Employer Stock Litigation

By: Amanda Sonneborn and John Duke

Continuing the trend observed throughout 2011, the Southern District of Indiana granted defendants’ motion to dismiss plaintiff’s complaint in DeWald v. Zimmer Holdings, Inc., Case No. 1:09-cv-00745 (S.D. Ind. Dec. 23, 2011), a typical stock drop complaint alleging that defendants violated ERISA by continuing to offer employer stock as an investment in a 401(k) plan even as the value of the stock fell.  Plaintiff specifically alleged that the company’s stock lost value due to alleged customer concerns about the quality and safety of its medical products.  Plaintiff also alleged that defendants failed to provide adequate information to participants regarding the risks of investing in the company’s stock.

            In rejecting the complaint at the motion to dismiss stage, the Court found that “even if deemed economically significant,” the drop in the stock price was insufficient evidence that the fiduciaries acted imprudently in carrying out their fiduciary duties to the plan and its participants.  Quoting the Seventh Circuit’s decision in Howell v. Motorola, Inc., 633 F.3d 552 (7th Cir. 2011), the Court pointed out that plaintiff failed to allege any facts that would support a conclusion that the fiduciaries “were or should have been tipped off to the fact that Zimmer’s stock had become ‘so risky or worthless’ that it warranted removal of the stock as a Plan investment option.”  The Court also noted that the single-day price declines suffered by the stock — 4%, 7%, and 13.5% — were “modest by any standard” and could not support plaintiff’s claim. 

            The Court also dismissed plaintiff’s failure to disclose claim.  Plaintiff alleged that defendants breached their ERISA disclosure obligations by failing to provide participants specific information about the potential decline in the stock price due to the alleged product concerns.  In denying plaintiff’s disclosure claim, the Court agreed with defendants that ERISA Section 404(c) barred any relief for a failure to disclose this information.  Instead, the Court found that the plan documents provided sufficient information to participants regarding the risks associated with investing in the company’s stock and that participants retained control over their investments.

            This decision is one more in a long line of recent cases that demonstrate courts’ strong skepticism of stock drop claims.  It remains to be seen if the repeated rejection of such claims at the motion to dismiss stage leads to a precipitous drop in filing of these claims by the plaintiffs’ bar.

By:  Amanda Sonneborn and Meg Troy

In the first case to rely substantially on Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541 (2011), to deny class certification in a putative ERISA class action, the Northern District of Illinois recently rejected the plaintiffs’ motion for class certification of a stock drop claim.  In Groussman et al. v. Motorola, Inc., No. 1:10-cv-00911, the court explained that after Dukes, class certification should only be granted after a “‘rigorous analysis’ by the court” and plaintiffs must show “more than that other courts certified classes in other ERISA cases based on different facts” to meet their burden under Rule 23.

In Groussman, plaintiffs alleged that defendants imprudently offered Motorola stock as a 401(k) plan investment option.  Plaintiffs sought to certify a class consisting of “all persons who were participants in, or beneficiaries of, the Plan at any time between July 1, 2007 and December 31, 2008 and whose account included investments in Motorola stock.”  The plaintiffs asserted claims that Motorola stock was an imprudent investment, that the defendants had failed to make adequate disclosures about Motorola’s business, and various claims derivative of those theories.

In refusing to certify plaintiffs’ proposed class, the Court first concluded that the proposed class did not meet the Rule 23(a) commonality requirement, because plaintiffs failed to show that members of the proposed class suffered the same injury or that key common issues of fact or law were capable of resolution in a class action.  The Court noted that the assessment of damages for each proposed class member would become “a massive series of individualized analyses,” in-appropriate for class treatment after Dukes because class members must all “have suffered the same injury.”  The Court also concluded that the plaintiffs’ proposed class did not meet the Rule 23(a) typicality requirement, noting “[i]t is not enough for the typicality requirement that Plaintiffs will present the same legal theories as the proposed class members.”  The Court agreed with defendants that each proposed class member would want to argue that it became imprudent to invest in Motorola stock on different dates based on their unique investment strategies, and that plaintiffs failed to identify the specific alleged misrepresentations and misleading statements that they relied upon to show they were deceived in a uniform fashion.  The Court noted that “among just Plaintiffs, there is a difference as to what each Plaintiff understood at any given time, and that Plaintiffs did not rely upon the same information or statements in making their investment decisions.”  The Court also found that plaintiffs failed to meet the Rule 23(a) adequacy requirement, because no one plaintiff could fairly and adequately represent the class, given that each proposed class member would want to tailor the liability and damages arguments in order to maximize his or her individual recovery.  

The Court also concluded that the class could not be certified under Rule 23(b)(1), because there was no risk of varying or inconsistent decisions.  In addition, the Court found that the class could not be certified under Rule 23(b)(3), because common questions of law or fact do not predominate.

