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While “ERISA and the securities laws ultimately have differing objectives pursued under entirely separate statutory schemes designed to protect different constituencies[,]” recent cases have explored the possibility of liability outside of the traditional “marketplace harm” for corporate practices which manipulated securities prices.  Jander v. Retirement Plans Committee of IBM, 910 F.3d 620, 632 (2d Cir. 2018).

 

Fentress v. Exxon Mobil Corporation

The recent case of Fentress v. Exxon Mobil Corporation, No. 4:16-CV-3484, 2019 WL 426147 (S.D. Tex., Feb. 4, 2019) assessed a company’s potential liability arising from its contribution to global warming.

Plaintiffs, who were participants in the Exxon Mobil Savings Plan and invested in Exxon company stock, brought a class action against Exxon senior corporate officers for failure to prudently manage the plan’s assets pursuant to 29 U.S.C. § 1104(a)(1)(D), alleging that they knew or should have known that Exxon’s stock had become artificially inflated in value owing to fraud and misrepresentation, mainly stemming from corporate failure to report impaired oil and gas reserves.  Exxon stock was the single largest holding of the plan, around $10 billion.

Materially false and misleading statements were primarily attributed to Exxon’s failure to disclose the impairment of reserves owing to, among other causes, “the proxy cost of carbon, which incorporated the future effects of global climate change….”

The plaintiffs alleged that, among other alternative actions, the defendants “should have sought out those responsible for Exxon’s disclosures under the federal securities laws and tried to persuade them to refrain from making affirmative misrepresentations regarding the value of Exxon’s reserves.”

The district court dismissed the non-public information claim because “the alternative actions proposed by plaintiffs were not ‘so clearly beneficial that a prudent fiduciary could not conclude that it would be more likely to harm the fund than to help it,” as required in the Fifth Circuit.  “[C]ourts have repeatedly found that early, corrective disclosures do not meet the alternative action standard of a duty of prudence claim.”

In their amended complaint, the plaintiffs uniquely pled that “based on general economic principles… corrective disclosures do not materially affect stock prices, and that Exxon’s stock drop was instead the result of the market punishing Exxon for its fraud.”

The court acknowledged that under a stock drop theory, plaintiffs may “allege imprudence (1) on the basis of publicly available information or (2) on the basis of non-public information” however reiterated the principle that “where a stock is publicly traded, allegations that [a] fiduciary should have recognized from publicly available information alone that the market was over or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances.” (quoting Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459, 2471 (2014)).  Apparently, global warming and reserve overvaluation do not qualify as “special circumstances.”

The court noted that, generally, ERISA fiduciaries can prudently rely on the market price, that the plaintiff’s burden is ‘significant’ and the alternative course of action must be “so clearly beneficial that a prudent fiduciary could not conclude that it would be more likely to harm the fund than to help it.”  (citing Whitley v. B.P., P.L.C., 838 F.3d 523, 529 (5th Cir. 2016)) (emphasis in the original).

The court refused to acknowledge that “attempting to prevent Exxon’s alleged misrepresentations would have been ‘so clearly beneficial that a prudent fiduciary could not conclude that it would be more likely to harm the fund than to help it.’ … As other comparable companies made corrective disclosures, remaining silent may have communicated to market investors that Exxon was facing the same troubles, which would have had much the same outcome as a corrective disclosure.”

During the pendency of briefing concluding and the court issuing a decision, Jander v. Retirement Plans Comm. of IBM, 910 F.3d 620 (2d Cir. 2018) was decided. The Fentress court identified a circuit split between the Second and Fifth that deprived the Jander opinion of any precedential value, centering on “the argument that reputational damage to the company would increase the longer the fraud went on.”

Further disassociating itself from Jander, the court identified that “there was no major triggering event that made Exxon’s eventual disclosure inevitable.” Despite investigations by state attorney generals and the SEC, the court held that, while “put[ting] pressure on the company [they] resulted in no charges within the class period… Exxon’s eventual disclosure was probably foreseeable, but the Court cannot say it was inevitable.”

 

In re Wells Fargo 401(K) Litigation

In re Wells Fargo 401(K) Litigation, 331 F. Supp. 3d 868 (D. Minn. 2018), is another recent case to address these concepts. The plaintiffs alleged that plan fiduciaries had inside information on the basis of which “they knew or should have known that the market price for the sponsor’s stock was ‘inflated’ and that therefore the plan fiduciaries, under ERISA, were required to take some sort of action, e.g., disclosure of the inside information.”

Wells Fargo established three primary hurdles for a plaintiff bringing an ESOP claim.  First, ERISA’s duty of prudence never requires a fiduciary to break the law, thus “a fiduciary cannot be imprudent for failing to buy or sell stock in violation of the insider trading laws.”  Second, when the action at issue is failure to act on negative inside information (be it via sale or disclosure), a court must carefully adjudge whether the proposed action would have ran afoul of corporate disclosure requirements or insider trading laws.  Third, and most often the heavily contested factor, a court must consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that stopping purchases or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and concomitant drop in the value of the stock already held by the fund.”

