Expert Analysis

Last October, the U.S. Equal Employment Opportunity Commission launched its new initiative on artificial intelligence and algorithmic fairness. In doing so, EEOC Chair Charlotte Burrows affirmed that while

[a]rtificial intelligence and algorithmic decision-making tools have great potential to improve our lives, including in the area of employment … the EEOC is keenly aware that these tools may mask and perpetuate bias or create new discriminatory barriers to jobs. We must work to ensure that these new technologies do not become a high-tech pathway to discrimination.

While the EEOC has been considering issues raised by the use of AI and big data in employment since at least 2016, its current initiative is its first effort to update federal employment decision-making guidance to account for new AI technologies that continue to proliferate amid social distancing policies.

The initiative will culminate with issuing technical assistance and guidance on algorithmic fairness.

While the EEOC’s guidance is welcome, voluntary standards are not enough to address the serious challenges posed by the use of AI in employment decision making.

New AI decision-making technology, including fully automated recruiting, resume screening and even video interviewing, continues to gain popularity with employers, but applicants often do not even know that their resume or videoed interview is being reviewed by AI, rather than human resources.

This lack of transparency is of particular concern because AI decision-making algorithms carry known risks of discriminating on the basis race or gender.

For example, in 2018, Amazon.com Inc. found that its AI hiring software downgraded resumes that included the word “women” and those of candidates from all-women’s colleges because the company had not hired enough female engineers and computer scientists for the AI to see women as viable candidates.

Similarly, a 2018 study found that Face++ and Microsoft AI, facial recognition software products that analyze candidates’ emotions for desirable traits, have been shown to assign Black men more negative emotions than their white counterparts.

As observed by the Brookings Institute, “[l]eft unchecked, these biases in automated systems result in the unjustified foreclosure of opportunities for candidates from historically disadvantaged groups.”

While facially neutral AI selection tools that adversely affect groups of applicants because of race or gender are good candidates for application of long-standing disparate impact analysis under existing Title VII standards, there is a significant missing link: employees and job applicants frequently do not know that they have been reviewed by AI at all, let alone know any details about how the algorithm works, which can leave them unable to frame their claims.

Currently, there are no federal laws or regulations that specifically require that employers inform employees or job applicants when they are being evaluated using AI. This means that employees and applicants typically lack the necessary awareness to challenge discrimination caused by these technologies.

States and cities nationwide have begun to fill this gap by considering and adopting legislation to require that employers disclose any use of AI decision-making tools, and in some cases adopt specific standards that employers must meet if they are going to use AI decision-making technologies.

Most recently and comprehensively, on Dec. 9, 2021, D.C. Attorney General Karl Racine introduced legislation that would prohibit legal entities that gross at least $15 million annually from making algorithmic decisions on the basis of actual or perceived race, color, religion, national origin, sex, gender identity or gender expression.

This proposed bill would make it illegal to use any AI practice that has an adverse effect against an individual or class based on demographic traits, not only in employment, but also in decisions about housing, education and public accommodations, including credit, health care and insurance. This proposal also requires entities using AI to inform consumers about what personal information they collect from consumers and how that information affects their decision-making.

The proposal comes on the heels of passage of a new law in New York City late last year, which regulates employers’ use of AI decision-making technologies. The New York City law prohibits employers from using automated decision-making tools for employment screening unless the tool used is subject to “an impartial evaluation by an independent auditor” on an annual basis, that checks for adverse impact, and the results of the audit published on the employer’s website.

Starting in January 2023, companies will be required to disclose to job applicants how AI technology was used in the hiring or promotion process, and must also allow candidates to request alternative evaluative approaches like having a human process their application. New York City will become the first city to impose fines for undisclosed or biased AI use by employers, charging up to $1,500 per violation.

Previously, but more narrowly, Illinois passed H.B. 2557, which requires employers to disclose when AI is used in a video interview and allows interviewees the option to have their data deleted after being interviewed. Maryland followed Illinois and passed H.B. 1202, which prohibits the use of facial recognition during preemployment interviews until an employer receives the consent of the applicant.

Legislation was introduced in California, but it died in committee. S.B. 1241 would have required AI used in hiring to be audited annually, something like the NYC statute.

However, S.B. 1241 also would have created a presumption that an employer’s decision relating to hiring or promotion based on a test or other selection procedure is not discriminatory if the employer conducted a validity study showing the selection procedure was job related, and if annual reviews showed that the use of the selection process resulted in an increase in hiring of a protected class as compared to the pre-implementation workforce.

In other words, if an employer had a distorted workforce due to a history of discrimination, it could continue to discriminate using new algorithmic tools, so long as the new tool discriminated a little bit less than the employer had in prior years.

Also, the employer would be protected from a finding of discrimination under state law unless a plaintiff proved by the heightened clear and convincing evidence standard that the employer had reason to believe that the selection device would cause disparate impact before it began using the new process.

