Loading article...
On October 30, 2014, a three-judge panel of the Ninth Circuit handed down its decision in Harris v. Amgen, a ‘stock drop’ case. The decision came after the Ninth Circuit’s earlier (2013) decision in favor of participant-plaintiffs had been vacated and remanded by the Supreme Court for reconsideration in light of Fifth Third Bancorp et al. v. Dudenhoeffer.
In this article we review the Ninth Circuit’s (new) Harris v. Amgen decision, focusing on how that court applied the principles articulated by the Supreme Court in Fifth Third.
In many ways Harris is, like Fifth Third, a classic stock drop case. Amgen maintained two defined contribution plans in which participants could choose from an investment fund menu that included a company stock fund. Over the period September 19, 2005-May 10, 2007, Amgen stock dropped from $86.17 to $57.33. Plaintiffs invested plan assets in the stock funds during that period.
The decline in Amgen stock price reflected certain revelations in 2006-2007 about the safety of two key Amgen drugs. Plaintiffs’ claim is that plan fiduciaries “acted imprudently, and thereby violated [ERISA], by continuing to provide Amgen common stock as an investment alternative when they knew or should have known that the stock was being sold at an artificially inflated price.” Their claim is that plan fiduciaries, who were also company officials, knew about the problems with the drugs before those problems were made public, and that they should have discontinued purchases of Amgen stock in the plans’ stock funds based on that knowledge. Plaintiffs also alleged defendant fiduciaries breached ERISA’s fiduciary duty of loyalty provisions by failing to disclose to participants the problems with the drugs.
The Ninth Circuit decision reverses a lower court decision granting defendants’ motion to dismiss. With respect to such a motion, courts generally treat facts alleged by plaintiffs to be true. Thus, with respect to the Harris defendants’ motion, the Ninth Circuit “decided only that the complaint contains allegations with a sufficient degree of plausibility to survive a motion to dismiss. … A determination whether defendants have actually violated their fiduciary duties requires fact-based determinations, such as the likely effect of the alternative actions available to defendants, to be made by the district court on remand, with the assistance of expert opinion as appropriate.”
The Supreme Court’s June 2014 decision in Fifth Third represented a significant jurisprudential departure in the analysis of stock drop cases. The Court rejected the ‘presumption of prudence’ analysis that had been typical of these cases in favor of a reliance on the market price of a (publicly traded) stock as, generally, defining ‘prudence.’ In our earlier article on Fifth Third we summarized the Court’s holdings as follows:
A plaintiff cannot sue a fiduciary on the premise that the fiduciary should know, based on public information, that a publicly traded stock is overvalued, absent special circumstances.
A plaintiff cannot state a claim that a fiduciary should have sold stock in a fund, based on private (‘inside’) information that the stock was overvalued, because to do so would violate insider trading laws.
With respect to a decision to continue to buy stock or not publicly disclose insider information in such circumstances, it’s probably better to consider the conduct of company officials under the securities laws.
In any case, in considering a motion to dismiss (“whether the complaint has plausibly alleged” a breach of ERISA’s prudence rule), a court should consider whether the proposed action (stopping buying stock and/or disclosing non-public information) would do more harm than good.
As noted above, plaintiffs’ claim did not involve an allegation of (1), a breach merely based on public information, or (2), a breach based on a failure to sell company stock held by the plan based on non-public information. It did involve an allegation of (3), a breach based on the failure to stop buying (additional) stock based on non-public information. With regard to such an allegation, the Supreme Court said in Fifth Third:
[W]here a complaint faults fiduciaries for failing to decide, based on negative inside information, to refrain from making additional stock purchases or for failing to publicly disclose that information so that the stock would no longer be overvalued, courts should consider the extent to which imposing an ERISA-based obligation either to refrain from making a planned trade or to disclose inside information to the public could conflict with the complex insider trading and corporate disclosure requirements set forth by the federal securities laws or with the objectives of those laws.
We will come back to this issue, but first let’s summarize the Ninth Circuit’s holdings.
In Harris, the Ninth Circuit found that plaintiffs had alleged sufficiently plausible facts that defendant fiduciaries were aware of non-public information that would have affected that market price of Amgen stock, and thus they were aware that its market price was inflated. In this regard the Ninth Circuit stated:
In a separate class action simultaneously pending before the same district judge [who dismissed plaintiffs’ ERISA action], investors in Amgen common stock claimed violations of federal securities laws based on the same alleged facts as in the ERISA action now before us. In a careful thirty-five page order, the district court concluded that the investors had sufficiently alleged material misrepresentations and omissions, scienter, reliance, and resulting economic loss to state claims under [applicable federal securities laws].
