The “more harm than good” standard once again proves to be too high a burden for plaintiffs in a stock drop suit—but defendants didn’t need to go “there.”
This suit (Burke v. Boeing Co., N.D. Ill., No. 1:19-cv-02203, 11/12/20) had been filed by plaintiffs Diane Burke, Alex Proestakis, Miguel A. Ibarra, and Mohammad Farooq Mustafa—participants in the Boeing Voluntary Investment Plan. One of the investment options offered by the Plan is the VIP Stock Fund, an employee stock ownership plan (ESOP), which invests in shares of Boeing stock, and which—as of Dec. 31, 2018, held $10.8 billion in Boeing stock, accounting for 18.6% of net plan assets.
The controversy arose in the wake of a series of plane crashes that were later attributed to the Boeing 737 MAX safety features, and subsequent grounding of the Boeing 737 fleet—which led to a sharp decline in the value of Boeing stock, and the retirement accounts of those who held Boeing stock.
The Case
Judge Virginia M. Kendall of the U.S. District Court for the Northern District of Illinois noted that the plaintiffs here (represented by Schneider Wallace Cottrell Konecky LLP, Law Offices of Michael M. Mulder, and Berger Montague PC) alleged three things:
- breach of fiduciary duty of prudence under ERISA § 404(a)(1);
- failure to monitor investments under ERISA § 404(a)(1); and
- breach of co-fiduciary duty under ERISA §§ 404(a)(1)–(3).
For their part, the Boeing defendants here (and there were several—Boeing, David A. Dohnalek, Robert E. Verbeck, the Employee Benefit Plans Committee (EBPC), the Employee Benefit Investment Committee (EBIC), and Committee members John Does 1–25) moved to dismiss the suit on three primary grounds:
- none of the Defendants were fiduciaries of the Stock Fund;
- plaintiffs fail to satisfy the Dudenhoeffer pleading standard; and
- Counts II and III fail as a matter of law.
Survival ‘Fit’
To survive a motion to dismiss, Judge Kendall explained, the complaint “must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Moreover, a claim is facially plausible “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” And, in upholding a motion to dismiss, the court “accepts the complaint’s factual allegations as true and draws all permissible inferences in Plaintiff’s favor.”
Having done that, Judge Kendall then turned to the issue as to whether the Defendants had fiduciary responsibility over the Stock Fund—quickly discerning that “as the Plan Administrator under ERISA § 3(16), the EBPC had no fiduciary responsibility over the Stock Fund,” since its responsibilities were limited to “all matters related to administration of the Plan.” Instead, the court cited an Independent Fiduciary Agreement that not only outlined Boeing’s role as a corporate entity, but specifically reserved to Evercore Trust Company, N.A. (which subsequently sold its institutional trust business to Newport Trust Company, and was throughout the opinion therefore referred to as “Newport”) “exclusive fiduciary authority and responsibility, in its sole discretion, to determine whether the continuing investment in the [Stock Fund] is prudent under ERISA.”
“Newport, then—not Boeing, not the EBIC, and not Dohnaek, Verbeck, or Does 1–25—had fiduciary responsibility over the Stock Fund,” she wrote, going on to note that “this alone is sufficient to dispose of Plaintiffs’ claims against Defendants.”
Alternative Arguments
However, even assuming Boeing “had fiduciary responsibility for the Stock Fund and possessed material inside information about the 737 MAX, the Second Amended Complaint still does not survive Defendants’ Rule 12(b)(6) challenge,” Judge Kendall wrote. Citing the Dudenhoeffer case, she noted that “ESOP fiduciaries confront a unique conflict between securities laws and their duty of prudence when alleged to have inside information that a stock is overpriced,” and that “the Supreme Court established a demanding pleading standard for imprudence claims based on allegations an ESOP fiduciary possessed inside information.” More specifically, that in order to successfully state a fiduciary breach claim, “…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.”
Judge Kendall then outlined the three conditions of the “requisite analysis”:
- ERISA does not require a fiduciary to break the law, including the securities laws;
- “where a complaint faults fiduciaries ... for failing to disclose that information to the public so that the stock would no longer be overvalued ... [t]he courts should consider the extent to which an ERISA-based obligation ... to disclose inside information to the public could conflict with the complex insider trading and corporate disclosure requirements imposed by the federal securities laws or with the objectives of those laws”; and
- the court “should also consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that ... publicly disclosing negative information 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.” And yes, she acknowledged that the “Dudenhoeffer standard places a significant pleading burden on Plaintiffs.”
Alternative Options
Here, as in other cases, the plaintiffs argued that a “corrective, public disclosure regarding the safety of the 737 MAX airplanes” would not have resulted in an “outsized correction in the stock price” because of the efficient markets in which the stock trades. Moreover, Judge Kendall was unpersuaded by the notion that “reputational harm is a common result of fraud and grows the longer the fraud is concealed, translating to larger stock drops” as an argument that an earlier disclosure could not have done “more harm than good.”
“Although the Seventh Circuit has yet to reach the issue,” Kendall wrote, “the overwhelming majority of circuit courts to consider an imprudence claim based on inside information post-Dudenhoeffer rejected the argument that public disclosure of negative information is a plausible alternative.” As for this case in particular, she concluded that “…it is entirely plausible that a prudent fiduciary would deem public disclosure as likely to harm more than it helped.”
Ultimately, she noted that “although public disclosure might have ameliorated some harm to the Plan, Plaintiffs have not adequately alleged that course of action was so clearly beneficial that a prudent fiduciary could not conclude it would be more likely to harm the Plan than to help it.”
She similarly concluded that the claim that the defendants breached their duty to monitor investments fell short, as the plaintiffs failed to put forth a plausible alternative action that would not have resulted in more harm than good. Likewise Judge Kendall dismissed the claim of co-fiduciary liability on similar grounds.
That said, the complaint was dismissed “without prejudice,” leaving the plaintiffs an opportunity to file an amended complaint within 21 days.
What This Means
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 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, when the “more harm than good” standard emerged with Fifth Third Bancorp v. Dudenhoeffer, it didn’t just establish a new standard, it also led to a refiling of claims of many of the so-called “stock drop” suits. However, while those had gotten further than previous litigation, they fell short of the new standard—though they did at least get past the summary judgment stage.
Indeed, since Fifth Third replaced the previous “presumption of prudence” standard, a number of these so-called “stock drop” cases have been relitigated, but most have resulted in judgments for the defendants, including BP and Delta Air Lines, Lehman and GM. In Dennis Smith v. Delta Airlines Inc., et al., the 11th Circuit noted that, “while Fifth Third may have changed the legal analysis of our prior decision, it does not alter the outcome.” There had been some hope that a recent Supreme Court case involving IBM might offer some clarity—but apparently not.
