Target Targeted in Stock Drop Suit

Recent stock market highs may have stemmed the tide of the so-called “stock drop” suits – but past performance has arisen as an issue in a new lawsuit.

In this case – involving Target Corporation – the suit claims that during the period in question (Feb. 27, 2013 and May 19, 2014, inclusive) – as the plan “spent hundreds of millions of dollars purchasing Target Stock” – the company made a series of reassuring statements about Target’s new Canadian stores and operations. The lawsuit, filed in in the U.S. District Court for the District of Minnesota, goes into some detail chronicling the various statements in a timeline, claiming that those statements resulted in Target stock being “artificially inflated” during the period in question, “making it an imprudent retirement investment for the Plan given its purpose of helping their Participants save for retirement.”

Here the defendants are charged with violating their fiduciary duties by allowing the plan to retain common stock of Target Corporation as an investment option in the plan when a reasonable fiduciary using the “care, skill, prudence, and diligence … that a prudent man acting in a like capacity and familiar with such matters would use” would have done otherwise.

The suit claims that, as of the start of the class period the Target plan held over $2 billion in company stock, and it further acquired hundreds of millions of dollars of Target stock while Target stock was artificially inflated. “Had that money not been wasted on artificially inflated Target Stock, the Plan would have been significantly better off.”

In the Target plan, all investments were participant directed, including the company’s matching contributions, which are invested in the Target Corporation Common Stock Fund unless otherwise directed by the participant.

At the start of the class period, or at least as of Nov. 20, 2013, participants’ earned matching contributions were put into the Target stock fund unless that participant affirmatively elected to have their matching contributions invested in the same way as their own contributions. That default option was changed on Oct. 9, 2014, at which time Target’s matching contributions automatically mirrored participants’ contributions.

On or around April 2015, participants were advised that State Street had been appointed to serve as an independent fiduciary for the Target stock fund. The suit notes that a purchase cap on the Target stock fund went into effect on June 25, 2015, and limited participants to a maximum allocation of 20% of their contributions or rebalancing of their plan account balance to the stock fund, and that they could only do so if the overall portion of their plan account invested in the fund would not exceed 20% of their account balance. By default, if participants had been allocating more than 20% of their contributions to the fund, such contributions were redirected to a target LifePath Fund based on that participant’s age.

Stock Biases

With regard to investing in company stock, the plaintiff argues that the plan fiduciaries should have know that:

  • out of loyalty, employees tend to invest in company stock;
  • employees tend to over-extrapolate from recent returns, expecting high returns to continue or increase going forward;
  • employees tend not to change their investment option allocations in the plan once made; and
  • lower income employees tend to invest more heavily in company stock than more affluent workers, though they are at greater risk.

Alternative Courses

The suit acknowledges that a full disclosure of the issues facing Target might not have prevented the plan from taking a loss on the stock it already held, but “it would have prevented the Plan from acquiring (through Participants’ uninformed investment decisions and continued investment of matching contributions) additional shares of artificially inflated Company Stock: the longer the concealment continued, the more of the Plan’s good money went into a bad investment; and full disclosure would have cut short the period in which the Plan bought Company Stock at inflated prices.”

To ameliorate the impact, the suit claims the plan fiduciaries could have:

  • Directed that all company and plan participant contributions to the company stock fund be held in cash or some other short-term investment rather than be used to purchase Target stock.
  • Closed the company stock itself to further contributions and directed that contributions be diverted from company stock into prudent investment options based upon the participants’ instructions or, if there were no such instructions, the plan’s default investment option.
  • Disclosed (or caused others to disclose) Target’s true problems with its Canadian segment so that Target stock would trade at a fair value.

Additionally, the suit says that the plan fiduciaries could have sought guidance from the DOL or SEC as to what they should have done, resigned as plan fiduciaries to the extent they could not act loyally and prudently; and/or retained outside experts to serve either as advisors or as independent fiduciaries specifically for the fund – which, of course, they eventually did, as well as changing the plan’s default investment option.

In addition to suing the plan fiduciaries, the litigants also cited “monitoring defendants,” who it claims “failed to adequately inform such persons about the true financial and operating condition of the Company or, alternatively, the Monitoring Defendants did adequately inform such persons of the true financial and operating condition of the Company (including the financial and operating problems being experienced by Target in Canada during the Class Period identified herein) but nonetheless continued to allow such persons to offer Target Stock as an investment option under the Plan when the market prices of Target Stock was artificially inflated and Target Stock was an imprudent investments for Participants’ retirement accounts under the Plan.”

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