Since being revived “post-Fifth Third,” Whitley v. BP PLC has been subject to multiple district and appeals court rulings, adding to the complex and ongoing debate about the intersection of the DOL fiduciary standard with SEC securities trading laws.
While BP won dismissal of several claims that alleged some of its corporate entities failed to monitor fiduciaries who oversaw company stock investments in its retirement plans, other elements of the case have moved forward. In particular, the 5th U.S. Circuit Court of Appeals is now considering several challenging questions about whether insiders and managers at the BP company had a duty to act (and if so, how) on non-public information in managing BP stock investments owned by employees and subject to fiduciary oversight under the Employee Retirement Income Security Act (ERISA).
The real-world events driving the stock-drop challenge are tied to the Deepwater Horizon drilling disaster in the Gulf of Mexico, which killed nearly a dozen people in 2010 and resulted in the spilling of incredible volumes of oil into the ocean. Importantly, the spill lasted for some 90 days, leading to prolonged drops in BP’s stock price and other hurdles for the company. Information also slowly came to light, according to plaintiffs, who are participants in various BP retirement plans, that the dangerous conditions making such a spill possible persisted long before the actual disaster event and were consistently and willfully covered up by BP executives.
From an ERISA perspective there was long a “presumption of prudence” around publicly traded employer stock (established under Moench v. Robertson), such that retirement plan fiduciaries would not be expected to trade away their own employer’s stock, even during periods of substantial or prolonged drops in the market value. But this presumption was recently overturned by the Supreme Court in Dudenhoeffer v. Fifth Third Bancorp, leading the lower courts to have to redefine what plausible factual allegations are required to meet the new “more harm than good to the fund” pleading standards created by Fifth Third.
The questions at hand are weighty enough that both the Department of Labor (DOL) and the Securities and Exchange Commission (SEC) have filed briefs expressing their legal staffs’ opinions.
NEXT: Digging into the issues at hand
The DOL’s amicus brief explains that, when participants in the BP individual account plans direct fiduciaries to buy or sell their fund interests, “the fund may buy or sell BP stock on the open market to accommodate participant transactions … such that requests to acquire or redeem units of participation in the fund shall be effected on a daily basis. In addition to purchases, participants may also sell employer stock or interests in the fund due to participants' death, retirement, resignation, and/or termination … or sell their fund investments in their accounts in exchange for other plan investments. The fund's fiduciary can thus effect concurrent purchases and sales for the plans' operation.”
This is a common arrangement within employee stock ownership plans (ESOPs), with fiduciaries formerly relying on the “presumption of prudence” to continue holding and offering the employers’ stock, even during serious down periods. In BP’s case, the Deepwater disaster led to a protracted tough period for the company's general stock price, which persists today amid climate change worries and record-low oil prices. On the date of the explosion and start of the spill, the price of BP stock closed at $60.48. By May 29, 2010, the price had fallen to $42.95. After The New York Times published an article the next day showing BP knew about Deepwater Horizon's safety issues months in advance of the explosion, the price fell again, closing on June 1, 2010, at $36.52. In the last year the price has bounced around that point and even lower.
As the SEC’s amicus brief explains, the allegations that insiders in a given company were aware of systemic problems that could eventually come to light and lead to a sharp drop in the company’s stock price, while simultaneously directing employee dollars into the vulnerable company stock investments, are at the heart of the newest generation of stock drop cases to arise (or be revived) post-Fifth Third.
Pushing these cases away from bad investment decisionmaking and into the realm of fiduciary breaches is less the fact that participants suffered big losses in the ESOP and more that company executives and plan fiduciaries are accused of making purposefully misleading statements about the financial and operational health of the company. That's the case here, with both the lawsuit and the amicus briefs calling out individual BP executives/fiduciaries by name for making materially false public statements about company safety, profitability and operations while at the same time having a say in the ongoing investment of retirement plan participant dollars into company stock.