This would have set up terrible incentives for employers if state law were the only law they were subject to, but this attempted safe harbor would have offered no protection against Title VII claims that would have been facilitated by the law’s requirements to collect and maintain data. Hopefully, California does a better job on its next attempt.

These examples from Illinois, Maryland, New York, D.C. and California are only a start. Other states are likely to consider legislation in this area as well.

Indeed, Iowa Attorney General Tom Miller, the incoming president of the National Association of Attorneys General, has said his presidential initiative will focus on technology consumer protection, including algorithms that may manipulate or harm consumers.

Employers and employees concerned about the import of these AI hiring tools should pay attention not only to the EEOC’s initiative, but to legislative initiatives in state houses nationwide. Given the variety of approaches states and cities have taken, federal action that could bring some uniformity may gain more support.

By Carol V. Gilden, Richard A. Speirs, and Amy Miller

In December 2019, the Seafarers Pension Plan (“Seafarers”), represented by Cohen Milstein, filed a derivative action in federal district court in Chicago under Section 14(a) of the Securities Exchange Act of 1934 (“Exchange Act”), alleging that The Boeing Company’s (“Boeing”) board members and officers made materially false and misleading statements about the development and operation of the 737 MAX airplane in Boeing’s 2017, 2018, and 2019 proxy materials. Seafarers alleged that these false and misleading statements caused stockholders to re[1]elect directors who for years had countenanced the poor oversight of passenger safety, regulatory compliance, and risk management during the 737 MAX’s development, to approve Boeing’s executive compensation plans, and to reject a shareholder proposal to separate the CEO and Chair positions, thereby causing massive harm to Boeing.

Boeing’s directors and officers moved to dismiss, seeking to enforce Boeing’s forum bylaw, which strips federal courts of their exclusive jurisdiction over derivative Exchange Act claims by designating the Delaware Court of Chancery—a state court without jurisdiction over these federal claims— as the exclusive jurisdiction for all derivative claims asserted on Boeing’s behalf. The district court agreed, and the Seafarers Pension Plan appealed the decision to the United States Court of Appeals for the Seventh Circuit. In January 2022, a panel of the Seventh Circuit issued a 2-1 opinion, Seafarers Pension Plan v. Bradway, No. 20-2244, — F.4th — (7th Cir. 2022) (“Seafarers”), reversing the district court’s decision to enforce Boeing’s forum bylaw against the Seafarers’ derivative Section 14(a) claims and finding the bylaw unenforceable under both Delaware and federal law.

The Seventh Circuit held that “[b]ecause the federal Exchange Act gives federal courts exclusive jurisdiction over actions under it, applying the bylaw to this case would mean that plaintiff’s derivative Section 14(a) action may not be heard in any forum. That result would be contrary to Delaware corporation law, which respects the non-waiver provision in Section 29(a) of the federal Exchange Act, 15 U.S.C. § 78cc(a).” Notably, the anti-waiver provision in the Exchange Act prevents parties from opting out of that federal law in favor of state law, regardless of any similarities between the laws.

The Seventh Circuit found Delaware law, including Section 115 of the Delaware General Corporation Law (“DGCL”), prohibits Delaware corporations from using a forum bylaw to “foreclose entirely” a stockholder’s derivative action under Section 14(a). The Seventh Circuit found two key phrases in Section 115 determinative: “consistent with applicable jurisdictional requirements” and “courts in this State.” First, the Seventh Circuit held that as applied, Boeing’s bylaw violates Section 115 because it is “inconsistent with” the Exchange Act’s jurisdictional requirement providing for cases to be heard in federal court. As support for this reading of the statute, the Seventh Circuit cited Section 115’s synopsis, stating, “Section 115 is also not intended to authorize a provision that purports to foreclose suit in a federal court based on federal jurisdiction, nor is Section 115 intended to limit or expand the jurisdiction of the Court of Chancery….” Second, the Seventh Circuit explained that references to courts “in” a state include both state and federal courts located in the state, as opposed to courts “of” a state. The Seventh Circuit also noted that the Delaware Supreme Court’s decision in Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020), supported this interpretation, stating, “Salzberg expressly presumed the reference to ‘courts in the state’ in the bylaws authorized by the new Section 115 included federal courts,” and pointing out that Boeing’s bylaw did not include federal courts. Further, the Seventh Circuit rejected the defendants’ argument that Salzberg allows such a bylaw under Section 109(b) of the DGCL, emphasizing that Salzberg stressed the “harmony between Delaware corporation law and federal securities laws” when it stated: “This Court has viewed the overlap of federal and state law in the disclosure area as ‘historic,’ ‘compatible,’ and ‘complimentary.’”

