Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-14-16433/USCOURTS-ca9-14-16433-0/pdf.json

Parties Involved:
Hewlett-Packard Company
Appellee
Mark A. Hurd
Appellee
Retail Wholesale & Department Store Union Local 338 Retirement Fund
Appellant

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

RETAIL WHOLESALE &

DEPARTMENT STORE UNION

LOCAL 338 RETIREMENT

FUND,

Plaintiff-Appellant,

v.

HEWLETT-PACKARD CO. and

MARK A. HURD,

Defendants-Appellees.

No. 14-16433

D.C. No.

3:12–cv–04115–JST

OPINION

Appeal from the United States District Court

for the Northern District of California

Jon S. Tigar, District Judge, Presiding

Argued and Submitted July 7, 2016

San Francisco, California

Filed January 19, 2017

Before: Marsha S. Berzon and N. Randy Smith, Circuit

Judges and Dana L. Christensen,* Chief District Judge.

Opinion by Chief Judge Christensen

* The Honorable Dana L. Christensen, Chief District Judge for the

U.S. District Court for the District of Montana, sitting by designation.

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2 RETAIL WHOLESALE V. HEWLETT-PACKARD

SUMMARY**

Securities Fraud

The panel affirmed the district court’s dismissal of a

securities fraud action alleging violations of the Securities

Exchange Act of 1934.

Shareholders of Hewlett-Packard Company alleged that

the company CEO and chairman violated the corporate code

of ethics after publicly touting the business’s high standards

for ethics and compliance. The panel held that the

shareholders failed to state a claim for securities fraud

because they failed to sufficiently allege that the defendants

made a material misrepresentation or misleadingly omitted a

material fact.

COUNSEL

Ira M. Press (argued), Mark A. Strauss, and Thomas W.

Elrod, Kirby McInerney LLP, New York, New York; for

Plaintiff-Appellant.

Marc J. Sonnenfeld (argued), Karen Pieslak Pohlmann, and

Laura Hughes McNally, Morgan Lewis & Bockius LLP,

Philadelphia, Pennsylvania; Thomas M. Peterson and Joseph

E. Floren, Morgan Lewis & Bockius LLP, San Francisco,

California; Robert E. Gooding, Morgan Lewis & Bockius

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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RETAIL WHOLESALE V. HEWLETT-PACKARD 3

LLP, Irvine, California; for Defendant-Appellee

Hewlett-Packard Company.

Lawrence D. Lewis (argued), Dwight L. Armstrong, and

Keith Paul Bishop, Allen Matkins Leck Gamble Mallory &

Natsis LLP, Irvine, California; Amy Wintersheimer Findley,

Allen Matkins Leck Gamble Mallory & Natsis LLP, San

Diego, California; for Defendant-Appellee Mark V. Hurd.

OPINION

CHRISTENSEN, Chief District Judge:

In 2010, Defendant-Appellee Mark Hurd resigned from

his position as CEO and Chairman of Defendant-Appellee

Hewlett-Packard Company (“HP”). During the course of an

investigation prompted by allegations of sexual harassment,

HP discovered that Hurd had misrepresented his relationship

with a former independent contractor, Jodie Fisher. Hurd had

not been forthcoming about the personal nature of his

relationship with Fisher; in fact, he had doctored expense

reports to prevent its discovery and lied to investigators. 

Immediately following Hurd’s resignation, the price of HP

stock dropped, resulting in an alleged loss of $10 billion. In

this putative class action lawsuit, HP shareholders allege

violations of the Securities Exchange Act of 1934. The

shareholders purchased HP stock between November 13,

2007, and August 6, 2010 (“the Class Period”) and held

shares as of August 6, 2010. 

This Court has not decided when a high-ranking

employee’s violation of a business’s ethical code may give

rise to a cause of action under § 10 and Rule 10–b of the

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4 RETAIL WHOLESALE V. HEWLETT-PACKARD

Securities Exchange Act of 1934. Here, the issue is relatively

narrow—whether shareholders may bring a claim for

securities fraud when a CEO and Chairman violates the

corporate code of ethics after publicly touting the business’s

high standards for ethics and compliance. Retail Wholesale

& Department Store Union Local 338 Retirement Fund

(“Retail Wholesale”), lead plaintiff in the putative class

action, claims that security fraud arises from the conflict

between Hurd’s unethical behavior and HP’s promotion of

business ethics. Defendants argue that Retail Wholesale

failed to sufficiently allege that Defendants had made a

material misrepresentation or misleadinglyomitted a material

fact. Affirming the district court below, we hold that Retail

Wholesale has failed to state a claim under the Securities

Exchange Act of 1934.

