SEC Disclosures: Balancing Investor Rights With Privacy Rights


Due to the recent #MeToo Movement, companies face increasing public pressure to address and prevent sexual harassment in the workplace.[1] Companies typically do not disclose sexual harassment investigations, even to shareholders, because of the privacy interests of those involved.[2] As shown in recent cases though, these investigations can drastically impact business matters, including share prices and corporate structure. [3] This raises the question of whether sexual harassment investigations are subject to disclosure requirements under federal securities law.[4]

Federal securities law provides some guidance.[5] Generally, disclosure is required when a company has an affirmative legal duty or its failure to disclose the information would render other disclosures materially misleading.[6] Since no rule or regulation requires disclosure of sexual harassment investigations, this analysis depends on whether a company’s failure to disclose has made its other disclosures materially misleading. [7]

Materiality is defined under SEC regulation S-K, Items 103 and 303.[8] The former directly addresses internal investigations, but only applies when there is an ongoing legal proceeding,[9] the issue being that internal investigations precede legal proceedings–item 103 is unlikely to apply.[10] Instead, materiality will be reviewed under Item 303, which requires disclosure for “any known trends or uncertainties that have had or that the company reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.”[11] Under this definition, companies must determine the likely impact of a sexual harassment investigation on future business operations using a fact-specific assessment.[12]

Recent cases help determine which investigations may warrant disclosure.[13] In the case of Wynn Industries, shares dropped by nearly 12% after sexual harassment allegations against CEO Stephen Wynn were made public and he subsequently resigned.[14] Here, the company would likely need to disclose the investigation based on the drop in share prices and Wynn’s close ties with the brand.[15]

Contrarily, in Retail Wholesale & Department Store Union Local 338 Retirement Fund v. Hewlett-Packard Co., the Ninth Circuit held that the investigation against CEO Mark Hurd did not trigger disclosure requirements.[16] Investors alleged that (i) Hurd made material misrepresentations by publicly promoting the company’s high ethical standards while undergoing an internal investigation and (ii) the board misled investors by failing to disclose Hurd’s behavior.[17] While Hurd’s behavior violated the company’s code of ethics, such violations are not material and do not require disclosure under the applicable securities law.[18]

In a third example, City of Monroe Employees’ Retirement System v. Rupert Murdoch, et al, shareholders alleged that the board’s failure to properly prevent and investigate sexual harassment breached its fiduciary duty.[19] The suit settled but presented an interesting scenario under securities law.[20] Shareholders could likely have brought a securities fraud claim against 21st Century Fox for failure to disclose the harassment investigations against Roger Ailes and Bill O’Reilly, which respectively cost the company $45 million and $13 million in settlement fees.[21]

At first glance the costs seem material, but 21st Century Fox reported $27 billion in revenue that year indicating the fees were not a substantial loss to the company.[22] From this illustration, it appears materiality can depend on company-specific factors, such as yearly revenue and size.[23] Given the uncertainty shown by these recent cases, companies need to stay abreast of case law and regulatory guidance to determine exactly when a sexual harassment investigation invokes disclosure requirements under federal securities law.[24]

[1] See Sindhu Sundar, How #MeToo Is Changing Internal Investigations, Law 360 (Jan. 28, 2018, 9:17 PM), /1004626/how-metoo-is-changing-internal-investigations.

[2] See EEOC Enforcement Guidance: Enforcement Guidance on Vicarious Employer Liability for Unlawful Harassment by Supervisors, available at (Last visited Apr. 1, 2018).

[3] See Debora Birnbach et. al, The Securities Law Questions Raised by #MeToo, Law 360 (Feb. 28, 2018, 3:05 PM), /articles/1015772/the-securities-law-questions-raised-by-metoo.

[4] Id.

[5] Id.

[6] 15 U.S.C. 78a-78kk.

[7] See Birnbach, supra note 3.

[8] Id.

[9] Id.

[10] Id.

[11] 17 C.F.R. § 229.303

[12] See Birnbach, supra note 3.

[13] Id.

[14] Id.

[15] Id.

[16] See Retail Wholesale & Dep’t Store Union Local 338 Ret. Fund v. Hewlett-Packard Co., 845 F.3d 1268 (9th Cir. 2017); See also Birnbach, supra note 3.

[17] Id. at 1271; See also Birnbach, supra note 3.

[18] See Retail Wholesale & Dep’t Store Union Local 338 Ret. Fund v. Hewlett-Packard Co., 845 F.3d at 1278.

[19] See City of Monroe Employees’ Retirement System v. Rupert Murdoch, et al, No. 2017-0833 (Del. Ch. 2017).

[20] Id.; See also Birnbach, supra note 3.

[21] See Birnbach, supra note 3.

[22] Id.

[23] Id.; See also Mike Snider, Fox’s Bill for Roger Ailes Settlements is Now $45 Million, USA TODAY (May 10, 2017), /2017/05/10/foxs-bill-roger-ailes-settlements-now-45-million/101515930/.

[24] See Birnbach, supra note 3; see also Spencer G. Feldman, Sexual Misconduct Allegations May Not Be Ready for SEC Disclosure Yet But Should Be Part of the Conversation, Olshan Law (Dec. 12, 2017),,reporting-sexual-misconduct-allegations-may-not-be.



About Author

Comments are closed.

Fordham Journal of Corporate & Financial Law