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Hewlett-Packard Co. shareholders failed to revive class securities fraud claims that the company and its former chief executive officer concealed an inappropriate romantic relationship with a contractor while touting the company’s superior ethical standards ( Retail Wholesale & Dep’t. Store Union Local 338 Ret. Fund v. Hewlett-Packard Co. , 2017_BL_15038, 9th Cir., No. 14-16433, 1/19/17 ).
The statements regarding ethics and compliance were aspirational and no material misrepresentations or actionable omissions were made, Judge Dana L. Christensen, sitting by designation on the U.S. Court of Appeals for the Ninth Circuit, said in a case of first impression.
The case marks the first time the Ninth Circuit has decided whether a high-ranking employee’s violation of a business’s ethical code can support a securities fraud claim under the 1934 Securities Exchange Act.
In 2010, sexual harassment claims against former Hewlett-Packard CEO Mark Hurd gave rise to an investigation that revealed he misrepresented his relationship with a former independent contractor. HP found that Hurd tried to hide the personal nature of the relationship by altering expense reports and lying to investigators, the appeals court said.
After Hurd’s truthful disclosures regarding the “very close relationship,” HP issued a press release acknowledging the investigation’s finding of unethical behavior and Hurd’s violation of HP’s code of conduct.
Immediately following Hurd’s resignation, HP’s stock price collapsed, resulting in an alleged loss of $10 billion.
Shareholders sued the company and Hurd alleging that Hurd, as a “high-ranking employee,” committed securities fraud when he violated the corporate code of ethics after publicly touting the business’s high ethical standards and zero-tolerance policy for violations.
The district court dismissed the claims saying the shareholders didn’t adequately allege materiality and falsity.
Affirming, the appeals court held that neither HP’s and Hurd’s statements nor their omissions were misleading. Hurd’s comments about HP’s code of conduct were aspirational in nature and provided a “vague statement of optimism” not capable of objective verification, the court said.
Additionally, the court found that since the statements didn’t create an impression of full compliance with the code of conduct, there was no duty to disclose Hurd’s misuse of his authority and misbehavior.
To contact the reporter on this story: Antoinette Gartrell in Washington at email@example.com
To view the opinion, visit: http://www.bloomberglaw.com/public/document/Retail_Wholesale__Dept_Store_Union_Local_338_Ret_Fund_v_HewlettPa.
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