L. Thompson of the United States
District Court for the Northern District of California denied a
motion to dismiss a putative securities class action brought by
investors against a financial services company (the
"Company") and certain of its officers (the
"Individual Defendants" and, collectively
"Defendants") asserting claims under Section 10(b) of the
Securities and Exchange Act of 1934 ("Exchange Act"), as
well as Rule 10b-5 promulgated thereunder, and Section 20(a) of the
Exchange Act. SEB Inv. Mgmt., AB v. Wells Fargo & Co., Case No.
22-cv-03811-TLT (N.D. Cal. July 29, 2024). Plaintiffs alleged that
the Company made false and misleading statements about its efforts
to hire more diverse candidates in response to public scrutiny over
the Company's diversity, equity, and inclusion
("DE&I") practices. The Court held that plaintiffs
adequately pleaded that Defendants' statements were actionable
and that the facts alleged raised a strong inference that
Defendants made those statements with scienter. The Court,
therefore, denied Defendants' Rule 12(b)(6) challenge in its
entirety.
In 2019, the U.S. Department of Labor's Office of Federal
Contract Compliance Programs ("OFCCP") alleged that the
Company had engaged in discriminatory hiring practices in several
lines of its business. The Company entered into a conciliation
agreement with the OFCCP to resolve these allegations shortly
thereafter in 2020. Around the same time, the Company hired a new
CEO who allegedly created initiatives to boost DE&I efforts
across the Company, in order to ameliorate the Company's
alleged compliance issues and demonstrate a shift in corporate
culture more generally. Among these programs was the Company's
now-defunct "Diverse Search Requirement," which the
Company announced in its March 2020 proxy. Under this Requirement,
at least 50% of the candidates whom the Company interviewed for
most U.S.-based positions had to qualify as "diverse,"
which the Company defined "based on race or ethnicity, sex or
gender, veteran-status, sexual orientation, and disability."
The Company also allegedly collected "extensive data"
concerning its diverse hiring practices.
On September 8, 2023, plaintiffs filed their second amended
complaint ("Complaint"), alleging that the Diverse Search
Requirement was a "sham." Based on the alleged accounts
of Company employees and contractors, plaintiffs averred that the
Company allegedly would conduct widespread interviews of diverse
candidates whom the Company had no intent to hire, simply so that
it could demonstrate adherence to the Diverse Search Requirement.
Plaintiffs claimed that the Company's practice of conducting
sham interviews rendered false and misleading various statements
made by Defendants that its Diverse Search Requirement had been
adopted to improve diverse hiring and that Defendants acted with
scienter. Defendants moved to dismiss the action entirely for
failure to state a claim.
The Court first concluded that plaintiffs adequately alleged
falsity. It found plaintiffs proffered alleged facts that plausibly
demonstrated the Company's sham-interview practice was
widespread, both in terms of geography, the Company's different
divisions, and frequency. In particular, the Court inferred this
from allegations recounting the experience of former employees who
allegedly conducted sham interviews and candidates who allegedly
participated in them. The Court further held that these sham
interviews rendered Defendants' statements about the Diverse
Search Requirement false and misleading. In so holding, the Court
rejected Defendants' argument that the statements identified by
plaintiffs were inactionable because the Company only ever
committed to interviewing diverse candidates—not necessarily
hiring those candidates. The Court found it to be significant that:
(1) Defendants' statements concerning its Diverse Search
Requirement were couched in surrounding language that framed the
Requirement as a method for improving workforce DE&I; and (2)
the Company adopted the Diverse Search Requirement in response to
public scrutiny regarding DE&I issues, including the OFCCP
conciliation agreement.
Having established falsity, the Court proceeded to scienter. It
observed the Complaint alleged both direct and indirect evidence
that Defendants knowingly made false statements regarding the
Diverse Search Requirement. In particular, plaintiffs alleged that
two former employees sent complaints to Defendants about sham
interviews. Defendants argued plaintiffs failed to adequately
allege that Defendants actually received and, therefore, were aware
of these complaints, but the Court found that plaintiffs'
allegation the former employees sent communications to
Defendants' Company-issued email addresses enabled the Court to
plausibly infer Defendants were aware of the sham interviews.
Plaintiffs augmented these averments with alleged circumstantial
evidence, including that (1) Defendants had access to metrics on
diverse hiring practices that the Company represented it regularly
reviewed; (2) Defendants had additional reason to view that data
given the internal and external attention to DE&I issues; and
(3) an employee alleged to have played a role in the sham
interviews resigned shortly after he was named in a complaint to
the Company's board. The Court found that, taken together and
viewed holistically, these allegations raised a strong inference of
scienter.
Finally, the Court held plaintiffs stated a Section 20(a) claim
against the CEO, finding that the allegations about his involvement
in the Company's DE&I efforts were sufficient to predicate
a plausible inference he exercised "actual power or
control" as required by Section 20(a).
SEB Inv. Mgmt., AB v. Wells Fargo & Co.
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