Turning to federal law, the Seventh Circuit distinguished federal cases where the federal courts had enforced forum provisions in international agreements, including the seminal U.S. Supreme Court decision, M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972). Notably, the Seventh Circuit stated that “Bremen differs from this case most importantly in that it involved a purely private contractual dispute” and did not involve a federal claim or a federal statute with a non[1]waiver provision like Section29(a) of the Exchange Act. The Seventh Circuit further reasoned that in international business transactions, the “presumptive validity” of choice of law and forum provisions offer predictability. However, extending forum provisions to “domestic investments” where the provisions waive federal securities rights and remedies and limit available remedies to those under state law “would undermine the pivotal decisions by Congress in 1933 and 1934 to assume the dominant role in securities regulation after decades of ineffective state regulation.” The Seventh Circuit also looked to the U.S. Supreme Court’s warning in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Corp., 473 U.S. 614 (1985) that “in the event that the choice-of-forum and choice[1]of-law clauses operated in tandem as a prospective waiver of a party’s right to purse statutory remedies for antitrust violations, we would have little hesitation in condemning the agreement as against public policy.”

The Seventh Circuit majority rejected the dissent’s “novel proposal” to allow a “Delaware state court to hear a derivative action under Section 14(a), despite the Exchange Act’s provision for exclusive federal jurisdiction” as inconsistent with Delaware law, the Exchange Act’s anti-waiver provisions, and U.S. Supreme Court decisions. Accordingly, the Seventh Circuit held that Boeing’s forum provision, as applied, “was contrary to Delaware corporation law and federal securities law” because it deprived the federal courts of their exclusive authority to hear derivative Exchange Act claims.

The Seventh Circuit’s decision is an important win for investors. It tells companies they cannot use a forum bylaw to close the courthouse doors to investors asserting federal only derivative claims.

Fiduciary Focus
Shareholder Advocate Winter 2022

Last November, the Massachusetts Pension Reserves Investment Board (“MassPRIM”) approved $1 billion in investments for emerging and diverse managers over the next two years. MassPRIM’s announcement represented part of the fund’s broader $96 billion strategy to meet its FUTURE initiative, which seeks to substantially increase allocation to diverse and emerging managers to at least 20 percent of assets under management. The FUTURE initiative was created to help MassPRIM meet diversity goals originally established in a bill championed by Massachusetts State Treasurer Deborah Goldberg, who chairs MassPRIM. Treasurer Goldberg said that “by investing $1 billion into emerging-diverse program, [PRIM] is taking important steps in addressing the inequities endemic in the financial sector.”

Goldberg’s FUTURE initiative is the most recent example of public employee pension funds’ leadership and prioritization of diversity in investments. Efforts by public funds to diversify investment managers can be traced to early adopters like the New York Common Retirement Fund (“NYSCRF”), the California Public Employees Retirement System (“CalPERS”), and the California State Teachers’ Retirement System (“CalSTRS”). The emerging managers program established by the $248 billion NYSCRF in 1994 has $6.7 billion in commitments, for example.

Efforts by both public and private institutional investors to improve their records of hiring diverse asset managers appeared to gain new urgency following the nationwide protests over racial inequality sparked by the murder of George Floyd by a Minneapolis police officer.

In October 2020, Illinois State Treasurer Michael Frerichs led a national effort urging Russell 3000 companies to disclose racial, ethnic, and gender data about their board of directors. In September 2020, Connecticut State Treasurer Shawn Wooden partnered with the Ford Foundation to put together a coalition of CEOs “to advance social change, racial justice, and greater economic prosperity for all.”

On the private investment side, Vanguard said in December 2020 that it would vote against directors who do not push for more racial and gender diversity on their company’s boards. In December 2021, BlackRock, the world’s largest asset manager, announced that its 2022 proxy voting guidelines would push U.S. companies to “aspire to 30% diversity” on their boards of directors and encourage them to include least two women directors and at least one director from an underrepresented group on their boards. BlackRock defined underrepresented groups as those including “individuals who identify as Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, or Native Hawaiian or Pacific Islander; individuals who identify as LGBTQ+; individuals with disabilities; and veterans.” That same month, Goldman Sachs updated its proxy policies to say it expected large corporations—those listed in the S&P 500 and FTSE 100—“to have at least one diverse director from an underrepresented ethnic minority group on their board” and all public companies with boards larger than 10 members to include at least two women directors. And in his 2022 letter to portfolio company boards, State Street Global Advisors (“SSGA”) CEO and President Cyrus Taraporevala reiterated SSGA’s “belief that strong, capable, independent boards exercising effective oversight are the linchpin to create long-term shareholder value.” Announcing an enhancement to State Street’s gender diversity policy, Taraporevala said SSGA was prepared to vote against board leaders if their companies did not have at least one female director by 2022 and 30 percent female representation in 2023. He also repeated SSGA’s pledge to expand its diversity focus to include race and ethnicity, pledging “voting action against responsible directors” of S&P 500 and FTSE 100 companies that do not have a “person of color” on their boards or failed to disclose information about their boards’ racial and ethnic makeups.

