In re Wells Fargo Erisa 401(K) Litig., Case No. 16-CV-3405 (PJS/BRT)

331 F.Supp.3d 868

IN RE: WELLS FARGO ERISA 401(K) LITIGATION

Case No. 16-CV-3405 (PJS/BRT)

United States District Court, D. Minnesota.

Signed July 19, 2018

Adam J. Levitt, Amy E. Keller, and Daniel R. Ferri, DICELLO LEVITT & CASEY LLC; Robert K. Shelquist and Rebecca A. Peterson, LOCKRIDGE GRINDAL NAUEN P.L.L.P.; Greg G. Gutzler, Richard M. Elias, and Tamara M. Spicer, ELIAS GUTZLER SPICER LLC; W. Daniel "Dee" Miles, III, and Claire E. Burns, BEASLEY ALLEN CROW METHVIN PORTIS & MILES, P.C.; Samuel E. Bonderoff, Jacob H. Zamansky, Edward H. Glenn, and Justin Sauerwald, ZAMANSKY LLC; Michael B. Ershowsky, LEVI & KORSINSKY LLP; Carolyn G. Anderson, June P. Hoidal, and Devon Holstad, ZIMMERMAN REED LLP; and Douglas J. Nill, DOUGLAS J. NILL, PLLC, for plaintiffs.

Russell L. Hirschhorn, Howard Shapiro, and Lindsey Chopin, PROSKAUER ROSE LLP; and Kirsten E. Schubert and Stephen P. Lucke, DORSEY & WHITNEY LLP, for defendants.

ORDER

Patrick J. Schiltz, United States District JudgePlaintiffs Francesca Allen, John Sterling Ross, and Mary Lou Shank are current and former employees of Wells Fargo & Company ("Wells Fargo"). All of them held Wells Fargo stock in their 401(k) accounts. In September 2016, the price of that stock dropped sharply-and plaintiffs suffered significant losses-after Wells Fargo and the United States government announced that thousands of Wells Fargo employees had engaged in grossly unethical sales practices.

Plaintiffs then brought this lawsuit under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et seq., against Wells Fargo and corporate insiders who served as fiduciaries of their 401(k) plan. Plaintiffs alleged that defendants violated two distinct duties under ERISA-the duty of prudence and the duty of loyalty-by failing to disclose Wells Fargo's unethical sales practices prior to September 2016. According to plaintiffs, if defendants had disclosed this information earlier, the value of the Wells Fargo stock in their 401(k) accounts would not have dropped as much as it did.

Defendants moved to dismiss plaintiffs' amended complaint. ECF No. 113. Defendants argued that plaintiffs' prudence claim should be dismissed because plaintiffs had not plausibly alleged-as Fifth Third Bancorp v. Dudenhoeffer requires-"that a prudent fiduciary in the defendant's position could not have concluded that [earlier disclosure of Wells Fargo's sales practices] ... would do more harm than good to the fund ...." ––– U.S. ––––, 134 S.Ct. 2459, 2473, 189 L.Ed.2d 457 (2014). The Court agreed and dismissed the prudence claim. In re Wells Fargo ERISA 401(k) Litig. , No. 16-CV-3405 (PJS/BRT), 2017 WL 4220439 (D. Minn. Sept. 21, 2017).

Defendants also argued that plaintiffs had not pleaded "a freestanding claim for breach of the duty of loyalty." ECF No. 155 at 15. The Court agreed that the amended complaint did not clearly separate the prudence claim from the loyalty claim. In re Wells Fargo , 2017 WL 4220439, at *7. The Court therefore dismissed plaintiffs' loyalty claim but gave plaintiffs leave to replead that claim more clearly in a second amended complaint. Id.

Plaintiffs responded by filing a second amended complaint and reasserting their loyalty claim. Defendants have now moved to dismiss that complaint. Defendants argue that the Dudenhoeffer pleading standard should be applied not only to prudence claims, but to loyalty claims-and that, under that standard, plaintiffs' loyalty claim should be dismissed for the same reasons that their prudence claim was dismissed. Defendants also argue that, even if the Dudenhoeffer pleading standard is not applied to plaintiffs' loyalty claim, that claim should nevertheless be dismissed.

I. APPLICATION OF DUDENHOEFFER TO LOYALTY CLAIMS

Defendants first argue that, even though Dudenhoeffer described only what was necessary to plead viable prudence claims, its pleading standard should also be applied to loyalty claims. See Dudenhoeffer , 134 S.Ct. at 2464 ("We limit our review to the duty-of-prudence claims."). To fully understand defendants' argument-and why the Court ultimately rejects it-some background is necessary.

