United States District Court, D. Minnesota
J. Levitt, Daniel R. Ferri, and Amy E. Keller, DICELLO LEVITT
& CASEY LLC; Robert K. Shelquist and Rebecca A. Peterson,
LOCKRIDGE GRINDAL NAUEN P.L.L.P.; Richard M. Elias, Greg G.
Gutzler, and Tamara M. Spicer, ELIAS GUTZLER SPICER LLC; Lori
G. Feldman and Michael B. Ershowsky, LEVI & KORSINSKY
LLP; W. Daniel “Dee” Miles, III, Rebecca D.
Gilliland, and Claire E. Burns, BEASLEY ALLEN CROW METHVIN
PORTIS & MILES, P.C.; Samuel E. Bonderoff, Jacob H.
Zamansky, Edward H. Glenn Jr., and Justin Sauerwald, ZAMANSKY
LLC; Carolyn G. Anderson and June P. Hoidal, ZIMMERMAN REED
LLP; and Douglas J. Nill, DOUGLAS J. NILL, PLLC, for
Russell L. Hirschhorn, Joseph E. Clark, Howard Shapiro, and
Lindsey H. Chopin, PROSKAUER ROSE LLP; and Kirsten E.
Schubert and Stephen P. Lucke, DORSEY & WHITNEY LLP, for
Patrick J. Schiltz United States District Judge
lawsuit-brought under the Employee Retirement Income Security
Act (“ERISA”), 29 U.S.C. § 1001 et seq.-is
one of many actions in which “plaintiffs' attorneys
have taken what is essentially a securities-fraud action and
pleaded it as an ERISA action in order to avoid the demanding
pleading requirements of the Private Securities Litigation
Reform Act of 1995 (‘PSLRA'), Pub. L. 104-67, 109
Stat. 737.” 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.”
lawsuit, the company at issue is defendant Wells Fargo &
Company (“Wells Fargo”), and the plaintiffs at
issue are current and former employees of Wells Fargo who
held the company's stock in their 401(k) accounts. The
price of Wells Fargo stock dropped sharply-and plaintiffs
consequently suffered significant losses-after Wells Fargo
and the United States government announced in September 2016
that thousands of Wells Fargo employees had engaged in
unethical sales practices, including opening deposit accounts
and issuing credit cards without the knowledge or consent of
allege that the fiduciaries of Wells Fargo's 401(k) plan
were corporate insiders who knew about the improper sales
practices long before the public announcement. Plaintiffs now
sue those fiduciaries, arguing that they violated their duty
of prudence under ERISA by not disclosing the improper sales
practices prior to September 2016. According to plaintiffs,
if the fiduciaries had disclosed that inside information
earlier, the value of the Wells Fargo stock in
plaintiffs' 401(k) accounts would not have dropped as
much as it did following the September 2016 announcement.
Supreme Court considered a similar claim in Fifth Third
Bancorp. v. Dudenhoeffer, 134 S.Ct. 2459 (2014). In
Dudenhoeffer, the defendants argued that “the
threat of costly duty-of-prudence lawsuits will deter
companies from offering ESOPs to their employees.”
Id. at 2470. (“ESOPs” is an abbreviation
for “employee stock ownership plans.”) In
response, the Supreme Court emphasized that Fed.R.Civ.P.
12(b)(6)-as interpreted in Ashcroft v. Iqbal, 556
U.S. 662 (2009), and Bell Atlantic Corp. v. Twombly,
550 U.S. 544 (2007)-provides an “important mechanism
for weeding out meritless claims.”
