Publications

(Article from Securities Law Alert, July 2019) 

For more information, please visit the Securities Law Alert Resource Center

On June 11, 2019, the Southern District of New York held that the Second Circuit’s decision in Singh v. Cigna Corporation, 918 F.3d 57 (2d Cir. 2019), did not entitle defendants to judgment on the pleadings in a securities fraud action alleging misstatements in the company’s Codes of Conduct and Ethics concerning its policies on sexual harassment and merit-based advancement.[1] In re Signet Jewelers Ltd. Sec. Litig., 2019 WL 2428529 (S.D.N.Y. 2019) (McMahon, J.). The court found that Cigna “did not announce a new legal rule . . . deeming an entire category of statements—those contained in a company’s code of conduct—per se inactionable.”

In Cigna, the Second Circuit determined that “general declarations about the importance of acting lawfully and with integrity” set forth in a company’s Code of Ethics were “textbook example[s] of puffery.” The Second Circuit explained that “general statements about reputation, integrity, and compliance with ethical norms are inactionable puffery, meaning that they are too general to cause a reasonable investor to rely on them.”

The Signet court rejected defendants’ contention that “Cigna wrought a sea change in the doctrine of puffery.” The court found that “Cigna did not purport to change the well-established law regarding materiality,” nor did it “rule . . . that all statements in codes of conduct qualify as puffery.” The court observed that “the Cigna court expressly stated that context bears on materiality.” The Signet court recognized that “[w]here a statement is located is one factor (of several) relevant to materiality; that was the law before Cigna, and it remains the law after it.” However, the court reasoned that “it does not follow from Cigna that a securities fraud claim can never rest on statements contained in a public company’s code of conduct.”

The Signet court pointed out that in Indiana Public Retirement System v. SAIC, 818 F.3d 85 (2d Cir. 2016), the Second Circuit specifically “eschewed laying down a bright line rule . . . that would categorize all statements located in a company’s code of conduct as immaterial puffery as a matter of law.” Signet, 2019 WL 2428529.  The SAIC court noted that “statements about a company’s reputation for integrity or ethical conduct . . . may amount to more than puffery and may in some circumstances violate the securities laws.” 818 F.3d 85. The SAIC court offered as examples “a company’s specific statements that emphasize its reputation for integrity or ethical conduct as central to its financial condition or that are clearly designed to distinguish the company from other specified companies in the same industry.”

The Signet court found that the facts alleged in the case before it “differ starkly from those alleged in Cigna.” Unlike the “exceptionally vague and aspirational” statements the Second Circuit deemed inactionable in Cigna, the statements at issue in Signet specifically “touted how the company makes decisions based solely on merit, disciplines misconduct, and provides a safe and anonymous means for employees to report misconduct without retaliation.” The court found these allegedly misleading statements were designed “to reassure the investing public that [the company] did not, in fact, have a toxic workplace” at a time when the company faced accusations of a culture of sexual harassment. The court held that these statements were actionable because a reasonable investor “would be concerned about how grave allegations concerning rampant sexual misconduct might affect her investment in [the company].”