ESG Securities Litigation is on the Rise – And Pomerantz is at the Helm
By Alison Preece | August 2, 2022 | News & Features
From climate change to racial discrimination, sexual harassment to the war in Ukraine, investors are increasingly pressing for accountability and transparency when it comes to a company’s ESG (environmental, social and corporate governance) practices. Institutional investors are in a particularly strong position to drive change, so naturally Pomerantz, the long-standing plaintiffs’ securities litigation powerhouse, is at the forefront of these issues.
“We’re meeting the demands of the marketplace, and the demands of investors,” says Jeremy Lieberman, Managing Partner at Pomerantz and a titan in the plaintiffs’ securities bar. “It’s something that the investor community is very concerned about.”
ESG has become increasingly prominent in the past 10 to 15 years, with the SEC now focusing on ESG disclosures and setting reporting requirements. The rationale, to which Pomerantz is keenly attuned, is that ESG issues go beyond being good for the world; they are increasingly understood to be financially material to the viability of a company – and therefore inherently important to investors.
“ESG is very much at the forefront of topics right now for pension funds and asset managers,” says Jennifer Pafiti, a Pomerantz partner and Head of Client Services. “If some information comes out pursuant to an ESG issue and the share price falls, people want to address that, now more than ever.”
For example, if a company was using shoddy practices to evaluate the environmental risk of building a new pipeline, then the pipe leaks and causes pollution, that affects the financial health of the company. The value of shares decline, and investors are robbed of their ability to accurately assess risk and viability. And of course, if something was concealed to investors or there was an outright lie, that is clear-cut securities fraud.
Further, when ESG problems are rampant at a company, “it raises eyebrows about how else they're poorly running their institution,” says Pafiti.
“It’s usually a canary in the coal mine,” says Lieberman. “If you have poor governance, poor respect for environmental issues, poor compliance with laws, you're probably going to end up at some point cheating investors with straight out fraud or financial manipulation.”
Risky Business
One of Pomerantz’s current ESG securities cases is against Deutsche Bank, targeting the bank’s onboarding of and continued relationships with bad actors, including the notorious sex offender Jeffrey Epstein. In 2020, news of the bank’s issues with internal controls surfaced and their stock price dropped, wiping out significant value.
The securities case centers around the bank’s “know your customer” policies, which are a key part of its anti-money laundering controls, and misstatements surrounding them.
“Epstein was making hundreds of payments to the victims he was abusing,” says Lieberman, “and to various co-conspirators, for hotel expenses, tuition – with very strange notations on the wire transfer records.”
The suit, which is led by Lieberman and partner Emma Gilmore, also points to the bank’s inadequate vetting of other problematic clients, including Vladimir Putin's cousin and other Russian oligarchs, as well as its ongoing business with the founders of the Hezbollah terrorist organization.
Lawyers for Deutsche Bank argued that, while these relationships and actions may have violated the firm’s code of ethics, it was really a matter of mismanagement. Internal ethics policies, they argue, are immaterial to the bottom line of a company, and therefore out of the purview of securities claims.
“It’s a very cynical argument,” says Lieberman. “Investors want to know if you’re violating the law. These are important issues. Investors in Deutsche Bank would certainly want to know that Jeffrey Epstein was a client, and that he had over 40 complaints of victimization of minors that were flagged to management.”
In May 2022, U.S. District Judge Jed S. Rakoff of the Southern District of New York denied a motion to dismiss the case, adopting Pomerantz’s argument that the statements surrounding the code of ethics were indeed material.
Rakoff’s ruling speaks to a crucial shift underway in ESG litigation, where the viability of a company goes beyond its ability to produce strong returns; increasingly, a company’s ethical and moral code is being understood as material to investors.
It wasn’t long ago that courts were prone to dismiss cases of this nature. In fact, Pomerantz brought an action in 2016 against Deutsche Bank after they were fined $650M by the New York Department of Financial Services for ignoring repeated warnings regarding their internal anti-money laundering controls, which was dismissed, twice: in district court and then the 2nd Circuit.
“We were really shocked,” says Lieberman, “because it was a very strong case. There were repeated warnings by the Federal Reserve, ignored by defendants. They engaged in $10B worth of wash sales in Russia to launder money out of the country.
“I think the courts were struggling to see that these issues are really what securities laws are meant to address,” says Lieberman. “Securities fraud is not just lying about your revenues, but any issue that's material to investors is fair game. If you’re a bank, you have to make sure that money that's coming in and out of the bank is not tainted with fraud, not tainted with criminal activity.”
We’re meeting the demands of the marketplace, and the demands of investors. It’s something that the investor community is very concerned about.
Thanks in part to the tenacious advocacy of Pomerantz and similar firms, courts are now recognizing that these ESG concerns are important to investors – both on their own and because they often portend even worse misconduct.
Sunlight is the Best Disinfectant
In one landmark ESG case against the casino heavyweight Wynn Resorts, Pomerantz has been able to connect the dots between the sexual misconduct of its former CEO Steve Wynn and the financial health of the company. For more than a decade, Wynn was sexually harassing his employees and paying millions of dollars in undisclosed settlements to settle those actions. None of this was ever disclosed to investors.
Even worse, “the board, which is run by the CEO, was covering up for the perpetrator,” says Pafiti. “When the board is run by the CEO, and the CEO is the problem, where does an employee go when they need to complain about the CEO?
