Sexual Harassment Complaint Against Your CEO? Don’t Freestyle the Investigation or It’ll Cost You in Business and at Work

In the category of “you can’t make this stuff up,” an interesting issue involving a sexual harassment complaint against the CEO of a publicly held tech company caught my attention last weekend; the source of the information was via their own 8-K disclosures:

On June 23, 2023, Applied Digital disclosed in a U.S. Securities and Exchange Commission filing “that its Audit Committee has conducted an internal investigation into a threat, but not a formal assertion, of a sexual harassment claim by Regina Ingel, its Chief Marketing Officer, based on a personal relationship between Ms. Ingel and Wes Cummins, the Company’s Chief Executive Officer. Based on information obtained through the investigation, the Audit Committee determined that the relationship between the parties was consensual and the allegations of workplace harassment are unfounded. The Board has reaffirmed Mr. Cummins’ role as Chief Executive Officer of the Company and will consider any additional actions that may be appropriate with respect to this matter.” 

On this news, Applied Digital’s stock price fell $1.58 per share, or 16.34%, to close at $8.09 per share on June 23, 2023. (Source: Global News Wire – https://www.globenewswire.com/news-release/2023/07/19/2707669/0/en/SHAREHOLDER-ALERT-Pomerantz-Law-Firm-Investigates-Claims-On-Behalf-of-Investors-of-Applied-Digital-Corporation-APLD.html)

A bit of late-week compliance quarterbacking:

• First and foremost from an investigation protocol standpoint, the complainant’s name should not have been disclosed, as it can directly impact as a much more serious charge of retaliation from a compliance standpoint than even the initial complaint against the CEO. The complainant is also the sole female executive direct report to the CEO.

• Current compliance best practice is that a complainant need not submit a formal written or verbal complaint to initiate a formal sexual harassment investigation. Moreover, once the employer has knowledge that sexual harassment has occurred, they are obligated from a compliance standpoint to investigate and stop the harassment, whether the complainant has communicated directly with the employer or not.
• As stated in prior blog posts: a CEO can’t have a consensual relationship with anyone in the company, because it’s harassment. See EEOC recent guidance here and below:
  • Vinson v. Taylor – The court ruled that a victim’s “voluntary” submission to sexual advances has “no materiality whatsover” to the proper inquiry: whether “toleration of sexual harassment [was] a condition of her employment.” The court further held that an employer is absolutely liable for sexual harassment committed by a supervisory employee, regardless of whether the employer actually knew or reasonably could have known of the misconduct, or would have disapproved of and stopped the misconduct if aware of it.

This past Friday, July 21, 2023, a follow-up 8-K disclosure was issued:

5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

On July 19, 2023, Regina Ingel, Chief Marketing Officer of Applied Digital Corporation (the “Company”), commenced an agreed-upon status of paid time off, without access to Company communications or systems, pending resolution of the previously announced issue relating to Ms. Ingel’s employment with the Company. In connection therewith, the Company and Ms. Ingel have agreed to enter into mediation.

A few follow-up data points based on the information above:

• It appears (not confirmed by any company source, at this writing an educated guess) that the 3 men on the Board’s Audit Committee are neither employer-side labor lawyers nor HR professionals. That would explain and predict, in addition to the stock price drop on June 23, 2023, the potential for even more loss prevention exposure for the company:
  • The disclosure of the Complainant’s name, creating the impact of a serious retaliation claim risk;
  • Their conclusion that the relationship was consensual via the written assertion that it wasn’t harassment, despite the above clear EEOC guidance – another loss prevention risk to the company – effectively (and seemingly unknowingly) that they were conclusively and officially documenting that harassment indeed had occurred;
  • Reaffirming the CEO’s role (a.k.a., retaining his employment), the target of their investigation as a potential final conclusion to their investigation – another loss prevention risk to the company; and
  • Effectively announcing last Friday in their 8-K disclosure that Ms. Ingel, the complainant – the sole female member of the company’s executive team supervised by the CEO (rather than the target of the investigation, the CEO), is exiting the company. Retaining the investigation target and exiting the complainant while documenting in writing that harassment indeed did occur is the opposite of best compliance practice – yet another potential retaliation / loss prevention risk for the company.

Again, theoretically speaking – a competent employer-side labor lawyer and HR executive partnering with the Board could have been a viable loss prevention solution in this matter. A cautionary tale for any Board or Leadership Team attempting to freestyle a sexual harassment complaint investigation and avoid subsequent corrective action against their CEO without these compliance subject-matter experts, in business and at work.