By Pension and Benefits Editorial Staff
Allegations that plan fiduciaries, including company officers, failed to avoid conflicts of interest and failed to disclose inside corporate information regarding unethical sales practices to plan participants did not state a plausible claim for breach of ERISA’s duty of loyalty, according to a federal trial court in Minnesota. The court declined to apply the Dudenhoeffer pleading standard to the loyalty claim, but determined that the participants failed to plead sufficient facts to state a claim for relief that was plausible on its face.
Stock drop following disclosure of corporate fraud triggers ERISA actions. Well Fargo sponsors a 401(k) plan that allows eligible employees to contribute to individual accounts. Two of the plan’s investment funds consist primarily of Wells Fargo stock. In addition, matching contributions made by Wells Fargo are invested automatically in company stock. Accordingly, at any given time, a large portion of the plan’s assets (an estimated 34%) is invested in Wells Fargo company stock.
In September 2016, following the disclosure by the federal government of widespread fraud and unethical sales practices at Wells Fargo (allegedly dating back to 2005) the value of the company stock declined substantially. Participants in the 401(k) plan, who experienced losses, brought suit against plan fiduciaries--who were also corporate insiders--alleging that they breached their duty of prudence under ERISA by failing to disclose their knowledge of the improper sales practices prior to 2016.
A federal trial court ruled that the failure of plan fiduciaries to disclose inside knowledge of a company’s unethical sales practices before the revelation adversely affected the value of the company’s stock did not breach the applicable duty of prudence. Applying the standard articulated by the Supreme Court in Fifth Third Bancorp v. Dudenhoeffer (US Sup Ct (2014), 134 S Ct 2459, the court ruled that the plan participants failed to establish that the fiduciaries could not have concluded that a later disclosure of the information would result in a reduced loss to the plan (In re: Wells Fargo ERISA 401(k) Litigation, DC MN (2017), No. 16-CV-3405 (PJS/BRT).
Amended complaint alleges breach of duty of loyalty. The participants’ claim that the fiduciaries breached their duty of loyalty was also dismissed. However, the court granted the participants leave to amend the claim to specifically identify the fiduciaries who breached the duty of loyalty, and when and how that duty was breached.
The participants’ second amended complaint alleged that individual fiduciaries breached their duty of loyalty by: failing to avoid conflicts of interest; failing to disclose material inside information about ongoing misconduct at Wells Fargo; and affirmatively misleading the general public. The fiduciaries countered that the Dudenhoeffer “more-harm-than-good” pleading standard should apply to both prudence and loyalty claims, warranting the dismissal of the complaint. Alternatively, the fiduciaries argued that, even without application of the Dudenhoeffer pleading standard, the participants’ allegations did not establish a claim for breach of the duty of loyalty under ERISA.
Dudenhoeffer pleading standard does not apply to loyalty claims. In rejecting further application of the Dudenhoeffer standard, the court initially noted that the elements of the loyalty and prudence claims differ. The duty of prudence requires fiduciaries to act in accordance with an objective standard. By contrast, the duty of loyalty is measured by a subjective standard that focuses on the motives behinds a fiduciary’s actions. Thus, a participant who brings a loyalty claim is not required to prove anything about what a hypothetical prudent person would have done under the circumstances. Rather, the participant must plead and prove that fiduciaries acted in bad faith to further their own interests, instead of the interest of the plan and its participants. Applying the Dudenhoeffer more-harm-than-good standard of prudence to the participants’ loyalty claims, the court reasoned, would, therefore, require them to plead something they were not required to prove.
Breach of duty of loyalty claim not plausible. Having rejected application of the Dudenhoeffer standard, the court next turned to whether the participants’ complaint pleaded sufficient facts to state a claim to relief that was plausible on its face. The court concluded that the participants’ allegations were not sufficient to state a plausible claim for breach of the duty of loyalty and dismissed the claim with prejudice.
Failure to avoid conflicts of interest. The participants charged that the fiduciaries breached their duty of loyalty by failing to avoid conflicts of interest. Specifically, the participants alleged that the Wells Fargo officers, employees, and Board members were incentivized to avoid doing or saying anything that would harm the image or reputation of Wells Fargo as doing so would harm their careers and places on the Board. However, the court noted that the mere fact that fiduciary has an adverse interest does not in itself state a claim for relief. ERISA, the court advised, does not prohibit corporate officers from also serving as plan fiduciaries.
Failure to disclose inside information. The participants conceded that fiduciaries may serve dual roles, but maintained that Wells Fargo fiduciaries went beyond serving dual roles and breached their duty of loyalty by failing to disclose material information about misconduct at the company. However, the court explained that ERISA does not impose an affirmative duty on a corporate insider who acts as a plan fiduciary to disclose to plan participants inside information about the corporation that might affect the value of the corporation’s stock. Any duty to disclose such information, the court stressed, would fall under securities laws, which would also provide a remedy for holding the officers accountable. ERISA, however, does not impose such a duty and merely requires that plan fiduciaries not dispense misleading plan and benefit specific information. The participants did not allege that the fiduciaries failed to comply with the ERISA standard by providing misleading plan information. Therefore, the court concluded, to the extent the loyalty claim relied solely on the fiduciaries’ nondisclosure of inside information about the present and future financial condition of Wells Fargo, it must be dismissed.
Misrepresentations to general public. As a third leg in their breach of the duty of loyalty claim, the participants suggested that the fiduciaries made affirmative misrepresentations to the general public. Initially, court noted that the alleged communications (media interviews and press releases) were not fiduciary communications, but were made by individuals acting in their corporate capacity. Moreover, the court stressed that the participants did not charge that they actually relied on the alleged misrepresentations in making the decision to retain Wells Fargo stock. As the participants did not claim reliance on the misrepresentations, the court reasoned, they could not establish that any loss resulted from an alleged misrepresentation.
Source: In re: Wells Fargo Litigation (DC MN).
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