The U.S. Court of Appeals for the Ninth Circuit has revived a 2007 ERISA “stock drop” lawsuit brought against Amgen, Inc. by plan participants who lost money in their employer-sponsored retirement savings plan accounts that were invested in company stock. The Ninth Circuit’s October 30, 2014 decision in Harris v. Amgen applied the U.S. Supreme Court’s June 2014 decision in Fifth Third Bancorp v. Dudenhoeffer in reviving the case. For more information on the Dudenhoeffer case, see our article Supreme Court Rejects Presumption of Prudence in Stock Drop Cases.
Current and former employees of Amgen, Inc. and its subsidiary (“Amgen”) participated in employer- sponsored retirement savings plans that qualified as “individual account plans” under ERISA and included the Amgen Common Stock Fund as an investment option. When participants lost money in their retirement savings accounts as a result of a drop in the value of Amgen’s common stock, plaintiffs filed an ERISA class action lawsuit alleging breach of fiduciary duty under ERISA. The district court dismissed the lawsuit after applying the presumption that offering company stock as an investment option is prudent (commonly known as the “Moench presumption”). In 2013, the Ninth Circuit reversed the district court’s dismissal and held that the presumption of prudence did not apply as the plans neither mandated nor required investment in employer stock (applying the test for such presumption using criteria set forth under the law at the time) and that, in the absence of such presumption, plaintiffs had sufficiently alleged violations of the defendants’ ERISA fiduciary duties. The defendants petitioned the U.S. Supreme Court for certiorari in the case. After deciding Fifth Third Bancorp v. Dudenhoeffer in June of 2014, the U.S. Supreme Court granted certiorari in Amgen and vacated and remanded the case to the Ninth Circuit for reconsideration in light of the Dudenhoeffer case holding that the Moench presumption is not valid. On reconsideration, the Ninth Circuit again reversed the district court’s dismissal of the Amgen case. The district court had simultaneously certified a class action in a separate suit confirming that investors may sue Amgen under the federal securities laws based on the same disclosure omissions raised in the ERISA complaint.
Ninth Circuit Decision in Harris v. Amgen
Because the U.S. Supreme Court held in Fifth Third Bancorp v. Dudenhoeffer that there is no presumption of prudence for employee stock ownership plan fiduciaries (besides the statutory exemption from the otherwise applicable duty to diversify plan investments), the Ninth Circuit held in Amgen that the plaintiffs were not required to satisfy the criteria that were set forth under prior law to show that no presumption of prudence applied. In Amgen, the Ninth Circuit held that plaintiffs stated a claim that the defendants did not act prudently, and thereby violated their ERISA fiduciary duties, by continuing to offer Amgen common stock as an investment option when they knew or should have known that the stock was being sold at an artificially inflated price as a result of Amgen’s failure to adequately disclose adverse safety test results regarding its drug products, and failing to provide plan participants with material information about Amgen common stock.
Defendants argued that if they had removed the Amgen Stock Fund based on alleged undisclosed material information, they would have potentially engaged in a violation of the federal securities laws. While the law is clear that fiduciaries are under no obligation to violate securities laws in order to satisfy their ERISA fiduciary duties, the Ninth Circuit noted in Amgen that compliance with ERISA would not have required the defendants to violate securities laws; in fact, had defendants revealed material information affecting the value of Amgen stock to the general public (including plan participants), they would have simultaneously satisfied their duties under both the securities laws and ERISA. The Ninth Circuit noted that, alternatively, even if defendants had not made such material disclosures, they would not have violated the prohibition on insider trading if the Amgen Stock Fund was closed to new investments during the time period when the price of Amgen stock was artificially inflated.
Defendants also argued that statements made in documents required by the federal securities laws and filed with the Securities and Exchange Commission were not made in a fiduciary capacity, and therefore could not be considered in an ERISA case for breach of fiduciary duty. The Ninth Circuit noted that defendants’ argument might have been correct if such documents had only been filed and distributed as required under the securities laws, for such acts would have been performed in a corporate capacity and not a fiduciary capacity. However, the Ninth Circuit rejected this argument because defendants prepared and distributed summary plan descriptions (“SPDs”) to plan participants, and the SPDs incorporated Amgen’s securities filings, including its financial statements, by reference. The Ninth Circuit held that defendants’ preparation and distribution of the SPDs, including the incorporation of the securities filings by reference, were acts performed in their fiduciary capacities, and therefore could be used in the ERISA case.
Now that there is no presumption of prudence for employee stock ownership plan fiduciaries, there may be a rising tide of “stock drop” lawsuits. Plan fiduciaries of retirement plans with company stock fund investment options should be attentive to this risk in response to the changing landscape post- Dudenhoeffer. In light of Amgen, plan fiduciaries should particularly be aware of potential ERISA liability exposure when incorporating company filings required by the securities laws into SPDs.