Wells Fargo conceded the Supreme Court’s decision in Fifth Third Bancorp et al. v. Dudenhoeffer, 573 U.S. 409 (2016), was limited to stock drop claims based on a breach of the ERISA duty of prudence – yet securities law still complicates breach of loyalty claims under ERISA: a court “would have as much concern about these loyalty claims as it had about the prudence claims in Dudenhoeffer.”  While stock drop claims may originate under ERISA, concern of the policy implemented by the Private Securities Litigation Reform Act of 1995 which “sought to reduce the volume of abusive federal securities litigation by erecting procedural barriers… such as heightened pleading standards” is still paramount. Plaintiff’s counsel must be wary of a complaint appearing to be nothing more than an attempt to get around those heightened pleading standards under the securities laws, involving “taking what is essentially a securities-fraud action and pleading it as an ERISA action.” (quoting Wright v. Medtronic, Inc., No. 09-cv-0443, 2010 WL 1027808 (D. Minn., Mar. 17, 2010)).

Pleading a breach of the duty of prudence requires an elevated showing – that a prudent person would not have delayed disclosure of the defect.  By comparison, pleading a breach of the duty of loyalty requires a showing that a fiduciary delayed disclosure of the defect to further his own interests, rather than the interests of the fund participants.  Tussey v. ABB, Inc., 850 F.3d 951, 958 (8th Cir. 2017) (“A fiduciary can abuse its discretion and breach its duties by acting on improper motives, even if one acting for the right reasons might have ended up in the same place.”).

Ultimately, the Wells Fargo court found that, as employees of Wells Fargo, the defendants were “incentivized to avoid doing or saying anything that would harm the image or reputation of Wells Fargo.”  The court stated, “the mere fact that a fiduciary had an adverse interest does not by itself state a claim for relief.”

 

Jander v. Retirement Plans Committee of IBM

In Jander v. Retirement Plans Committee of IBM, 910 F.3d 620 (2018), IBM employees claimed that the plan’s fiduciaries knew that a division of the company was overvalued but failed to disclose that fact – a failure which artificially inflated IBM’s stock price, harming the ESOP’s members.[1]  The court held that even under a more restrictive interpretation of the Supreme Court’s ruling – which was at contention between the parties – the plaintiffs plausibly alleged an ERISA violation.[2]

The plaintiffs took issue with the defendants’ continual investment of the ESOP’s funds in IBM common stock despite the plan defendants’ knowledge of undisclosed troubles relating to IBM’s microelectronics business, in violation of the duty of prudence. The plaintiffs argued the defendants should have either disclosed the truth about Microelectronics’ value or issued new investment guidelines that would temporarily freeze further investments in IBM stock.

The Jander court recognized Dudenhoeffer’s concern that “subjecting ESOP fiduciaries to a duty of prudence without the protection of a special presumption will lead to conflicts with the legal prohibition on insider trading,” given that “ESOP fiduciaries often are company insiders” subject to allegations that they “were imprudent in failing to act on inside information that they had about the value of the employer’s stock.”  That being said, the Jander court still emphasized that “an ESOP-specific rule that a fiduciary does not act imprudently in buying or holding company stock unless the company is on the brink of collapse (or the like) is an ill-fitting means of addressing” that issue, concluding that the presumption of prudence was not “an appropriate way to weed out meritless lawsuits or to provide the requisite ‘balancing.’”

The court identified the correct standard as one which must “readily divide the plausible sheep from the meritless goats,” a task that is “better accomplished through careful, context-sensitive scrutiny of a complaint’s allegations.”  The court also attacked the “presumption of prudence as ‘making it impossible for a plaintiff to state a duty-of-prudence claim, no matter how meritorious, unless the employer is in very bad economic circumstances.’”

Critically then, under the IBM court’s holding, plaintiffs must allege “an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”

The IBM court identified three considerations to “inform the requisite analysis.”  The first is that the duty of prudence does not, and cannot, require an ESOP to perform an action which would violate the securities laws.  The second is that if the complaint faults fiduciaries for failing to make additional purchases or disclose information to the public, thereby avoiding overvalued stock, courts must consider whether the action advocated by the plaintiffs could conflict with insider trading and/or corporate disclosure requirements.  Finally, courts must consider whether the complaint plausibly alleged that a prudent fiduciary could not have concluded that any alternative action would have done 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.”  Citing Fifth Third.

Noting that the plan defendants “allegedly knew that IBM stock was artificially inflated through accounting violations” and that the plaintiffs had “plausibly alleged a GAAP violation,” under ERISA’s “lower pleading standards” the plaintiffs had “plausibly pled that IBM’s Microelectronics unit was impaired and that the Plan fiduciaries were aware of its impairment.”

