Usenko v. MEMC LLC, 2019 WL 2344827 (8th Cir. 2019)
Another federal appellate court has relied on the U.S. Supreme Court’s Dudenhoeffer decision to affirm the dismissal of a stock drop case alleging breach of fiduciary duty based on publicly available information. The employer in the case maintained a defined contribution retirement plan with a fund that invested solely in the stock of the employer’s former parent. After the plan was amended to freeze contributions to that fund, the former parent suffered a series of publicly reported setbacks that eventually resulted in the parent filing for bankruptcy. In his complaint, a participant claimed that the plan’s fiduciaries knew or should have known that continuing to hold the former parent’s stock in the plan was imprudent because public information about the stock showed that it was not suitable as a retirement investment. The trial court dismissed the claims and the participant appealed.
On appeal, the Eighth Circuit Court of Appeals noted the “undeniable” similarity between the participant’s claims and those considered insufficient in the U.S. Supreme Court’s Dudenhoeffer decision. In Dudenhoeffer, the Supreme Court vacated an appeals court decision allowing a stock drop case to proceed, and directed the appeals court to reconsider whether the participant had adequately stated a claim for breach of fiduciary duty taking into account several considerations. One of those considerations was the Court’s view that, in cases involving publicly traded stocks, claims alleging that a fiduciary “should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances” (see our Checkpoint article). Applying Dudenhoeffer to this case, the Eighth Circuit observed that the participant’s complaint cited no “special circumstances” and alleged that public information alone should have led plan fiduciaries to divest the former parent’s stock. The court concluded that this, in essence, amounted to a claim that plan fiduciaries breached their duties because they failed to outperform the market. Because Dudenhoeffer and later cases have concluded that such claims are untenable, the court affirmed the trial court’s dismissal. The court rejected the participant’s attempt to limit Dudenhoeffer to employer securities, as well as the participant’s argument that the fiduciaries’ continuing duty to monitor investments and remove imprudent ones (acknowledged by the U.S. Supreme Court, see our Checkpoint article), exempted his claims from the Dudenhoeffer pleading standard.
EBIA Comment: The number of federal circuit courts that have used the Dudenhoeffer case to dismiss fiduciary breach claims based solely on public information continues to grow (see our Checkpoint article). But the courts’ application of Dudenhoeffer to these claims raises some questions. What are the special circumstances that can preserve a claim based solely on public information? And, in the absence of (as yet undefined) special circumstances, what is left of plan fiduciaries’ duty to monitor publicly traded stock investments and weed out imprudent ones? Did the Supreme Court intend to insulate fiduciaries from claims that publicly traded stocks are unsuitable investments if the evidence of that unsuitability is entirely public? Until the courts have more fully explored the answers to these and other questions, cautious plan fiduciaries are unlikely to assume that the presumptive accuracy of market prices now allows them to pay less attention to factors other than price. For more information, see EBIA’s 401(k) Plans manual at Section XXV.H.6 (“Potential Fiduciary Liability for Investments in Employer Stock”).
Contributing Editors: EBIA Staff.