SCOTUS Scuttles Another Stock Drop Review

May 6, 2021

Yet another stock drop case has made its way to the doors of the U.S. Supreme Court—but no further.

The defendants in this case (Allen v. Wells Fargo & Co.) were the fiduciaries of the Wells Fargo 401(k) plan—and the plaintiff filed on behalf of Wells Fargo 401(k) plan participants whose individual accounts were invested primarily in Wells Fargo stock from Jan. 1, 2014 through the filing of the original suit back in 2016. Echoing themes common to these so-called “stock drop” suits, the Wells Fargo defendants were charged with intentionally withholding “material non-public information” from plan participants invested in Wells Fargo stock—specifically the impact of cross-selling activities on the firm’s stock price. 

Case History

The district court granted Wells Fargo’s motion to dismiss the first amended complaint, finding that the allegations made failed to meet the criteria required by the U.S. Supreme Court in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (2014), in that they “failed to plausibly allege that a prudent fiduciary in Appellees’ position could not have concluded that Appellants’ proposed alternative actions would do more harm than good to the Wells Fargo Stock Funds.” Thus, the court dismissed that claim with prejudice, and also found that Appellants had not pled a “freestanding claim of breach of the duty of loyalty” and also dismissed that claim, but without prejudice (allowing for another shot). The plaintiffs filed an amended complaint—but that one fared no better.

A subsequent appeal to the U.S. Court of Appeals for the Eighth Circuit similarly feel short, despite its review premised upon “assuming all factual allegations as true and construing all reasonable inferences in the light most favorable to Appellants, the nonmoving party.”

The Supreme Court had been asked to consider issues raised in this case, specifically: “(1) Whether, under Fifth Third Bancorp v Dudenhoeffer, fiduciaries of an employee stock ownership fund are effectively immune from duty-of-prudence liability for the failure to publicly disclose inside information; and (2) whether Dudenhoeffer’s framework extends beyond prudence-based claims and applies to duty-of-loyalty claims against ESOP fiduciaries.”

‘Harm’ Full?

In 2014 the Supreme Court seemed truly concerned that the “presumption of prudence” standard basically established a standard that was effectively unassailable by plaintiffs—and in fact, until that point the vast majority of these cases (including BP and Delta Air Lines, Lehman and GM) failed to get past the summary judgment phase. Indeed, the plaintiff in another stock drop case (Jander v. IBM ) had argued that no duty-of-prudence claim against an ESOP fiduciary has passed the motion-to-dismiss stage since the 2010 Harris v. Amgen decision. They had also noted that “imposing such a heavy burden at the motion-to-dismiss stage runs contrary to the Supreme Court’s stated desire in Fifth Third to lower the barrier set by the presumption of prudence.” 

Enter the “more harm than good” standard that emerged with the case of Fifth Third Bancorp v. Dudenhoeffer, which in essence states that the plaintiff must plausibly allege: (1) an alternative action that the defendant fiduciary could have taken that would have been consistent with the securities laws; and (2) that a prudent fiduciary in the same circumstances “could not have concluded” that such alternative action would do “more harm than good” to plan participants.

However, on May 3, the Supreme Court denied certiorari—and that basically leaves the Eighth Circuit’s decision in place—not to mention the “more harm than good” standard.