The Groussman decision highlights the difficulty of obtaining class certification post-Dukes and shows that motions to certify classes in ERISA cases will receive higher scrutiny in the future.  Dukes and recent appellate court decisions are forcing district court judges to carefully examine whether cases truly involve uniform issues suited for class treatment or whether individual issues such as proof of causation, harm, and reliance predominate.

By: Ian Morrison and Sam Schwartz-Fenwick

Joining at least the Third, Fifth, Sixth, and Ninth Circuits, in finding a presumption of prudence attaches when defined contribution plans offer employer stock as an investment option, a divided panel of the Second Circuit today affirmed the dismissal of ERISA “stock drop” claims against Citigroup in In re: Citigroup ERISA Litigation, 09-3804 (Oct. 19, 2011). 

A majority (Judges Walker and Cabranes) voted to affirm dismissal of the complaint, which alleged that plan fiduciaries had breached their ERISA duty of prudence by not limiting the 401(k) Plan’s investments in Citigroup stock in the face of mounting subprime mortgage exposure.  The Court also affirmed the dismissal of plaintiffs’ claim that defendants breached their ERISA duty of loyalty by not disclosing inside information about these exposures to plan participants.

The court affirmed dismissal of the prudence claim because: 1) the Citigroup plan required offering a Citigroup stock fund and 2) the inclusion of that fund as an investment option is entitled to the “presumption of prudence” first articulated by the Third Circuit in Moench v Robertson, 62 F.3d 553 (3d Cir. 1995).  Under Moench, an employee stock ownership plan or “eligible individual account plan” participant may only recover from an ERISA fiduciary for failing to eliminate company stock investments if the court finds (under an abuse of discretion standard) that he has overcome a presumption that offering the stock investment is prudent.  

Importantly, the Second Circuit found that this rule could be applied at the motion to dismiss stage.  The plaintiffs’ allegations that the defendants knew of the bank’s subprime mortgage exposure and failed to evaluate the ongoing prudence of Citigroup stock were insufficient to overcome the presumption under an abuse of discretion standard of review.  To state a viable claim plaintiffs would have had to allege “circumstances placing the employer in a ‘dire situation’ that was objectively unforeseeable by the [plan’s] settlor” in order to require them to override the plan’s terms requiring that employer stock be offered as an investment.  Although Citigroup’s stock price fell more than 50% during the class period, that was not a sufficiently dire situation in the Court’s view.

The Court also found that ERISA fiduciaries have no duty to disclose non-public information regarding the performance of plan investment options and that the plaintiffs had not supported their claim that plan fiduciaries made knowingly false statements.

Judge Straub dissented, arguing that the Moench presumption improperly guts ERISA’s fiduciary duties.  Judge Straub would have reviewed the fiduciaries’ conduct under a plenary standard of review, a standard he found ill suited for resolution at the pleadings stage.  Judge Straub found plausible allegations of misstatements by at least one plan fiduciary and would have reversed as to the disclosure claim as well.

By: Ian Morrison, Nadir Ahmed and Sam Schwartz-Fenwick

Recently, many courts have dismissed ERISA “stock drop” cases at the pleadings stage, finding plaintiffs’ allegations insufficient to overcome the presumption of prudence which many courts find applies to the decision to offer qualifying employer securities as a plan investment option.  In the face of recent dismissals, several plaintiffs have sought leave to amend their complaints in an effort to plead around these deficiencies.  A recent decision from the Southern District of New York rejected such an attempt. 

On October 5, 2011, in In re Lehman Brothers Securities and ERISA Litigation (Case No. 09-MD-02017-LAK), the United States District Court for the Southern District of New York dismissed for the second time a complaint alleging that the defendant directors and/or plan administrators failed to prudently and loyally manage the Lehman Brother’s Savings Plan’s  assets, misstated and omitted material information about the company’s financial condition, and breached their duty of loyalty by failing to avoid conflicts of interest and monitor the committees appointed to administer the Plan.  In so deciding, the Court affirmed the high threshold necessary to rebut the presumption that a fiduciary’s decision to offer company stock as a plan investment option is consistent with his or her ERISA obligations.

In the wake of Lehman’s collapse, plan beneficiaries sued Lehman’s former directors and a member of the Plan Committee alleging that they knew of Lehman’s deteriorating condition but failed to protect the Plan by continuing to “hold and invest in Lehman’s stock before, during and after Lehman’s collapse.”  After the Court dismissed the original complaint, the plaintiffs filed a second pleading in which they named six more Plan Committee defendants, alleged that the defendants knew or should have known that Lehman was in a dire situation after March 16, 2008, when Bear Stearns was sold to JP Morgan Chase for $2 per share, and added fifty pages of new allegations.  The new allegations, included: (1) that an investment consulting company made presentations regarding a potential credit crunch and the Lehman’s Stock Fund’s poor performance; and (2) that the defendants were aware of the original complaint.