This Court reviews de novo a district court’s dismissal for

failure to state a claim under Federal Rule of Civil Procedure

12(b)(6). In re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d

694, 700–01 (9th Cir. 2012). In addition to the plausibility

pleading standard applicable to all complaints, Retail

Wholesale’s fraud allegations must satisfy the particularity

standard of Federal Rule of Civil Procedure 9(b), as well as

the heightened pleading standard for securities fraud created

by the Private Securities Litigation Reform Act of 1995

(“PSLRA”), 15 U.S.C. § 78u–4. Id. at 701. Under the

PSLRA, plaintiffs must, among other requirements, “specify

each statement alleged to have been misleading [and] the

reason or reasons why the statement is misleading.” 15

U.S.C. § 78u–4(b)(1)(B).

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RETAIL WHOLESALE V. HEWLETT-PACKARD 5

I. FACTUAL AND PROCEDURAL HISTORY

A. Facts

The Triggering Event: Mark Hurd’s Sexual

Harassment Scandal

In the fall of 2007, Jodie Fisher began working part-time

for HP as an independent contractor.1 Fisher’s contract

required her to introduce significant clients to Hurd at HP

events held at hotels throughout the world. She worked in

this capacity for approximately two years.

In the summer of 2010, about nine months after Fisher

stopped contractingwith HP, Fisher’s attorney, Gloria Allred,

sent a letter to HP’s Board of Directors. Asserting claims of

discrimination against both Hurd and HP, Allred alleged that

Hurd had sexually harassed Fisher. In addition to the

harassment allegations, Allred wrote that Hurd had given

Fisher confidential information about an impending merger.

HP’s Board promptly launched an investigation. Initially,

Hurd lied to the Board about the nature and scope of his

relationship with Fisher and about his familiarity with

Fisher’s prior work in adult films. The investigation revealed

that Hurd and Fisher spent more time together during HP

events than Hurd had represented. It also uncovered that

Hurd doctored expense reports on several occasions, claiming

that he had eaten dinner with his bodyguard when he had in

1 Because Retail Wholesale appeals from the district court’s order

granting Defendants’ motion to dismiss, the facts are taken from

Plaintiffs’ complaint and are assumed to be true. Zucco Partners, LLC v.

Digimarc Corp., 552 F.3d 981, 989 (9th Cir. 2002).

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6 RETAIL WHOLESALE V. HEWLETT-PACKARD

fact dined alone with Fisher. At least twice, Hurd expensed

meetings with Fisher when there had been no nearby HP

event. Some time before the investigation concluded, Hurd

admitted that he and Fisher had a “very close personal

relationship.” Without having interviewed Fisher or her

attorney, the investigating law firm did not find evidence of

sexual harassment or insider trading, but it concluded that

Hurd falsified expense reports and lied about his relationship

with Fisher.

Hurd resigned from HP shortly after the investigation

concluded. In a press release, HP acknowledged Hurd’s

knowing violation of HP’s code of conduct, confirming that

sexual harassment allegations had been made and that an

investigation found unethical behavior. Hurd was quoted as

saying, “As the investigation progressed, I realized that there

were instances in which I did not live up to the standards and

principles of trust, respect and integrity that I have espoused

at HP and which have guided me through my career.” 

Immediately following Hurd’s resignation, the price of HP

stock dropped, resulting in an alleged loss of $10 billion to

HP’s stockholders.

Background: HP’s 2006 Ethics Scandal

A few years earlier, in 2006, a major scandal erupted

when a whistleblower informed several government agencies

that HP had hired detectives to monitor the phone records and

email accounts of HP directors, HP employees, and

journalists to find the sources of leaks of company

information to the press. Criminal charges were brought

against HP’s then-Chairwoman and General Counsel. 

