Plan fiduciaries have once again prevailed in a suit challenging the presence of company stock in a 401(k) plan.
Plaintiffs-appellants Mike Laffen, Karyn Lustig Keelan and Paul Higgins had filed the class action suit on behalf of current and former HP employees who participated in HP’s 401(k) Savings Plan, and whose accounts purchased or held HP Common Stock Fund at any time between Oct. 3, 2011 and Nov. 21, 2012.
The suit claimed that the fiduciaries of HP’s 401(k) Savings Plan “breached their fiduciary duties by permitting the Plan and Plan participants to purchase and hold HP common stock when the stock was artificially inflated and was an imprudent investment for the Plan.” Having had their suit dismissed by the district court, the plaintiffs appealed to the U.S. Court of Appeals for the 9th Circuit.
Basically, the plaintiffs argued that HP acquired a company (British software maker Autonomy) “without doing almost any due diligence,” that shortly after the acquisition, HP: (1) learned about Autonomy’s accounting practices which inflated the company’s revenues; (2) realized that it overpaid for Autonomy; and (3) “covered up this information.” HP stock fell 12% in the wake of that acquisition. However, in rejecting the appeal in an unpublished opinion, the U.S. Court of Appeals for the 9th Circuit made short work of this claim, noting that what they termed the plaintiffs’ “theory” was not only “inconsistent with the overall complaint,” but that the defendants offered a convincing alternative explanation.
Additionally, though plaintiffs had argued that HP should have at least prevented the plan from making new investments in HP Common Stock Fund and/or made public disclosures about HP stock’s risks following the whistleblower’s allegations, the court said that “a prudent fiduciary in the same circumstances as Defendants-Appellees could view Laffen’s proposed alternative course of action as likely to cause more harm than good without first conducting a proper investigation” – invoking the standard that emerged from the U.S. Supreme Court's 2014 decision in Fifth Third Bancorp v. Dudenhoeffer.
The court concluded that since the plaintiffs had not “…plausibly alleged an alternative action Defendants-Appellees could have taken that was consistent with securities laws and that a similarly situated prudent fiduciary would not have viewed as more likely to harm than help the Plan” (the standard that emerged from the U.S. Supreme Court’s 2016 decision in Amgen Inc. v. Harris) – they failed to plead a claim for breach of the duty of prudence – and affirmed the decision of the lower court.
The case is Laffen v. Hewlett-Packard Co., 2018 BL 7981, 9th Cir., No. 15-16360, unpublished 1/9/18.
