Webny presentation april 20, 2017
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The document discusses fiduciary duties and challenges following the Supreme Court's Dudenhoeffer decision. It summarizes various court cases that have addressed different types of ERISA stock drop claims. The document discusses claims based on publicly available information and whether "special circumstances" were adequately alleged. It also discusses pleading standards for claims based on inside information, examining what alternative actions plaintiffs must plausibly allege fiduciaries could have taken without doing more harm than good. The document provides examples from multiple circuit court cases.
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• “The Ninth Circuit … failed to assess whether the
complaint in its current form ‘has plausibly alleged’ that
a prudent fiduciary in the same position ‘could not have
concluded’ that the alternative action ‘would do more
harm than good.’”
• “The Ninth Circuit's proposition that removing the
Amgen Common Stock Fund from the list of investment
options was an alternative action that could plausibly
have satisfied [Dudenhoeffer]'s standards may be true.
If so, the facts and allegations supporting that
proposition should appear in the stockholders'
complaint.”](https://image.slidesharecdn.com/ufg4oswpqm6b3q6uivbx-signature-6af1f87674ae67f79661a5d638a4ee63e2cbc24db96c1497983854963effec9d-poli-170421181436/85/Webny-presentation-april-20-2017-19-320.jpg)
Webny presentation april 20, 2017
- 1. Fiduciary Challenges Following Dudenhoeffer & Ethics In ERISA Litigation | Russell L. Hirschhorn Proskauer Rose LLP rhirschhorn@proskauer.com 212.969.3286 David S. Preminger Keller Rohrback LLP dpreminger@kellerrohrback.com 646.380.6690
- 2. | • Prudence Claim: Plan fiduciaries knew or should have known that company stock was an imprudent investment, and failed to halt or eliminate the stock fund as an investment option or discontinue investments in that fund • Disclosure Claim: Plan fiduciaries made material misrepresentations about the company or failing to disclose material information affecting the value of the company’s stock 1
- 3. | • Plan fiduciaries presumed to act prudently when they offer employees the option to invest in employer stock unless company’s viability as a going concern is in doubt or other “dire circumstances” are present • Moench v. Robertson, 62 F.3d 553 (3rd Cir. 1995) 2
- 4. | • “In our view, the law does not create a special presumption favoring ESOP fiduciaries. Rather, the same standard of prudence applies to all ERISA fiduciaries, including ESOP fiduciaries, except that an ESOP fiduciary is under no duty to diversify the ESOP’s holdings.” • The presumption “does not readily divide the plausible sheep from the meritless goats. That important task can be better accomplished through careful, context- sensitive scrutiny of a complaint’s allegations.” 3
- 5. | • Allegations that a fiduciary should have recognized from publicly available information alone that the market was overvaluing or undervaluing the stock are implausible as a general rule, at least in the absence of “special circumstances.” • ERISA fiduciaries, like many investors, see little hope of outperforming the market based solely on publicly available information and thus may generally prudently rely on the market price. 4
- 6. | • To state a claim for breach of duty of prudence based on 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 • A prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it. 5
- 7. | • Three points for consideration in determining whether a claim based on inside information has been plausibly pled: • Plan fiduciaries are not required to break the law • Does a plan fiduciary’s decision to purchase (or refrain from purchasing) stock or for failure to disclose information to the public conflict with federal securities laws or with the objectives of those laws • Whether a prudent fiduciary could not have concluded that stopping purchases or publicly disclosing negative information would do more harm than good to the stock fund 6
- 8. | • What, if any, types of claims are viable based on publicly available information? • What is a “special circumstance” for purposes of stating a prudence claim based on publicly available information? • How can plaintiffs properly allege prudence claims based on inside information? 7
