US Court of Appeals for the Second Circuit Affirms Dismissal of Securities Fraud Class Action Suit Against Liberty Tax, Inc.

September 30, 2020

Willkie partner Tariq Mundiya was lead counsel on the matter representing Liberty Tax and argued the case in the Second Circuit on September 21. This is an important securities law decision that addresses the intersection between securities laws and the #MeToo movement.

On September 30, the US Court of Appeals for the Second Circuit affirmed the dismissal of a securities fraud class action lawsuit against Liberty Tax, Inc. In January, the Eastern District of NY dismissed the case which is predicated upon allegations of years-long sexual and personal misconduct by John Hewitt (its former Chairman and CEO) that pervaded the workplace, including Hewitt’s alleged misuse of corporate funds. Of note, this is the first securities fraud case since the #MeToo Movement began to be dismissed in its entirety and affirmed on appeal.

In January, the Eastern District court accepted all of Willkie’s arguments on behalf of Liberty Tax and ruled that there were no material misrepresentations or omissions in the company’s 10-Ks and 10Q-s over many years that made statements about risk controls and compliance. The Eastern District also ruled that plaintiff had failed to plead loss causation as a matter of law because they could not allege that the wrongdoing substantively and temporally caused losses. The decision included a number of favorable rulings for corporate defendants embroiled in “me too” securities litigation, including that sexual misconduct is not an actionable basis for an omission under Item 303 of Regulation S-K, and that extravagant business expenses incurred as part of an executive’s sexual misconduct are not perquisites under Item 402 simply because they are extravagant.

On appeal, plaintiff limited its challenge to allegedly misleading statements in a December 8, 2016 quarterly earnings call and a September 6, 2017 press release. The Second Circuit concluded that the Fund’s arguments are without merit and affirmed the judgement of the district court. The Second Circuit accepted Willkie’s arguments that the two challenged statements were not materially misleading and that the plaintiff was reading them out of context.

Willkie Farr & Gallagher partner Tariq Mundiya was lead counsel on the matter representing Liberty Tax and argued the case in the Second Circuit on September 21. The Willkie team also included partner Jeffrey Korn and associates Zeh Ekono, Joe Niczky and Xiaoli (Lily) Wu.