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Construction Laborers Pension Trust for Southern California v. CBS Corp.

United States District Court, S.D. New York

January 15, 2020

CONSTRUCTION LABORERS PENSION TRUST FOR SOUTHERN CALIFORNIA, GENE SAMIT and JOHN LANTZ, individually and on behalf of all others similarly situated, Plaintiffs,
v.
CBS CORPORATION et al., Defendants.

          OPINION AND ORDER

          VALERIE CAPRONI, UNITED STATES DISTRICT JUDGE.

         This is a putative securities class action against CBS Corporation (“CBS” or “the Company”) and several of its officers and employees, including former CEO and Chairman of the Board Leslie Moonves. Plaintiffs bring claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and related regulations.

         The Amended Complaint alleges that Moonves-the architect of the Company's success-concealed a dark history of sexual misconduct and fostered a hostile workplace culture that posed material business risks to the Company. Am. Compl. (Dkt. 59) ¶¶ 2-3, 5. Defendants allegedly failed to disclose the risk that journalists would uncover and expose Moonves's misconduct and force Moonves out, all the while paying lip service to the Company's purported anti-harassment ethical standards. Id. ¶¶ 4, 6.

         The putative class includes purchasers of CBS stock from September 26, 2016, to December 4, 2018 (the “Class Period”) and hinges on two corrective disclosures-Ronan Farrow's initial exposé on Moonves and CBS that was published in the New Yorker on July 27, 2018, and three articles that were published on December 4, 2018, by the New York Times disclosing new details about Moonves's misconduct that the reporters drew from an independent investigation that had been commissioned by CBS and then leaked to the press. Id. ¶¶ 1, 19.

         CBS and all individual Defendants except Moonves made a joint motion to dismiss, and Moonves made a separate motion to dismiss. Dkts. 76-77. Both argue that the Amended Complaint fails to state a claim and must be dismissed under Federal Rule of Civil Procedure 12(b)(6). The Court grants in part and denies in part both motions.

         BACKGROUND[1]

         CBS is a mass media, entertainment, and publishing company. Am. Compl. ¶ 28. It operates various businesses spanning these industries, including the CBS Television Network, cable networks, content production and distribution, television stations, internet-based businesses, and consumer publishing. Id. ¶ 2. Individual Defendants include Moonves, his former co-Board member and CBS's controlling shareholder Shari Redstone, other Board members from the Class Period, and three executive employees: former COO Joseph Ianniello, former Executive VP Lawrence Liding, and President of CBS News David Rhodes. Id. ¶¶ 28- 29, 30-33. The facts in this case center on Moonves's allegedly unique value to the Company and on accusations of sexual misconduct made against Moonves and other non-defendant executives at CBS that were reported by the New Yorker and other news organizations.

         I. Moonves's Leadership Was Instrumental to CBS's Success

         Moonves led CBS for over two decades in varying roles, including President, CEO, and Chairman of the Board. Id. ¶¶ 38-41. He stepped down on September 9, 2018, and was terminated for cause on December 17, 2018. Id. ¶¶ 18, 29. During his tenure, CBS's stock rose from $5 per share to $70. Id. ¶ 39. Analysts lauded his leadership, stating, for example, that Moonves was the “secret weapon” and “key to” CBS's success. Id. ¶ 40. Analysts placed an “unquantifiable premium” on Moonves's creative input, network, and successful strategic track record. Id. ¶ 41. The Company's proxy statements attributed record-setting revenues in 2016 and 2017 to Moonves's leadership. Id. ¶¶ 40, 42.

