Once again, plaintiffs find the “more harm than good” bar too high to clear in employer stock litigation.
This time the plaintiff is one Adele Varga, and she is appealing the March 5, 2020 judgment of the U.S. District Court for the Northern District of New York that dismissed her class action complaint alleging that General Electric Company and Jeffrey Robert Immelt “failed to exercise their fiduciary duty of prudence to the participants of the GE Retirement Savings Plan in violation of the Employee Retirement Income Security Act.”
Plaintiff Varga invested in the GE Stock Fund in her 401(k) account, and the suit alleges that in January 2018, GE announced the liabilities of its two insurance subsidiaries were under reserved by approximately $15 billion and that, in addition to $3.5 billion in contributions already made to shore up those reserves at the end of 2017, it anticipated the need to contribute several billion dollars. Following that news, GE’s stock price decreased. The suit alleges that: (1) GE’s reinsurance subsidiaries plainly did not provide for adequate reserves for years, and GE and Immelt should have known of such shortcomings “by 2009, or thereafter”; and (2) GE “failed to take corrective action to protect GE Stock Fund participants, either by closing the Fund to future participants, or publicly disclosing the underfunding by the close of 2009, or shortly thereafter.”
The district court dismissed Varga’s lawsuit for failure to state a claim that satisfied the pleading standards set forth in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (2014)—which led to the current appeal.
Prior History
Now, for those who may have forgotten, the judges here (Adele Varga et al. v. General Electric Co. et al., case number 20-1144, in the U.S. Court of Appeals for the Second Circuit) remind us that “to plausibly state a claim that an ESOP fiduciary possessing inside information about the company breached ERISA’s duty of prudence, plaintiffs must allege “that a prudent fiduciary in the defendant’s position could not have concluded that [the proposed alternative action] would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.”
Harkening back to the (relatively) recent case of Jander v. Retirement Plans Committee of IBM, 910 F.3d 620 (2d Cir. 2018)—also dealt with in the Second Circuit (both before, and again after) the U.S. Supreme Court weighed in)—a case with a similar pattern of facts (IBM’s stock price fell after the sale of a subsidiary revealed the subsidiary was greatly overvalued), and while in that case this court found that the plaintiffs did “plausibly allege[] that disclosures could have been included within IBM’s quarterly SEC filings,” and held that the plaintiffs’ allegations that the overvaluation was “inevitable” once the sale was made public, made it “far more plausible that a prudent fiduciary would prefer to limit the effects through prompt disclosure,” the court saw things here in a different light.
Alternative ‘Investment’
The panel of judges here noted that the suit laid two alternative actions the fiduciaries could have taken, “earlier disclosure and closure of the fund to additional investment.” More specifically, the suit argued that a prudent fiduciary could not have concluded that disclosure would do more harm than good because GE’s previous disclosures related to its insurance subsidiaries did not trigger a stock drop, and that economic studies have shown that delayed disclosure triggers more severe stock drops. Regarding the second alternative, the plaintiff argued that a previous settlement (2009) regarding these issues “gave the fiduciaries a tailor-made pathway for closing the fund without arousing concern from outside investors.”
However, the panel here concluded that “though Varga contends that prolonged failure to disclose ‘would only increase the reputational damages once the issue was inevitably disclosed,’” it aligned itself with the district court that “Varga fails to allege any similar major triggering event” to the impending sale in Jander “that would make GE’s eventual disclosure inevitable and instead relies on ... a general allegation that since other insurers with under-funded long-term care liabilities ‘inevitably’ had to disclose their problems, GE would have to as well.”
As for the argument that the fiduciaries could have closed the fund in 2009, the panel here said it was “similarly conclusory, unsupported by any factual matter suggesting that the fiduciaries could not have concluded that such an action would do more harm than good.”
And—having discarded the alternatives presented by the plaintiff—the panel noted that it “…need not address Varga’s additional argument that the district court erred in concluding that Varga failed to adequately plead the fiduciaries knew or should have known about the shortfall in reserves,” and “have considered the remainder of Varga’s arguments and find them to be without merit,” as it affirmed the judgment of the district court in rejecting the suit.
What This Means
We’ve noted before that back in 2014, the Supreme Court seemed truly concerned that the “presumption of prudence” standard basically established a standard that was effectively unassailable by plaintiffs—and in fact, until that point the vast majority of these cases (including BP and Delta Air Lines, Lehman and GM) failed to get past the summary judgment phase. Indeed, the plaintiff in the IBM case cited above had argued that no duty-of-prudence claim against an ESOP fiduciary has passed the motion-to-dismiss stage since the 2010 decision in Harris v. Amgen. They had also noted that “imposing such a heavy burden at the motion-to-dismiss stage runs contrary to the Supreme Court’s stated desire in Fifth Third to lower the barrier set by the presumption of prudence.”
However, the “more harm than good” standard that emerged with Fifth Third, while a new “standard,” hasn’t had much impact on the ultimate result, though more cases did get past the summary judgment stage (we’ll set aside the question of whether that has created “more harm than good”).
That said, there had been a sense in some places that the Jander case (also cited above), and the ruling of the appellate court in that case might have been a bit of a “game changer”—or at least established a split in the circuits with regard to what the standard threshold was—that suits based on the same issue might be adjudicated differently based on the venue.
However, this decision suggests that it is the facts, not the standard, that was distinguishable in this case. And if that provides little comfort to the plaintiffs in this specific litigation genre, it doubtless offers a modicum of solace to the retirement plan fiduciaries trying to thread their way through this litigation minefield.
