It Doesn’t Pay to Be Too Ethical

You know the theory. If a public company does a bad thing, it is also securities fraud. The company didn’t disclose the bad thing when it was doing it—it didn’t put out a press release saying “our CEO is going to do some sexual harassment this afternoon,” etc.—and, when the bad thing was revealed, the stock went down. Shareholders can say: You didn’t tell us about the bad thing, we bought stock in ignorance, you deceived us, it is fraud.

I stress that this is not an exactly correct statement of U.S. securities law, and in fact sometimes the shareholders who bring these cases lose. When I write about it, lawyers sometimes email me to say, no, this is not how the law works, companies don’t actually have to disclose everything bad that happens. You are not allowed to lie, in your securities filings, and if you do say things you can’t “omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading,” but there is no general affirmative obligation to disclose everything, or even every bad material thing. If your CEO is a sexual harasser, there is not an item in Form 8-K specifically requiring disclosure. You can just keep quiet.