         II. Moonves and CBS Face a #MeToo Reckoning

         Several events portended what has become known as the #MeToo movement-a wave of victim- and journalist-driven revelations of sexual assault perpetrated by media and entertainment power brokers. In late 2016, Fox News came under scrutiny when it settled several sexual harassment claims against top executives and media figures, including Bill O'Reilly and Roger Ailes. Id. ¶ 44. These and past settlements came to light due to investigative reporting, leading to O'Reilly's termination. Id. A ground swell of solidarity from victims of sexual harassment and assault trended on Twitter as hashtag MeToo, rattling the industries as new accusations against executives rolled out from what came to be characterized as a “movement.” Id. ¶¶ 44-45. The most significant report, credited with officially kicking off the #MeToo movement, was Ronan Farrow's exposé published in the New Yorker in October 2017 of film producer Harvey Weinstein, describing in lurid detail a long history of sexual misconduct. Id. ¶¶ 7, 46.

         Before and after the New Yorker article about Weinstein, CBS had its own issues with workplace sexual harassment. Producer Brad Kern, executive producer Andrew Kreisberg, vice president Vincent Favale, and other senior level managers were accused of sexual harassment; CBS terminated or suspended some of them and settled several related lawsuits. Id. ¶¶ 13, 66, 70-73, 84. There were also allegations of retaliation against victims by those managers. Id. ¶¶ 70, 74, 87. On November 20, 2017, the Washington Post published an article detailing alleged sexual misconduct by Charlie Rose-a contributing correspondent for CBS News's 60 Minutes and co-host of CBS This Morning-involving multiple women who worked with him. Id. ¶ 7. CBS News fired Rose shortly after the report ran. Id. ¶ 68.

         Around November 2017, Moonves learned of a criminal complaint that had been filed with the Los Angeles Police Department (“LAPD”) “accusing Moonves of physically restraining [the complainant] and forcing her to perform oral sex on him, and of exposing himself to her and violently throwing her against a wall in later incidents.” Id. ¶¶ 15, 55. Law enforcement sources later reported that they found the complainant's allegations “credible and consistent but prosecutors declined to pursue charges because the statutes of limitations for the crimes had expired.” Id. ¶ 55.

         In early December 2017, on the heels of learning about the LAPD complaint, Moonves was contacted by Marv Dauer, the former manager of actress Bobbie Phillips, about the possibility that Phillips would publicly reveal incidents of sexual assault by Moonves that occurred at the beginning of her career. Id. ¶¶ 16, 57-58. Moonves acknowledged to Dauer that he believed that an article about him and Phillips would be published shortly. Id. ¶ 80. Through Dauer, Moonves offered Phillips work at CBS, stating privately to Dauer that he believed he would be “done” if Phillips talked to the media. Id. ¶¶ 58, 80.

         In January 2018, Redstone heard rumors that Moonves would soon face accusations of sexual misconduct and have a “#MeToo moment” in the press. Id. ¶ 78. At her direction, CBS engaged a law firm to investigate the rumor. Id. ¶ 79. In late January, the law firm reported that “Moonves had told [them] that while there might have been a few incidents before he came to CBS, there was no cause for concern now.” Sept. 12, 2018, N.Y. Times Article (Dkt. 80, Ex. 28) at 3. The law firm told CBS that “there was nothing to worry about.” Nov. 28, 2018, N.Y. Times Article (Dkt. 80, Ex. 29) at 6-7. Also in early 2018, Moonves informed some members of the nomination and governance (“N&G”) committee of the CBS Board about the complaint that had been filed with the LAPD; in April 2018, the CBS Board called an emergency meeting to discuss a course of action if a rumored-of report should publicly emerge regarding Moonves. Am. Compl. ¶ 78. The Board cancelled the meeting when it discovered that Moonves was not the subject of the soon-to-be-published article about which they had heard rumors. Id.

         A few months later, on July 27, 2018, the New Yorker published an exposé detailing accusations from six women who claimed Moonves had sexually assaulted them “between the nineteen-eighties and the late aughts, ” with the most recent incident allegedly occurring in 2006. Id. ¶¶ 9, 49, 52, 145, 149; see July 27, 2018, N.Y. Times Article (Dkt. 80, Ex. 21). The accusations included “forcible touching or kissing during business meetings, in what they said appeared to be a practiced routine, ” and two women stated that “Moonves physically intimidated them or threatened to derail their careers.” Id. ¶¶ 49-53. A second New Yorker article, published on September 9, 2018, detailed accusations from six other women, including allegations of forced oral sex. Id. ¶¶ 54-56. Moonves also allegedly retaliated against his accusers. Id. In addition, these articles and others from outlets such as the Wall Street Journal described incidents of sexual harassment at CBS that went beyond Moonves, including with “60 Minutes” chief Jeff Fager. Id. ¶¶ 65-67.

