Tuesday, May 04, 2021

Supreme Court will not take suggested opportunity to clarify Dudenhoeffer's application

By Rodney F. Tonkovic, J.D.

The Supreme Court has denied certiorari for a petition asking it to clarify what it takes to allege a breach of ERISA’s duty of prudence. The petition argued that divergent interpretations of the court's decision in Dudenhoeffer have led to some circuits holding that ESOP fiduciaries are effectively immunized from certain duty-of-prudence claims based on the failure to disclose potentially harmful inside information (Allen v. Wells Fargo & Company, December 23, 2020).

Wells Fargo fraud. The plaintiffs in this action were Wells Fargo employees who had participated in the firm's 401(k) defined contribution plan. A large proportion of the plan's assets were invested in Wells Fargo common stock, and when the news broke that Wells Fargo had concealed a years-long massive fraud involving the opening of accounts without customer authorization, its stock price collapsed, and employees invested in the ESOP lost their retirement savings. While private investors were able to reach a settlement, the employees were limited to ERISA for their recovery.

Before the Eighth Circuit. The employees brought suit alleging that the defendants breached duties of prudence and loyalty to the ESOP. The district court granted Wells Fargo's motion to dismiss, and the Eight Circuit affirmed. On appeal, the employees argued that the plan fiduciaries knew or should have known that public disclosure of the fraud was inevitable and that, based on general economic principles, the longer the fraud was concealed, the greater the harm to the company's reputation and stock price. The Eight Circuit noted that most circuits have rejected this argument and held that in cases where ESOP fiduciaries know about a regulatory investigation, it is prudent to wait for the investigation to be completed. The panel recognized that earlier disclosure may have ameliorated some harm, that course of action was not clear. The panel also dismissed the duty of loyalty claims, refusing to permit any loyalty-based claims that would impose an affirmative duty to disclose non-public information.

Circuit split. The petition asked the Supreme Court to resolve a circuit split over what a plaintiff must plead to plausibly allege an ESOP duty-of-prudence claim. At issue was the interpretation of the Court's holding in 2014's Fifth Third Bancorp v. Dudenhoeffer. Specifically, the petition asked whether ESOP fiduciaries are effectively immune from duty-of-prudence liability for the failure to publicly disclose inside information and whether Dudenhoeffer applies to duty-of-loyalty claims.

According to the petitioners, the Eighth, Fifth, and Sixth Circuits have constructed a "a nearly insurmountable bar for pleading duty-of-prudence claims, while the Second Circuit has followed Dudenhoeffer in refusing to do so." The petitioners favored the Second Circuit's context-specific approach in Jander, where a reasonable executive could plausibly foresee that a fraud would be disclosed and that no prudent fiduciary would conclude that earlier disclosure would do more harm than good. The Eight, Fifth, and Sixth Circuits, on the other hand, have, in various ways, more stringent standards that require a plaintiff to show that a proposed alternative action was so clearly beneficial that no prudent fiduciary could have opted against it. Under these standards, the petition says, it is unclear what, if any, ESOP duty-of-prudence claim could survive.

The petition also noted that the issue had previously arrived before the court in Retirement Plans Committee of IBM v. Jander. That case, however, was ultimately sent back to the Second Circuit to consider arguments raised during merits briefing; the circuit court in turn remanded the case to the trial court. The petition argued that the Court should have ruled on what should have been decided in Jander: "ERISA imposes no heightened pleading standard on duty-of-prudence claims against ESOP fiduciaries, but simply calls for a careful, context-specific application of the ordinary pleading standards."

In conclusion, the petition asserted that if left standing, the Eighth Circuit's approach incongruously treats ERISA participants and beneficiaries less favorably than private investors. In this case, the petitioners said, every shareholder but Wells Fargo's own employees had a means to recover.

Read the Docket. These cases, and others before the Court may be referenced in the latest version of the Supreme Court Docket, a regular feature of Securities Regulation Daily. Issued opinions, granted petitions, pending petitions, and denied petitions are listed separately, along with a summary of the questions presented and the current status of each appeal.

The petition is No. 20-866.