Randall v. GreatBanc Tr. Co.

1

Aryne Randall, Scott Kuhn, and Peter Morrissey, on behalf of the Wells Fargo & Company 401k Plan and a class of similarly situated participants of the Plan, Plaintiffs, v. GreatBanc Trust Company, Wells Fargo & Co., and Timothy J. Sloan, Defendants.

No. 22-cv-2354 (ECT/DJF)

United States District Court, D. Minnesota

February 21, 2024

Daniel Feinberg, Nina Wasow, and Todd Jackson, Feinberg, Jackson Worthman & Wasow, LLP, Berkeley, CA, and Brock J. Specht Paul J. Lukas, and Steven Andrew Smith, Nichols Kaster PLLP Minneapolis, MN, for Plaintiffs Aryne Randall, and Scott Kuhn.

Brock J. Specht and Paul J. Lukas Peter Morrissey, Nichols Kaster PLLP, Minneapolis, MN, for Plaintiff Peter Morrissey.

David Lurie and Roger H. Stetson, Barack Ferrazzano Kirschbaum & Nagelberg, Chicago, IL, and Nichlas H. Callahan, Barack Ferrazzano Kirschbaum & Nagelberg, Wayzata, MN, for Defendant GreatBanc Trust Company.

Kiera Murphy and Richard A. Duncan, Faegre Drinker Biddle &amp Reath LLP, Minneapolis, MN, and Myron D. Rumeld, Russell Laurence Hirschhorn, and Sydney Juliano, Proskauer Rose, LLP, New York, NY, for Defendants Wells Fargo & Co. and Timothy J. Sloan.

OPINION AND ORDER

Eric C. Tostrud, United States District Court.

Plaintiffs-participants in a 401(k)/Employee Stock Ownership Plan established by Defendant Wells Fargo & Co.-bring ERISA prohibited transaction and breach of fiduciary duty claims against Wells Fargo, plan fiduciary GreatBanc Trust Company, and former Wells Fargo CEO Timothy J. Sloan. Plaintiffs claim that the ESOP paid more than fair market value for Wells Fargo preferred stock and improperly used preferred stock dividends to satisfy Wells Fargo's matching contributions.

Defendants move to dismiss under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). The motions will be denied. Under Rule 12(b)(1), Defendants launch a factual attack, contending Plaintiffs received all common stock they were owed under the terms of the 401(k) plan. But Plaintiffs claim Defendants violated ERISA by using certain preferred stock dividends to satisfy Wells Fargo's matching contributions, and but for these violations, participants of the Plan would have received additional shares of common stock. Defendants' Rule 12(b)(6) motion will be denied because Plaintiffs plausibly allege ERISA prohibited transaction and breach of fiduciary duty claims.

I

The parties. Plaintiffs Aryne Randall, Peter Morrissey, and Scott Kuhn were employees of Defendant Wells Fargo &amp Company who participated in the Wells Fargo & Company 401(k) Plan (the “Plan”). Am. Compl. [ECF No. 49] ¶¶ 18-22. Wells Fargo is a multinational financial services company that sponsors the Plan. Id. ¶¶ 24-25. Defendant Timothy J. Sloan was the Chief Executive Officer of Wells Fargo from October 2016 to March 2019 and was the sole member of the ESOP Committee. Id. ¶¶ 30-32. Defendant GreatBanc Trust Company was appointed by Wells Fargo to act as a named fiduciary for the Employee Stock Ownership Fund (“ESOP”). Id. ¶¶ 36-37.

The Plan. Wells Fargo operates the Plan to help Wells Fargo employees save for retirement. Id. ¶ 41. The Plan is a 401(k) defined contribution retirement plan, id. ¶ 39, meaning qualified Wells Fargo employees can participate in the Plan by making deferred salary contributions, ECF No. 91-2 §§ 2.42, 4.1. Participants in the Plan can invest their salary deferrals in a menu of options, including Wells Fargo stock. Am. Compl. ¶ 46. Wells Fargo also contributes to the Plan by matching employee salary deferrals and through discretionary profit-sharing. Id. ¶ 44. Wells Fargo matches employee contributions dollar-for-dollar up to 6% of employees' eligible compensation, ECF No. 91-2 § 5.1(a), and usually makes discretionary profit-sharing contributions to employees' accounts in the amount of 1% of their eligible compensation, see, e.g., ECF No. 45-3 at 31. Wells Fargo invested its matching and discretionary contributions in Wells Fargo stock through the ESOP. ECF No. 91-2 § 8.1(a). Because the ESOP is a “unitized stock fund,” participants seem to receive ESOP Fund units in their individual accounts reflecting common stock in the ESOP. ECF No. 91 ¶¶ 5, 8, 12 n.4.^[1]

Preferred stock.