- 9. Claims Based on Publicly Available Information |
- 10. 9 | • Kodak allegedly relied on a “dying technology” • “The fact that the market, on any given date, may have provided the best available estimate of the ‘value’ of Kodak stock, does not necessarily reveal much about whether defendants acted prudently in continuing to invest in that stock” • Relevant inquiry – should defendants “have realized that Kodak stock represented such a poor long-term investment that they should have ceased to purchase, hold, or offer Kodak stock to plan participants” 9
- 11. 10 | • Plan fiduciaries allegedly knew or should have known that Citigroup was heavily invested in subprime mortgages and was thus an imprudent investment • media reports about the subprime mortgage crisis • ratings downgrades of Citigroup securities • Citigroup’s public announcements of quarterly losses • the decline in Citigroup stock by more than half • No identifiable “special circumstance” alleged • Claims were barred by statute of limitations
- 12. 11 | • Third Amended Complaint added allegations about: • ominous news articles • volatility in Lehman’s stock price • increased trading volumes • rising costs of Lehman credit default swaps • downgrades from various ratings agencies • Plaintiffs alleged “special circumstances” • SEC orders that prohibited short selling the securities of certain large financial services firms, including Lehman, to eliminate the possibility that short selling would contribute to artificial and unnecessary depression in security prices
- 13. 12 | • Unlike Kodak, “Lehman did not spend months slowly withering in public view such that any observer could have foretold its collapse. Its ultimate demise was abrupt, market-shaking, and occurred over a period lasting barely longer than a week” • Without allegations justifying a conclusion that reliance on the market price was imprudent, Dudenhoeffer forecloses public information claims irrespective of whether such claims are characterized as based on alleged overvaluation or alleged riskiness of a stock
- 14. 13 | • Allegations about Delta’s ability to survive in the industry • Increased industry competition from discount airlines • Experienced losses of over one billion dollars a year • Stock price decline by 92% • Debt increase by 42% • Dramatic reduction in workforce • Eleventh Circuit: claim was just the type of claim that the Supreme Court deemed "implausible as a general rule," since it failed to allege any special circumstances
- 15. 14 | • State Street bought (and declined to sell) GM stock until March 2009 despite the alleged “overwhelming evidence in the public domain” raising concerns about GM’s viability • Sixth Circuit affirmed the summary judgment for State Street • Plaintiff failed to allege any “special circumstance” such that State Street should not have relied on market pricing • State Street’s processes for monitoring and evaluating the investment in GM stock, which involved many meetings and advice from outside counsel and financial advisors, demonstrated prudence
- 16. 15 | • Alleged negative publicity regarding Cliffs and the mining industry (excessive risk) should have led the plan to stop investing in Cliffs stock • Sixth Circuit – rejected allegation that a fiduciary’s failure to independently verify the accuracy of the market’s pricing is a “special circumstance”
- 17. 16 | • Allegations that RadioShack stock was excessively risky • District Court • That the derivative and equity markets predicted RadioShack would default is not a special circumstance • Large debt-load is not a special circumstance • One of a handful of cases that tried to revive claims against directed trustees
- 18. Claims Based on Inside Information |
- 19. 18 | • “The Ninth Circuit … failed to assess whether the complaint in its current form ‘has plausibly alleged’ that a prudent fiduciary in the same position ‘could not have concluded’ that the alternative action ‘would do more harm than good.’” • “The Ninth Circuit's proposition that removing the Amgen Common Stock Fund from the list of investment options was an alternative action that could plausibly have satisfied [Dudenhoeffer]'s standards may be true. If so, the facts and allegations supporting that proposition should appear in the stockholders' complaint.”
