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Are Company Misstatements Of Diversity Actionable Under Rule 10b-5?

In a typical securities fraud action brought under Rule 10b-5, a private plaintiff must prove (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.  Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157, 128 S. Ct. 761, 768, 169 L. Ed. 2d 627, 637 (2008).  Today's post will focus on the first element and company disclosures regarding board diversity. 

In January of this year, the California Secretary of State amended the disclosure statement required to be filed by all publicly traded corporations incorporated in California or registered to transact intrastate business in California.  The amended form now includes the following question: "Does the Corporation have 1 or more female Director on its current Board of Directors?"  The new question is intended to elicit information concerning the corporation's compliance with California's gender quota law.  Consistent with that law, the Secretary of State's form defines "female" as "an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth". Cal. Corp. Code § 301.3(f)(1). 

Because the definition of "female" is entirely based on an individual's self-identification, the only way that companies will know for sure about their directors' gender identities is to ask them.  Yet, when I asked the question at recent conference, no one stated that their company had included a gender identity question in their director and officer questionnaires.

It is conceivable that a director's self-identified gender will be challenged such as Senator Elizabeth Warren's self-identification of Native American ancestry.  But can a person's self-identification ever be false, and hence the subject a Rule 10b-5 action?  It seems unlikely.  If such a case is filed, it seems that the plaintiff would be required to show that that the claimed gender identification was not sincere.  See Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015).  Proving insincerity, however, would likely prove to be extremely difficult in the absence of an admission or self-incriminating statement.

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