Although Wells Fargo distributes some common stock to the ESOP directly from the Wells Fargo treasury, see ECF No. 94 ¶ 10(c), Wells Fargo primarily distributes common stock to the ESOP by using convertible Wells Fargo preferred stock, see id. ¶ 10(b). Preferred stock, and its conversion into common stock, requires an explanation. Wells Fargo loans money to the ESOP, and the ESOP uses the proceeds to purchase preferred stock from Wells Fargo. Am. Compl. ¶ 55; ECF No. 91-2 § 16.3. Once acquired, the ESOP holds the preferred stock in a reserve account as collateral for the loan from Wells Fargo. Am. Compl. ¶ 58; ECF No. 91-2 § 16.2. As principal payments are made on the loan, a proportionate amount of preferred stock is released from the reserve account and converted into common stock. Am. Compl. ¶ 59. When released from the reserve account, preferred stock converts into $1,000 of common stock “based on the then current market price of Common Stock.” Id. ¶ 60.

Wells Fargo's valuation of preferred stock.

Despite preferred stock converting into $1,000 worth of common stock, Defendants calculate the value of preferred stock at higher than $1,000. Id. ¶ 79. This is because the ESOP earns dividends on the preferred stock. See, e.g., id. ¶ 65. Defendants thus calculate the value of preferred stock to include future dividend income, discounted to present value. Id. ¶ 70. In 2018, for example, Wells Fargo purchased 1,100,000 shares of Wells Fargo preferred stock for $1,142,900,000. ECF No. 104 at 5.

Participants' common stock dividends.

Shares of Wells Fargo common stock also pay dividends. Historically, Wells Fargo paid these dividends on “March 1, June 1, September 1, and December 1 to the Plan's trust account.” ECF No. 91 ¶ 6. Participants in the Plan can reinvest their common stock dividends in the ESOP-in other words, reinvest their common stock dividends in additional shares of common stock-or elect to be paid the dividend in cash. Id. ¶ 7. Participants who elect to reinvest their dividends in the ESOP “receive units equivalent to the value of the cash dividends paid.” Id. ¶ 8. The default option is for participants to reinvest common stock dividends in the ESOP. Id. If participants reinvest their dividends in the ESOP, the ESOP pays off the loan with the reinvested common stock dividends to release shares of common stock (by converting preferred stock released from the reserve account into common stock). See ECF No. 94 ¶ 10.

Wells Fargo's allocation of common stock released from the reserve.

The released common stock is allocated to participants according to § 16.5 of the Plan. ECF No. 91-2 § 16.5. If participants do not elect for cash distributions of their common stock dividends, their dividends are reinvested into the ESOP, and participants receive released common stock shares equal to the value of their dividend. Id. § 16.5(a). The remaining released common stock shares are allocated pursuant to § 5.1 to satisfy Wells Fargo's matching contributions to participants. Id. § 16.5(b). If the common stock released is less than the amount required to equal participants' reinvestment of common stock dividends and Wells Fargo's matching contributions, Wells Fargo covers the shortfall. Id. § 16.5(c). Wells Fargo covers the shortfall by contributing cash to the ESOP, and in turn having the ESOP pay off the Wells Fargo loan to release additional shares of common stock, or by distributing common stock to the ESOP directly from the Wells Fargo treasury. ECF No. 94 ¶ 10. If at the end of a calendar year “all allocations under subsections (a) and (b) have been completed and there is Company Stock which has been released from Unallocated Reserves and which remains unallocated, said Company Stock shall be allocated” to participants on a pro rata basis. ECF No. 91-2 § 16.5(e).

Preferred stock dividends in 2018.^[2]

In 2018, Wells Fargo paid preferred stock dividends to the ESOP totaling $158,847,743.50. ECF No. 94 ¶ 5. All of the preferred stock dividends “paid to the ESOP in 2018 were used by the ESOP in 2018 to make loan payments.” Id. ¶ 6.^[3] “Wells Fargo contributed an additional $1,016,968,311.70 of cash to make the ESOP loan payments.” Id. ¶ 10(b). The ESOP loan payments released 1,105,029 shares of preferred stock, which converted into 21,446,001 shares of common stock. Id. ¶ 10(c). Wells Fargo contributed the remaining 2,288,686 shares of common stock needed to fund Wells Fargo's employer matching contributions in 2018 directly from the Wells Fargo treasury. Id. ¶ 11.

Common stock dividends received by Plaintiffs.

“[E]ach Plaintiff received all of the units of Common Stock that he or she was entitled in all of their Plan accounts” from September 26, 2016, to March 31, 2023, “as a result of having elected to reinvest all of his or her common stock dividends in the ESOP Fund[.]” ECF No. 91 ¶ 11.

Plaintiffs' claims.

Plaintiffs filed the operative seven-count Amended Complaint on January 6, 2023, as a putative class action. Am. Compl. Plaintiffs bring the following seven claims: (1) GreatBanc violated ERISA's prohibited transaction rules, id. ¶¶ 98-111; (2) GreatBanc breached its fiduciary duties, id. ¶¶ 112-24; (3) Wells Fargo violated ERISA's prohibited transaction rules id. ¶¶ 125-34; (4) Wells Fargo breached its fiduciary duties, id. ¶¶ 135-42; (5) Sloan violated ERISA's prohibited transaction rules, id. ¶¶ 14352; (6) Sloan breached his fiduciary duties, id. ¶¶ 153-60; and (7) all Defendants breached their co-fiduciary duties, id. ¶¶ 161-67. After...