- 20. 19 | • Allegations of material non-disclosed information relating to BP’s securities and environmental violations caused BP American Depository Shares to be artificially inflated • Plan fiduciaries could have averted plan losses by freezing, limiting or restricting stock purchases, and/or by accurate disclosures • Fifth Circuit • Plaintiff bears the “significant burden” of proposing an alternative course of action so clearly beneficial that a prudent fiduciary could not conclude that it would be more likely to harm the fund than to help it • Rejected conclusory allegations that the proposed alternatives were consistent with Fifth Third
- 21. 20 | • Allegations that plan fiduciaries failed to investigate nonpublic information regarding risks facing Lehman • Second Circuit • Assuming a duty to investigate nonpublic information even exists, complaint failed to explain in non-conclusory fashion how a hypothetical investigation would have uncovered alleged inside information • ERISA does not impose a duty on appointing fiduciaries to keep their appointees apprised of nonpublic information
- 22. 21 | • Allegations that plan fiduciaries had non-public information regarding fraud by CIO • Second Circuit • Allegations were “wholly conclusory and materially indistinguishable” from the allegations in Amgen • Complaint did not plausibly allege that a prudent fiduciary could not conclude that freezing purchases or disclosing the fraud publicly would cause more harm than good
- 23. 22 | • Allegations that defendants knew that a mining project would not deliver the projected profits • Sixth Circuit • Rejected allegations that a prudent fiduciary could not have concluded that disclosing the inside information or halting additional contributions would do more harm than good. • Plan fiduciaries could have concluded that divulging inside information would have collapsed the company stock price • Closing the fund without explanation might be even worse
- 24. 23 | • Allegations of improper accounting practices of Autonomy – acquired by HP • HP retained PwC to conduct an investigation of Autonomy’s accounting practices • Defendants allegedly should have restricted new investments in HP stock or publicly disclosed the illegal scheme • District Court • Complaint failed to allege facts making it plausible that “a prudent fiduciary in the same circumstances would not have viewed pre- investigation disclosure to be more likely to harm the fund than to help it” • Market impact of freezing the HP stock fund “likely would have been dire,” and a prudent manager would have waited to investigate Autonomy’s accounting practices before disclosing it to the market • It is inconsistent with securities laws to require “HP to disclose in real time any suspicions about Autonomy that are yet uninvestigated”
- 25. 24 | • Closely-held corporation ceased operations and employees retirement savings were worthless • Plaintiffs alleged that the decision to continue to offer company stock when insiders knew that dissolution of the company was “imminent” was a breach of defendants’ fiduciary duties • Court found that plaintiffs “failed to allege an alternative action that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than help it”
- 26. 25 | • Cassandra Wilson v. Edison Int'l, Inc., 2016 WL 7469601 (C.D. Cal. July 6, 2016) • Allegations that there was fraudulent activity related to administrative proceedings in which the company was a party to • Complaint failed to account for the risk that the market might overreact to the proposed public disclosures • In re Pilgrim’s Pride, No. 08-cv-472 (E.D. Tex. Oct. 4, 2016) • Allegations that the stock was artificially inflated as a result of poor financial decisions by management • Public disclosure and/or a sale or “transfer” of company stock would have all but guaranteed a collapse of the stock price
- 27. 26 | • Jander v. IBM, 205 F. supp. 3d 538 (S.D.N.Y. 2016) • Plaintiffs alleged that defendants knew that IBM’s stock price was artificially inflated based on the value of its microelectronics business, leading to a 17% drop in IBM’s stock price • Plaintiffs only offered “a rote recitation of proposed remedies” • Martone v. Whole Foods Mkt., Inc., 2016 WL 5416543 (W.D. Tex. Sept. 28, 2016) • Allegations that stock inflated due to misrepresentations • Dudenhoeffer set a “highly demanding” pleading standard • Complaint offers only a rote recitation of proposed remedies without the necessary facts and allegations supporting Plaintiffs’ proposition
- 28. 27 | • In re RadioShack, 14-cv-959 (N.D. Tex. Sept. 29, 2016) • Allegations that stock price was artificially inflated by withholding material information from the market and made misleading statements of its unrealistic turnaround abilities • Must at least allege that defendants possessed such information • In re Idearc ERISA Litig., 2016 WL 7189981 (N.D. Tex. Oct. 4, 2016) • Plaintiffs alleged that defendants knew of a decline in Idearc’s customer base, loosening of credit policies, reduction in account collection workforce, and alteration of accounting book • Complaint failed to plead how a prudent fiduciary might have perceived a risk of stock price drop as a result of a purchase freeze