The court also noted that two of the plan defendants had the primary responsibility for the public disclosures that had artificially inflated the stock price to begin with and disclosure could have been done within a regular SEC reporting regime so as not to “spook the market.”

Perhaps most notably, the appellate court endorsed the allegation that the defendants’ failure to promptly disclose “hurt management’s credibility and the long-term prospects of IBM as an investment” as the eventual disclosure of prolonged fraud caused exponentially increasing “reputational damage.”  The court refused to classify this argument as retrospective – the district court’s issue with this claim – as a “reasonable business executive could plausibly foresee that the inevitable disclosure of longstanding corporate fraud would reflect badly on the company and undermine faith in its future pronouncements.”  The plaintiff also supported this argument with economic analyses.

Potentially unique to the IBM case, the court noted that the defendants “allegedly knew that disclosure of the truth… was inevitable, because IBM was likely to sell the business and would be unable to hide its overvaluation from the public at that point… In the normal case, when the prudent fiduciary asks whether disclosure would do more harm than good, the fiduciary is making a comparison only to the status quo of non-disclosure.  In this case, however, the prudent fiduciary would have to compare the benefits and costs of earlier disclosure to those of later disclosure…”  When a loss is inevitable, a fiduciary should endeavor to limit the effects of the artificial inflation, generally leaning toward earlier disclosure.

[1] In a subsequent motion to stay the Second Circuit’s mandate, the defendants’ alleged this ruling was the first to “hold that a plaintiff can state a claim for breach of the fiduciary duty of prudence under Section 502… based on the failure of a corporate officer to disclose that the company’s stock was overvalued.”  Jander v. Retirement Plans Committee of IBM, No. 17-3518, ECF No. 84.

[2] On February 4, 2019, the Second Circuit denied the defendants’ motion to stay the mandate pending the filing and disposition of their writ of certiorari.

Admittedly, the title may be a bit misleading – there is no foolproof way to shield yourself from pension errors.  Pensions and other retirement benefits are complicated beasts, often tracking 30+ years of an employee’s career history across multiple positions, companies, plan amendments and, typically, through at least one merger or acquisition.

Fortunately, there are a few ‘best practices’ which, if followed, may allow you to document the promises made to you along the way, so that any unwelcome surprise waiting for you when it is time to finally ‘cash in the chips’ may be resolved as expeditiously as possible – and in your favor.

Print out your pension statements and summaries quarterly.

These documents are generally updated on a quarterly basis – if not, you have the right to request updated statements at any time.  Statements and accounts summaries can help you track accruals throughout the years and diagnose if, and when, an issue may have first arisen.  They can also serve as valuable evidence should an appeal or lawsuit become necessary.

Save and/or scan every piece of correspondence you receive from either your employer or the plan.

A seemingly innocuous letter informing you of a ‘minor’ modification to the pension calculation formula today may be worth tens of thousands of dollars to you a decade from now – it is simply impossible to predict.  While employers and pension administrators are required, by ERISA, to turn over all correspondence sent to pension participants upon request, generally the only way to verify compliance, and thereby ensure all relevant communications are accessible, is to keep your own file.

Ask for everything in writing.

While your regional manager may have an excellent memory and reputation for honesty, obtaining written confirmation in some form of every message delivered to you from either your employer or an agent of the pension administrator in relation to your pension is the only way to ensure those characteristics endure.  Do not settle for handshake promises or announcements at the end of weekly meetings – ERISA requires all material modifications to your pension plan to be communicated either electronically or via mail.

When calling on your pension, document the first and last name of every individual you speak with, as well as an employee identification number and call number, if possible.

While the electronic recording at the beginning of your call may kindly inform you that your call is being recorded, it does not guarantee you access to that recording.  Corporations’ data retention policies regarding recordings of calls are hardly transparent and rarely available, so if a call recording ever holds the key to evidencing your entitlement to a larger pension amount, do not be surprised if it has ‘unfortunately’ been purged under a ‘regular or routine’ data-deletion schedule.  Even if the call recordings are available, administrators are typically unwilling to release those prior to litigation.  Documenting names and any form of identification numbers is a best practice which can lend credence to a claim of explanations or promises made verbally, in the event the actual recordings are unobtainable.

Digitally preserve any unusual activity.

Modern technology enables you to prepare for the worst case scenario in real-time.  If you notice unusual activity on your online pension portal, take screenshots and/or recordings of the abnormality.  Document the URLs, export a PDF version of the webpage causing you concern.  Any form of digital evidence is exponentially more persuasive, and valuable, than personal testimony.

Document each and every employment or financial decision you make which is predicated on your current understanding of your future pension entitlement.

