Teladoc Wins Dismissal of Securities Fraud Class Action

Paul Weiss secured the dismissal of a putative securities fraud class action against Teladoc Health, Inc. and certain individual defendants. In dismissing the complaint, Judge Gregory Woods of the Southern District of New York largely agreed with the report and recommendation issued by Magistrate Judge Barbara Moses on September 4.

The case—one of several brought during the #MeToo era that alleged securities violations related to executive misconduct—was based on an extramarital affair between Teladoc’s former CFO and a junior subordinate that allegedly began in 2014. In late 2016, after senior management learned of the affair, Teladoc engaged outside counsel to conduct an internal investigation, and the CFO was disciplined. In December 2018, the Southern Investigative Research Foundation (SIRF) published an article detailing the story of the affair. Teladoc’s stock price dropped by nearly 7%, and the CFO resigned shortly thereafter.

The plaintiffs’ securities fraud claims were based on two sets of statements in Teladoc’s public filings, neither of which Judge Woods found actionable. First, the plaintiffs argued that statements discussing Teladoc’s commitment to integrity and ethics, including through its Code of Business Conduct and Ethics (CBCE), were rendered materially misleading in failing to disclose the CFO’s misconduct and the company’s allegedly insufficient response, allegedly rendering the CBCE “a dead letter.” Judge Woods agreed with Judge Moses that the statements pleaded in the complaint were inactionable because they were aspirational in nature, and thus did not invite reasonable reliance. In addition, they were not issued in a context in which the company was seeking to assure investors during a time of concern, and certain statements were not alleged to be false or misleading.

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 Woods adopted in full Judge Moses’s reasoning that defendants making such statements do not have a duty to disclose that an executive might subsequently lose their position. Having concluded that there were no material misstatements, Judge Moses declined to reach the issue of scienter; Judge Woods also agreed with that conclusion. Finally, Judge Woods departed from Judge Moses’ recommendation to deny leave to amend the complaint, noting that the usual practice in the Second Circuit upon granting a motion to dismiss is to grant leave to replead.

The Paul, Weiss team included litigation partners Daniel Kramer and Audra Soloway, who argued the motion to dismiss, and counsel Caitlin Grusauskas.