Dudenhoeffer, 134 S.Ct. at 2471. The Supreme Court
then instructed district courts handling lawsuits challenging
the failure of ERISA fiduciaries to disclose inside
information to determine “whether the complaint has
plausibly alleged that a prudent fiduciary in the
defendant's position could not have concluded that . . .
publicly disclosing negative information would do more harm
than good to the fund by causing a drop in the stock price
and a concomitant drop in the value of the stock already held
by the fund.” Id. at 2473.
a very tough standard. Trying to predict the impact of
anything on the price of a company's stock-like
trying to predict the impact of an athlete's injury on an
upcoming game or the impact of a politician's gaffe on an
upcoming election-is a highly speculative endeavor. An ERISA
fiduciary who is trying to figure out whether earlier
disclosure of negative inside information would have more or
less of an impact on a stock's price than later
disclosure of that negative information is trying to predict
the future on the basis of information that is incomplete,
imperfect, and fluid. In light of the inherently uncertain
nature of this task, plaintiffs will only rarely be able to
plausibly allege that a prudent fiduciary “could
not” have concluded that a later disclosure of
negative inside information would have less of an impact on
the stock's price than an earlier disclosure.
Id. (emphasis added).
not that rare case. Plaintiffs have not plausibly alleged
that defendants could not have concluded that an earlier
disclosure of the unethical sales practices would have done
more harm than good. The Court therefore dismisses
plaintiffs' amended complaint.
Fargo sponsors a 401(k) plan (“the Plan”) for its
employees. ECF No. 54 ¶ 55. Eligible employees may
contribute their own money to their individual 401(k)
accounts. Id. ¶ 58. If they do, Wells Fargo
matches their contributions, dollar-for-dollar, up to a
certain amount. Id. ¶ 61; ECF No. 116-1 §
the Plan's investment funds-the Wells Fargo Non-ESOP Fund
and the Wells Fargo ESOP Fund-“consist primarily of
shares of Company Stock.” ECF No. 116-1 §
8.1(a)-(b). Wells Fargo's matching contributions are also
“invested automatically in Wells Fargo stock.”
ECF No. 54 ¶ 62. At any given time, then, a large
portion of the Plan's assets is invested in Wells Fargo
stock. See Id. ¶ 60 (estimating that
“approximately 34% of the 401(k) Plan Assets . . . were
invested in Wells Fargo common stock” in 2016). Wells
Fargo employees are not required to keep their 401(k) money
invested in Wells Fargo stock. They may transfer their money
into “any other Investment Fund” maintained by
the Plan, including funds that do not invest in Wells Fargo
stock. ECF No. 116-1 § 8.6(a).
amended complaint alleges that Wells Fargo has been engaging
in widespread unethical sales practices since at least 2005.
See ECF No. 54 ¶¶ 88-103, 112, 163. For
example, Wells Fargo opened more than 1.5 million deposit
accounts for customers without their authorization.
Id. ¶¶ 92, 102. Wells Fargo also submitted
over 500, 000 credit-card applications for customers without
their permission. Id. ¶¶ 93, 102. Because
of these improper sales practices, “federal banking
regulators announced [in September 2016] that Wells Fargo had
been fined $185 million.” Id. ¶ 169. That
was the first public disclosure of the unethical sales
practices, and the market value of Wells Fargo's stock
fell in response to the disclosure. Id. ¶¶
175, 186, 199.
allege that the Plan's fiduciaries-who were also
corporate insiders- “were aware of systemic criminal
and unethical conduct at the Company since as early as 2005,
” yet they failed to disclose this fraud to the public.
Id. ¶ 163. Plaintiffs claim that earlier
disclosure would have mitigated the impact on Wells
Fargo's stock price that would inevitably result from the
disclosure of Wells Fargo's fraud. See Id.
¶ 208 (“Defendants . . . knew that . . . the
longer the fraud is permitted to fester, and the longer the
fraud is concealed, the greater the inflation and the greater
the ultimate damage upon revelation-which is
precisely what happened here.”); id.
¶ 220 (“[T]he lengthy cover-up made the situation
far worse for Plan Participants.”). Plaintiffs also
allege that the Plan's fiduciaries acted imprudently by
failing to take other corrective measures to protect
participants, such as “implementing processes to stop
the known fraud”; temporarily freezing stock purchases
and sales to prevent Plan participants from purchasing more
Wells Fargo stock at inflated prices; “[d]iscontinuing
the automatic investment” of matching contributions in
Wells Fargo stock; or purchasing a hedging product.
Id. ¶ 229.
allege that defendants violated their duties of prudence and
loyalty under ERISA. See 29 U.S.C. §
1104(a)(1)(A)-(B). The ...