Court Rejects ‘Risky’ Argument in Company Stock Appeal

Lacking “special circumstances,” another company stock-based lawsuit has been dismissed.

The most recent was an appeal brought in the U.S. Court of Appeals for the District of Columbia Circuit (Coburn v. Evercore Tr. Co., N.A., 2016 BL 435165, D.C. Cir., No. 16-7029, 12/30/16) by a former J.C. Penney employee, who had appealed the district court’s dismissal of her complaint against Evercore Trust Company, N.A., where she had alleged that Evercore breached its fiduciary duties of prudence and loyalty when it failed to take preventative action as the value of J.C. Penney common stock tumbled between 2012 and 2013.

Rather than frame her appeal consistent with the ruling in the U.S. Supreme Court’s 2014 ruling in Fifth Third Bancorp v. Dudenhoeffer, which set a different standard of judicial review, the plaintiff argued – unsuccessfully as it turned out – that her situation was different because Evercore failed to appreciate the riskiness of J.C. Penney stock rather than Evercore’s valuation of its price.


On Dec. 17, 2009, Evercore became the designated fiduciary and investment manager of the Penney Stock Fund. In this role, Evercore had the authority to restrict or limit the ability of plan participants to purchase or hold J.C. Penney stock, including the power to “eliminate the [Penney Stock Fund] as an investment option under the Plan and to sell or otherwise dispose of all of the Company Stock held in the [Penney Stock Fund],” though it had no responsibility for any other investment option of the plan.

In 2011, J.C. Penney attempted to reconceptualize its brand and hired former Apple, Inc. executive Ron Johnson as its chief executive officer. But, as the court’s decision recounts, it did not work. And from the end of 2012’s first quarter to the end of 2013’s fourth quarter, J.C. Penney’s stock price fell from $36.72 to $5.92 per share. Johnson’s tenure ended in April 2013. The court noted that “throughout the entire period that the value of J.C. Penney common stock dipped ever lower, Evercore stood resolute,” and “despite its authority to eliminate the Penney Stock Fund as an investment option in the Plan and its ability to sell shares currently in the Fund, Evercore exercised neither option.” In 2015, plaintiff Donna Coburn sued on behalf of herself and all others similarly situated, alleging that Evercore was liable for $300 million in losses to the plan for having breached its fiduciary duty.

Case History

In February 2016, the district court granted Evercore’s motion to dismiss the complaint for failure to state a claim. Primarily relying on the U.S. Supreme Court’s opinion in Dudenhoeffer (which outlined the standards for stating a claim for breach of the duty of prudence against fiduciaries who manage employee stock ownership plans, including the rejection of the so-called “presumption of prudence” that had been the law of the land up till then), the district court held that Coburn’s allegations that Evercore should have recognized from publicly available information alone that continued investment in J.C. Penney common stock was “imprudent” were generally implausible absent “special circumstances” affecting the market. The plaintiff not only failed to plead special circumstances – indeed, as the appellate court noted, “Coburn expressly disclaimed any need to plead them,” the district court rejected her claim that Evercore should have recognized that the retirement plan participants had a low risk tolerance.

The district court also rejected Coburn’s alternative argument that, pursuant to another Supreme Court decision, Tibble v. Edison, Evercore violated its fiduciary “duty to monitor” investments and remove imprudent ones. However, the district court reasoned that Tibble did not affect the Dudenhoeffer holding and thus could not save Coburn’s complaint.

The appellate court noted that in order to succeed, a complaint must “state a claim to relief that is plausible on its face,” specifically that it must include factual allegations that, when taken as true, rise above a “speculative level.” They also restated what it termed the “refined pleading requirements” from the Supreme Court’s decision in Dudenhoeffer that “where a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances.” The appellate court went on to explain that “because a stock price on an efficient market reflects all publicly available information, Dudenhoeffer requires additional allegations of “special circumstances” when a plaintiff brings a breach of the duty of prudence claim against a fiduciary based on that information. Those special circumstances, as it read the Supreme Court’s decision, included evidence questioning “the reliability of the market price as an unbiased assessment of the security’s value in light of all public information … that would make reliance on the market’s valuation imprudent.” This, according to the court, would be evidence that “illicit forces” such as fraud, improper accounting, illegal conduct, etc., were influencing the market.

Under the Dudenhoeffer standards, this appellate court held that this plaintiff’s case “falls far short.” The court noted that “despite the Supreme Court’s instruction that claims of imprudence based on publicly available information must be accompanied by allegations of ‘special circumstances,’” Coburn acknowledges that she “did not allege the market on which J.C. Penney stock traded was inefficient.”

The appellate court went on to note that Dudenhoeffer also included claims that the stock involved was too risky – claims dismissed by the Supreme Court in favor of its special circumstances requirement. “If the Supreme Court had no difficulty in using its value-centric rule to dismiss a risk-based claim by plaintiffs with similar risk tolerance, we have no license to deviate therefrom here.”

Or, as the appellate court concluded, “if Dudenhoeffer controls, Coburn’s complaint was properly dismissed.”

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