A Wells Fargo plan participant has filed a class action lawsuit against her former employer – the second such stock-drop lawsuit in a week, though some of the defendants – and arguments – are different.
The most recent litigation, brought by plaintiff Lynette Fletcher, a former Wells Fargo employee and a plan participant, claims that defendants, including former CEO John Stumpf (not a named defendant in the other suit), had access to nonpublic information relating to Wells Fargo’s operations, and yet permitted the plan to continue to offer Wells Fargo Stock as an investment option even after they knew (or should have known) that the stock value was “artificially inflated.” “Due to the artificial inflation of the Company Stock price—which would be corrected upon the revelation of negative information—Wells Fargo Stock was an imprudent retirement investment for the Plan given its purpose of helping Plan Participants save for retirement,” according to the suit, filed October 14 in the U.S. District Court for the District of Minnesota (Fletcher v. Wells Fargo & Co., D. Minn., No. 0:16-cv-03495, complaint filed 10/14/16).
The suit notes that on Jan. 3, 2011, the first trading day of the class period, Wells Fargo stock closed at $31.58 per share, rising to $58.52 per share on July 22, 2015 (an 85.3% increase), only to tumble “when the nature of Wells Fargo’s business, including its fraudulent sales practices… were revealed to the market.” Between Dec. 31, 2015, and Oct. 7, 2016, the stock dropped from $54.36 to $45.33, a loss of 16.6%, according to the suit, which notes that On Jan. 1, 2011, the plan held more than $5 billion in company stock, “and it acquired billions of dollars of Wells Fargo Stock while Wells Fargo Stock was artificially inflated…”
Other Defendants
While the most recent suit covers much of the same ground as the earlier litigation in terms of reciting the history and response to the bank’s cross-selling program, it includes as a defendant GreatBanc Trust Company, who was appointed independent fiduciary to act as a named fiduciary for limited purposes in connection with the ESOP provisions of the plan in 2012. According to the suit, GreatBanc was a fiduciary of the plan for “a significant portion of the Class Period.”
The suit also highlights the role of defendant Hope A. Hardison, Senior Executive VP, Chief Administrative Officer and HR Director, who “ultimately oversaw both the Plan and the termination of thousands of employees as a direct result of fraud surrounding the Company’s primary business strategy,” according to the complaint.
Alternative Actions
As is the case with this type of litigation now, the suit not only claims that defendants acted imprudently, but cite alternative actions that could have been taken that would not have violated securities laws, nor would they have – in the spirit of the Supreme Court’s holding in Dudenhoeffer, “been more likely to harm the Plan’s Wells Fargo Stock holdings than to help.” The options cited here were to:
- direct that all employer and participant contributions “be held in cash or some other short-term investment rather than be used to purchase Wells Fargo Stock”;
- provide that participant contributions meant to purchase company stock be diverted into prudent investment options based upon the participants’ instructions or, if there were no such instructions, the plan’s default investment option;
- seek guidance from the DOL or SEC as to what they should have done;
- resign as plan fiduciaries to the extent they could not act loyally and prudently;
- retain outside experts to serve as advisors specifically for the funds; and
- disclose (or caused others to disclose) “the issues plaguing Wells Fargo so that Wells Fargo Stock would trade at a fair value.”
“Given the relatively small number of shares of Wells Fargo Stock purchased by the Plan when compared to the market float of Wells Fargo Stock, it is extremely unlikely that this decrease in the number of shares that would have been purchased, considered alone, would have had an appreciable impact on the price of Wells Fargo Stock,” according to the suit.
‘Natural Bias’
Instead, “defendants fostered a positive attitude toward Company Stock, and/or allowed Participants to follow their natural bias towards investment in the equities of their employer by not disclosing negative material information concerning the imprudence of investment in Company Stock.”
In another interesting twist, the suit goes on to cite (and state that defendants knew or should have known) “certain basic facts about the characteristics and behavior of the Plan’s participants,” which it says are “well-recognized in the 401(k) literature and the trade press concerning employees’ natural bias toward investing in company stock.” The suit notes that:
- out of loyalty, employees tend to invest in company stock; and
- lower-income employees tend to invest more heavily in company stock than more affluent workers, though they are at greater risk.
It also cites two factors that arguably apply to all investment behaviors:
- employees tend to over-extrapolate from recent returns, expecting high returns to continue or increase going forward; and
- employees tend not to change their investment option allocations in the plan once made.
As noted above, this suit does acknowledge the focus that such alternatives must countenance in the wake of the U.S. Supreme Court’s Dudenhoeffer decision; that for each proposed alternative, a prudent fiduciary could not have concluded that the alternative would do more harm than good.
Similar arguments have been argued in other cases without much success (including BP, Delta Air Lines, Lehman and GM.
Whether the courts will concur this time remains to be seen.