The Court dismissed the new complaint for a number of reasons.  First, the Court found the new allegations insufficient to overcome the so-called Moench presumption of prudence, which attaches when an employee stock ownership plan fiduciary follows plan terms that mandate offering the opportunity to invest in employer stock. Generally, plaintiffs may overcome this presumption by pleading that the fiduciary knew of an imminent corporate collapse or other dire situation indicating that continuing to offer employer stock as an investment would be inconsistent with the intent of the plan’s sponsor.  Here, the Court rejected plaintiffs’ argument that knowledge of the first complaint placed the defendants on notice of such dire circumstances, finding instead that the original complaint was composed of allegations, not evidence, and that the first complaint had not even alleged a claim upon which relief could be granted.  Likewise, the Court found that the presentations related to a credit crunch in the broader market and Lehman’s stock’s poor performance were equally insufficient to serve as notice of a dire situation, since even significant downswings can be expected.  Second, the Court rejected plaintiffs’ affirmative disclosure claim because ERISA only requires defendants to provide disclosures related to plan benefits, and the Second Circuit, unlike other Circuits, has not extended disclosure obligations to include information about a company’s financial condition.  Finally, the Court found that the complaint failed to allege a primary breach of fiduciary duty.  Specifically, the complaint did not plead facts demonstrating that: (1) the Director Defendants were fiduciaries for the purpose of exercising control and authority over the plan, (2) the defendants had any conflicts of interest that would violate ERISA’s duty of loyalty, and/or (3) the defendants appointed unqualified plan fiduciaries. 

 This decision reinforces the increasing degree to which courts are skeptical of stock drop claims and will insist on specific pleadings setting forth that the defendants knew of circumstances plainly rendering employer stock imprudent as an investment.  Courts no longer will find conclusory allegations, speculation, or inferences sufficient to allow a stock drop claim to proceed.

By:  Ronald Kramer, Alexis Hawley and Sam Schwartz-Fenwick

On September 6, 2011, in In re Nokia ERISA Litigation (Case No. 1:10-cv-03306-GBD), the Southern District of New York dismissed a class action complaint alleging breach of fiduciary duty claims based on defendants’ decision to continue to offer Nokia Corp. stock as an investment option under Nokia’s retirement plan.

According to plaintiffs, defendants Nokia, Inc. (a wholly owned subsidiary of Nokia Corp.), Nokia, Inc.’s Board of Directors, and Nokia, Inc.’s Plan Committee members breached their fiduciary duties by including Nokia Corp. Stock as an investment alternative when they knew or should have known that it presented an imprudent option.  Concurrent with the ERISA litigation, a securities fraud action was filed against the parent, Nokia Corp., alleging that the company made various misrepresentations about Nokia’s financial condition.  The majority of plaintiffs’ allegations in their ERISA complaint mirrored those in the related fraud action.  Specifically, plaintiffs pointed to Nokia Corp’s decision to reduce the price of Nokia phones and to exit the Chinese market.  Plaintiffs asserted that such decisions represented a dramatic shift in business strategy that Nokia Corp. allegedly failed to disclose to the public.  Plaintiffs asserted that as a result of these undisclosed shifts in strategy, Nokia Corp.’s stock price plummeted.

Based on these alleged omissions by Nokia Corp., the Court evaluated whether the complaint stated a viable claim that Nokia, Inc. breached various fiduciary duties, including the duty to prudently and loyally manage plan assets and to disclose complete and accurate information.  Relying on the Supreme Court’s Twombly/Iqbal pleading standard, the Court characterized plaintiffs’ complaint as dominated by conclusory allegations that utterly lacked any factual basis.  First, plaintiffs failed to raise any factual allegations demonstrating that Nokia Corp. perpetrated securities fraud by making misleading representations regarding its financial condition.  Thus, no plausible basis existed that Nokia stock was artificially inflated by fraud or that the stock constituted an imprudent investment.  Second, even if plaintiffs had made the requisite factual showing that Nokia Corp. engaged in fraud, their Complaint still failed because they presented no factual basis for imputing knowledge of Nokia Corp’s misrepresentations to the ERISA defendants.  Plaintiffs merely concluded – without factual support – that the ERISA defendants (none of whom were officers or directors of Nokia Corp.) possessed knowledge regarding the financial health of Nokia Corp. that would lead them to believe the stock was an improper investment option.  In short, the Court declined to assume that Nokia, Inc. and its Board played any role in the alleged securities fraud or knew of the alleged misrepresentations committed by its parent, Nokia Corp.

This case presents an important victory for employers because it enforces a stricter pleading standard for plaintiffs in stock-drop actions.  Courts should not entertain complaints based solely on conclusory allegations;  rather, plaintiffs must assert sufficient facts that the company and plan fiduciaries either committed or possessed actual knowledge of fraudulent misrepresentations that would impair the value of the stock and thus render it an imprudent investment option.