- 29. 28 | • Murray v. Invacare Corp, 2015 WL 5093438 (N.D. Ohio Aug. 28, 2015) • Plaintiff alleged defendants knew that Invacare was not complying with FDA safety and compliance standards applicable to the Company's most important products • Plaintiff’s “allegations . . . show that a prudent fiduciary armed with this inside information, would have known that Invacare stock was artificially inflated . . . and that a significant fall was inevitable” • “A prudent fiduciary in Defendants' position could have concluded that stopping Plan participants from further investment in Company stock before the fall occurred would not have caused the Plan more harm than good”
- 30. 29 | • Ramirez v. J.C. Penney Corp., 2015 WL 5766498 (E.D. Tex. Sept. 11, 2015) • Defendants argued that: • public could not have been unaware that JCP’s transformation plan carried substantial risk, pointing to public disclosures and other statements showing that the investing public was aware of these risks • disclosing inside information to the public would have caused a large drop in stock price • defendants delegated duty to manage company stock fund to Evercore - they had no duty to manage or control the fund • Plaintiffs argued that value of JCP stock remained virtually constant and the market could not have appreciated true risks
- 31. 30 | • Public information presented by defendants may raise an issue of fact of whether the market was actually aware of the riskiness of JCP stock, but did not demonstrate that plaintiffs’ claim failed as a matter of law • Truthful disclosure that corrected alleged material misrepresentations was only course of action consistent with the securities laws • Because disclosing fraud was the only viable option to defendants, the harm caused by that action was irrelevant • Because defendants did not disclose information about the riskiness of company stock to Evercore, Evercore could no longer effectively discharge its obligations
- 32. 31 | Potential Action Discussion Continue to Offer Company Stock Investment • Retain status quo – no change to existing ability of participants to invest in company stock • Review investment policy and practices in light of recent cases Hire an Independent Fiduciary • Shift company stock fiduciary responsibilities to take advantage of reliance on market price and avoid potential conflicts from access to inside information • Consider retaining qualified institutional fiduciary with existing procedures for monitoring company stock investments and reporting capabilities Freeze or Limit Participant Investments or Eliminate the Company Stock Fund • Freeze company stock fund from any further investments or limit the % of participant balances invested in company stock • Sunset or eliminate company stock as an investment option • Freezing or limiting investments in company stock still requires continued oversight
- 33. 32 | Reconsider Fiduciary Composition • Determine if individual internal fiduciaries are or may be in a position to have access to inside information and evaluate the potential ramifications • Consider appointing only individuals without access to inside information as internal fiduciaries • Evaluate the potential retention of a qualified independent fiduciary for company stock investments • Create or enhance company stock investment oversight processes to align with other plan investment monitoring practices • Document periodic review for prudency of continued holding or investment in company stock and any other fiduciary decisions with respect to the stock fund • If you have a company stock investment manager or independent fiduciary understand its oversight process and receive periodic reporting • Does the plan require or mandate an investment in company stock? • Are the fiduciaries responsible for company stock clearly identified and is their authority for investment oversight and decisions articulated? • Is there an investment policy for the plan or other asset classes that contemplates company stock issues? Enhance Investment Oversight Processes Review Plan Documents
- 34. Fiduciary Exception to the Attorney-Client Privilege |
- 35. 34 | • The Legal Framework • Advising Fiduciaries Regarding Personal Liability • Representation of Multiple Clients • How to Render Advice at Meetings
- 36. 35 | • An exception to the normal rules of attorney-client privilege where the communication relates to advice pertaining to plan administration and/or a participant’s benefit rights under an ERISA plan • Recognized by several circuit courts – Second, Fifth, Sixth, Seventh, Ninth, Eleventh, DC
- 37. 36 | • Duty to Disclose • Derives from an ERISA fiduciary’s duty to disclose • “Real Client” • As a representative for the beneficiaries of the plan which s/he is administering, the beneficiaries, and not the fiduciaries, are the attorney’s real clients.
