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In re Wells Fargo Erisa 401(k) Litigation

United States District Court, D. Minnesota

September 21, 2017


          Adam 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 plaintiffs.

          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 defendants.


          Patrick J. Schiltz United States District Judge

         This 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.” Id.

         In this 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 customers.

         Plaintiffs 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.

         The 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.

         This is 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).

         This is 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.

         I. BACKGROUND

         Wells 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 § 5.1(a).

         Two of 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).

         The 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.

         Plaintiffs 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.

         II. ANALYSIS

         Plaintiffs allege that defendants violated their duties of prudence and loyalty under ERISA. See 29 U.S.C. ยง 1104(a)(1)(A)-(B). The ...

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