The plaintiffs in a long-running Employee Retirement Income Security Act (ERISA) lawsuit filed against various Wells Fargo defendants have petitioned the U.S. Supreme Court to review an unfavorable ruling handed down by the 8th U.S. Circuit Court of Appeals in July.
The 8th Circuit ruling at issue affirmed a lower court ruling out of the U.S. District Court for the District of Minnesota, which sided firmly with the Wells Fargo defendants based on precedent set by the 2014 Supreme Court ruling known as Fifth Third v. Dudenhoeffer.
The allegations in the suit follow the classic pattern of so-called “stock-drop” litigation. Such suits are often filed when a negative news story or regulatory filing reveals a piece of information that causes the price of a company’s stock to decline—leading to losses in the retirement investment accounts of its employees. In this case, negative media reports and congressional inquiries plagued Wells Fargo’s personal banking wing for several years, starting in late summer 2016. According to contemporaneous news reports and the admissions of now-ousted CEO and Chairman John Stumpf, the company’s aggressive sales requirements for low-level banking professionals directly inspired the opening of millions of unauthorized customer accounts.
Disclosure of this information resulted in a significant backlash against the company. At its low point, Wells Fargo’s stock lost roughly 12% to 15% of its pre-disclosure value, while the company faced separate civil penalties approaching $200 million.
In their petition, the plaintiffs/appellees call on the Supreme Court to answer two primary questions:
- Whether, under Dudenhoeffer, employee stock ownership plan (ESOP) fiduciaries are effectively immune from duty-of-prudence-liability for the failure to publicly disclose inside information; and
- Whether Dudenhoeffer’s framework extends beyond prudence-based claims and applies to duty-of-loyalty claims against ESOP fiduciaries.
In Dudenhoeffer, the Supreme Court held that stating a claim against fiduciaries of an ESOP, for breaching ERISA’s duty of prudence in the offering of their own company’s stock, requires meeting a high pleading standard, given the fact that rigorous securities disclosure laws are almost always implicated. Specifically, the ruling requires that plaintiffs plausibly describe “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.”
Dudenhoeffer also held that such a claim is governed by ordinary pleading standards and requires a “careful, context-sensitive scrutiny” of whether the complaint plausibly alleges that fiduciaries “behaved imprudently by failing to act on the basis of nonpublic information that was available to them because they were [company] insiders.”
The plaintiffs’ Supreme Court appeal suggests that various courts of appeal have adopted impermissibly divergent interpretations of Dudenhoeffer. Most of them, according to the plaintiffs, are overly strict and make the successful filing of stock-drop lawsuits nearly impossible.
“Last term, this court granted certiorari in Retirement Plans Committee of IBM v. Jander to clarify what it takes to plausibly allege a breach, but vehicle problems prevented it from doing so,” the appeal states. “Meanwhile, the [8th Circuit] has deepened the split, and interpreted Dudenhoeffer to effectively immunize all ESOP fiduciaries from duty-of-prudence claims premised on the failure to publicly disclose inside information because such disclosure would always cause an initial stock drop.”
The appeal, which stretches over 30 pages, presents various detailed arguments to this effect.
“In Dudenhoeffer, this court made clear that ERISA applies its stringent duty-of-prudence standards to all ERISA fiduciaries, including ESOP fiduciaries, except where the statute provides otherwise,” the appeal states. “Accordingly, the Supreme Court rejected the application of any pleading presumption to ESOP fiduciaries, disapproving an approach that made it impossible to state a duty-of-prudence claim. Yet, the 8th Circuit does just this. It requires plaintiffs to satisfy hurdles that are so onerous that it is difficult to imagine how a plaintiff could ever successfully plead a claim for relief.”
The argument continues as follows: “According to the 8th Circuit, plaintiffs are flatly barred from relying on generally applicable economic principles that any prudent fiduciary would be required to consider. So, they are deprived of the very context-specific circumstances that Dudenhoeffer identified as necessary for explaining how or why a prudent fiduciary should have known to take alternative actions such as earlier corrective disclosure. It will be similarly difficult to overcome inferences favoring fiduciary delay—the 8th Circuit’s presumption of prudence in the face of any ongoing investigation all but shuts the door on any earlier-disclosure claim, even when such a claim could proceed under the securities laws.”
Among other supporting arguments, the plaintiffs invite the Supreme Court to compare how claims filed on behalf of the ESOP stack up against those filed by outside investors in the wake of the fake-account scandal.
“Left to stand, the 8th Circuit’s decision erects a pleading rule that incongruously treats ERISA participants and beneficiaries less favorably than private investors,” the appeal states. “Recall that those non-ERISA investors brought securities-fraud and state-law fiduciary-duty claims against Wells Fargo and its insiders for the same misconduct that formed the basis of the plaintiffs’ duty-of-prudence claims here. And recall also that those claims were all subject to pleading standards that are indisputably higher than they are supposed to be here. But, unlike here, when courts had the opportunity to examine those claims, they had little difficulty concluding that those plaintiffs stated claims for relief—even under those heightened pleading standards. That was true with regard not only to claims that Wells Fargo executives breached the securities laws by failing to make an early corrective disclosure, but also to claims that they violated state-law fiduciary obligations—which are considered possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.”
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