Top Reasons CEOs Get Sued—and How to Avoid Them

It’s no secret that lawsuits can often be frivolous, and CEOs are not exempt from getting sued. The last thing your company needs is a lawsuit that could have been avoided. Whether filed by a disgruntled employee or the SEC, lawsuits of any scale can damage your company. Below are some of the top reasons CEOs get sued and how you can avoid them.

1. Insider Trading

Every CEO knows it exists, but most think they will never be involved. Yet the Wall Street Journal reported in 2012 that over 1,000 CEOs traded their company’s stock ahead of corporate news that later affected their share prices. Since then, the numbers have only gone up. The SEC and the Department of Justice are keenly aware of this, and they are heavily focused on nabbing those involved in insider trading. The best way to avoid insider trading is to get rid of the temptation. Create a Rule 10b5-1 trading plan. This is a written plan showing you have predetermined the time and price at which you will sell stock. This plan is documentation that your trades were made legally and even if you had access to nonpublic information, it did not affect your decision to buy or sell stock.

2. Social Media Blunders

Social media is, as always, a blessing and a curse when it comes to business. CEOs hopping on Facebook and Twitter to relate to clients often end up in hot water over impulsive posts. In 2012, Netflix CEO Reed Hastings posted: “Netflix monthly viewing exceeded 1 billion hours for the first time ever in June. When House of Cards and Arrested Development debut, we’ll blow those records away.” The SEC was all over Hastings in a matter of days. Hastings was accused of providing selective disclosure of information to investors. The SEC holds that public companies should disclose material information through public filings or press releases, not via social media. If you are questioning the content of your post, send a simultaneous press release to cover yourself legally. Social media is also a breeding ground for other problems, including harassment. Martin Shkreli, Daraprim CEO infamous for spiking the price of the drug by 5,500 percent overnight, was accused of harassing a former employee over social media. Shkreli allegedly sent a plethora of threatening Facebook messages to the ex-employee and was charged with harassment. CEOs should never pursue individuals via social media while representing the company. Always act in a professional manner online.

3. Blocking Communication

T-Mobile was recently made an example of by the NLRB. The company was found guilty of having its 50,000 employees sign unlawful handbooks. The NLRB ruled that T-Mobile had violated the National Labor Relations Act in 11 different ways, but nearly all of them involved blocking communication. T-Mobile employees were not allowed to make comments about the company to media sources or discuss their salary openly. CEOs should foster open communication in their companies, not only to create a healthy environment but also to avoid lawsuits. Ensure that your company’s compliance program encourages internal reporting of violations of the securities laws and that complaints are handled properly. It is a good idea to hire an attorney to draft or review your company’s handbook and new-hire documents to ensure that they are in compliance with the National Labor Relations Act.

4. Inadequate Training

If you think managers and supervisors do not need human resources training, think again. You should never assume that your HR staff or in-house attorneys will handle all employee issues. All managers and supervisors should be well trained in good practices regarding hiring, performance management, disciplinary actions, and terminations. Improperly trained employees cause lawsuits; why rely on attorneys when you could just train your staff? Have clear training procedures in place and ensure that both the employers and the employees understand exactly what is acceptable in your company.

If a lawsuit does arise, contact a lawyer immediately. Many CEOs’ kneejerk response in being sued can itself harm their brand and reputation. Yet attorneys too attached to the company may not be able to offer all perspectives in fear of being slapped with a malpractice claim. First, CEOs should seek counsel who is willing to offer all options and properly evaluate the risk level of the lawsuit. Is it routine risk, complex risk, or risk that could put the company out of business? Let your attorney analyze this while you show restraint. Gather all information and discuss with appropriate parties before going to the press. Your desire is to win the lawsuit, but winning might be for naught if your entire brand is damaged in the process. In all cases, follow the above tips to keep your company—and yourself—out of trouble.

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