To reach this point the case has gone through a great number of procedural twists and turns that could confuse the most die-hard ERISA nerd. Most recently, a Texas district court “examined the alternative actions plaintiffs alleged defendants could have taken to protect the plans and concluded that, among the proposed options, only freezing the stock fund and disclosure presented plausible alternative actions consistent with the securities laws and ERISA.” The court then turned to whether those two actions would have done “more harm than good” to the plans. As the DOL brief explains, plaintiffs argued that they needed to only “plausibly allege that a prudent fiduciary in the same circumstances would have viewed the proposed alternative as more likely to help the fund than harm it. Defendants argued plaintiffs instead needed to plausibly allege a prudent fiduciary could not have concluded that any proposed alternative would have done more harm than good to the plans.”
NEXT: What’s it all mean?
The district court “found both formulations unhelpful, relying instead on the plausibility pleading standards of Bell Atlantic Corp. v. Twombly (2007), and Ashcroft v. Iqbal (2009).” Because the court could not “determine that no prudent fiduciary would have concluded that removing the BP Stock Fund as an investment option, or fully disclosing the state and scope of BP's safety reforms, would do more good than harm,” it held that plaintiffs plausibly alleged claims against certain BP executive and entities.
Now that the case has once again been appealed to the Fifth Circuit, the DOL and SEC are formally weighing in, seemingly on the side of plaintiffs and suggesting that BP will be held to account for its behavior leading up to the Deepwater disaster. In short, DOL argues the plaintiffs’ complaint “satisfies the standard established in Fifth Third... Plaintiffs allege that fiduciaries of the plan knew a BP insider had made publicly misleading statements—in violation of the securities laws—that inflated the value of the stock and concealed ongoing serious safety threats. In that circumstance, ERISA's duty of prudence required fiduciaries to protect plan participants and beneficiaries by taking corrective action to prevent the plans' ESOP from continuing to purchase illegally overvalued company stock.”
Like the district court, DOL believes the plaintiffs have “plausibly alleged at least two actions—freezing the stock fund and, if necessary, making a public disclosure—that the defendant-fiduciaries could have taken consistent with the securities laws and that a prudent fiduciary could not have concluded would do more harm than good given the ongoing fraud.”
For its part, SEC seems to agree with the DOL’s interpretation, explaining in its brief that neither freezing stock purchases nor making public disclosures would violate relevant securities law. “Under the securities laws, the issuer or its designees, or those that made the misstatements, can make a corrective disclosure that will sufficiently dissipate the artificial inflation,” the brief explains. “Here, the CEO of BP, who is one of the defendants, is alleged to have made the misstatements. The CEO could have, and indeed should have (under the facts alleged), made corrective securities-law disclosures … Other defendants could have attempted to induce the CEO as their co-fiduciary or the issuer to make such disclosures, or taken other steps, such as contacting the SEC, to protect plan participants (and the public at large) from making further purchases at inflated prices.”
Also important to note, DOL and SEC argue, “if the corrective action was not taken, the defendant-fiduciaries could have stopped purchasing and selling employer stock at the inflated price until corrective disclosures were made. Refraining from purchasing employer stock, even if based on inside information, does not violate the securities laws for corporate fiduciaries with inside knowledge of misstatements, so long as the fiduciary concurrently refrains from selling that stock for the plans.”
Further, they argue “suspending trading would have triggered the requirement that the issuer file a Form 8-K with the SEC, which would disclose the suspension and the reasons for it to the public. If all else fails, the plan fiduciaries could make a public disclosure of the fraud themselves.”
DOL summarizes the argument this way as it awaits yet another appeals court ruling in the ongoing case: “In the particular circumstances of this case, those two courses of action would have satisfied the second requirement of Fifth Third, that a prudent fiduciary could not have concluded the actions would do more harm than good to the Plans' ESOP. Where a known, ongoing fraud exists—and therefore a corrective disclosure is separately required by the securities laws—the fiduciary's overarching objective presumptively must be to stop the fraud and prevent the plan from continuing to purchase overvalued stock while the fraud continues. That conclusion is fortified in this case by the plaintiffs’ specific allegations that earlier disclosure of the safety problems at BP would have caused far less harm to the plans than continuing to conceal the fraud. In the circumstances here, putting an immediate end to the fraud advances the objectives of both ERISA and the securities laws.”
These arguments, as well as the complex case history in Whitley v. BP PLC, are presented in greater detail in the DOL and SEC briefs.