Plaintiffs’ Prudence Claims Snapped in General Cable Stock Drop Suit

In dismissing the stock drop challenge, the judge offers an illuminating review of what is required by ERISA’s duty of prudence; discussion of counts alleging breaches of the duty of loyalty and the duty to monitor is much briefer.

The latest ruling on an Employee Retirement Income Security Act (ERISA) lawsuit comes out of the United States District Court for the Eastern District of Kentucky, Northern Division; like many other recent decisions reached on stock drop matters, this one has come down strongly in favor of defendants.

The lead plaintiff filed suit on behalf of the General Cable Savings and Investment Plan, himself, and a class consisting of similarly situated participants of the plan. The first count of the amended class action complaint alleged breaches of the duty of prudence. Count two alleged breach of the duty of loyalty, while count three alleged breaches of the duty to monitor.

Echoing other stock-drop lawsuits that have similarly failed to clear motions to dismiss, here the plaintiff contended unsuccessfully that defendants permitted the plan to continue to offer General Cable stock as an investment option even after defendants knew or should have known that the stock was artificially inflated. In this case, the alleged knowledge of an artificially high stock price was rooted in the fact that the company had not disclosed that employees of its foreign subsidiaries had violated the Foreign Corrupt Practices Act of 1997 (FCPA) by paying bribes to foreign government officials. The plaintiff alleged that the stock was thus an imprudent investment, and defendants breached their various fiduciary duties in continuing to offer the stock to plan participants.

The text of the decision dives into the complex, precedent setting Supreme Court case of Fifth Third Bank vs. Dudenhoeffer, first considering the count of breach of prudence. On this point, the plaintiff alleged that defendants should have made “early and candid” disclosures of the FCPA violations because “the longer the concealment continued, the more of the plan’s good money went into a bad investment.” However, as the decision states, “the Sixth Circuit and other courts have expressly rejected that argument after Dudenhoeffer.” The text of the decision cites a number of examples from the Sixth Circuit, including Graham vs. Fearon; Saumer v. Cliffs Natural Res; Dormani v. Target Corp; and Fentress v. Exxon Mobil Corp.

“Plaintiff argues that early disclosure in this case would not have caused significant harm compared to the losses that eventually resulted because of the length of the class period—12 years—and the fact that General Cable ultimately was a net purchaser due to large purchases made towards the end of the class period,” the decision explains. “Again, however, the Sixth Circuit and other courts have rejected this argument because it effectively invokes hindsight to task fiduciaries with acting on information not available until years later. … Plaintiff’s allegation that defendants should have held participants’ contributions in cash or some other short-term investment or should have simply frozen further purchases meets with the same fate.”

The decision highlights the following key point: “Finally, plaintiff alleges that defendants should have resigned, sought guidance from regulatory authorities, or retained experts to advise them. These allegations are wholly conclusory and also do not satisfy Dudenhoeffer. … In sum, plaintiff has not plausibly alleged any alternative action the defendants could have taken that would have been consistent with the securities laws and that a similarly situated prudent fiduciary would not have viewed as more likely to harm than help the plan. Plaintiff thus has failed to plead a claim for breach of the duty of prudence.”

Discussion in the decision of the counts alleging breaches of the duty of loyalty and the duty to monitor is much briefer.

“Count two of the amended complaint alleges that defendants breached their duty of loyalty to plan participants by continuing to allow investment in General Cable stock; failing to engage independent fiduciaries to make judgments about investing plan assets; placing their interests above the interest of participants; misrepresenting information; satisfying General Cable’s matching obligations with company stock; and breaching their co-fiduciary obligations,” the decision points out. “These allegations largely mirror those underlying plaintiff’s breach of prudence claim, and to that extent they are derivative and fail for the same reasons.”

On the duty to monitor claims, only the following is noted by the district court: “Finally, plaintiff concedes that its duty to monitor claim is derivative of its first two claims. See In re: Target Sec. Litig., noting that plaintiffs cannot maintain a claim for breach of the duty of monitoring absent an underlying breach of other ERISA duties. This claim thus also fails as the pleading stage.”

The full text of the decision is available here.