Sex Sells Contracts: Why Not Securities Law?

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The ContractsProf Blog recently posted about “Sex and Contracts.” Frank Snyder notes that the post resulted in a huge traffic spike. “There’s a lesson there,” he concludes. There sure is.

I could (as this blog did) identify a case or so that directly appeals to your prurient interest in the topic. But maybe the better path is to take a step back, and consider a more academic question.

Let us assume that you, a general counsel, have just learned that your CEO is having a consensual affair with a subordinate. Also assume that the corporation has recently stated, in a regular reporting statement, that its management team is “cohesive, ethically sound, and 100% committed to shareholder value.” [Note: this is entirely hypothetical]

Putting aside other considerations, is it likely that a court or jury would find it materially misleading to have omitted disclosure of the affair?


I think there is at least an argument that reasonable shareholders would find it significant that the officers of the corporation are romantically involved with each other, because such relationships often end badly, either in litigation or in a private settlement. Assuming materiality, I think that plaintiffs would assert that failing to disclosure the affair renders the statement misleading (“cohesive” and “100% committed” have a different meaning in light of the relationship). Still, I am tempted to think that we should immunize non-disclosure to protect the privacy interests of the employees in question. Does the answer differ if the affair is an adulterous one?

If disclosure is required, I have to bet that the following example wouldn’t do at all.

“I’ll try to answer you, but you can’t put a lot of faith in what I’m going to say,” [the CEO] said, according to a transcript of the call. “I know in one meeting I said if we look at this a year from now it will be clear, or should be clear, you know, what is and what we can do and what’s attainable and how quickly, and I still think that’s true. God knows, I would hope that’s true.”

Er. What was that again?

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4 Responses

  1. anonymous says:

    Having worked for a publicly-held employer where the president/CEO was engaged in an adulterous relationship, I can tell you that the fiscal effect of dalliance goes beyond the immediate participants. Consider the Jack Welch case, where the retirement “package” of GE’s former CEO became “assets” in an acrimonious divorce. In the case of my ex-employer, the itemization (demanded as part of the divorce proceedings) of “non-cash” services provided to “all officers and directors” threatened to sink the company’s prospectus (this was pre- Sarb-Ox). A fast resignation saved the company’s disclosures.

    A CEO whose wife is not happy with his extra-marital prowess is a definite fiscal liability.

  2. Interesting hypo. I agree that there probably is enough of a materiality argument to at least survive a motion for summary judgment. Hence, I think the lesson to take from the hypo is to avoid statements like cohesive, ethically sound, 100%, etc. in SEC filings. Absent these statements, I don’t think the company would have any duty to disclose the affair. As an aside, no securities lawyer should ever let “100%” appear as a modifier in an SEC filing.

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