Despite the historical efforts by pension funds to diversify investment managers and the more recent developments of both public and private institutional investors to diversify company board of directors, however, some institutional investors remain reluctant to embrace the concept of diversity. The argument falls back to economist Milton Friedman who argued in a 1970 New York Times article that the social responsibility of businesses should focus on increasing profits, not “providing employment” or “eliminating discrimination.” More recently, The Wall Street Journal’s editorial board referred to such diversity initiatives as “virtue signaling at the expense of someone else.” In other words, they believe diversity falls outside an institutional investor’s fiduciary duty to maximize risk-adjusted returns for its beneficiaries.

Yet there are several strong arguments that pension funds can square their long and established pursuit of diversifying investment managers while meeting their fiduciary duties.

First, extensive research suggests that corporate diversity results in better financial performance. The Carlyle Group, a private equity manager, found a positive correlation between board diversity and profits among the companies it holds in its investment portfolio. The Carlyle Group’s study, which examined the last three years of financial results, showed that companies with at least two diverse directors out-earned less diverse companies by 12 percent per year on average. Using 2019 data, meanwhile, Global management firm McKinsey & Company (“McKinsey”) found that companies in the top quartile for racial and ethnic diversity on executive teams were 33 percent more likely to have above-average profitability than companies in the bottom quartile. Consulting firm FSG recently conducted a six-month study of 12 leading companies and found these companies generated new sources of growth and profit by advancing racial equity.

Second, evidence suggests that diversity creates better governance and informs better decision-making. Research indicates that diverse groups perform better than like-minded groups because such diversity results in more careful information processing that’s absent in homogenous groups.

Diversity has another benefit, too: diverse firms can help mitigate risk. Studies have found that diverse board of directors, particularly those with gender diversity, approve less financially risky policies than homogenous board of directors. Furthermore, diversity can help reduce litigation risks. In 2020 alone, the United States Equal Employment Commission secured $440 million from victims of discrimination. Such discrimination can also harm the reputation of a company or institutional investor.

Finally, public pension funds can factor diversity as part of their fiduciary duty. The most recent guidance comes from the U.S. Department of Labor’s October 2021 proposed rule on duties of prudence and loyalty for investments. In the Department’s proposed rule, fiduciaries may give “appropriate consideration” of environmental, social, and governance (“ESG”) factors for investments when carrying out a risk-return analysis. Specifically, the proposed rule cites workplace diversity and inclusion as an example of ESG factors. The Department’s proposed rule then cites 15 different studies in which diversity has a material impact on employee recruitment and return, performance and productivity, and litigation. Among the studies and reports cited are the McKinsey and FSG ones discussed above.

For years, some scholars and others adhered to the idea that increasing diversity doesn’t meet fiduciary standards because it sacrifices beneficiaries’ financial interests in the name of a purely “social” goal. However, public pension funds like NYSCRF, CalPERS, and CalSTRS have long demonstrated the opposite: that institutional investors with more diverse staff, boards, and investment managers can make more money over the long term. As the country grapples with continuing gaps in opportunity for underrepresented populations, the need for diversity seems even more evident. As most recently demonstrated by MassPRIM’s FUTURE initiative, a well-designed program that considers diversity no longer raises any real fiduciary questions. Those questions have been answered by the Department of Labor’s proposed rules and associated studies. Now, the real question becomes whether more institutional investors will follow the lead of these public pension funds.

The Winter 2022 issue of the Shareholder Advocate includes:

• Reining in Abuse: SEC Proposes Amendments Regarding Rule 10b5-1 Insider Trading Plans
• Groundbreaking Settlement Reached in Pinterest Shareholder Derivative Litigation – Molly J. Bowen
• Seventh Circuit Reverses Dismissal of Boeing Investors’ Derivative Action on Forum Bylaw Grounds – Carol V. Gilden, Richard A. Speirs, and Amy Miller
• Fiduciary Focus: Allocation to Diverse Investment Managers – Jay Chaudhuri

Download the Winter 2022 edition of the Shareholder Advocate (PDF).

For years, institutional investors have been clamoring to tighten the rules governing plans that allow corporate executives to buy and sell their own companies’ stock without incurring insider trading liability. On December 15, 2021, the SEC finally answered those calls and announced proposed amendments to Rule 10b5-1, which govern such plans. The SEC Commission’s three Democrats and two Republicans all voted for the proposed amendments, although some did not approve of every single proposal.

“We welcome these proposed amendments, which we have long supported after seeing time and time again how corporate insiders have abused the current rule,” said Steven J. Toll, co-chair of Cohen Milstein’s securities litigation practice group. Julie G. Reiser, the practice group’s other co-chair, concurred. “Many of the proposed changes will strengthen institutions’ ability to confront illegal insider trading in the courtroom,” she said.

Rule 10b5-1 and Its Abuse

Rule 10b5-1, which was adopted over 20 years ago in 2000, provides corporate insiders protection from insider trading claims if their trades were exercised according to a written pre-arranged plan that was devised before the executive was aware of any material non-public information (“MNPI”). Although these plans are not a prerequisite to an executive’s sale of stock, they have become widespread because they provide an effective shield against securities fraud lawsuits.

