From the WSJ:
Federal securities regulators have launched a wide-ranging investigation into Activision Blizzard Inc., ATVI -3.33% including how the videogame-publishing giant handled employees’ allegations of sexual misconduct and workplace discrimination, according to people familiar with the investigation and documents viewed by The Wall Street Journal.
The Securities and Exchange Commission has subpoenaed Activision, known for its Call of Duty, World of Warcraft and Candy Crush franchises, and several of its senior executives, including longtime Chief Executive Bobby Kotick, according to the people and documents.
The agency is asking for documents including minutes from Activision board meetings since 2019, personnel files of six former employees and separation agreements the company has reached this year with staffers, records show. The SEC is asking for Mr. Kotick’s communications with other senior executives regarding complaints of sexual harassment or discrimination by Activision employees or contractors, the documents show.
If there are plausible allegations that senior Activision management engaged in discriminatory practices, a investigation into whether employment civil rights laws were violated is clearly appropriate. But that is not the SEC's job.
As the SEC itself explains:
The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.
To be sure, the SEC (and plaintiff securities lawyers) have sometimes tried to use disclosure claims to regulate substantive behavior. Apparently, that's the wedge the SEC is relying on here to insert itself into Activision's employment practices. But such efforts are contrary to both the letter and the spirit of the securities laws.
As I explained some years ago in my WLF Legal Pulse post, SEC Drifting Further Away From Its Statutory Mission With Latest “Therapeutic Disclosure” Idea, with respect to an SEC proposal to require board diversity disclosure:
This sort of disclosure, as Chairman White remarked when discussing another potential SEC disclosure mandate, is “directed at exerting societal pressure on companies to change behavior, rather than to disclose financial information.” So what she’s proposing now with regards to board diversity is known as therapeutic disclosure.
Therapeutic disclosure requirements undoubtedly affect corporate behavior in a substantive way, as the WSJ opinion piece explains. Therapeutic disclosure, however, is also troubling from a legal perspective on at least two levels.
First, seeking to effect substantive goals through disclosure requirements violates the congressional intent behind the federal securities laws. ...
I go on to explain the relevant historical background, from which I conclude that "the substantive behavior of corporate issuers is not within the SEC’s purview." Hence, the SEC has no business using alleged disclosure concerns about Activision's human resources practices as a pretext for getting Activision to correct alleged unlawful practices.
Second, and even more disturbing, in this case the SEC’s rules overstep the boundaries between the federal and state regulatory spheres. ... [F]ederal securities regulation has two principal goals. First, and foremost, it regulates the disclosures shareholders receive. Second, it regulates the procedures by which events such as tender offers and proxy solicitations are conducted. But the [Securities Exchange] Act’s purposes do not include matters such as regulating the substantive aspects of shareholder voting.
Regulating the substance of employee relations is even further outside the purview of that statute.
Obviously, the SEC will claim that it is about Activision's allegedly deficient disclosures relating to its Human Resources practices. But even if we accept that risible claim at face value, the SEC is still overstepping its bounds.
It's critical that Activision management has not been convicted of any civil or criminal violations. If they had been, it would be arguable that failing to disclose those convictions would be a material omission (obviously, I realize that one is not convicted of civil violations, but I'm using it as a shorthand).
Where plaintiff complains of noncriminal conduct allegedly constituting mismanagement, courts have been unwilling to require disclosure. In Amalgamated Clothing and Textile Workers Union, AFL―CIO v. J. P. Stevens & Co., 475 F.Supp. 328 (S.D.N.Y.1979), for example, plaintiffs argued that the board of directors had either knowingly violated the labor laws or, at least, failed to prevent management from doing so. According to plaintiffs, this alleged misconduct had harmed the corporation's reputation and exposed it to liability. The failure to disclose these purported facts in connection with the election of the directors allegedly constituted an omission of material facts. In rejecting plaintiff's argument, the court held that it would be "silly" to "require management to accuse itself of antisocial or illegal policies."
Yet, that is precisely what the SEC investigation of Activision assumes management is required to do.
And that is, as the court opined, just silly.
