Central District of California Dismisses Putative Class Action Against Software Developer for Failure to Adequately Allege Falsity or Science | Shearman & Sterling LLP
On April 18, 2022, the United States District Court for the Central District of California dismissed without prejudice a putative class action lawsuit asserting claims under the Securities Exchange Act of 1934 against a computer game development company and certain of its leaders. Cheng vs. Activision Blizzard, Inc., no. 21-cv-6240, bordereau op. (CD Cal. April 18, 2022), ECF No. 75. The plaintiffs alleged that the company made misleading statements because they failed to disclose certain government investigations and the prevalence of sexual harassment and discrimination based on gender within the company. The Court held that the plaintiffs did not identify any actionable misrepresentations or adequately raise an inference of scienter, but granted the plaintiffs leave to represent themselves.
Relying on allegations contained in complaints filed by the California Department of Fair Employment and Housing and the U.S. Equal Employment Opportunity Commission, as well as various media reports and confidential witnesses, the plaintiffs alleged that certain company statements regarding its legal exposure, code of conduct and policy against retaliation were misleading. Identifier. at 6–8. The plaintiffs also argued that the company had a positive obligation to disclose ongoing investigations. Identifier. at 7 O’clock.
The Court first held that the plaintiffs had not pleaded sufficient facts to establish that any of the impugned statements were untrue. First, plaintiffs argued that disclosure of the company’s “legal proceedings” in SEC filings – that the company was party to “routine” investigations and other proceedings in the normal course of matters that were “not material” and which the company “had no reasonable basis to believe” would have a “significant adverse effect” – were false or misleading because they did not disclose alleged “widespread illegal conduct”. Identifier. at 12. The Court declined to rule “[a]t this stage of the litigation” as to whether such statements were protected by the PSLRA’s safe harbor provision regarding forward-looking statements accompanied by a material disclaimer. Identifier. at 12-13. The Court determined, however, that the plaintiffs failed to identify specific facts that would render these statements false in any event. Identifier. The Court also held that, to the extent that the company’s investigations received post-fact media coverage, that in itself did not indicate that there had been anything unusual about the investigations warranting further disclosure. . ID. at 13. In addition, the Court rejected the plaintiffs’ argument that the company had an obligation to disclose additional information because it “was talking about [the company’s] ongoing investigations” in its SEC filings, finding that “[t]The mere mention of “investigations” is not enough, on its own, to trigger an introduction to the subject. Identifier. at 14.
Regarding the company’s statements regarding compliance with its code of conduct – which stated that the company did not tolerate harassment, retaliation and discrimination – the Court rejected the plaintiffs’ argument that it s These were “verifiable statements” contradicted by government complaints and other sources. . Identifier. at 14-15. Rather, the Court observed that a company’s “promotion of business ethics” was not unusual and that, in this context, plaintiffs “should establish that [the company] ‘has taken no action in the face of gross and widespread violations of its’ [c]ode.'” Identifier. at 15.
Finally, with respect to statements in the company’s environmental, social and governance report indicating that the company did not tolerate retaliation, the Court rejected plaintiffs’ argument that these statements “were materially untrue and misleading because… retaliation against female employees… who engaged in sexual acts complaints of harassment and discrimination were rampant and tolerated by [c]society. Identifier. The Court explained that these “summary assertions” did not meet the PSLRA’s enhanced pleading standard. Identifier.
Furthermore, the Court found that the plaintiffs had failed to establish that the company had a positive obligation to disclose the information allegedly omitted. The Court rejected the suggestion that Rule 103 SK, regarding the disclosure of “legal proceedings… known to be contemplated by governmental authorities,” required disclosure, determining that a governmental investigation alone is not not a “legal proceeding” under section 103. Identifier. at 13-14.
With respect to scienter, the Court rejected plaintiffs’ argument that scienter was established by corporate investigations, public knowledge regarding corporate culture, and stock sales by individual defendants. Identifier. at 16. The Court explained that the plaintiffs did not plead specific facts showing that the defendants knew that the company’s statements regarding the investigations were inaccurate. Identifier. Although the plaintiffs argued that the government’s allegations that the company obstructed its investigation showed that the company was aware that the investigation posed a “serious threat”, the Court determined that it was a “speculative conclusion” and would not have, in any case, demonstrated that the defendants “lied” in their prior statements. Identifier. Additionally, the Court rejected plaintiffs’ argument that the context of the “#MeToo” movement created an inference that defendants were reckless in not recognizing the importance of government investigations and claiming “continuing wrongdoing” because this theory was “too vague a concept to raise strong scientific inference.” Identifier.
Further, the Court determined that the company’s disclosure of a government investigation – and the statement that “[i]If we experience prolonged periods of negative publicity, a significant reduction in productivity, or other negative consequences related to this issue, our business would likely be adversely affected” – did not attract sufficient scienter inference. The Court pointed out that the words “if” and “likely” imply a “conditional assessment and therefore a malicious inference is not as persuasive as any opposing innocent inference”. Identifier. at 17. The Court also rejected, in the absence of specific factual allegations, the plaintiffs’ argument that the defendants “must have known” that the alleged harassment and discrimination were “endemic” because of their positions at the company. Identifier.
The court also rejected plaintiffs’ argument that scienter should be deducted from the company’s CEO compensation structure, which included incentive bonuses based on the company’s stock price. Identifier. at 18-19. The Court explained that the plaintiffs do not allege “no facts to link a clear financial inducement…to the misrepresentations alleged by [the CEO].” Identifier. 18. Finally, with respect to the plaintiffs’ allegations based on the sales of shares of certain executives, the Court found that the plaintiffs had failed to provide factual information concerning the business backgrounds of the executives from which a comparison could be established with the period preceding the announcement of the investigations, otherwise “no scientific inference can be gleaned”. Identifier. at 19 years old.
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Cheng vs. Activision Blizzard, Inc.