Prior to 1995, the federal courts were burdened with a substantial number of abusive securities-fraud actions. The filing of a securities-fraud action seemed to follow on the heels of every substantial drop in the price of the stock of a publicly traded company. Congress eventually concluded that "nuisance filings, targeting of deep-pocket defendants, vexatious discovery requests, and ‘manipulation by class action lawyers of the clients whom they purportedly represent’ had become rampant." Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit , 547 U.S. 71, 81, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006) (quoting H.R. Conf. Rep. No. 104-369, at 31 (1995) ).

To curb these perceived abuses, Congress passed the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Pub. L. 104-67, 109 Stat. 737. Among the PSLRA's features was the imposition of heightened pleading standards on certain securities-fraud actions. See Dabit , 547 U.S. at 81-82, 126 S.Ct. 1503. As the Ninth Circuit explained, "Congress sought to reduce the volume of abusive federal securities litigation by erecting procedural barriers .... such as heightened pleading standards." In re Silicon Graphics Inc. Sec. Litig. , 183 F.3d 970, 977-78 (9th Cir. 1999).

In the wake of the enactment of the PSLRA, the plaintiffs' bar came up with a strategy to evade the heightened pleading standards. That strategy involves "tak[ing] what is essentially a securities-fraud action and plead[ing] it as an ERISA action." Wright v. Medtronic, Inc. , No. 09-CV-0443 (PJS/AJB), 2010 WL 1027808, at *1 (D. Minn. Mar. 17, 2010). "Plaintiffs' attorneys are able to evade the PSLRA in this manner-as well as take advantage of the strict duties imposed on fiduciaries by ERISA-by suing not on behalf of those who purchased the stock of a company as members of the investing public, but instead on behalf of those who purchased the stock of a company as participants in a defined-contribution plan sponsored by that company." Id. The centerpiece of these ERISA stock-drop cases is typically a claim that the fiduciaries of a 401(k) plan breached their duty of prudence by directing the plan to buy or hold shares of a company's stock, when they knew or should have known that the stock was overpriced.

As these ERISA stock-drop cases proliferated, federal courts began to have a number of concerns, including the concern that companies would be deterred from offering employee stock ownership plans ("ESOPs"). Dudenhoeffer , 134 S.Ct. at 2470. The Supreme Court described this concern as follows:

ESOP plans instruct their fiduciaries to invest in company stock, and [ 29 U.S.C.] § 1104(a)(1)(D) requires fiduciaries to follow plan documents so long as they do not conflict with ERISA. Thus, in many cases an ESOP fiduciary who fears that continuing to invest in company stock may be imprudent finds himself between a rock and a hard place: If he keeps investing and the stock goes down he may be sued for acting imprudently in violation of § 1104(a)(1)(B), but if he stops investing and the stock goes up he may be sued for disobeying the plan documents in violation of § 1104(a)(1)(D).

Id.

To address this concern, many courts held that ESOP fiduciaries who were sued under ERISA enjoyed a "presumption of prudence." This presumption was "generally defined as a requirement that the plaintiff make a showing that would not be required in an ordinary duty-of-prudence case, such as that the employer was on the brink of collapse." Id. at 2463.

In Dudenhoeffer , the Supreme Court eliminated the presumption of prudence, holding that "the law does not create a special presumption favoring ESOP fiduciaries." Id. at 2467. Rather, the Supreme Court said, "the same standard of prudence applies to all ERISA fiduciaries, including ESOP fiduciaries ...." Id. The Supreme Court acknowledged the concern that "the threat of costly duty-of-prudence lawsuits will deter companies from offering ESOPs to their employees, contrary to the stated intent of Congress." Id. at 2470. But, the Supreme Court said, "we do not believe that the presumption at issue here is an appropriate way to weed out meritless lawsuits ...." Id.

According to the Supreme Court, a far better "mechanism for weeding out meritless claims" is for defendants to move to dismiss those claims under Federal Rule of Civil Procedure 12(b)(6), and for district courts to rigorously apply the standards of Ashcroft v. Iqbal , 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), and Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). See Dudenhoeffer , 134 S.Ct. at 2471. In particular, districts courts must closely examine a complaint that asserts a prudence claim against an ESOP fiduciary to ensure that the complaint pleads "enough facts to state a claim to relief that is plausible on its face." Twombly , 550 U.S. at 570, 127 S.Ct. 1955.

The Supreme Court wrapped up its Dudenhoeffer opinion by setting forth various "considerations" intended to guide lower courts in "apply[ing] the pleading standard as discussed in Twombly and Iqbal ...." Dudenhoeffer , 134 S.Ct. at 2471. In insider-information cases such as this one-that is, cases in which "a complaint faults fiduciaries for failing to decide, on the basis of the inside information, to refrain from making additional stock purchases or for failing to disclose that information to the public so that the stock would no longer be overvalued," id. at 2473 -the Supreme Court identified "three points [to] inform the requisite analysis," id. at 2472. The third of those points was the following:

Third, lower courts faced with such claims should ... 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

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