In Retail Wholesale & Dep’t Store Union Local 338 Ret. Fund v. Hewlett-Packard Co., 845 F.3d 1268 (9th Cir. 2017), the United States Court of Appeals for the Ninth Circuit affirmed the District Court’s dismissal of plaintiffs’ amended class action complaint (the “Complaint”) against Hewlett-Packard Company (“HP”) and Mark Hurd, former CEO and Chairman of HP (“Defendants”). The Ninth Circuit held Retail Wholesale & Department Store Union Local 338 Retirement Fund, individually and on behalf of those similarly situated (“Plaintiffs”), failed to sufficiently allege a material misrepresentation or omission under Fed. R. Civ. P. 9(b) and the Private Securities Litigation Reform Act (“PSLRA”). 

Plaintiffs purchased HP stock between November 13, 2007, and August 6, 2010 (the “Class Period”) and held shares on August 6, 2010. According to the allegations, the HP Board conducted a sexual harassment investigation into Mark Hurd in 2010 after a former independent contractor made allegations against him. The HP Board discovered Hurd, during the Class Period, “falsified expense reports and lied about his relationship” with the independent contractor. Hurd admitted to violating HP’s corporate code of ethics, the Standards of Business Conduct (“SBC”), and conceded that at times he had failed to “live up to the standards and principles of trust, respect, and integrity” which he actively promoted at HP. According to the Complaint, the price of HP stock dropped immediately after Hurd’s resignation and resulted in a $10 billion loss to HP’s stockholders. 

The Complaint alleged violations of Sections 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder. Plaintiffs claimed that Defendants’ made misrepresentations about the business ethics of the Company.  In part, the Complaint relied on statements within the SBC. In the alternative, Plaintiffs asserted that Defendants’ omitted material information by failing to disclose Hurd’s unethical behavior. 

In order to survive a motion to dismiss a claim brought under Section 10(b) of the Exchange Act and Rule 10b-5, plaintiffs must allege: (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation. Under Fed. R. Civ. P. 9(b) and the PLSRA, plaintiffs must plead with particularity the facts giving rise to a material misrepresentation or misleading omission and explain why it is misleading. The materiality of the misrepresentation or omission, determined by an objective standard, depends on whether a reasonable investor would have viewed the information as having “significantly altered the total mix of information made available” for the purpose of investment decisions. Likewise, a material omission is actionable only when disclosure is required “to make the statements made, in light of the circumstances under which they were made, not misleading.”    

The court had to determine “whether statements made in or about an ethical code are actionable representations if the ethical code is violated.”  The court found that the allegations relating to ethical behavior were “inherently aspirational” and thus were not capable of objective verification. Moreover, representations about ethical behavior “did not reasonably suggest that there would be no violations of the SBC by the CEO or anyone else.”  The court left open the possibility that the statements could be actionable had they occurred closer in time to the scandal involving Hurd.  See Id. (“We note that the case may have been closer had Hurd's sexual harassment and false expenses scandal involved facts remotely similar to those presented by the 2006 scandal, as the ethical code could then have been understood as at least promising specifically not to do what had been done in 2006.”).  With respect to Plaintiffs’ alternative pleading, the court found neither the promotion of business ethics at HP nor Defendants’ statements created an impression of total compliance with the SBC. Therefore, Defendants’ failure to inform investors of Hurd’s unethical behavior was not a material omission.

Accordingly, the Ninth Circuit affirmed the District Court’s dismissal of the Complaint, with prejudice, and held that Plaintiffs failed to state a claim under the Exchange Act.

The primary materials for this case may be found on the DU Corporate Governance website.