The U.S. District Court for the Northern District of Illinois, Eastern Division, has ruled in favor of the defense in the Employee Retirement Income Security Act (ERISA) stock drop lawsuit targeting the Boeing Co.
The complaint in the case was filed back in April 2019, following the well-publicized events involving two major crashes of Boeing 737 MAX series airplanes. As is typically the case in such stock-drop lawsuits, Boeing’s stock price suffered significantly in a short period of time, due to an issue that the plaintiffs believe should have been foreseen and addressed. Their complaint suggests the continued provision of employer stock during the proposed class period represented an ongoing fiduciary breach, as, in their view, the defendants should have taken action to protect plan participants’ balances.
To this end, the plaintiffs alleged Boeing’s leadership had known about the potential problems with the 737 MAX airplanes since at least 2010, when it faced the issue of placing more fuel-efficient, but larger engines in the line of airplanes. After the two crashes of Boeing 737 MAX planes, the complaint alleged, almost every country grounded the planes and new deliveries were put on hold. The markets reacted swiftly, with Boeing’s share price plunging more than $65 per share, from $442.54 on March 8, 2019, to $375.41 on March 12, 2019.
As has been seen time and again since the Supreme Court’s landmark 2014 ruling in a case known as Fifth-Third v. Dudenhoeffer, these stock drop claims have failed to persuade the district court to grant standing to the proposed class of plaintiffs. In simple terms, the Fifth-Third v. Dudenhoeffer precedent requires plaintiffs to plausibly allege an alternative course of action that the fiduciaries should have taken that would, first, not require them to break securities laws, and second, result in an undoubtedly better outcome for the plan. In the years since the Supreme Court handed down this precedent, very few stock drop cases have made it past the motion to dismiss stage.
In this particular case, the ruling first rejects the plaintiffs’ claims that the employee benefit plans committee (EBPC) is a fiduciary to the employee stock ownership plan (ESOP) for the purposes of investment selection and monitoring.
“As the plan administrator under ERISA Section 3(16), the EBPC had no fiduciary responsibility over the stock fund,” the ruling states. “The EBPC’s responsibilities are limited to ‘all matters related to administration of the plan.’ This entails ‘full discretionary authority to interpret the plan,’ determine questions relating to the plan (including questions of participation eligibility and benefits entitlement), establish rules and procedures required to administer the plan, maintain accounts and generate annual reports. The EBPC is also responsible for ‘providing information to members regarding the investment funds available under the plan, including a description of the investment objectives and types of investments of each such investment fund.”
The ruling then states that the EBPC is “not responsible for—and plaintiffs have identified no evidence to the contrary—investment decisions related to the stock fund.”
From here, the ruling states that the fiduciary status of the remaining defendants is “not quite so straightforward,” including the status of the employee benefit investment committee (EBIC). The fiduciary status of the advisory firm Newport is also important to the ruling.
“The independent fiduciary agreement provides that Boeing shall retain the responsibility ‘in its corporate capacity’ to comply with the requirements of applicable securities laws and ERISA with respect to the offering of Boeing stock under the plan,” the ruling states. “The plain language of this provision describes Boeing’s corporate role, not a fiduciary role, with respect to the stock fund. Newport, then—not Boeing and not the EBIC—had fiduciary responsibility over the stock fund. This alone is sufficient to dispose of plaintiffs’ claims against defendants.”
While this is enough to throw out the case, the ruling goes a step further and declares that, even assuming defendants had fiduciary responsibility for the stock fund and possessed material inside information about the 737 MAX, the second amended complaint still does not survive the defendants’ Rule 12(b)(6) challenge.
“Plaintiffs’ allegations fail to meet the Dudenhoeffer standard,” the ruling explains. “Specifically, plaintiffs have not adequately pled that a prudent fiduciary could not conclude that public disclosure would do more harm than good to the plan. Although the 7th U.S. Circuit Court of Appeals has yet to reach the issue, the overwhelming majority of circuit courts to consider an imprudence claim based on inside information post-Dudenhoeffer rejected the argument that public disclosure of negative information is a plausible alternative. … Plaintiffs admit that, during the class period, the 737 MAX’s safety was the subject of ongoing, fast-paced and highly publicized investigations. In this context, it is entirely plausible that a prudent fiduciary would deem public disclosure as likely to harm more than it helped.”
Importantly, the dismissal has been granted without prejudice, meaning plaintiffs may file another amended complaint consistent with the order within 21 days of the date of entry. The full text of the ruling is available here.