Although Hurd had been CEO throughout this time, having

taken the position in 2005, he was found free from

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RETAIL WHOLESALE V. HEWLETT-PACKARD 7

wrongdoing. The scandal had the effect of bolstering his

reputation for integrity. Following the then-Chairwoman’s

departure, HP integrated the roles of Chairman and CEO and

named Hurd as the company’s first joint Chairman and CEO. 

Under Hurd’s leadership, HP’s shares remained buoyant

during the 2006 scandal, dipping only for a brief time during

which Hurd’s own involvement in the monitoring was

questioned.

Apparently as a result of the 2006 scandal, HP intensified

its promotion of ethical behavior within the company. With

Hurd at the helm, HP reinforced the importance of its

corporate code of ethics, the Standards of Business Conduct

(“SBC”). Through congressional testimony, press releases,

investor briefings, and public letters to employees, Hurd took

many opportunities to proclaim HP’s integrity and its

intention to enforce violations of the SBC. HP, its

stockholders, and Wall Street insiders viewed Hurd as one of

HP’s most valuable assets, seeing his leadership as the 2006

scandal’s silver lining.

Shareholders filed multiple derivative claims in the wake

of the 2006 scandal, all of which were settled together in

2007. HP made some promises regarding business ethics as

part of the settlement, including: appointing a “Lead

Independent Director,” tasked with implementing and

enforcing the SBC; appointing a “Chief Ethics and

Compliance Officer” to report SBC violations; appointing an

“Ethics and Compliance Committee” to oversee HP’s policies

and procedures regarding compliance and ethics; improving

ethics and compliance training programs; and strengthening

the SBC, particularly in regard to whistleblowing.

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8 RETAIL WHOLESALE V. HEWLETT-PACKARD

Defendants’ Statements Regarding Business Ethics

Hurd led the charge to strengthen and ensure compliance

with the SBC. After HP redoubled its commitment to

corporate ethics and before Allred’s letter triggered the

investigation into Hurd’s relationship with Fisher, HP revised

the SBC. Hurd wrote the introductory message, describing

the importance of ethics and entreating HP’s employees to

“commit together, as individuals and as a company, to build

trust in everything we do by living our values and conducting

business consistent with the high ethical standards embodied

within our SBC.”

Manyof Defendants’ representations regarding ethics and

compliance were made outside of the Class Period. The 2006

scandal predated the Class Period, as did the strongest

statements made by Hurd and HP allegedly elevating the

importance of the SBC. For example, Retail Wholesale

points to a letter sent to employees, statements made during

press conferences, and congressional testimony, all of which

occurred during 2006. It was during this time that

Defendants suggested having implemented a zero-tolerance

policy for SBC violations, informing employees that: “Any

violations of our standards are unacceptable to HewlettPackard and we will take appropriate action.”

The complaint alleges fewer instances of representations

made during the Class Period. Most notably, the SBC itself

was updated and released, including Hurd’s prefatory

message. Concurrentlywith the release of the updated ethical

code, HP published the SBC on the investor-relations portion

of HP’s website. Additionally, during this time, HP

restructured its internal organization, creating procedures and

positions designed to improve compliance and ethical

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RETAIL WHOLESALE V. HEWLETT-PACKARD 9

conduct, and HP’s Chief Ethics and Compliance Officer

stated that ethics and compliance were a “competitive

advantage” for HP.

The SBC includes several provisions inconsistent with

Hurd’s relationship with Fisher and its cover-up. Retail

Wholesale draws attention to particular provisions within the

SBC, all of which are stated affirmatively and in the present

tense. For example, HP states in the SBC that “[w]e maintain

accurate business records” and “create business records that

accurately reflect the truth of the underlying transaction or

event.” The SBC contains similarly worded statements

regarding: honesty; cooperation with investigators; using

good judgment; reporting misconduct; treating others with

respect; avoiding unlawful discrimination; refusing to tolerate

harassment; preserving assets; avoiding conflicts of interest;

providing gifts appropriately; preventing insider trading; and

protecting confidential information.

During the Class Period, HP also asserted that the strength

of its business was tied to retaining executives such as Hurd. 

In its 10–K and 10–Q filings with the SEC, HP included a

risk factor: “The failure to hire executives and key employees

or the loss of executives and key employees could have a

significant impact on our operations.” 

