Teladoc Secures Recommendation of Dismissal of Putative Securities Class Action

Paul, Weiss achieved a significant victory for Teladoc Health Inc. and certain individual defendants when U.S. Magistrate Judge Barbara Moses of the Southern District of New York recommended, for the second time, that putative securities class action claims against the company be dismissed with prejudice.

The case—one of several brought during the #MeToo era that alleged securities violations related to executive misconduct—was brought following news about an extramarital affair between Teladoc’s former CFO and a junior subordinate that allegedly began in 2014. After senior management learned about the affair in late 2016, Teladoc engaged outside counsel to conduct an internal investigation, and ultimately disciplined the CFO. In December 2018, the Southern Investigative Research Foundation published an article detailing the story of the affair. Shortly after, Teladoc’s stock dropped by approximately 7% and the CFO resigned pursuant to a separation agreement. Judge Moses previously recommended dismissal of the prior complaint, and U.S. District Judge Gregory Woods adopted Judge Moses’s recommendation, but permitted plaintiffs leave to replead.

The plaintiffs’ securities fraud claims were based on two sets of statements in Teladoc’s public filings, both of which Judge Moses found failed to state a claim.

First, plaintiffs argued that Teladoc’s failure to disclose the CFO’s misconduct and the company’s purportedly insufficient response rendered materially false and misleading statements in or about Teladoc’s code of business conduct and ethics, including statements regarding strict enforcement and protection of whistleblowers, as well as statements discussing Teladoc’s commitment to integrity and ethics. Citing the cases relied on by defendants, Judge Moses found that the alleged misstatements were too general, vague and aspirational to be actionable, and that certain statements were not adequately alleged to have been false. Judge Moses further found that the alleged misstatements were not misleading, agreeing with defendants that this case was a “far cry” from other cases allowing claims based on alleged misrepresentations regarding a code of conduct to survive a motion to dismiss; this case involved neither pervasive misconduct nor a company wielding its code of conduct to reassure investors in a time of concern.

Second, the plaintiffs argued that general risk disclosures concerning the importance of senior executives were materially misleading in failing to disclose the possibility that the CFO’s misconduct could lead him to leave the company. Judge Moses rejected plaintiffs’ argument, reasoning that defendants making such disclosures do not have a duty to disclose that an executive might subsequently lose their position.

Concluding that there were no material misstatements, Judge Moses declined to reach the issue of scienter, and recommended that dismissal be with prejudice, finding that there was “not even a hint” as to what more the plaintiffs could allege to overcome their deficiencies.

The Paul, Weiss team included litigation partners Daniel Kramer and Audra Soloway, and counsel Caitlin Grusauskas.