On July 29, 2024, Judge Trina L. Thompson of the United States District Court for the Northern District of California denied a motion to dismiss a putative securities class action brought by investors against a financial services company (the “Company”) and certain of its officers (the “Individual Defendants” and, collectively “Defendants”) asserting claims under Section 10(b) of the Securities and Exchange Act of 1934 (“Exchange Act”), as well as Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act. SEB Inv. Mgmt., AB v. Wells Fargo & Co., Case No. 22-cv-03811-TLT (N.D. Cal. July 29, 2024). Plaintiffs alleged that the Company made false and misleading statements about its efforts to hire more diverse candidates in response to public scrutiny over the Company’s diversity, equity, and inclusion (“DE&I”) practices. The Court held that plaintiffs adequately pleaded that Defendants’ statements were actionable and that the facts alleged raised a strong inference that Defendants made those statements with scienter. The Court, therefore, denied Defendants’ Rule 12(b)(6) challenge in its entirety.
In 2019, the U.S. Department of Labor’s Office of Federal Contract Compliance Programs (“OFCCP”) alleged that the Company had engaged in discriminatory hiring practices in several lines of its business. The Company entered into a conciliation agreement with the OFCCP to resolve these allegations shortly thereafter in 2020. Around the same time, the Company hired a new CEO who allegedly created initiatives to boost DE&I efforts across the Company, in order to ameliorate the Company’s alleged compliance issues and demonstrate a shift in corporate culture more generally. Among these programs was the Company’s now-defunct “Diverse Search Requirement,” which the Company announced in its March 2020 proxy. Under this Requirement, at least 50% of the candidates whom the Company interviewed for most U.S.-based positions had to qualify as “diverse,” which the Company defined “based on race or ethnicity, sex or gender, veteran-status, sexual orientation, and disability.” The Company also allegedly collected “extensive data” concerning its diverse hiring practices.
On September 8, 2023, plaintiffs filed their second amended complaint (“Complaint”), alleging that the Diverse Search Requirement was a “sham.” Based on the alleged accounts of Company employees and contractors, plaintiffs averred that the Company allegedly would conduct widespread interviews of diverse candidates whom the Company had no intent to hire, simply so that it could demonstrate adherence to the Diverse Search Requirement. Plaintiffs claimed that the Company’s practice of conducting sham interviews rendered false and misleading various statements made by Defendants that its Diverse Search Requirement had been adopted to improve diverse hiring and that Defendants acted with scienter. Defendants moved to dismiss the action entirely for failure to state a claim.
The Court first concluded that plaintiffs adequately alleged falsity. It found plaintiffs proffered alleged facts that plausibly demonstrated the Company’s sham-interview practice was widespread, both in terms of geography, the Company’s different divisions, and frequency. In particular, the Court inferred this from allegations recounting the experience of former employees who allegedly conducted sham interviews and candidates who allegedly participated in them. The Court further held that these sham interviews rendered Defendants’ statements about the Diverse Search Requirement false and misleading. In so holding, the Court rejected Defendants’ argument that the statements identified by plaintiffs were inactionable because the Company only ever committed to interviewing diverse candidates—not necessarily hiring those candidates. The Court found it to be significant that: (1) Defendants’ statements concerning its Diverse Search Requirement were couched in surrounding language that framed the Requirement as a method for improving workforce DE&I; and (2) the Company adopted the Diverse Search Requirement in response to public scrutiny regarding DE&I issues, including the OFCCP conciliation agreement.
Having established falsity, the Court proceeded to scienter. It observed the Complaint alleged both direct and indirect evidence that Defendants knowingly made false statements regarding the Diverse Search Requirement. In particular, plaintiffs alleged that two former employees sent complaints to Defendants about sham interviews. Defendants argued plaintiffs failed to adequately allege that Defendants actually received and, therefore, were aware of these complaints, but the Court found that plaintiffs’ allegation the former employees sent communications to Defendants’ Company-issued email addresses enabled the Court to plausibly infer Defendants were aware of the sham interviews. Plaintiffs augmented these averments with alleged circumstantial evidence, including that (1) Defendants had access to metrics on diverse hiring practices that the Company represented it regularly reviewed; (2) Defendants had additional reason to view that data given the internal and external attention to DE&I issues; and (3) an employee alleged to have played a role in the sham interviews resigned shortly after he was named in a complaint to the Company’s board. The Court found that, taken together and viewed holistically, these allegations raised a strong inference of scienter.
Finally, the Court held plaintiffs stated a Section 20(a) claim against the CEO, finding that the allegations about his involvement in the Company’s DE&I efforts were sufficient to predicate a plausible inference he exercised “actual power or control” as required by Section 20(a).
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