Compliance

Target Prevails in ERISA Stock Drop Suit

The plaintiffs failed to meet pleading standards set forth in Fifth Third v. Dudenhoeffer, a court ruled.

By Rebecca Moore editors@plansponsor.com | August 07, 2017
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A federal district court judge has dismissed claims in a combined Employee Retirement Income Security Act (ERISA) and securities lawsuit about the decline in Target Corp.’s stock price after its failed attempt to open stores in Canada.

A proposed class action lawsuit was filed in July 2016 by a participant in Target Corporation’s 401(k) plan, which alleges the company violated its fiduciary duties under ERISA by continuing to allow participants to invest in the company stock fund when it was no longer prudent. The plaintiff in the suit suggested several actions Target could have taken when it knew or should have known its stock price was artificially inflated. Less than a week later, another ERISA challenge was filed against Target.

U.S. District Judge Joan N. Ericksen of the U.S. District Court for the District of Minnesota agreed with the defendants’ argument that the plaintiffs’ claims fail under the pleading standards articulated by the Supreme Court in Fifth Third Bancorp v. Dudenhoeffer. Ericksen noted that the Supreme Court held that in order for plaintiffs to state a claim “for breach of the duty of prudence on the basis of inside information,” they must plausibly allege an alternative action that the defendant fiduciaries could have taken that would have been consistent with the securities laws, and “a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.” The Supreme Court noted one example of an action that would be inconsistent with securities laws: “divesting the fund’s holdings of the employer’s stock on the basis of inside information.”

The plaintiffs alleged that Target defendants should have taken the following alternative actions to protect plan participants from artificially-inflated Target stock prices: (1) refrained from purchasing Target stock by “freezing” purchases and/or sales of Target stock in the Fund; (2) held plan contributions in cash or some other short-term investment rather than making future purchases of Target stock; disclosed the nonpublic, material information to the public; sent targeted letters to plan participants encouraging them to diversify holdings; sought guidance from the Department of Labor (DOL) or Securities and Exchange Commission (SEC) or outside experts; or resigned as fiduciaries.

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