On December 4, 2024, Judge John L. Badalamenti of the United States District Court for the Middle District of Florida denied a motion to dismiss a putative securities fraud action against a retail company (the "Company"), its CEO, and its Board of Directors, alleging violations of Sections 10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14a-9 promulgated thereunder. Craig v. Target Corp., et al., No. 2:23-cv-599-JLB-KCD (M.D. Fla. Dec. 4, 2024). Plaintiff alleged that defendants made false and misleading statements and omissions in the Company's annual reports, proxy statements, and investor presentations regarding the risks and oversight of the Company's environmental, social, and governance ("ESG") and diversity, equity, and inclusion ("DEI") initiatives.
The amended complaint alleged that defendants made false and misleading statements and omissions about the risk of customer boycotts in response to the Company's ESG, DEI, and LGBT initiatives, particularly its 2023 LGBT "Pride Month" campaign, which plaintiff alleged resulted in customer backlash and a boycott allegedly causing the Company's sales and stock price to decline significantly. Plaintiff further alleged that shareholders relied on the alleged misleading statements and omissions in re-electing the Company's board, by turning down multiple proposals to reform the board's risk oversight functions and approving executive compensation plans that incentivized the Company's officers to implement DEI programs. Defendants moved to dismiss the case.
The Court denied defendants' motion to dismiss, finding that plaintiff sufficiently pleaded violations of both Section 10(b) and Section 14(a).
As to the Section 10(b) claims, brought against the Company and CEO, the Court first held that plaintiff adequately pleaded falsity as to defendants' risk warnings, holding that defendants' general warnings in the Company's 2021 and 2022 annual reports that reputational incidents could affect the Company's business could be materially misleading, because the warnings were not specifically tailored to the allegedly known risks of customer backlash from the campaign. The Court further rejected defendants' arguments that prior news articles and other public statements demonstrated that the public was aware of the risks, holding that the Company's allegedly "new and aggressive" campaign could be construed as a change to their prior ESG and DEI initiatives. Accordingly, the Court held that plaintiff adequately pleaded that the 2021 and 2022 risk disclosures contained actionable omissions. The Court also rejected defendants' arguments that their statements were forward-looking and therefore protected under the PSLRA's safe harbor, because plaintiff cited alleged statements from a confidential witness that defendants' alleged decisions to undertake the Campaign and purportedly "push the envelope on social issues" were "deliberate" despite the Company already allegedly receiving backlash for its opposition to a 2016 North Carolina transgender bathroom law. The Court therefore held that plaintiff adequately pleaded facts demonstrating that the risk disclosures were made with actual knowledge of falsity.
As to defendants' alleged oversight statements in the Company's 2022 and 2023 proxy statements, the Court found that plaintiff adequately pleaded that the statements were false and misleading. Although the proxy statements allegedly noted that the Company's Governance & Sustainability Committee were responsible for monitoring social and political risks, the Court found that plaintiff adequately alleged it was plausible that defendants ignored these risks, resulting in the purported backlash to the campaign.
Turning to scienter, the Court held that plaintiff adequately pleaded particularized facts supporting a strong inference of scienter for both the Company and its CEO. While the Court agreed with defendants that ordinary compensation cannot support a strong inference of scienter and that the CEO's alleged statements on the Company's corporate purpose did not adequately demonstrate that he did not oversee risks of customer backlash, the Court nevertheless held that plaintiff adequately pleaded that the CEO acted with "severe recklessness" based on his alleged admission that the Company "didn't adequately access risk" of the "new, more aggressive" campaign in light of the previous boycott.
As to loss causation, the Court rejected defendants' arguments that the campaign backlash and the Company's 2023 second quarter earnings call did not cause cognizable losses, holding that plaintiff sufficiently pleaded a causal connection between defendants' alleged misstatements and the stock's subsequent decline in value. Specifically, the Court held that plaintiff sufficiently alleged that the Company concealed a "new truth" by acting aggressively to push the campaign despite alleged knowledge of adverse reactions to prior campaigns and that the stock drop allegedly occurred as the "market progressively realized the scope and intensity of customer backlash."
The Court next considered and denied defendants' motion to dismiss the Section 14(a) claim (asserted against the Company and its Board of Directors), which prohibits the use of false statements in proxy solicitations. In dismissing defendants' motion, the Court rejected their arguments that plaintiff failed to plead a strong inference of scienter and transaction and loss causation. The Court held that a plaintiff is not required to plead scienter in Section 14(a) claims, but rather only negligence, and that plaintiff adequately alleged the requisite materiality and negligence. In particular, the Court found that plaintiff adequately alleged that defendants were "on notice" that the Company was subject to the risk of backlash due to prior backlash allegedly arising from what plaintiff referred to as the Company's "activism on LGBT political issues." The Court further held that plaintiff adequately pleaded both transaction and loss causation by alleging that the false and misleading proxy statements caused the shareholders to re-elect the board, reject shareholder proposals, and approve compensation plans, which in turn allegedly caused the harm of lack of oversight and the resulting financial losses. Having found that plaintiff adequately pleaded both Section 10(b) and Section 14(a) claims, the Court denied defendants' motion to dismiss.
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