On July 28, 2021, Judge Andrew P. Gordon of the United States District Court for the District of Nevada granted in part and denied in part a motion to dismiss a putative securities class action against a resort and casino operator (the "Company") and its current and former officers alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), Rule 10b-5, and Section 20(a) of the Exchange Act. Ferris v. Wynn Resorts Ltd., No. 18-CV-00479 (D. Nev. July 28, 2021). Plaintiffs alleged that the Company made material misstatements and omissions concerning allegations that its CEO engaged in sexual misconduct. The Court denied the Company's motion to dismiss plaintiffs' claims relating to alleged misstatements made directly in response to a newspaper article and lawsuit concerning the CEO's alleged misconduct, but granted the motion to dismiss with respect to the alleged misstatements that concerned the Company's code of conduct, compliance with laws and regulations, and corporate culture.
In January 2018, after a newspaper published an article detailing the CEO's pattern of sexual misconduct, the price of the Company's stock dropped precipitously. The Company and the CEO made several statements denying the allegations in the article and other allegations of misconduct from a lawsuit brought by the CEO's ex-wife. Shortly thereafter, two women filed police reports accusing the CEO of sexually assaulting them in the 1970s. The CEO resigned in February 2018, days before news of the police reports became public. Plaintiffs alleged that the Company made seven categories of misstatements relating to its CEO's alleged misconduct: (1) responses to the article that denied the misconduct or downplayed the Company's knowledge of the CEO's misconduct, (2) responses denying the allegations made in a lawsuit brought by the CEO's ex-wife, (3) statements regarding the Company's code of conduct, (4) statements regarding the Company's full compliance with all applicable laws, (5) statements about regulatory risks, (6) statements about the CEO's skills and possible departure, and (7) statements regarding corporate culture. The Company moved to dismiss the complaint, arguing that plaintiffs had failed to allege falsity of the statements at issue.
The Court granted in part and denied in part the Company's motion to dismiss. First, the Court denied the Company's motion as to the statements made in response to the newspaper article because it found the Company's statements would give a reasonable investor the "impression that the allegations are false and fabricated." The Court emphasized that the Company had received multiple complaints about the CEO's sexual misconduct by the time the article was published and that various Company executives were aware of the complaints. Similarly, the Court held that plaintiffs had adequately alleged that the Company's statements in response to the lawsuit brought by the CEO's ex-wife were materially misleading. Specifically, the Court held that the Company's statements would have given a reasonable investor the impression that the Company denied all allegations concerning the CEO's "serious misconduct," when, in fact, the Company had already received multiple complaints about the CEO's misconduct.
Second, the Court granted the motion to dismiss claims regarding the remaining categories of misstatements. With respect to the statements in the Company's code of conduct, the Court rejected plaintiffs' argument that the code of conduct was misleading because the Company did not apply its standards to the CEO's behavior. The Court dismissed plaintiffs' claims as to these statements because they were aspirational in nature, and even if they were affirmative misrepresentations, they could not be material. The Court also dismissed plaintiffs' claims as to the Company's statements regarding its compliance with all applicable laws because the challenged statements were made in the context of a specific litigation and "a reasonable person reading the statement[s] fairly and in context" would not find the statements misleading. Similarly, the Court rejected plaintiffs' claims with respect to the Company's statements regarding regulatory and compliance risks because the omission of the CEO's alleged pattern of misconduct did not render misleading statements that "merely describe[d] possible measures regulators could take if they determine that the Company violated a regulation." With respect to the alleged misstatements regarding the CEO's unique skills and possible departure, the Court agreed with the Company that the "statements only describe[d] [the CEO]'s value and possible departure in a general manner and did not create a duty to disclose his alleged misconduct." Finally, the Court agreed with the Company that the challenged statements regarding company culture, which focused on topics like diversity and the CEO's comfort with the pace of company growth, were inactionable puffery.
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