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Company Stock Claims Come Up Short – Again

Plaintiffs claiming a fiduciary breach in yet another stock drop suit have come up short in court.

As has been common in these so-called “stock drop” cases, the plaintiffs here (In re Allergan ERISA Litigation, D.N.J., No. 2:17-cv-01554-SDW-LDW, order granting defendants’ motion to dismiss 7/2/18) allege that their employer knew more about the precarious financial status of the firm than they let on, and violated their fiduciary duties under ERISA by keeping Allergen stock as an investment option in the plan “even though they knew or should have known that Allergan’s statements artificially inflated its stock prices.”

The plaintiffs – former participants Andrew J. Ormond and Jack Xie – filed suit against the plans’ alleged fiduciaries: Allergan; Allergan’s Employee Benefits Plan Committee, Oversight Committee and Investment Committee, as well as the individual members of those committees; and the individual members of Allergan’s Board of Directors (the so-called “Monitoring Defendants”).

Fiduciary Factors

The key issue here was the fiduciary status of the defendants.

The plaintiffs here first alleged that Allergan was a de facto fiduciary because it “hired, and retained the right to terminate, a third party administrator,” and that the “Monitoring Defendants,” in turn, were de facto fiduciaries because they “retained authority over any independent fiduciary.” However, Judge Susan D. Wigenton of the U.S. District Court for the District of New Jersey noted that “…without more, these allegations are insufficient to show that Defendants were de facto fiduciaries.”

The plaintiffs also alleged that Allergan was a fiduciary because it made SEC filings as the plans’ administrator. Judge Wigenton was no more persuaded by this argument, citing another case that had ruled that, “communications made by a company in SEC filings do not become fiduciary statements for ERISA plans unless they are ‘intentionally connected ... to statements ... about the future of benefits, so that its intended communication about the security of benefits was rendered materially misleading.’” And since the complaint did not make that connection, Judge Wigenton noted that, “Allergan’s SEC filings did not transform it into the Plans’ de facto fiduciary.”

But perhaps the most powerful argument – certainly one that is routinely cited as indicative of fiduciary responsibility under ERISA – was the allegation by plaintiffs that Allergan was a fiduciary because “it exercised discretionary authority or control over the administration and/or management of the Plans or disposition of the Plans’ assets.” This was also dismissed by Judge Wigenton, who stated that, “These conclusory statements are insufficient to state a claim against a purported ERISA fiduciary,” and therefore that “based on the foregoing, Plaintiffs’ allegations are insufficient to state a claim against either Allergan or the Monitoring Defendants as de facto fiduciaries of the Plans,” as she dismissed the claims on all counts.

Prudence ‘Parse’

Turning to allegations of a breach of a duty of prudence, Judge Wigenton wrote that, “[t]o plausibly allege violations of the duty of prudence based on non-public information, a plaintiff must allege that the defendants knew or should have known that the market price was based on materially false or misleading statements that would make it an imprudent investment.” However, she noted that “in alleging that Defendants knew or should have known that Allergan stock was not a suitable or appropriate investment for the Plans,” they relied on a 2014 letter from a U.S. Senator and Representative, and a 2015 subpoena from the U.S. Department of Justice, which requested information about Allergan’s pricing of generic drugs, as well as “news reports that federal charges might be filed against generic pharmaceutical companies for price collusion.”

‘Fifth’ Findings

However, once again she found that “these examples, standing alone, do not rise above the speculative level of misconduct.” Moreover, she explained that, “as pled, Plaintiffs have not set forth sufficient facts to establish or even infer that Defendants engaged in collusive and/or fraudulent activity during the Class Period such that they could have insider information to that effect.” And even if they had inside information to that effect, Judge Wigenton determined that they had “not met the heightened pleading standard articulated in Fifth Third (Fifth Third Bancorp v. Dudenhoeffer) to maintain a cause of action for breach of the duty of prudence” because they failed to 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.”

Alternative Courses

Not that they didn’t put forth alternatives. The plaintiffs argued that the defendants:

  • Could have disclosed (or caused others to disclose) Allergan’s antitrust violations so that Allergan Stock would trade at a fair value (though Judge Wigenton noted that “courts have consistently ruled against Plaintiffs’ argument that earlier disclosure would have been better than later or non-disclosure”).

  • Could have frozen the ESOP, and held contributions “in cash or some other short-term investment” (though Judge Wigenton explained that, “this alternative suffers from the same infirmity as Plaintiffs’ first proposal because ERISA mandates disclosure if plan fiduciaries halt new stock fund purchases,” and that “courts have held that freezing stock purchases ‘could send mixed signals,’ such as diminished confidence in [company] stock, ‘causing a drop in stock price’ that could have done more harm than good to the Fund.”).

  • Could have “directed the Fund to hold incoming assets in cash until Company Stock was no longer artificially inflated” (though Judge Wigenton noted that, “this alternative fails to meet the Fifth Third standard because a prudent fiduciary could have found that creating a large cash buffer could do more harm than good”).

  • Rather than having the plan continue to purchase significant amounts of Allergan stock, “Defendants could have “directed ... cash assets [from the acquisition] be placed into the Plan’s default investment fund, or allocated based upon [p]articipant[’s] instructions.” Judge Wigenton wasn’t buying this argument either, stating that it “lacks sufficient detail to establish that a prudent fiduciary could not have found that reducing or redirecting purchases of Allergan stock would cause more harm than good, especially at the time of a merger,” and that the Supreme Court in Fifth Third explained that, “ESOP fiduciaries, unlike ERISA fiduciaries generally, are not liable for losses that result from a failure to diversify” – and that this “…would not a viable alternative to the extent that it required the fiduciaries to diversify the Plan.”

  • Could have: (1) sent targeted letters to participants, reminding them to diversify holdings and warning them of the risks of overconcentrating investments in employer securities; (2) resigned as fiduciaries; or (3) sought guidance from the DOL or SEC. Judge Wigenton concluded, however, that these alternatives were “unpersuasive because it is unclear how they would have resulted in different courses of action.”

Judge Wigenton dismissed the remaining two claims – breach of duties of loyalty and monitoring – even more succinctly. She noted that the former was “premised on the same theories” in the breach of prudence claims which she had already dismissed. As for the latter, she explained that, “because this Court has dismissed Plaintiffs’ claims for breach of the duties of prudence and loyalty, Plaintiffs’ derivative claim for breach of the duty to monitor is also dismissed.”

The defendants’ victory here is hardly unprecedented – indeed, the Supreme Court’s 2014 Fifth Third decision set aside the “presumption of prudence” standard in favor of a finding that “special circumstances” warranted determining that something other than the market price of a security was the fair price and refuting the notion that an alternative action would produce “more harm than good,” as noted above.

Indeed, that lack of success at trial was put forth by the parties in their petition to settle another stock drop case, noting that since “Amgen clarified the Supreme Court’s prior decision in Fifth Third Bancorp v. Dudenhoeffer, no plaintiff in a similar action has survived a motion to dismiss, let alone a trial…”

One is tempted to say that plaintiffs “knew or should have known” how this case would come out as well.