B. Procedural History

Cement & Concrete Workers District Council Pension

Fund initiated this putative class action in the summer of

2012, and filed its First Amended Complaint (“FAC”) later in

2012. Plaintiffs claimed that Defendants committed

securities fraud in violation of the Securities Exchange Act of

1934. Upon motions to dismiss for failure to state a claim

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10 RETAIL WHOLESALE V. HEWLETT-PACKARD

filed by Defendants HP and Hurd, the district court dismissed

the FAC without prejudice, determining that the Plaintiffs had

failed to adequately allege materiality and falsity.

Retail Wholesale filed the Second Amended Complaint

(“SAC”) shortly after the court’s first order granting

dismissal. HP and Hurd again moved to dismiss for failure to

state a claim, and the district court again granted their motion,

this time with prejudice, finding that any further amendments

would be futile. As in its first order, the district court

determined that Retail Wholesale’s claims could not survive

because materiality and falsity had not been alleged. Retail

Wholesale timely appealed.

II. DISCUSSION

Section 10(b) of the Securities Exchange Act of 1934

prohibits the use of “any manipulative or deceptive device or

contrivance” related to the purchase or sale of securities when

the use violates the regulations promulgated by the Securities

and Exchange Commission (“SEC”). 15 U.S.C. § 78j(b). 

Under the operative regulation, Rule 10b–5, it is unlawful for

any person “[t]o make any untrue statement of fact or to 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.” 17 C.F.R.

§ 240.10b–5(b).

To be viable, a claim brought under § 10(b) and Rule

10b–5 must contain six essential elements: “(1) a material

misrepresentation or omission by the defendant; (2) scienter;

(3) a connection between the misrepresentation or omission

and the purchase or sale of a security; (4) reliance upon the

misrepresentation or omission; (5) economic loss; and (6)

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RETAIL WHOLESALE V. HEWLETT-PACKARD 11

loss causation.” Matrixx Initiatives, Inc. v. Siracusano, 563

U.S. 27, 37–38 (2011) (quoting Stoneridge Inv. Partners,

LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157 (2008)). 

Our discussion focuses on the first element—whether there

was a material misrepresentation or omission—as that factor

is the issue most hotly contested by the parties, and its

resolution is dispositive of the case.

An actionable material misrepresentation or omission has

two components. First, under the PSLRA and the Federal

Rules of Civil Procedure, plaintiffs must allege a

misrepresentation or a misleading omission with particularity

and explain why it is misleading. 15 U.S.C.

§ 78u–4(b)(1)(A)–(B); Fed. R. Civ. P. 9(b). Second, applying

an objective standard, that misrepresentation or omission

must have been material to investors. 15 U.S.C.

§ 78u–4(b)(1)(A)–(B). The materiality of the

misrepresentation or an omission depends uponwhether there

is “a substantial likelihood that [it] would have been viewed

by the reasonable investor as having significantly altered the

‘total mix’ of information made available” for the purpose of

decisionmaking by stockholders concerning their

investments. Basic Inc. v. Levinson, 485 U.S. 224, 231–32

(1988) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S.

438, 449 (1976)). 

Retail Wholesale has raised two theories in support of its

argument regarding this element. First, it asserts that there

were material misrepresentations—specifically, that

Defendants’ public statements about business ethics,

particularly the SBC itself, were material representations

made demonstrably false by their inconsistency with Hurd’s

conduct. Second, it argues that there were material

omissions, contending that Defendants misled investors by

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12 RETAIL WHOLESALE V. HEWLETT-PACKARD

failing to meet a duty owed to investors to disclose Hurd’s

unethical behavior. Because neither Defendants’ statements

nor their omissions were misleading, both theories fail.

A. Material Misrepresentation

Retail Wholesale argues that the SBC, bolstered by

Defendants’ express promotion of corporate ethics, gives rise

to a finding of material misrepresentation. Its claim is based

in three factual allegations: (1) HP and Hurd actively

promoted the SBC and stated that HP had zero tolerance for

SBC violations; (2) Hurd’s SBC violations led to his

resignation; and (3) Hurd’s resignation caused HP’s stock

price to drop. The Court cannot agree that, under the facts

alleged in the complaint, Defendants’ representations about

ethics were materially misleading.

