On September 26, the US Court of Appeals for the Fifth Circuit ruled that a stock-drop complaint against BP and fiduciaries of its 401(k) plan failed to state a plausible claim of imprudence based on insider information under the pleading standards established in Fifth Third Bancorp v. Dudenhoeffer. See Whitley, et. al. v. BP, P.L.C., et. al.
The complaint in Whitley stemmed from the decline in BP’s stock price that followed the Deepwater Horizon oil spill in April 2010. The plaintiffs, participants in BP’s retirement plans, including BP’s employee stock ownership plan (ESOP), filed suit in June 2010 in the US District Court for the Southern District of Texas against the company, its affiliates, the oversight committee for the plan, and several of the company’s executive officers. Plaintiffs alleged that the defendants
- breached their duties of prudence and loyalty by allowing the plan to acquire and hold overvalued company stock,
- breached their duty to provide adequate investment information to plan participants, and
- breached their duty to monitor those responsible for managing the company stock fund.
Plaintiffs’ theory of imprudence was that the price of BP’s stock was “artificially inflated” due to adverse undisclosed information regarding BP’s safety and compliance practices prior to Deepwater Horizon.
The district court initially dismissed the complaint on grounds that it failed to overcome the “presumption of prudence” that most courts (at that time) applied to complaints alleging fiduciary imprudence with respect to offering employer stock as an ERISA investment. The plaintiffs appealed and, while their appeal was pending in the Fifth Circuit, the US Supreme Court issued its ruling in Dudenhoeffer holding that there was no “presumption of prudence” under ERISA for claims involving employer stock. Instead, in setting forth new pleading standards for such claims, the Supreme Court held that “to state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.” The Fifth Circuit then vacated the District Court’s ruling and remanded it for consideration in light of Dudenhoeffer.
On remand, plaintiffs sought leave to file an amended complaint in light of Dudenhoeffer. In their proposed amended complaint, plaintiffs alleged that the defendants could have taken various alternative actions based on the alleged adverse insider information that would not have done more harm than good to the company stock fund, including (i) freezing, limiting, or restricting company stock purchases; and/or (ii) making a “corrective disclosure” to the market. The district court granted the plaintiffs’ motion to amend with respect to pleading these alternative actions, but made clear that it “struggled” with how to apply the “more harm than good” standard articulated in Dudenhoeffer. The district court certified its ruling for interlocutory appeal to seek clarification from the Fifth Circuit as to Dudenhoeffer’s “more harm than good” pleading standard for claims based on insider information (the district court also dismissed the plaintiffs’ proposed claim based on public information, but that claim was not at issue in the appeal).
Effect of Amgen Inc. v. Harris
While the Whitley appeal was pending, the Supreme Court decided Amgen Inc. v. Harris, which effectively mooted the question raised by the district court as to the “more harm than good” standard. Amgen confirmed that a stock-drop plaintiff alleging imprudence based on insider information must plausibly allege that no prudent fiduciary could find that the proposed alternative action would do more harm than good to the plan. Thus, the Fifth Circuit’s job was an easy one. The Fifth Circuit found that the proposed amended complaint failed to satisfy the Dudenhoeffer/Amgen pleading standards because the plaintiffs did not plausibly plead facts and allegations showing that a prudent fiduciary would not have viewed disclosure of material nonpublic information as more likely to harm the ESOP than to help it. The Fifth Circuit opined that it was unreasonable to say that a prudent fiduciary could not have concluded that disclosure of nonpublic information or freezing trades of company stock, both of which would likely lower the stock prices, would do more harm than good. In fact, as the Fifth Circuit stated, it seems that a prudent fiduciary could have easily concluded that such actions would do more harm than good. Accordingly, the Fifth Circuit reversed the judgment of the district court and remanded for further proceedings.
Notably, the Fifth Circuit declined to address the amicus briefs filed by both the US Securities and Exchange Commission (SEC) and US Department of Labor, which were the first post-Dudenhoeffer amicus briefs filed by either agency (and, in the SEC’s case, the first amicus brief filed in any stock-drop case).
The Whitley ruling is consistent with the strong trend in dismissing post-Dudenhoeffer stock-drop complaints based on insider information. While new stock-drop complaints have been on the decline in recent months, the ERISA plaintiffs’ bar still seems focused on these types of claims, so we may not have seen the last of them (yet).