Instead of preventing trading on MNPI, critics say these plans can enable such behavior due to design loopholes. In some circumstances, for example, insiders create multiple overlapping plans and then cancel certain plans if they learn of MNPI that likely will increase the stock price. Incredibly, the current rules allow for the cancellation of a 10b5-1 plan even if the cancellation is based on MNPI.

Written to address these types of problems, the proposed SEC amendments fall into two main categories: (1) restrictions to the plans themselves and (2) disclosure requirements for the plans.

Proposed Restrictions on the Plans

One of the most popular proposed amendment is to require a “cooling off period” for any trades to take place after a plan has been created. Supporters of such a restriction include former SEC Chair Jay Clayton, who was appointed by President Trump.

Currently, an insider can create a 10b5-1 plan and then execute a trade based on that plan the same day. Under the new proposal, corporate officers or directors could not trade until 120 days after establishing a 10b5-1 plan. If the trading plan is entered into by an issuer, i.e., the company itself, the cooling off period would need to be only 30 days.

Another important amendment would “eliminate the affirmative defense for any trades by a trader who has established multiple overlapping trading arrangements for open market purchases or sales of the same class of securities.” This would eliminate the ability of insiders to game the system by setting up multiple plans and then later deciding to cancel certain plans that would execute trades that would result in losses.

Moreover, there is a proposal to sharply curtail the use of plans that are limited to a single-trade. Unlike what many envision Rule 10b5-1 plans to be, which is a set plan to sell securities at multiple, prearranged dates over an interval of time whether the stock is up or down, single-trade plans are set up to execute just a single trade at one moment in time. Some have argued single-trade plans are not “plans” at all, but more equivalent to a date-triggered order and should be completely prohibited under Rule 10b5-1. A recent Stanford study from January 2021 found that single[1]trade plans generally avoided losses of some four percent, indicating their abuse.¹ Therefore, the SEC now proposes to limit their use to only one plan per 12-month period. Although the SEC does not propose banning single[1]trade plans, partly because they envision legitimate, one-time liquidity needs for such a plan, they did invite the public to make the case for a ban when submitting their comments.

Finally, while current rules require that the plans be entered into in good faith, a proposed amendment would require them to be operated in good faith. According to the SEC, this amendment “is intended to make clear that the affirmative defense would not be available to a trader that cancels or modifies their plan in an effort to evade the prohibitions of the rule or uses their influence to affect the timing of a corporate disclosure to occur before or after a planned trade under a trading arrangement to make such trade more profitable or to avoid or reduce a loss.”

Proposed New Disclosure Requirements

On the disclosure front, the proposed amendments would require issuers to disclose their policies and procedures on insider trading. The disclosure of such policies would be required annually and must also “provide detailed and meaningful information,” such as how the issuer ensures compliance.

In addition, issuers would need to disclose their option grant policies and exhibit a tabular showing of all option grants they made within 14 days of the disclosure of nonpublic information, while also disclosing the market price of the security the trading day before and after such release of information. These disclosures would make it easier to detect likely links between knowledge of MNPI and manipulated trades.

Under the proposed rules, issuers would need to disclose each quarter any adoption or termination of Rule 10b5-1 plans by its directors, officers, or the issuer. Currently, issuers are not required to disclose such plans. In fact, executives do not even have to say whether the trades they report on SEC Form 4 were made pursuant to such a plan.

Public Response

The SEC has invited public comments to the proposed rules, which must be received within 45 days of their publication in the Federal Register. Although the proposed amendments were announced on December 15, 2021, they have yet to be published in the Federal Register, so the deadline clock has not yet started to tick.

So far, there have been very few substantive comments submitted through the formal process; most are terse statements from individuals. One of the most consequential comments comes from the Securities Industry and Financial Markets Association (“SIFMA”), which complained of the limited time allotted for public comments without providing any commentary on the proposed rules. SIFMA’s critique echoed one by Commissioner Elad Roisman the day the proposed amendments were announced. Roisman, one of the SEC’s two Republican members until he resigned effective January 21, said the 45-day limit was “shorter than our customary comment periods, which have typically been 90 or at least 60 days.” He also noted that the period for commentary falls over several major holidays.

Two Republican U.S. Senators followed with the same criticism in a letter to SEC Chairman Gary Gensler on January 10, 2022. Senators Pat Toomey (R[1]Pa.) and Patrick McHenry (R-N.C.) expressed dismay at the “unprecedented pattern” of issuing proposed rules with shorter comment periods, especially considering they were issued during the holiday season. They noted that customarily more time is allotted for public comments and that then-President Barack Obama recommended federal agencies allow at least 60 days and sometimes 120 days for commentary depending on the complexity of the issues. The SEC has so far refused to extend the 45-day period for comments, which starts after the proposed amendments are published in the Federal Register. In the past, the SEC would have published the proposed rules in the Federal Register by now, something that generally happens two to three weeks after an announcement.

