Participant-plaintiffs have come out losers – again – in a suit alleging that plan fiduciaries violated their duties by keeping employer securities in the plan and failing to disclose inside information about the stock valuations.
In Whitley v. BP, PLC, 2016 BL 316686, 5th Cir., No. 15-20282, 9/26/16, the 5th U.S. Circuit Court of Appeals took another look at the case, filed by BP plan participants in the wake of the 2010 explosion of the BP-leased Deepwater Horizon offshore drilling rig, which resulted in a massive oil spill in the Gulf of Mexico and a subsequent decline in BP’s stock price.
The participant-plaintiffs filed suit on June 24, 2010, alleging that the plan fiduciaries breached their duties by:
- allowing the plans to acquire and hold overvalued BP stock;
- not providing adequate investment information to plan participants; and
- failing to monitor those responsible for managing the BP Stock Fund.
The district court (the U.S. District Court for the Southern District of Texas) initially applied the Moench “presumption of prudence,” found that the plaintiffs failed to overcome that presumption, and dismissed those claims.
Taking the ‘Fifth’
But while that appeal was pending, the U.S. Supreme Court issued a new ruling in Fifth Third Bancorp et al v. Dudenhoeffer et al, holding that there was no such “presumption of prudence" under ERISA, and establishing a new standard of review in such cases — essentially a “more harm than good” standard. Said another way, after Fifth Third, in order 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 the 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 high court said. With that new standard in hand, the 5th Circuit vacated the district court’s judgment and remanded the BP case to that court for reconsideration in light of Fifth Third.
At this point, the plaintiffs amended their complaint, arguing that the plan fiduciaries possessed unfavorable inside information about BP and that they could have taken various alternative actions that would not have done more harm than good to the BP Stock Fund. The district court determined that:
- the plaintiffs had plausibly alleged that the defendants had inside information; and
- the plaintiffs had plausibly alleged two alternative actions that the defendants could have taken that met the Fifth Third standard: (1) freezing, limiting or restricting company stock purchases; and (2) disclosing unfavorable information to the public.
‘Altered’ State
The 5th Circuit rejected that finding, however, noting that the district court erred “when it altered the language of Fifth Third to reach its holding.” The 5th Circuit noted that the district court stated that it could not determine, “on the basis of the pleadings alone, that no prudent fiduciary would have concluded that [the alternatives] would do more good than harm.” The 5th Circuit held that, under the Supreme Court’s formulation, the plaintiff “…bears the significant burden of proposing an alternative course of action so clearly beneficial that a prudent fiduciary could not conclude that it would be more likely to harm the fund than to help it” – and that the BP plaintiffs had failed to do so.
Facts ‘Check’
Moreover, the 5th Circuit not only found that the defendants failed to specifically allege, for each proposed alternative, that a prudent fiduciary could not have concluded that the alternative would do more harm than good, “…nor do they offer facts that would support such an allegation,” which the court said ran counter to the Supreme Court’s directive that “the facts and allegations supporting” an alternative action that could satisfy the standards of the Fifth Third decision “should appear in the stockholders’ complaint.”
And as if that weren’t enough, the 5th Circuit noted that the plaintiffs “…theorize that BP stock was overpriced because BP had a greater risk exposure to potential accidents than was known to the market,” and that based on that fact alone, “it does not seem reasonable to say that a prudent fiduciary at that time could not have concluded that (1) disclosure of such information to the public or (2) freezing trades of BP stock — both of which would likely lower the stock price — would do more harm than good.” In fact, the 5th Circuit said that “…a prudent fiduciary could very easily conclude that such actions would do more harm than good.”
This is the latest in a series of rulings by various courts in the wake of the Dudenhoeffer decision that have upheld the decision to retain employer stock in the plan for a variety of reasons without regard to the “presumption of prudence” that had triggered their dismissal prior to the Supreme Court’s ruling, including Delta Air Lines, Lehman and GM.
Moreover, in rejecting the district court’s BP decision, the 5th Circuit was also rebuffing the petitions of the Department of Labor and the Securities and Exchange Commission, which filed coordinated briefs urging the court to embrace a less stringent standard.