         Shortly after first New Yorker article broke in July 2018, the CBS Board announced that it would engage outside counsel to independently investigate the allegations against Moonves and CBS. Id. ¶¶ 18, 59. The day of the second article's publication, CBS reported that Moonves would step down as the Company's Chairman and CEO. Id. ¶ 12.

         III. A Draft Report Leaks from CBS's Independent Investigation of Moonves

         On December 4, 2018, the New York Times published the details of a fifty-nine page draft report from CBS's independent investigation into Moonves, describing previously unreported acts of sexual misconduct by Moonves. Id. ¶¶ 19-20, 154-55. The draft report highlighted that Moonves had “repeatedly lied to investigators about his behavior” and “destroyed evidence and misled investigators in an attempt to preserve his reputation and save a lucrative severance deal.” Id. ¶ 155. In investigating CBS's workplace culture more generally, the draft report described “past incidents of improper and unprofessional conduct” by other senior CBS employees. Id. ¶¶ 19, 89. The draft report concluded that Moonves's behavior “arguably constitutes willful misfeasance and violation of the company's sexual harassment policy, ” and “the Company's historical policies, practices and structures have not reflected a high institutional priority on preventing harassment and retaliation.” Id. ¶¶ 60, 89.

         After reviewing the findings of the investigation, which included interviews with approximately 350 people, CBS's Board decided to terminate Moonves for cause due to his “willful misfeasance” and lack of cooperation with the investigation. Id. ¶¶ 150, 157.

         IV. Defendants' Public Statements

         From 2016 to 2018, CBS's proxy statements incorporated the Company's Business Conduct Statement (“BCS”), which “sets forth the Company's standards for ethical conduct that are expected of all directors and employees of the Company.” Id. ¶ 100. The proxies stated that the BCS was designed to address “[t]he Company's commitment to providing . . . a bias-free and harassment-free workplace environment.” Id. The BCS itself contained a section stating that “CBS has a ‘zero tolerance' policy for sexual harassment, ” and that CBS would “take all steps necessary and appropriate to stop such acts of harassment or discrimination of which it becomes aware.” Id. ¶ 103.

         The proxies from 2016 to 2018 also discussed CBS's Supplemental Code of Ethics for Senior Financial Officers (the “Ethics Code”). Id. ¶ 105. The proxies stated that the Ethics Code was “applicable to the Company's Chief Executive Officer, ” and required the CEO to disclose any information regarding a violation of the BCS to CBS's Chief Legal Officer. Id.

         Finally, the proxies described Moonves as being a “critical link to management's perspective” and as having a “unique institutional knowledge of the Company.” Id. ¶ 99. Additionally, CBS-in its annual and quarterly reports during the class period-disclosed potential risks to “the Company's business” and revenues if CBS were to lose its “chief executive officer” or other “key employees.” Id. ¶ 95.

         On November 29, 2017, shortly after Charlie Rose was fired, Moonves told an audience at Variety magazine's Innovate Summit-where he was the keynote presenter and interviewee- that the #MeToo movement was “a watershed moment” and that “it's important that a company's culture will not allow for this. . . . There's a lot we're learning. There's a lot we didn't know.” Id. ¶ 8; Keynote Presentation Video (Dkt. 95, Ex. 36).

