United States District Court, D. Minnesota
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.
Patrick J. Schiltz United States District Judge
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.
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.
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 . . . .” 134
S.Ct. 2459, 2473 (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).
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.
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
APPLICATION OF DUDENHOEFFER TO LOYALTY CLAIMS
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.
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 (2006) (quoting H.R. Conf. Rep. No. 104-369, at 31
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. 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).
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.
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
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 §
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