Like the district court below, some courts that have

considered whether a corporate code of ethics may give rise

to a § 10 and Rule 10b–5 claim have found that the claim

failed for lack of materiality, never reaching falsity, see

Nathanson v. Polycom, Inc., 87 F. Supp. 3d 966, 976–77

(N.D. Cal. 2015), or reaching falsity only after first finding a

lack of materiality, see In re Yum! Brands, Inc. Sec. Litig., 73

F. Supp. 3d 846, 864–65 (W.D. Ky. 2014). Others have

analyzed falsity first and not considered materiality after

determining that no misleading representation or omission

was made. See City of Roseville Emps.’ Ret. Sys v. Horizon

Lines, Inc., 686 F. Supp. 2d 404 (D. Del. 2009); Andropolis

v. Red Robin Gourmet Burgers, Inc., 505 F. Supp. 2d 662,

685–86 (D. Colo. 2007). Where a complaint arises from “soft

information,” such as representations of compliance, the

Sixth Circuit applies a wholly different analysis, considering

scienter alongside materiality to determine whether a

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RETAIL WHOLESALE V. HEWLETT-PACKARD 13

representation is an actionable misrepresentation. See In re

Omnicare, Inc. Sec. Litig., 769 F.3d 455, 470–73 (6th Cir.

2014). 

The Ninth Circuit has not addressed how to determine

whether statements made in or about an ethical code are

actionable representations if the ethical code is violated. We

approach this issue here by first analyzing falsity, to

determine whether an ethical code and statements made about

the code contain any misrepresentations of fact, and then, if

there was a misrepresentation, determining its materiality—

that is, its significance to stockholder decisionmaking.

2

1. Objective Falsity

“[A] statement is misleading if it would give a reasonable

investor the ‘impression of a state of affairs that differs in a

material way from the one that actually exists.’” Berson v.

Applied Signal Tech., Inc., 527 F.3d 982, 985 (9th Cir. 2008)

(quoting Brody v. Transitional Hosps. Corp., 280 F.3d 997,

1006 (9th Cir. 2002)). To be misleading, a statement must be

“capable of objective verification.” Or. Pub. Emps. Ret.

Fund v. Apollo Grp. Inc., 774 F.3d 598, 606 (9th Cir. 2014). 

For example, “puffing”—expressing an opinion rather than a

knowingly false statement of fact—is not misleading. Id.; see

also Lloyd v. CVB Fin. Corp., 811 F.3d 1200, 1206–07 (9th

Cir. 2016); In re Cutera Sec. Litig., 610 F.3d 1103, 1111 (9th

Cir. 2010).

Defendants made no objectively verifiable statements

during the Class Period. As one court has aptly written, a

2 There may be instances in which another order of decision is more

efficient. We do not mean to prescribe any particular sequence of analysis.

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14 RETAIL WHOLESALE V. HEWLETT-PACKARD

code of conduct is “inherently aspirational.” Andropolis, 505

F. Supp. 2d at 686. Such a code expresses opinions as to

what actions are preferable, as opposed to implying that all

staff, directors, and officers always adhere to its aspirations. 

See id.

Similarly, Hurd’s comments prefacing the SBC are not

objectively verifiable. In the 2008 preface to the SBC, Hurd

stated, in part,

We want to be a company known for its

ethical leadership . . . . 

We know actions speak louder than

words. We must make decisions and behave

in ways that we can be proud of, that reflect

our commitment to doing the right thing.

. . . . 

. . . Let us commit together, as individuals and

as a company, to build trust in everything we

do by living our values and conducting

business consistent with the high ethical

standards within our SBC.

The aspirational nature of these statements is evident. They

emphasize a desire to commit to certain “shared values”

outlined in the SBC and provide a “vague statement[] of

optimism,” not capable of objective verification. See Or. Pub.

Emps., 774 F.3d at 606. 