“At that point, the problem is cultural,” says Pafiti. “The CEO thinks he’s untouchable because the board is covering up for him, paying these women to be quiet. So employees feel they have no real recourse.”
Pomerantz laid out a fact pattern for the federal court of Nevada that showed how this ongoing pattern of sexual misconduct and cover-up amounted to securities fraud. The case, led by Lieberman and partner Murielle Stevens Walsh, was originally dismissed but an amended class action has been granted approval to proceed.
The harassment and cover-up were brought to light in a Wall Street Journal investigation in 2018, part of a tidal wave of up-turned stones in the #MeToo movement. The stock fell 10 percent following the news.
“As soon as there is some kind of public disclosure about these payments,” says Pafiti, “that’s affecting the financial health of the company.” Prior financial statements are then called into question.
“We got the court to understand that these were false and misleading statements relating to those issues,” says Lieberman.
In another prominent ESG case, Pomerantz brought an action on behalf of shareholders in the sports behemoth Nike, after uncovering widespread gender discrimination and harassment at the company that was allegedly repeatedly ignored by the board.
Nike proceeded to initiate an internal investigation, resulting in the departure of 11 top-level executives.
An Investment in Knowledge
From their vantage point at the forefront of ESG securities actions, Pomerantz is also focused on education in the area. The firm holds a regular Corporate Governance Roundtable, spearheaded by Pafiti, for institutional investors, in order to promote both networking and knowledge. “We believe in bringing people together to discuss the common themes and issues that affect the value of their assets,” says Pafiti.
The 2022 event, which featured special guest speaker President Bill Clinton, was focused on ESG issues. The theme was: The Collective Power to Make Change.
“The Roundtable is an opportunity for corporate counsel, CIOs, CEOs and others making these crucial decisions to get together and discuss best practices and common issues, and to share their ideas and knowledge,” says Pafiti. “Sometimes they find not just mentorship, but avenues to explore that they otherwise wouldn't have.”
Among other topics, the panelists and attendees are able to discuss the SEC’s developing agenda when it comes to ESG and related securities regulations.
The SEC had been considering allowing forced arbitration clauses for securities fraud claims, which would be a “death knell” to securities class actions, says Lieberman. “Corporations are still pushing for that type of bylaw, and they would like to see it in the Chamber of Commerce. But the SEC under the current administration is probably less prone to allow forced arbitration.”
What they are allowing, however, are forum selection clauses, which dictate where certain claims can be litigated. “It’s low hanging fruit,” says Lieberman, “because you’re not stopping someone from bringing a class action, you’re just dictating where the forum should be. But it’s one of the ways they’re attempting to chip away at investors’ rights.”
The Long Fight for Lasting Good
While ESG securities litigation is very hot at the moment, Pomerantz has a long history of finding innovative ways to hold corporations accountable for fraud. One of their landmark wins, where they achieved $3B for defrauded investors in Brazilian oil giant Petrobras, centered around corruption at the corporate governance level.
“The company had a lot of complaints over the years about transparency, and about the right to put an independent director on the board,” says Lieberman. Institutional investors held meetings to discuss these concerns, but Petrobras did not make the reforms.
Ultimately, “there was a major bribery scandal that rocked the markets, with huge consequences for investors.”
Pomerantz’s client in the case was Universities Superannuation Scheme, the largest private pension fund in the UK. USS was traditional, conservative, and not prone to litigation. But Pafiti, who had a long-standing relationship with USS, knew this was going to be a historic case worth pursuing.
“Every now and again, there's that one case that comes across where the conduct is so egregious and the losses for the client are so significant,” says Pafiti, “that it just makes sense to move.”
The CEO thinks he’s untouchable because the board is covering up for him, paying these women to be quiet. So employees feel they have no real recourse.
The firm secured the lead plaintiff role for USS, despite them not having the largest loss, which is the traditional criteria. “The judge was very thorough,” says Pafiti. “He asked the general counsel of these funds: ‘What have you done to select your counsel? How did you come together? How are you informed of this?’”
The firm filed the claims in 2015 and, after “a titanic amount of paperwork and lots of sleepless nights,” says Pafiti, settled the case three years later for a staggering $3B. The case was the largest settlement ever in the U.S. not involving a restatement of financials; the largest case ever against a foreign defendant; and the largest with a foreign plaintiff.
Going back even further, Pomerantz is perhaps best known – and emulated by others in the securities bar – for their work following the U.S. Supreme Court’s 2010 ruling in Morrison v. National Australia, which barred investors who bought securities on non-U.S. exchanges from bringing claims in American courts.
“Morrison created a dual class system for investors,” says Lieberman. “If an investor purchased shares on a U.S. exchange, in the case of fraud, they would get a recovery. If they happened to make a purchase of the same company outside of the U.S., they couldn’t get a recovery. It didn’t make sense, particularly in our globalized world.”
The first case they brought to challenge the Morrison ruling came out of BP’s Deepwater Horizon oil spill. The firm represented investors in the UK who had purchased BP on the London Stock Exchange. Through their novel legal theory of supplemental jurisdiction, they were able to persuade the UK court to hear the claims under UK law.
As is so often the case when Pomerantz is involved: The recovery was phenomenal, the precedent was set, and the world got a little more just.
