United States: Retail Wholesale & Department Store Union Local 338 Retirement Fund V. Hewlett-Packard Co.: Federal Appeals Court Dismisses Securities Class Action Because CEO's Statements Touting Ethical Standards Were "Transparently Aspirational"

On 19 January 2017, in Retail Wholesale & Department Store Union Local 338 Retirement Fund v. Hewlett-Packard Co., the federal appeals court based in California affirmed the lower court's decision to dismiss a securities class action against Hewlett-Packard Co. ("HP") and its former chief executive officer. The plaintiffs alleged that HP and its former CEO violated Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") when the CEO breached HP's code of ethics after he and the company had publicly promoted HP's high ethical standards. The court concluded that the plaintiffs failed to allege an actionable fraud because, among other reasons, the alleged statements about HP's code of ethics were not objectively false, but "transparently aspirational."

The plaintiffs' claims stemmed from the resignation of HP's former CEO after an internal investigation revealed that he had falsified expense reports and lied about his relationship with an independent contractor. According to the plaintiffs, HP's public statements about its business ethics were shown to be demonstrably false based on the CEO's misconduct. The district court, dismissing the action, held that the complaint failed to adequately allege that the statements at issue were objectively false or material. The appeals court affirmed that ruling, and said that a code of conduct is "inherently aspirational" because it "expresses opinions as to what actions are preferable, as opposed to implying that all staff, directors, and officers always adhere to its aspirations." The court noted that a contrary interpretation would be untenable because it could turn all corporate wrongdoing into securities fraud. The court also ruled that the statements at issue were not material because there was nothing unusual about HP's promotion of business ethics that would have affected a reasonable investor's decision to invest in the company.

The court's decision, which was a matter of first impression for this court, establishes that, where a company's statements do not guarantee absolute compliance with ethical standards, but instead are merely aspirational, they do not give rise to a securities fraud claim if the ethical standards are later breached. In reaching this result, the court here joins several other courts around the country that have reached the same conclusion.

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