A contrary interpretation—that statements such as, for

example, the SBC’s “we make ethical decisions,” or Hurd’s

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RETAIL WHOLESALE V. HEWLETT-PACKARD 15

prefatory statements, can be measured for compliance—is

simply untenable, as it could turn all corporate wrongdoing

into securities fraud. See, e.g., Santa Fe Indus. v. Green, 430

U.S. 462, 478–89 (1977) (holding that the Securities

Exchange Act is limited in scope to its textual provisions and

does not conflict with state law regarding corporate

misconduct, particularlycorporate mismanagement). Indeed,

at oral argument, Retail Wholesale conceded that the SBC in

and of itself could not support its claim and acknowledged

that it has been unable to locate a case from any jurisdiction

in which a court found alleged noncompliance with an ethical

code actionable. 

Nor does the context, as Retail Wholesale argues,

somehow make the SBC and related representations capable

of being objectively false. The case that comes closest to

supporting Retail Wholesale’s context argument, Omnicare,

decided by the Sixth Circuit, involved not a code of ethics but

rather a Form 10–K annual report to the SEC. 769 F.3d at

463–64. According to the Omnicare complaint, the

defendants, a pharmaceutical care provider and its current and

former employees, conducted internal audits revealing

pervasive Medicare fraud. Id. at 462, 479. The audits were

consistent with the defendants’ recent history of noncompliance, including conduct leading to a $98 million

settlement with the government. Id. at 478. After the audits,

the defendant certified in its Form 10–K that it was in

material compliance with state and federal law. Id. Although

the language in the Form 10–K was vague and boilerplate, the

Sixth Circuit determined that the complaint did not fail for

lack of falsity or materiality. Id. at 478–80.

Retail Wholesale argues that, similar to the Omnicare

context, the context in this case surrounding the adoption and

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16 RETAIL WHOLESALE V. HEWLETT-PACKARD

promotion of the SBC transforms what would otherwise be

aspirational into statements capable of objective verification. 

We disagree, in part because context more appropriately

factors into the question of whether an alleged

misrepresentation was material to investors, not into whether

a statement itself could be a misrepresentation. See Matrixx,

563 U.S. at 43–47. 

Even if background facts were relevant to whether a

statement is amenable to falsity, the totality of the statements

made within the Class Period leads only to the proposition

that business ethics are important to HP. We note that the

case may have been closer had Hurd’s sexual harassment and

false expenses scandal involved facts remotely similar to

those presented by the 2006 scandal, as the ethical code could

then have been understood as at least promising specifically

not to do what had been done in 2006. Here, however, the

context does not make HP’s promotion of business ethics any

less subjective or vague. Further, Retail Wholesale cites to

no case law suggesting that context may operate to allow a

plaintiff to import an out-of-Class-Period statement into the

Class Period. The strongest statement alleged in the

complaint—the suggestion of a zero tolerance policy for SBC

violations—was made outside of the Class Period.

In sum, we conclude that as there was no statement during

the Class Period that was capable of being objectively false,

there was no affirmative misrepresentation.

2. Materiality

Additionally, although the threshold for a showing of

materiality is lower than that for falsity, we agree with the

reasoning of the district court that any affirmative

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RETAIL WHOLESALE V. HEWLETT-PACKARD 17

misrepresentation could not have been material. It cannot be

said that there is “a substantial likelihood” that the SBC and

related representations “altered the ‘total mix’ of information

made available” for use in stockholder decisionmaking. 

Basic, 485 U.S. at 231–32. Not only was there nothing

unusual about the promotion of business ethics at HP, but the

substance and online publication of the SBC were mandated

by the SEC. 17 C.F.R. § 229.406(a). In fact, the ethical

issues most relevant to this litigation—conflicts of interest,

disclosure, internal handling of violations—are directly

addressed by SEC regulations. Id. 

Although materiality is generally an issue of mixed fact

and law, best left to the fact-finder, Matrixx, 563 U.S. 45–48,

a standard that is too low would “bury the shareholders in an

avalanche of trivial information—a result that is hardly

conducive to informed decisionmaking.” TSC Indus., 426

U.S. at 448–49. It simply cannot be that a reasonable

investor’s decision would conceivably have been affected by

HP’s compliance with SEC regulations requiring publication

of ethics standards. 

Further, Retail Wholesale’s contention that a slump in

HP’s stock indicates materiality is not well-taken.

“[E]vidence of stock price movements provides no rational

basis for determining whether [a product’s] risks were

adequately conveyed to the public.” In re Apple Comput.