         In March 2018, Rhodes, President of CBS News, made a series of statements regarding the allegations of sexual misconduct against Rose. Specifically, Rhodes denied having any knowledge of Rose's misconduct during Rose's time at CBS News and spoke of the need to take seriously the imperative of removing “misconduct and harassment” from the workplace while “drawing out the truth-revealing, not concealing.” Am. Compl. ¶ 130. A representative of CBS News similarly stated in May 2018 that “[CBS News] take[s] swift action when we learn of unacceptable behavior.” Id. ¶ 138. Finally, in an interview with Hollywood Reporter on July 19, 2018, Rhodes stated that Moonves was “really good” at managing the oversight of sexual harassment claims. Id. ¶ 143.[2]

         V. CBS's Stock Fluctuation and Trading Activity by Executives

         Following the July 27, 2018, publication of sexual assault allegations involving Moonves, CBS Class A and Class B stock prices fell about six percent, from $57.85 to $54.27 per share and $57.53 to $54.01 per share, respectively. Id. ¶¶ 10, 146. By the next trading day, the stock prices had each fallen about ten percent total. Id. The stock price recovered slightly, but following the December 2018 New York Times article regarding the draft report from the independent investigation, CBS's stock prices again declined approximately 4%. Id. ¶ 21.

         Before sexual harassment allegations against CBS executives became public, Moonves and other CBS executives collectively sold approximately 3.4 million shares of CBS stock. Id. ¶ 91. Moonves sold around $155 million worth between June 2017 and May 2018. Id. Ianniello sold around $30 million worth between January 2017 and June 2018. Id. Liding sold around $2 million worth between February and March 2017, and non-defendant Gil Schwartz (head of communications at CBS) sold around $15 million worth between February 2017 and June 2018. Id. ¶¶ 20, 91.

         DISCUSSION

         I. Standard of Review

         To survive a motion to dismiss under Rule 12(b)(6), “a complaint must allege sufficient facts, taken as true, to state a plausible claim for relief.” Johnson v. Priceline.com, Inc., 711 F.3d 271, 275 (2d Cir. 2013) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555-56 (2007)). “[A] complaint does not need to contain detailed or elaborate factual allegations, but only allegations sufficient to raise an entitlement to relief above the speculative level.” Keiler v. Harlequin Enters., Ltd., 751 F.3d 64, 70 (2d Cir. 2014) (citation omitted). The Court accepts all factual allegations in the complaint as true and draws all reasonable inferences in the light most favorable to the plaintiff. See Gibbons v. Malone, 703 F.3d 595, 599 (2d Cir. 2013). The Court, though, is “not bound to accept as true a legal conclusion couched as a factual allegation.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 555).

         II. Motions to Dismiss Plaintiffs' Section 10(b) Claim

         A. The Elements of the Claim

         Section 10(b) of the Securities Exchange Act makes it unlawful to “use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe.” 15 U.S.C. § 78j(b). The SEC's implementing rule, Rule 10b-5, makes it unlawful to “make any untrue statement of a material fact” or “omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.” 17 C.F.R. § 240.10b-5.

         To state a claim under these provisions, a plaintiff must plead six elements: “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Pac. Inv. Mgmt. Co. v. Mayer Brown LLP, 603 F.3d 144, 151 (2d Cir. 2010) (quoting Stoneridge Inv. Partners v. Scientific-Atlanta, Inc., 552 U.S. 148, 157 (2008)).

         Because claims under Section 10(b) and Rule 10b-5 sound in fraud, a heightened pleading requirement applies. Pursuant to Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act (“PSLRA”), the complaint must “(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.” ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir. 2007) (citing Novak v. Kasaks, 216 F.3d 300, 306 (2d Cir. 2000)); see also 15 U.S.C. § 78u-4(b)(1)(B).