The SEC, however, did reissue the proposed rule on January 13, 2022 without any substantive changes. It is not yet clear whether the delay in the proposed amendments’ publication in the Federal Register or its reissuance on January 13 is a way of extending the deadline without appearing to bend to outside pressure.

Although they have not yet provided a formal comment, the Council of Institutional Investors (“CII”) applauded the SEC for the proposed amendments, many of which were suggested in CII’s rule-making petition to the SEC nearly a decade ago.

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1. See David F. Larcker, Bradford Lynch, Philip Quinn, Brian Tayan, and Daniel J. Taylor, Gaming the System: Three Red Flags” of Potential 10b5-1 Abuse, Stanford Closer Look Series, January 19, 2021.

Pinterest, Inc. has agreed to spend $50 million on workplace reforms to settle a lawsuit in which the lead plaintiff Employees’ Retirement System of Rhode Island (“ERSRI”), represented by Cohen Milstein, alleged the company’s leadership fostered a culture of racial and gender bias that caused financial and reputational harm to Pinterest. Cohen Milstein has filed with the court a motion for preliminary approval of the settlement on behalf of ERSI and other Pinterest shareholders.

Originally filed by Cohen Milstein on November 30, 2020, In re Pinterest Derivative Litigation, Lead Case No. 3:20-cv-08331- WHA, alleged that officers and directors, including Pinterest Chairman and Chief Executive Officer Ben Silbermann, CoFounder and Board of Directors (“Board”) member Evan Sharp, and Chief Financial Officer Todd Morgenfeld, breached their fiduciary duties by waste of corporate assets, abuse of control, and violation of Section 14(a) of the Securities Exchange Act of 1934.

Pinterest is an online visual discovery engine people use to find lifestyle inspiration, including ideas for recipes, home decor, style, travel destinations, and more. Pinterest launched in 2010 and has hundreds of millions of primarily female monthly active users around the world.

The case stems from an allegedly systematic culture, policy, and practice of illegal discrimination on the basis of race and sex at Pinterest that goes back to at least February 2018. Top Pinterest executives and members of its Board of Directors personally engaged in, facilitated, or knowingly ignored the discrimination and retaliation against people who spoke up and challenged the company’s white, male leadership clique. As a result of defendants’ illegal misconduct, the company’s financial position and its goodwill and reputation among its user base (which Pinterest’s success depends upon) were harmed and continued to be harmed.

Prior to filing the complaint, plaintiffs began to build their case by obtaining documents pursuant to a Section 220 books and records demand. After briefing an opposition to defendants’ motion to dismiss, the parties agreed to explore mediation and ultimately agreed to a settlement. The settlement is the first of its kind to embrace diversity goals around a company’s product. It also requires Pinterest to commit $50 million to a holistic set of workplace and board-level reforms designed to protect employees from discriminatory treatment and to promote diversity, equity, and inclusion (DEI) throughout its workplace and product. Key requirements of the settlement include:

Release of former employees from non-disclosure agreements (“NDAs”) who want to discuss the facts of their mistreatment.

The Audit Committee of Pinterest’s Board will be responsible for the implementation and oversight over certain reforms designed to create equal opportunities for employees.

A Board member will act as a co-sponsor with the CEO for diversity, equity, and inclusion initiatives, which will help ensure accountability exists for Pinterest’s top executives.

The company will conduct external bi-annual pay equity audits that review performance ratings, promotions, and compensation across gender and racial categories.

Diversity reports to shareholders will describe progress made in implementing pay equity and DEI goals

The settlement also requires enhancements to Pinterest’s recruiting, hiring, and training. Combined, these reforms will substantially increase the value of the company for its investors and help ensure its continued future growth, as well as improve the workplace experience for Pinterest’s employees.

“We pushed for these sweeping reforms to support Pinterest’s employees with a fair and safe workplace, and to strengthen the company’s brand and performance by ensuring that the values of inclusiveness are made central to Pinterest’s identity,” said Rhode Island General Treasurer Seth Magaziner on behalf of ERSRI. “This holistic approach will fundamentally support and positively impact Pinterest’s workplace culture in the years to come.”

A preliminary approval hearing is scheduled for January 27, 2022.

While the expansion of telehealth during the pandemic benefits patients, the current situation is ripe for fraud

The Covid-19 pandemic has caused a dramatic increase in the use of telehealth services, and this higher usage is likely to continue in the future.  At the start of the pandemic, Medicare and Medicaid acted quickly to increase the range of healthcare services that are covered when provided though telehealth technology, and this expansion has allowed patients to receive safe and secure healthcare from the convenience of their own homes. Private markets responded by investing billions of dollars into telehealth companies. As whistleblower lawyers, we know from our experience that the combination of expanded coverage and increased private investment creates a situation that is ripe for fraud.