The Ninth Circuit appeared to reach the conclusion that, if ‘regular investors’ can bring an action under the securities laws based on the failure to disclose material information, then ‘ERISA investors’ in an ERISA-covered plan may, based on the same facts, bring an action under ERISA:
If the alleged misrepresentations and omissions, scienter, and resulting decline in share price … were sufficient to state a claim that defendants violated their duties under [applicable federal securities laws], the alleged misrepresentations and omissions, scienter, and resulting decline in share price in this case are sufficient to state a claim that defendants violated their more stringent duty of care under ERISA.
Defendants argued that “if the Amgen Fund had been ‘remove[d] . . . as an investment option,’ based on nonpublic information about the company, this action ‘may have brought about “precisely the result [P]laintiffs seek to avoid: a drop in the stock price.”‘” In this regard, the Harris court quoted Fifth Third:
[L]ower courts faced with such claims should also consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that stopping purchases – which the market might take as a sign that insider fiduciaries viewed the employer’s stock as a bad investment – or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held in the fund.
The Harris court concluded, however, that:
Based on the allegations in the complaint, it is at least plausible that defendants could have removed the Amgen Stock Fund from the list of investment options available to the plans without causing undue harm to plan participants.
It found that “the relatively small number of Amgen shares that would not have been purchased by the Fund in comparison to the enormous number of actively traded shares,” would not have affected the price.
The Harris court acknowledged that suspending purchases might (as the Supreme Court suggested) have sent a negative signal that would have affected the stock price, but:
[S]everal factors would have mitigated this effect. The efficient market hypothesis ordinarily applied in stock fraud cases suggests that the ultimate decline in price would have been no more than the amount by which the price was artificially inflated. Further, once the Fund was removed as an investment option, plan participants would have been protected from making additional purchases of the Fund while the price of Amgen shares remained artificially inflated. Finally, the defendants’ fiduciary obligation to remove the Fund as an investment option was triggered as soon as they knew or should have known that Amgen’s share price was artificially inflated. That is, defendants began violating their fiduciary duties under ERISA by continuing to authorize purchases of Amgen shares at more or less the same time some of the defendants began violating the federal securities laws. If defendants had acted to remove the Fund as an investment option when Amgen’s share price began to be artificially inflated — that is, when some of the defendants began to violate their obligations under the securities laws — that action may well have caused those defendants to comply with those obligations.
The court’s argument here is interesting, if a little hard to follow. Remember, unlike many of the stock drop cases we are familiar with, this case does not involve the allegation of a breach based on the failure to sell stock previously purchased (claim (1) above). Signaling to the market (and, obviously, to participants) that the Amgen stock price was ‘inflated’ would, in a claim (1) case, “bring about precisely the result plaintiffs seek to avoid: a drop in the stock price.” But with respect to future purchases, such a signal would avoid the losses that are the basis of plaintiffs’ claim, which involves allegation of breach based on a failure to stop buying stock (claim (3) above).
We note, however, that disclosure would have done harm to (reduced the value of stock held by) participants who had acquired stock prior to the period under litigation, especially those participants who might have sold during that period.
In Harris, plaintiffs won and defendants lost. Does that mean that, as some have argued, Fifth Third – on the basis of which Harris was theoretically decided – is a pro-plaintiff stock drop case? Maybe, maybe not.
First, let’s note that the claim considered by the Harris court is pretty narrow: it only applies to continued purchases during the relevant period, not to the failure to sell stock purchased before that period began.
Second, the court’s ‘more harm than good’ discussion ignores the consequences to participants who purchased stock before the period under litigation began.
Third, the Harris court did not, as the Supreme Court in Fifth Third directed it should, consider whether:
[I]mposing an ERISA-based obligation either to refrain from making a planned trade or to disclose inside information to the public could conflict with the complex insider trading and corporate disclosure requirements set forth by the federal securities laws or with the objectives of those laws.
Unless creating an additional claim/remedy under ERISA for the identical facts that give rise to a securities law claim constitutes such consideration.
As the Harris court notes, those identical facts gave rise to a cause of action under the securities laws for securities fraud. Participants can (and presumably did) join in that lawsuit.
Should plan participants be given a superior and additional claim (superior and additional to the securities law claim that non-participants have) simply because they bought their stock in plan? Are an issuer/plan fiduciary’s disclosure obligations to participants greater than its disclosure obligations to mere shareholders? Isn’t that letting the ERISA-disclosure tail wag the securities law-disclosure dog – will it not result in the announcement of market-moving material information to plan participants first, before it is announced to securities buyers-and-sellers generally? What happens if the non-participant shareholders lose their case, but the plaintiffs win theirs – could that possibly be an appropriate result? Doesn’t this supplemental ERISA action present the very conflicts with “the complex insider trading and corporate disclosure requirements set forth by the federal securities laws or with the objectives of those laws” the Supreme Court was concerned about?
Conceivably these issues will be resolved at trial. Or, conceivably, defendants will appeal the Ninth Circuit decision, and the Supreme Court will address them.
***
We will continue to follow the development of stock drop case law in the aftermath of Fifth Third.