         B. The Amended Complaint Does Not “Puzzle Plead”

         CBS first argues that the Amended Complaint should be dismissed in its entirety because it does not explain why and how each particular statement is false or misleading. That sort of “puzzle pleading”-marked by lengthy block quotes followed by pro forma reasons why the statements quoted are allegedly false-fails to state a claim because it is insufficiently particular under the PSLRA. See Boca Raton Firefighters & Police Pension Fund v. Bahash, 506 Fed.Appx. 32, 37-38 (2d Cir. 2012). But CBS's characterization of the Amended Complaint is inaccurate. Although the Amended Complaint is not a model of clarity, it identifies statements and omissions, describes relevant predicate events, and alleges how those events make the statements and omissions false or misleading. In doing so, the Amended Complaint describes “what portion of each quotation constitutes a false representation” and avoids “placing the burden on the Court to sort out the alleged misrepresentations and then match them with the corresponding adverse facts.” In re Alcatel Sec. Litig., 382 F.Supp.2d 513, 534 (S.D.N.Y. 2005). The Amended Complaint is far from the 280-page complaint in Bahash where the lengthy quotations and canned allegations made any analysis a Sisyphean task.[3]

         C. The Amended Complaint Adequately Alleges One Misleading Statement of Material Fact

         A single theory of securities fraud underpins the Amended Complaint. Plaintiffs allege that Moonves and other managers and officers sexually harassed and threatened female employees behind the scenes for years, fostering a crude and hostile workplace culture. This behavior and culture created a risk that CBS would lose Moonves, its star executive, should his dirty laundry come to light. Plaintiffs' securities fraud theory is that, with the advent of the #MeToo movement, the risk of losing Moonves to sexual scandal increased, and yet Defendants failed to disclose the risk even as they touted CBS's ethical culture and Moonves's importance to the Company's financial performance. See Am. Compl. ¶¶ 2, 16, 98, 106-11, 123-24, 129, 140, 144.

         The Amended Complaint includes numerous alleged misstatements that fall broadly into six categories: (1) the BCS, Ethics Code, and various related statements, [4] Id. ¶¶ 100-05, 119-21, 134-36; (2) disclosures about the importance to CBS of key personnel and Moonves in particular, Id. ¶¶ 95-97, 99, 114, 116-18, 122, 127, 132, 139; (3) management statements to news media made by Moonves, Rhodes, and CBS News, Id. ¶¶ 125, 130-31, 138, 141-43; (4) disclosures about legal proceedings, Id. ¶ 128; (5) disclosures contained in a press release announcing CBS's financial results, Id. ¶ 126; and (6) disclosures about CBS's corporate governance, Id. ¶ 137.

         As to the last three categories, Plaintiffs did not respond to Defendants' arguments that these statements were neither material nor misleading. Thus, Plaintiffs abandoned their claims as to the statements contained in categories four, five, and six. See In re Mylan N.V. Sec. Litig., No. 16-CV-7926, 2018 WL 1595985, at *14 n.9 (S.D.N.Y. Mar. 28, 2018).

         As to the first three categories, the statement by Moonves to the Variety audience is materially misleading, but the remaining statements are either immaterial or not adequately alleged to be false or misleading.

         1. Legal Principles

         To support a claim of securities fraud, the stated or omitted fact must be material. A fact is material if it “would have been viewed by the reasonable investor as having significantly altered the total mix of information available.” Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (quotation omitted). Put differently, “there is a substantial likelihood that a reasonable person would consider it important in deciding whether to buy or sell shares of stock.” Operating Local 649 Annuity Tr. Fund v. Smith Barney Fund Mgmt. LLC, 595 F.3d 86, 92-93 (2d Cir. 2010) (quotation omitted). Statements that are too vague or general to be relied upon- puffery-are, by definition, not material. ECA, Local 134 IBEW Joint Pension Tr. of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 206 (2d Cir. 2009). “Whether a representation is ‘mere puffery' depends, in part, on the context in which it is made.” In re Petrobras Sec. Litig., 116 F.Supp.3d 368, 381 (S.D.N.Y. 2015).

         An alleged statement or omission must also be false or misleading. Whether a statement is false or misleading is “evaluated not only by ‘literal truth,' but by ‘context and manner of presentation.'” Singh v. Cigna Corp.,918 F.3d 57, 63 (2d Cir. 2019) (quoting Operating Local, 595 F.3d at 92). To base a claim on an omission-such as failing to disclose a material business risk-a plaintiff must also plead that ...


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