- 38. 37 | • Pre-Decisional v. Post-Decisional Communications • Fiduciary exception applies to communications between counsel and plan fiduciaries concerning claims for benefits. • Communications must have occurred prior to the decision on appeal. • Post-decisional communications are no longer relevant to the decision-making process and constitute evidence that the interests of the beneficiary and the plan fiduciary have diverged.
- 39. 38 | • Advice relating to a settlor function • Divergent interests/anticipation of litigation • Where the advice pertains to matters involving a participant who is adverse to the plan (in anticipation of litigation) • Where attorney work-product is prepared for the plan in anticipation of litigation, such that plan’s interests diverge from the participant’s • Goal of advice is to advise the fiduciary of his or her potential personal liability
- 40. 39 | • ERISA does not distinguish between insurers and other types of fiduciaries, Stephan v. Unum Life Ins. Co. of Am., 697 F.3d 917 (9th Cir. 2012) • Because there is a conflict between an insurer’s profit motive and the interests of a beneficiary, beneficiaries are not clients and there is no reason to impose trustee- like disclosure obligations, Wachtel v. Health Net, Inc., 482 F.3d 225 (3d Cir. 2007)
- 41. 40 | • Where the DOL commences an action on behalf of participants and beneficiaries, courts frequently have concluded that it steps into the shoes of the participants and beneficiaries and may invoke the fiduciary exception. • Fiduciary exception can be invoked by the DOL in lawsuits and during compliance investigations. • However, there is an argument to be made that the DOL should not have unfettered access to documents and information that are unrelated to the investigation.
- 42. 41 | • There are many potential clients in ERISA litigation • Plan • Employer/Sponsor • Plan Committees • Trustees or Fiduciaries • Third-party Administrators • Insurers • Independent Fiduciaries • Other Entities with Discretion or Responsibility to Pay Claims
- 43. 42 | • Benefits lawyers commonly represent more than one client. • If you represent an employee organization or employer organization, can you represent the organization’s constituents? • What are the potential or actual conflicts of interest? • Multiple representation examples • Board of Trustees • Employer, Board of Directors and/or Benefits Committee
- 44. 43 | • Even when two or more clients have “differing interests,” the affected clients may be able to waive the conflict and consent to the attorney’s simultaneous representation. • Such waiver and written, informed consent are effective if three conditions are met: • competent and diligent representation to each affected client • representation is not prohibited by law • representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal
- 45. 44 | • Potential Pitfalls • Waiver and Exceptions to Waiver • Mixing Settlor and Administrative Advice
- 46. 45 | • Presence of a Third Party • Agency Exception • Common Interest Exception to Waiver • Inadvertent Disclosures
- 47. 46 | • To preserve privilege, and avoid the fiduciary exception, discuss the legal advice in a conversation, meeting or email that is separate from the decision on a benefit claim. • Maintain the proper audience. Be sure that an intended privileged communication is not made during the claims process to a claims fiduciary. • If the nature of the legal advice relates to personal liability of the fiduciary, to the extent possible make that clear before the communication is made.
- 48. 47 | • Understand and communicate the potential conflicts of interests to your clients before they arise if they can reasonably be foreseen at the time of the engagement. • The engagement letter should clearly set forth what will happen if a conflict arises that will preclude you from continuing to represent multiple clients. • Clients should be cognizant of their lawyer’s ethical obligation not to represent multiple clients with divergent interests.
- 49. 48 | • Remove unnecessary parties from the room before conducting privileged conversations. • Separate advice to plan sponsor from advice to plan fiduciaries. • Make clear on all written communications that they are protected by the joint/common interest privilege. Create an “expectation of privilege.”
- 50. 49 | 49