The steep drop in the stock price of Wynn Resorts Ltd. following a report that chairman Steve Wynn subjected female staff to unwanted sexual advances offers an illustration of how such allegations may now be “material” information that public companies need to disclose.
The #MeToo movement has sparked a wave of harassment and abuse allegations leveled against dozens of powerful men in recent months.
In the past, companies generally did not need to disclose such claims, which under U.S. securities law the companies would have to evaluate based on the profit impact from any settlement payments, according to legal experts.
But in the current environment, lawyers say companies must consider factors including reputational harm, litigation risk, and the potential disruption if a key executive is forced out.
“A settlement involving a CEO would cross the threshold now if it didn’t a few years ago,” said Brian Quinn, a professor at the Boston College Law School.
The Wall Street Journal reported last week that Wynn personally paid $7.5 million to settle sexual assault allegations by a former manicurist. The newspaper also said the tycoon routinely subjected employees to unwanted sexual advances.
The company’s stock has fallen around 15 percent since the report was published. Several law firms specializing in securities class actions have said they were exploring possible lawsuits.
Wynn Resorts did not respond to a request for comment.
Reuters has not independently verified the allegations. Wynn, the billionaire founder, chairman and chief executive officer of Wynn Resorts, has called the claims “preposterous.” The company set up a special committee to investigate.
The report prompted investigations by gaming regulators in Nevada, where the company has its flagship U.S. resort, the Wynn Las Vegas. Authorities in Massachusetts, where a new Wynn casino is planned, this week expressed concern about whether Wynn would meet a “suitability” requirement for a gaming license.
On Thursday, shares in retailer Guess Inc fell over 17 percent after a #MeToo tweet by model Kate Upton, who accused co-founder Paul Marciano of using his power to harass women. Marciano denies misconduct.
U.S. public companies are required to report ‘material events,’ such as mergers or major product recalls, that can impact the share price.
The rules are subjective and something that would be considered material to a $100 million company might not be for a $100 billion multinational.
Even if Wynn Resorts, rather than Wynn himself, had paid out a $7.5 million settlement, the amount would likely be considered immaterial for a company with $6.3 billion in revenue in 2017, according to legal experts.
Corporate lawyer Steven Shapiro was former general counsel at a publicly traded company he declined to identify when it paid a small confidential settlement to resolve misconduct allegations. Today, Shapiro said he would give more consideration to disclosure in a similar situation, though he would still be cautious.
“Sometimes disclosure can be more misleading,” he said. “Shareholders might think the problem is more widespread than it is. That’s not fair to investors.”
Allegations of sexual misconduct can be particularly tricky because they involve the interests of shareholders, who may want information public, and the rights of those who want privacy, including the accuser, the accused executive and his or her family.
Disclosure can also open a company to liability if it describes an incident as isolated, and it later emerges there was problem of serial abuses, legal experts said.
Many companies that uncover credible misconduct claims will opt now to force out an accused executive quickly, lawyers said, but that may not solve the problem when the person, like Wynn, is highly identified with the brand and remains a major shareholder.
Tax return preparer Liberty Tax Inc. encountered such a situation when it fired CEO John Hewitt without explanation in September, although he remained a controlling shareholder and chairman.
In the following months, according to press reports and a resignation letter from a company director, Hewitt had sex in his office and lavished company funds on women with whom he was involved. The auditor soon quit, the stock has tumbled and Nasdaq has warned it could delist the company after Hewitt stacked the board with allies.
The company and a lawyer for Hewitt did not respond to requests for comment.
Allen Nelson, former general counsel of Crawford & Co., which manages insurance claims, said harassment settlements, regardless of size, raise material questions about leadership and corporate culture.
“I think people in the board room should be having that discussion now,” said Nelson.
(Reporting by Tom Hals in Wilmington, Delaware; Editing by Anthony Lin and Rosalba O’Brien)