Plaintiffs Charge Stock Price Pumped Up in New 401(k) Suit

Another plan sponsor has been sued for continuing to permit investment in company stock.

Exxon Mobil Corp. is the latest plan sponsor to be sued for knowing that its stock was overvalued, and not only did not communicate that to the participants whose interests it was obligated to protect as a fiduciary, but continued to permit and encourage participant investment in that option.

Failure to Disclose

In Fentress v. Exxon Mobil Corp. (S.D. Tex., No. 4:16-cv-03484), filed Nov. 23 in the U.S. District Court for the Southern District of Texas, participant-plaintiff Bobby D. Fentress charges that his employer failed to disclose to investors the true state of its hydrocarbon extraction business, and that, throughout the class period (late 2015 until Oct. 28, 2016), Exxon repeatedly highlighted the strength of its oil and gas reserves and the value of those reserves. As proof of their knowledge, the plaintiff says Exxon failed to disclose that:

  • Exxon’s own internally generated reports concerning climate change recognized the environmental risks caused by global warming and climate change;
  • given the risks associated with global warming and climate change, the company wouldn’t be able to extract the existing hydrocarbon reserves Exxon claimed to have; and
  • Exxon had employed an inaccurate “price of carbon” — the cost of regulations such as a carbon tax or a cap-and-trade system to push down emissions — in evaluating the value of certain of its future oil and gas prospects in order to keep the value of its reserves materially overstated.

“The Plan participants who chose to purchase the Exxon stock paid fraudulent, excessive prices for the stock during the Class Period,” according to the suit. “They suffered concrete financial harm to their retirement savings by over-paying for Exxon stock which, Defendants knew, would fall sharply in value when the truth came out and the stock corrected. When the fraud was revealed, Exxon’s stock fell by more than 13%. The Plan participants who purchased Exxon stock were damaged by overpaying this amount. No matter what happens to the stock price in the future, these Plan participants sustained a loss due to paying the excessive artificial price, and they will bear this loss even if Exxon stock eventually recovers.”

Knew, or Should Have Known

Plaintiffs alleged that the plan fiduciaries “knew, or should have known, that no fraud lasts forever,” that their misrepresentations would come to light eventually, and that they had alternatives available to them to fulfill their fiduciary duty by, among other things:

  • halting new purchases or investments of Exxon stock;
  • trying to effectuate, through personnel with disclosure responsibilities, or, failing that, through their own agency, truthful or corrective disclosures to cure the fraud and make Exxon stock a prudent investment again; and
  • diverting a portion of its holdings into a low-cost hedging product (that would at least serve as a buffer to offset some of the damage to the stock value once disclosures about the company’s accounting process came to light).

Sure enough, once questions were raised about Exxon’s accounting for its reserves, the stock price fell by more than 13%, from a high of $95 per share to a class period low of $82 per share.

In response to the suit, Exxon told Bloomberg BNA that, “This lawsuit misstates our financial reporting and repeats the same tired allegations pushed by activists and inaccurate media reports that claim we reached definitive conclusions about climate change decades before the world’s experts and while climate science was in an early stage of development.”

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