Yesterday, in Wilson v. Craver, No. 18-56139, __F.3d__, 2021 WL 1523253 (9th Cir. Apr. 19, 2021), the Ninth Circuit issued another decision in a matter involving the duty of prudence as applied to fiduciaries of an employee stock ownership plan (“ESOP”). Following the current of its sister circuits, the Ninth Circuit found that the ESOP plan participant failed to allege a breach of fiduciary duty. This decision highlights the difficulty for plaintiffs to meet the duty-of-prudence pleading standard announced in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 428, 134 S.Ct. 2459, 189 L.Ed.2d 457 (2014).
Plaintiff-Appellant Cassandra Wilson is an employee of Edison International Inc. (“Edison”) and a participant in Edison’s 401(k) ESOP. She alleges that Defendant Robert Boada, a plan fiduciary, breached his duty of prudence by allowing employees to invest in Edison stock after he learned that the stock was artificially inflated. The Stock Fund, which primarily holds Edison common stock, is one fund option available to plan participants. Stock Fund options are chosen by Edison’s Trust Investment Committee. Defendant Theodore Craver is Edison’s CEO and appointed the Committee’s members, including Boada. Craver and Boada are the defendant fiduciaries.
Wilson alleges that Defendants breached their duty of prudence because they knew that undisclosed misrepresentations were artificially inflating Edison’s stock price, but they took no action to protect the plan participants from the foreseeable harm that results when fraud becomes public. In 2013, Southern California Edison Company (“SCE”) for which Edison is the parent company, closed the San Onofre Nuclear Generating Station (“SONGS”) due to generator failure. SCE participated in rate-setting proceedings before the California Public Utilities Commission (“CPUC”) to determine how costs of the closure should be allocated between SCE and its ratepayers. The CPUC approved the SONGS Settlement in November 2014. Per CPUC’s rules, while the SONGS proceedings were ongoing, SCE was required to file a notice whenever an SCE employee interacted privately with a CPUC official if the interaction concerned any substantive issue in the proceedings. Two months after the SONGS Settlement was approved, SCE filed a notice of an ex parte communication that occurred in March 2013. Further investigation revealed additional non-reported ex parte communications and an Administrative Law Judge overseeing the CPUC investigation ruled that SCE failed to report ten ex parte communications. In December 2015, the CPUC issued a $16.7 million penalty against SCE concluding that it failed to report eight qualifying communications. After the SONG Settlement was first announced, Edison’s stock price rose from $49 per share to over $67 per share in early 2015. Following news of the improper ex parte communications, Wilson claims that the stock price depreciated fifteen percent.
Plaintiff alleges that Boada breached his duty of prudence by failing to promptly disclose the ex parte communications, which would have allowed the stock price to correct and mitigate harm to the participants. Plaintiff further alleges that Craver breached his duty by ensuring that Boada took corrective action. The district court dismissed Plaintiff’s complaints and the operative Second Amended Complaint (“SAC”) because it failed to satisfy the Fifth Third pleading standard:
To state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege 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.
Id. at 428, 134 S.Ct. 2459.
The issue in this case is the “more harm than good” standard. Plaintiff contends that no reasonable fiduciary could have thought that disclosing the truth of the ex parte communications would do more harm than good to the Plan because the longer corrective disclosure was delayed the greater the negative price impact would be once disclosure finally occurred. And the longer the fraud went on, the more damage would be done to Edison’s reputation when the truth emerged. The court rejected this argument. It explained that, “nearly every court to consider duty-of-prudence claims post Fifth Third has rejected the notion that general economic principles, such as those Plaintiff relied on, are enough on their own to plead duty-of-prudence violations.” The Ninth Circuit joined its “sister circuits in concluding that the recitation of generic economic principles, without more, is not enough to plead a duty-of prudence violation.” A complaint must also include “context-specific allegations explaining why an earlier disclosure was so clearly beneficial that a prudent fiduciary could not conclude that it would be more likely to harm the fund than help it.”
The court distinguished this case from the Second Circuit’s decision in Jander v. Ret. Plans Comm. of IBM, 910 F.3d 620, 632 (2d Cir. 2018), where the court reversed the dismissal of a duty-of-prudence claim. Here, the SAC did not plausibly allege that Defendants knew that disclosure of the ex parte communications was inevitable, but even if they did, the press reports and government investigation did not begin to surface until after Edison’s stock price had peaked. Thus, when it appeared “inevitable” that the information would become public, it likely would have been too late to benefit the participants by mitigating the correction. “Accordingly, it is far less likely that a corrective disclosure was so clearly beneficial at that time that a prudent fiduciary in Defendants’ positions could not have concluded that it would be more likely to harm the fund than to help it.” Also in this context, it was unclear whether Defendants had enough information during the class period to fully disclose the number of ex parte communications that constituted violations of the CPUC’s reporting rules. Even Plaintiff concedes that premature disclosure could be a mistake and lead to an unnecessary diminution of a company’s stock price.
The Ninth Circuit concluded “that the district court properly determined that Plaintiff Wilson failed plausibly to plead that a prudent fiduciary in Defendants’ position could not have concluded that Plaintiff’s proposed alternative action of issuing a corrective disclosure would do more harm than good. The SAC relies solely on general economic theories and is devoid of context-specific allegations explaining why an earlier disclosure was so clearly beneficial that a prudent fiduciary could not conclude that disclosure would be more likely to harm the fund than to help it. Therefore, Plaintiff failed to state a claim for breach of the duty of prudence consistent with the standard announced in Fifth Third. As a result, the derivative monitoring claim alleged against Defendant Craver also fails.”
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