Securities Regulation Daily Alleged harm regarding general economic allegations did not outweigh the good
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Monday, April 19, 2021

Alleged harm regarding general economic allegations did not outweigh the good

By Amy Leisinger, J.D.

The plaintiff failed to state how earlier disclosure could have prevented actual losses.

A Ninth Circuit panel affirmed a district court’s dismissal of an action alleging breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA) in the pension-plan's asset management. An employee of Edison International alleged that fiduciaries of the company’s employee stock ownership plan (ESOP) breached their duty of prudence by allowing employees to continue to invest in Edison stock after learning about artificial stock price inflation. According to the panel, the plaintiff failed to state a duty-of-prudence claim under the Fifth Third Bancorp v. Dudenhoeffer standard to allege a clearly beneficial alternative action less likely to harm. General economic principles are not enough on their own to plead duty-of-prudence violations, the panel explained (Wilson v. Craver, April 19, 2021, Murguia, M.).

Allegations. An employee of Edison International, an electric company, brought a class action against two Edison executives alleging a breach of the duty of prudence by allowing employees to continue to invest in Edison stock after learning that the company’s stock was artificially inflated. The plaintiff stated that the defendants breached their duty because they knew that undisclosed information regarding a plant closure was artificially inflating Edison’s stock price and took no action to protect plan participants from foreseeable harm. The district court dismissed the plaintiff’s claims, finding a failure to plausibly allege a proper alternative action.

Statutory requirements. ERISA requires the fiduciary of a pension plan to act prudently in managing the plan’s assets. Under the Supreme Court’s Fifth Third standard, to state a claim, a plaintiff must plausibly allege that an alternative action could have been taken consistent with the securities laws that a prudent fiduciary would not have viewed as more likely to harm than help. Under the precedent, the ESOP duty of prudence requires plan management to act with "care, skill, prudence, and diligence." Previously, ESOP fiduciaries were entitled to a presumption that their fund management was prudent.

The Supreme Court, however, recognized that absent the presumption of prudence, ESOP fiduciaries may face excessive litigation but also that ESOP fiduciaries are often company insiders frequently alleged to have inside information that their company’s stock is overpriced. In light of these considerations, the Supreme Court endeavored to balance Congress’s stated interest in encouraging the creation of ESOPs with the right of plan participants to enforce their rights under a plan "through careful, context-sensitive scrutiny of a complaint’s allegations."

Failure to show "more harm than good." The plaintiff contends that that the district court incorrectly concluded that whenever the plaintiff’s proposed alternative action—in this case an immediate comprehensive corrective disclosure—would result in a decline in the stock price, the court applied such an impossible standard. However, the panel found, the district court did not hold that the plaintiff failed to state a duty-of-prudence claim solely because a corrective disclosure would have caused a drop in Edison’s stock price. Rather, it concluded that the complaint failed to include context-specific allegations plausibly explaining why a prudent fiduciary in the defendants’ position "could not have concluded" that a corrective disclosure would do more harm than good to the fund.

The complaint primarily relies on the theory that no reasonable fiduciary could have thought that disclosing the truth of the ex parte communications would do more harm than good to the stock price, even with underlying volatility, the court stated. However, nearly every court to consider duty-of-prudence claims post-Fifth Third has rejected the notion that general economic principles, such as those asserted by the plaintiff, are enough to plead duty-of-prudence violations, according to the panel.

"Notably, if all that is required to plead a duty-of-prudence claim is recitation of generic economic principles that apply in every ERISA action, every claim, regardless of merit, would go forward," the panel explained.

The district court properly determined that the plaintiff failed to plead that a prudent fiduciary in the defendants’ position could not have concluded that an alternative action in issuing a corrective disclosure would do more harm than good. The plaintiff did not provide context-specific allegations explaining why earlier disclosure would have been so clearly beneficial that a prudent fiduciary could not conclude that disclosure would do more harm than good., according to the court. As such, the derivative monitoring claim alleged must also fail, the court concluded.

The case is No. 18-56139.

Attorneys: Samuel E. Bonderoff (Zamansky LLC) for Cassandra Wilson. John M. Gildersleeve (Munger, Tolles & Olson LLP) for Theodore F. Craver.

Companies: Edison International Inc.

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