From purchasing a new home to extending employment for another year, innumerable day to day decisions are based upon a basic understanding of the size of one’s pension – and rough calculations of where it should be at come retirement.  Keep a journal in some form of these decisions, dating the point in time the decision was made and, ideally, what your current expected pension cash-out is.  In the event issues later arise, a written record of your reliance upon calculations provided to you through past years is critical to maximizing your likelihood of recovering all that was promised to you.

 

While these ‘best practices’ may seem tedious, or even unnecessary, in light of your plan’s ‘superb’ funding status, the amounts potentially at stake justify surplus precaution.  Creating your own paper-trail should give you peace of mind that you are preparing yourself for a worst-case scenario which could rob you of the satisfaction of reaching retirement.

On January 22nd, 2019, a federal district judge certified a class of at least 28,000 participants and beneficiaries of the Cornell University Retirement Plan, consisting of the Employees of the Endowed Colleges at Ithaca Plan and the Cornell University Tax Deferred Annuity Plan, in Cunningham et al. v. Cornell University et al., No. 1:16-cv-06525 (S.D.N.Y., Jan. 22, 2019).

Consistent with a number of suits for underfunded and poorly performing university pension plans, the plaintiffs’ complaint asserts the fiduciaries did not manage the plans prudently, underperformed, and accrued excessive administrative fees in violation of ERISA Sections 404 and 406, 29 U.S.C. §§ 1104, 1106.

Each plan holds more than a billion dollars in assets, a fact which the plaintiffs claim affords the plans and their fiduciaries “tremendous bargaining power in the market for retirement plan services.”  While participants are allowed to designate which of the available investment options to invest their individual accounts, the Plans’ fiduciaries choose the investment option offerings, which as of December 2014 averaged 300 separate investment options between the two plans.

The defendant fiduciaries, including Cornell University, the Retirement Plan Oversight Committee, the plan recordkeepers – TIAA-CREF (Teachers Insurance and Annuity Association of America) and the College Retirement Equities Fund) and Fidelity, and CAPTRUST Financial Advisors, had previously filed a motion to dismiss which was denied in part.

In denying the defendants’ motion to dismiss, the federal court held that the plaintiffs’ amended complaint plausibly alleged:

  • All defendants, other than CAPTRUST, failed to monitor and control the plans’ recordkeeping fees and failed to solicit bids from competing recordkeeping providers on a flat per-participant fee basis, and failed to determine, in a timely manner, whether the plans would benefit from moving to a single recordkeeper; and
  • All defendants unreasonably continued to offer as a fund option the CREF Stock Account and TIAA Real Estate Account, despite high fees and poor performance, selected and retained funds with high fees and poor performance relative to other available options, and selected and retained high-cost mutual funds instead of identical lower-cost funds.

In ruling on the motion to dismiss, the court also held that the plaintiffs had plausibly alleged that Cornell University and Mary G. Opperman, the head of the Oversight Committee, failed to monitor the performance of their appointees to the Committee and failed to remove appointees whose performance was inadequate as related to selecting and retaining funds.

In certifying the class, the court defined the class as “All participants and beneficiaries of the Plans from August 17, 2010, through the date of judgment, excluding the Defendants and any participant who is a fiduciary to the Plans.”

The court held that the plaintiffs had demonstrated individualized losses for each count which survived the motion to dismiss, noting that the Second Circuit has previously held that plaintiffs who assert claims in a derivative capacity on behalf of a retirement plan establish sufficient injury-in-fact by alleging injuries to the plan itself, regardless of whether the plan is a defined benefit or defined contribution plan.  Nor was standing predicated on a plaintiffs actual purchase of a financial instrument – as long as the defendant’s conduct in question implicates the same set of concerns, a plaintiff can bring claims on behalf of the absent class members who had purchased said instruments. (“Personalized injury-in-fact requires named plaintiffs to demonstrate individualized losses in the form of some amount of financial damage; it does not require harm to be shown from investment in each fund that makes up an overall plan.”).

In adjudging commonality, the court noted that the common contention of the classes’ action was that “the investment lineup made available to all participants violated ERISA… [and that] the centralized administration of [the plans] is common to all class members.”  This commonality holds regardless of the number of individual funds available in each plan, as the allegations go to the defendants’ prudential oversight and failure to take actions that would result in lower costs.

Also of note, the court refused to credit defendants’ argument that individualized statute of limitation calculations negated the “many other common issues in this case.”

Regarding typicality, the court held that “[e]ach plaintiff’s claim and each class member’s claim is based on the same legal theory and underlying events, namely, that CAPTRUST and the Cornell Defendants breached their duty of prudence by imprudently selecting, administering, and reviewing the Retirement and TDA Plans’ investments, recordkeeping fees, and the Committee’s delegates.”

A full copy of the court’s opinion and order is available here.