Prior to the pandemic, Medicare imposed strict limitations on when telehealth services were covered. Historically, Medicare would only cover telehealth services that were provided in certain designated geographical areas, at certain types of provider locations (such as a hospital or doctor’s office), using certain types of telehealth technology, or a narrow set of “virtual check-ins” used solely for the purpose of determining whether an in-person visit was necessary. Due to these limitations, as of February 2020, only 0.1% of all Medicare healthcare services were provided via telehealth technology.

Beginning in March 2020, Medicare and Medicaid widened the scope of covered telehealth services, including services that may be provided remotely to a patient’s home. This expansion of healthcare services has benefitted both patients and providers during the pandemic. The dramatic increase in private capital investments in telehealth companies reflects a strong belief that this expansion of telehealth is here to stay.

While a broader range and type of telehealth services are now covered by Medicare and Medicaid, Medicare’s core requirement that services be reasonable and necessary remains in force. The unique nature of telehealth services presents a high risk that providers may bill Medicare or Medicaid for unreasonable, unnecessary, or otherwise non-covered services.

For instance, if a doctor billed for in-office visits that he or she did not actually perform, it would be likely that nurses or other staff would see that fraud was being committed. But if a doctor is billing for telehealth services that were not performed, other staff may not learn about the fraud since they would not observe a patient entering or leaving the office.

Other examples of telehealth fraud may include when a provider:

• bills for more services than were actually provided, i.e., billing for a 25-minute service when the service was only 5 minutes long.
• bills for a medically unnecessary service or product that was provided or ordered using telehealth technology;
• receives or offers any kind of kickback in exchange for referring or providing a telehealth service to a patient; or
• bills for telehealth services that do not occur using an interactive audio and video telecommunications system that permits real-time communications to occur.

The United States Department of Justice and the Centers for Medicare and Medicaid Services are concerned about misuse of telehealth services, and actively investigate and pursue those who abuse the programs.

An individual who learns of telehealth fraud should speak with an experienced whistleblower attorney to analyze the situation and consider whether his or her information would support a whistleblower lawsuit under the False Claims Act.

By Gary L. Azorsky and Raymond M. Sarola:

In its 10-year existence the SEC’s whistleblower program has recovered nearly $5 billion in actions that were initiated or assisted by whistleblower tips and paid over $1 billion in awards to those whistleblowers.

In its 2021 annual report to Congress on its whistleblower program, the Securities and Exchange Commission proudly touted its continuing success in encouraging and rewarding individuals for blowing the whistle on financial fraud. In its 10-year existence the SEC’s whistleblower program has recovered nearly $5 billion in actions that were initiated or assisted by whistleblower tips and paid over $1 billion in awards to those whistleblowers.

More than half of total whistleblower payments—over $500 million—were awarded last fiscal year alone, which is one of several trends indicating that the role of whistleblowers in securities law enforcement will continue to increase in the years to come.

It is clearer than ever that individuals who have knowledge of securities law violations should consult with a whistleblower attorney about participating in the SEC’s whistleblower program. This year’s report shows that the SEC values tips from any whistleblower who has useful knowledge to assist in an investigation, regardless of whether they are an “insider” and are eager for assistance in new and emerging fields, such as cryptocurrencies.

The Headline Facts of 2021: More Tips and More Awards

In its 2021 fiscal year, the SEC received over 12,200 whistleblower tips. This figure not only continued but accelerated an upward-sloping trend. From 2012 to 2020, the number of tips increased steadily from approximately 3,000 to 7,000 per year. This number jumped by over 5,000 tips last year, a 76% increase from 2020, which was previously the year with the largest number of tips.

Remarkably, the amount of whistleblower award payments made by the SEC in 2021 reflected an even bigger increase from prior years. The SEC awarded $564 million to 108 individuals in 2021. Both figures were not only the highest annual numbers but were larger than the $562 million that the SEC awarded to 106 individuals in the nine prior years of the program combined. The SEC made its two largest whistleblower awards in 2021, a payment of over $114 million to a single whistleblower and a payment of nearly $114 million to a pair of whistleblowers.

Trends and Implications: Continued Growth, New Case Types, and Faster Payments

The dramatic year-over-year growth in the number of whistleblower tips received suggests a trend that is likely to continue. While the underlying drivers of this growth are numerous, a few possibilities stand out. The turbulence in the labor market caused by the COVID pandemic has led many people to leave their jobs. Reporting fraud against a prior employer, versus a current employer, may appear to present fewer risks. Even those who remained in their jobs but transitioned to remote work may feel less of an emotional bond with their company or be better positioned to objectively evaluate its conduct. And the success of the SEC’s whistleblower program may be self-reinforcing as more people hear about the program and the increasingly large awards that whistleblowers receive.

