Once again, plan fiduciaries didn’t need a “presumption of prudence” to prevail in a stock drop lawsuit.
The ruling came in a stock-drop suit (In re Pilgrim’s Pride Stock Inv. Plan ERISA Litig., E.D. Tex., No. 2:08-cv-00472-JRG-RSP, report and recommendation 8/19/16) involving Pilgrim Pride Corp.’s 16,000-participant 401(k) plan, whose fiduciaries had been accused of leaving what was described as “grossly overvalued” company stock from the plan during 2008, when the firm’s financial difficulties culminated in a Chapter 11 bankruptcy filing.
Fifth ‘Take’
The Pilgrim’s Pride case had been put on hold pending the U.S. Supreme Court’s decision in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. ___, 134 S.Ct. 2459 (2014). In that case the Supreme Court ultimately held that while the fiduciaries of an ESOP have the same duty of prudence and loyalty as the fiduciaries of other retirement plans, and that, absent “special circumstances affecting the reliability of the market price,” allegations that a fiduciary should have recognized the overvaluation of the stock based on publicly available information are “implausible” and that allegations based on non-public information are similarly “problematic.”
The nation’s high court also directed lower courts to “consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that stopping purchases — which the market might take as a sign that insider fiduciaries viewed the employer’s stock as a bad investment — or 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.”
Harm’s Ways
In considering the plaintiffs’ case here, Magistrate Judge Roy S. Payne of the U.S. District Court for the Eastern District of Texas found that the Pilgrim’s Pride workers didn't meet this standard.
In his ruling, Judge Payne observed that the plaintiffs acknowledge that disclosure of the adverse financial information would have decreased the stock price, but contend that by allowing the sale of the stock in the plan it would have done more good than harm for the participants. He then noted that while plaintiffs had alleged four alternative courses of action for the plan fiduciaries, he didn’t find the argument that they would have resulted in more good than harm. Those alternatives were:
- The notion that “even with any drop in the price,” a prudent fiduciary could not have concluded that disclosing the true condition and selling the stock would do more harm than good to the plan.
- The defendants could have “transferred” the plan’s assets into other investment options in the plan, such as cash.
- The defendants could all have resigned as fiduciaries and relinquished management of the plan to independent fiduciaries who would have been free to sell without concern for insider-trading laws (though the judge pointed out that the plaintiffs failed to explain why the new fiduciaries would have wanted to sell the plan’s stock if they did not know of the company’s poor condition).
- The defendants could have sought guidance from the Department of Labor or the SEC, which would have allegedly counseled resignation, leading to the option above.
None of the workers’ suggested alternatives were actions that a prudent fiduciary “could not have concluded … would do more harm than good,” Payne said. Indeed, he said that forcing public disclosures about the company’s difficulties, as the workers suggested that fiduciaries should have done, “would guarantee the collapse of the company stock, as plaintiffs actually allege,” he said.
It’s not the first post-Fifth Third stock drop suit to be rejected despite the demise of the presumption of prudence, including BP, 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.”
That said, Payne's recommendation isn't binding and ultimately will be accepted, rejected or modified by a district judge, according to BloombergBNA.