Sec. Litig., 886 F.2d 1109, 1116 (9th Cir. 1989). As this

Court recently noted, a change in stock price, such as that

following Hurd’s resignation, would factor into reliance, a

different prong of the § 10(b) and Rule 10b–5 analysis, and

“[a]bsent an actionable misstatement, reliance does not come

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18 RETAIL WHOLESALE V. HEWLETT-PACKARD

into play.” Police Ret. Sys. of St. Louis v. Intuitive Surgical,

Inc., 759 F.3d 1051, 1060 (9th Cir. 2014).3

In sum, the representations made in and about the SBC

were not material to stockholder decisionmaking.

B. Materially Misleading Omission

As an alternative theory, Retail Wholesale argues that

Defendants’ failure to disclose material facts—namely, the

facts concerning Hurd’s noncompliance with the SBC—is

actionable. We disagree. Just as there was no statement

capable of being factually misleading, there was no omission

that could have been actionable as misleading.

Absent a duty to disclose, an omission does not give rise

to a cause of action under § 10(b) and Rule 10b–5. Basic,

485 U.S. at 239 n.17. “[Section] 10(b) and Rule 10b–5(b) do

not create an affirmative duty to disclose any and all material

information.” Matrixx, 563 U.S. at 44. An actionable

omission claim arises only when disclosure is “necessary . . .

to make the statements made, in light of the circumstances

under which they were made, not misleading.” 17 C.F.R.

3 Although we do not reach the issue, having failed to find an

actionable misstatement, we note that we are somewhat perplexed by

Retail Wholesale’s argument that it was the falsity of the SBC that led to

their damages. To the contrary, it appears that HP’s ethics and

compliance policies worked. Hurd did not live up to HP’s standards; HP

became aware of Hurd’s ostensible misconduct; HP quickly launched an

investigation, confirming the misconduct; and Hurd resigned. In fact,

given Retail Wholesale’s position that Hurd’s resignation triggered the

decline in stock value, it’s entirely possible that the strength—as much as

the weakness—of the SBC factored into Retail Wholesale’s claimed

damages.

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RETAIL WHOLESALE V. HEWLETT-PACKARD 19

§ 240.10b–5(b). In other words, a duty to provide

information exists only where statements were made which

were misleading in light of the context surrounding the

statements.

Here, there was no duty to disclose because HP’s and

Hurd’s failures to speak did not “affirmatively create an

impression of a state of affairs that differs in a material way

from the one that actually exists.” Brody, 280 F.3d at 1006. 

As noted, the SBC, and the statements within the Class Period

promoting it, were transparently aspirational. The promotion

of ethical conduct at HP did not reasonably suggest that there

would be no violations of the SBC by the CEO or anyone

else. Nor did Hurd’s own statements warrant that he had

been personally compliant or that he personally would

comply with the SBC in the future.

The analysis would likely be different if HP had

continued the conduct that gave rise to the 2006 scandal while

claiming that it had learned a valuable lesson in ethics. 

However, that is not the case here. Although the facts reflect

misbehavior by the corporation’s highest executive in

violation of its ethical code, the fact that HP and Hurd

enhanced and touted the SBC does not, without more,

transform the misbehavior into an actionable material

omission under the securities laws.

Because the affirmative statements did not create an

impression of full compliance, HP and Hurd had no duty to

disclose Hurd’s misuse of CEO authority and misbehavior in

violation of the SBC.

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20 RETAIL WHOLESALE V. HEWLETT-PACKARD

III. CONCLUSION

The complaint does not give rise to an actionable claim

for securities fraud. This is not to say that Hurd’s conduct

was consistent with the general ethical values espoused

within the SBC and related statements. Indeed, Hurd did not

demonstrate the “uncompromising integrity” asked of him by

the SBC. However, there was no fraud. The statements made

were aspirational, and neither Hurd nor HP warranted total

compliance with the SBC. Nor did Hurd, personally, attest to

stockholders that he was not behaving as it turned out he was. 

In short, there were no material misrepresentations or

actionable material omissions. Further, even if the complaint

adequately alleged the existence of a misrepresentation or a

misleading omission, it would not have been actionable, as it

was immaterial.

AFFIRMED.

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