The SEC closely guards the identity of whistleblowers, who can submit claims anonymously if they are represented by counsel, but the 2021 report included aggregated statistics concerning successful whistleblower claims that highlight important trends. For example, while most successful whistleblowers were current or former employee “insiders,” approximately 40% were not. Similarly, a majority of successful whistleblower tips caused the SEC to open a new investigation, but approximately 44% provided useful information regarding an existing investigation. Taken together, these facts show that the SEC values and will reward whistleblowers who provide substantial contributions to SEC enforcement actions, even if the information they provide was generated from their own analysis of publicly available data or related to a company that was already under investigation.

The large volume of tips in 2021 encompassed a wide range of securities law violations. The most frequent type of whistleblower tip alleged some form of “manipulation,” and other common topics were corporate disclosure and offering frauds, and trading violations. Notably, the fifth-most common topic included initial coin offerings and cryptocurrencies, for which the SEC received over 750 tips. Whistleblowers can be extremely helpful to the SEC in uncovering and prosecuting new types of securities fraud, as further illustrated by the SEC’s recent enforcement action against a special purpose acquisition company that was the subject of a whistleblower tip. (SPACs are newly popular investment vehicles in which a shell company raises money in a public offering to buy or merge with a private company and thereby take it public.)

Lastly, the report emphasized the administrative improvements that the whistleblower program has implemented to more efficiently handle and resolve whistleblower claims. As a result of recent amendments to the regulations covering the whistleblower program, the SEC now applies a presumption that whistleblower awards of $5 million or less will be granted the statutory maximum award percentage of 30% of the SEC’s monetary proceeds. The recent amendments also permit the SEC to use a summary disposition process to quickly deny frivolous claims. These program improvements contributed to the SEC processing 354 whistleblower claims in 2021, the largest annual figure in its history.

Conclusion: Whistleblowers Play a Valuable Role in Securities Law Enforcement

It is undeniable that whistleblowers play a unique and valuable role in assisting the SEC in protecting our capital markets and prosecuting companies and individuals that violate the federal securities laws. The most recent statistics from the SEC whistleblower program show a clear trend towards greater participation from whistleblowers and awards that are more frequent and larger in size than ever before.

Gary L. Azorsky is a partner at Cohen Milstein Sellers & Toll in Philadelphia, and co-chair of the firm’s Whistleblower/False Claims Act practice.  Raymond M. Sarola is of counsel with the firm in the Whistleblower/False Claims Act practice.

The complete article can be viewed here.

According to multiple employee surveys, sexual harassment is one of the most underreported forms of abuse in the workplace. There are a number of reasons that reportedly account for this reluctance to complain about sexual harassment. They include the potential shame, embarrassment, and fear that may accompany reports of sexual harassment and the blame and heightened scrutiny of the victim that may be prompted by these complaints. Unlike most other forms of discrimination, where their presence may be inferred from patterns observed in workforce data, sexual harassment is typically undetectable and certainly not actionable unless it is the subject of a legally cognizable complaint. This brief Article poses whether, and if so to what extent, the legal framework for addressing sexual harassment imposes unrealistic obligations on victims of this misconduct and, if so, whether there are strategies that practitioners can employ to help overcome these obstacles.

Comment Letter:  The IRS Should Direct Individuals with Information on Tax Fraud to File a Whistleblower Claim

PHILADELPHIA – Gary L. Azorsky, co-chair of Cohen Milstein’s Whistleblower and False Claims Act practice group, along with co-chair Jeanne A. Markey, and Raymond M. Sarola, submitted today a comment letter on the group’s behalf to the Internal Revenue Service (IRS) proposing changes to a form used for collecting information on tax fraud that will promote awareness and use of the IRS Whistleblower Program.

Cohen Milstein regularly represents individuals who provide information to the IRS Whistleblower Program and who are eligible for financial awards if that information meets program criteria and contributes to the IRS’s collection of tax underpayments and penalties.  Today’s comment letter responds to the IRS’s request for input on its Form 3949-A, which is used by individuals to submit information regarding tax fraud to the IRS, but which does not qualify individuals for mandatory awards under the IRS Whistleblower Program.  Cohen Milstein proposes to the IRS that it revise Form 3949-A and its instructions to more fully and prominently communicate that individuals with information regarding tax underpayments who wish to participate in the IRS Whistleblower Program and be eligible for financial awards need to file a different form (Form 211) and comply with all rules and regulations of the Whistleblower Program.

“Whistleblowers have provided the IRS Whistleblower Office with valuable information that has led to the collection of over $6 billion in underpaid taxes,” said Gary L. Azorsky.  “We share the IRS’s belief in the importance of its Whistleblower Program and have offered our thoughts on how to increase the public’s awareness and use of this crucial mechanism to assist the enforcement of our nation’s tax laws.”

Read the comment letter.

Cohen Milstein’s Whistleblower and False Claims Act practice group has decades of combined experience successfully pursuing whistleblower cases under the federal and state false claims act statutes, and claims under the whistleblower programs of the SEC, IRS, and CFTC.