U.S. District Judge Patrick J. Schiltz of the U.S. District Court for the District of Minnesota has dismissed a consolidated lawsuit alleging Wells Fargo violated its duties of prudence and loyalty under the Employee Retirement Income Security Act (ERISA) by keeping company stock as an investment in its 401(k) plan when plan fiduciaries knew the stock price was inflated.
Schiltz relied on the pleading standards set forth by the U.S. Supreme Court in Fifth Third v. Dudenhoeffer to make his decision. While the plaintiffs did put forth alternative actions plan fiduciaries could have taken to avoid participant losses after the September 2016 disclosure of fraud allegations against Wells Fargo caused its stock price to drop significantly, Schiltz found the plaintiffs did not plead specific facts to make plausible their allegation that, under the circumstances of the case, a prudent fiduciary “could not have concluded” that a later disclosure would result in a smaller loss to the company stock fund than an earlier disclosure.
“Plaintiffs’ prudence claim largely rests on their conclusory assertion that early disclosure of corporate misconduct is always better for a plan than later disclosure. That assertion is simply not true, as multiple courts have recognized,” he wrote in his opinion.
Plaintiffs allege that the plan fiduciaries knew or should have known about the fraud as early as 2005. Schiltz said plan fiduciaries’ decision about whether to disclose the information earlier than 2016 is a “fact‐sensitive inquiry.” Citing a court decision in a lawsuit against Target Corporation, he also said the fiduciary’s decision should not be “evaluated from the ‘vantage point of hindsight.’”
In his opinion, Schiltz put forth the many questions plan fiduciaries must consider when determining whether disclosure would cause a fund more harm than good. For example:
- Just how serious is the alleged fraud?
- How much would disclosure affect the company’s stock price in the short run? How about in the long run?
- How many shares of company stock does the plan currently own?
- How many additional shares will plan participants purchase if disclosure is delayed for a month? Or a year?
- How confident is the fiduciary that he or she has all relevant information, so that a single complete and accurate disclosure can be made?
- Should the fiduciary wait to get more information before disclosing the fraud so as to avoid a piecemeal release of a disparate array of half‐truths and incomplete data to the market?
- Should the fiduciary wait until the company’s fraud can be disclosed simultaneously with some remedial action, such as a settlement with the SEC, the resignation of the company’s CEO, or the rollout of a new company initiative to win back its customers’ trust? “Being able to pair an announcement of fraud with an announcement of remedial action may cushion the bad news and thus mitigate the dropin the stock price,” Schiltz noted.
- Would it be more beneficial to disclose the fraud through normal channels rather than through the fiduciaries of a 401(k) plan?
Schiltz conceded that this list of considerations is not exhaustive, but he said it is sufficient to make the point that an earlier disclosure is not always better than a later disclosure. “A dozen fiduciaries in the same position could weigh the same factors and reach a dozen different (but equally prudent) conclusions about whether, when, how, and by whom negative inside information should be disclosed,” he wrote.
Schiltz cited several post‐Dudenhoeffer cases that came down on the side of the defendants. For example, in Whitley v. BP, P.L.C., the 5th U.S. Circuit Court of Appeals held that a prudent fiduciary “could very easily conclude” that early disclosure of BP’s past safety breaches “would do more harm than good” to the plan.
The plaintiffs argue that their case is different because it involves fraud that was ongoing at the time that defendants failed to disclose. Schiltz conceded that ongoing fraud is one factor that a prudent fiduciary might consider in deciding whether early disclosure would better protect the plan’s assets; disclosing the fraud will usually end the fraud, and less fraud will usually mean less damage to the company. However, he said “ongoing fraud is not a talisman that will always satisfy Dudenhoeffer’s pleading standard. Rather, it is simply another factor that Defendants might have considered when deciding whether to make an earlier disclosure.”
Wells Fargo and the United States government announced in September 2016 that thousands of Wells Fargo employees had engaged in unethical sales practices, including opening deposit accounts and issuing credit cards without the knowledge or consent of customers. Plaintiffs’ attorneys took no time to start filing lawsuits, with a first, second and third lawsuit all filed in October 2016.
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