Wynn Sex Misconduct Case Raises Question: When Do Investors Need to Know?

When should a company have to tell investors that a top executive is facing sexual misconduct allegations?

The question comes as Wynn Resorts is being rocked by the resignation of Steve Wynn, its chairman and CEO, following allegations that first surfaced in a newspaper report that sent the casino and resorts company’s stock tumbling.

The issue is further complicated by the web of workplace and legal practices that companies have used to keep such situations under wraps.

The billionaire casino mogul’s resignation Tuesday came less than two weeks after the Wall Street Journal reported that a number of women said Wynn harassed or assaulted them and that one case led to a $7.5 million settlement.

Wynn now faces investigations by gambling regulators in Nevada and Massachusetts, where the company is building a roughly $2.4 billion casino just outside Boston. Regulators in Macau, the Chinese enclave where the company operates two casinos, are also inquiring about the allegations.

Wynn has vehemently denied the report’s allegations, denouncing in his resignation statement an environment “in which a rush to judgment takes precedence over everything else, including the facts.” In accepting Wynn’s resignation, the company’s board of directors made clear it had done so “reluctantly.”

The scandal has cost shareholders money, leaving the company exposed to complaints that investors should have been informed about the allegations against a leader whose image and reputation were tightly tied to the brand. The company’s stock rallied Wednesday after Wynn resigned but has fallen almost 12 percent since the Journal’s Jan. 26 report.

Wynn remains the largest shareholder of his company and his signature is its logo. Additionally, in its annual filings with the Securities Exchange Commission, Wynn Resorts said the mogul’s “efforts, skills and reputation” are a large factor in the company’s ability to compete, and its business could suffer if he were to leave or lose his ability to focus on the company.

At least one shareholder raised those factors in a lawsuit filed Wednesday in a Nevada district court. The shareholder, Norfolk County Retirement, accused the company’s board of directors of breaching its fiduciary duties by “turning a blind eye and disregarding a sustained pattern of sexual harassment and egregious misconduct by Mr. Wynn.”

Joe Schmitt, an employment attorney with Minneapolis firm Nilan Johnson Lewis, said he would not be surprised if Wynn Resorts were to face more lawsuits from shareholders claiming the allegations against Wynn should have been disclosed.

“More importantly, in this case, the lawsuit is likely to result in a disclosure of the very facts that the company sought to keep confidential,” Schmitt said.

There is no law obligating companies to disclose internal allegations of sexual harassment or any settlements involvement employment-related complaints. The Securities and Exchange Commission, however, does have the power to require publicly traded companies to disclose litigation that could have a material effect on their financial results.

But so far, Wynn Resorts hasn’t been linked to any payments to Wynn’s accusers. According to the Journal report, Wynn did not use company funds to pay the $7.5 million settlement to a manicurist who alleged that he pressured her into having sex during an appointment. The newspaper reported that Wynn and his legal representatives set up a separate company to handle the settlement, which helped hide the payment.

However, under securities law, a company is obligated to disclose developments that might be important to investors considering buying its stock.

“It should have been disclosed,” said Jeffrey Sonnenfeld, a professor at the Yale School of Management and an expert on corporate governance.”It’s not just his choice, his decision, but also his name and even his signature, so it’s hard to disentangle the value of his personal conduct and image with the brand value.”

A wave of sexual misconduct claims against prominent figures in entertainment, media and politics gained momentum last fall in the aftermath of articles detailing movie industry mogul Harvey Weinstein’s decades of alleged rape and harassment. But Wynn is the first CEO and founder of a major publicly held company to come under scrutiny since the Weinstein allegations surfaced.

In some ways, corporations may be facing new territory when it comes to their legal obligations to disclose sexual misconduct allegations against their star executives. Sexual harassment allegations are proving more damaging to reputations than even just a few years ago because public perception over the gravity of such conduct has changed, Schmitt said.

“(hash)MeToo has changed the landscape dramatically,” he said. “Things that were not a big deal 10 years ago are a big deal now.”

When it comes to corporate responsibility, companies have traditionally perceived a need to protect their reputations by keeping sexual misconduct allegations private. For that reason, “companies as a general matter, almost as a matter of course, structure non-disclosure agreements into their settlements to prevent people from talking about it,” Schmitt said.

“From the company’s perspective, if it were shared, it would be damage the company’s brand and the bottom line,” he said.

There are some efforts in the works that would make it more difficult for companies to hide sexual misconduct allegations.

In December, Senators Lindsay Graham, R-S.C., and Kirsten Gillibrand, D-N.Y., introduced bipartisan legislation that would ban companies from forcing employees into arbitration proceedings if they bring sexual harassment claims. Currently, it is common practice for companies to require employees to settle misconduct lawsuits through arbitration, which is handled by private companies instead of courts and typically leaves no public record.

“The company would rather be in arbitration because that is a much more favorable venue for them than a court. This is why arbitration agreements are popular with employers but also very controversial,” Schmitt said.

Wynn is a titan in Sin City and played a major role in the revitalization of the Las Vegas Strip in the 1990s. He built the Bellagio, Treasure Island and Mirage before he sold his Mirage Resorts company in 2000. Two years later, he founded Wynn Resorts, which now operates two luxurious casino-resorts in the city and is in the process of building a lake and hotel development called Paradise Park on the site of a former golf course.

He resigned as finance chairman of the Republican National Committee a day after the allegations were published.

(Associated Press writer Regina Garcia Cano in Las Vegas contributed to this report.)