Plaintiffs have filed a class action challenge against the Allergan, Inc. Savings and Investment Plan and the Actavis, Inc. 401(k) Plan,  claiming breaches pursuant to Sections 404, 405, 409 and 502 of the Employee Retirement Income Security Act (ERISA).

According to the compliant, “this case is about the failure of the defendants, fiduciaries of the plan, to protect the interests of the plan’s participants in violation of the defendants’ legal obligations under ERISA.” Defendants, the complaint argues, “breached the duties they owed to the plans, to plaintiff, and to the putative class members who are also participants, by, inter alia, retaining common stock of Allergan as an investment option in the plans when a reasonable fiduciary using the ‘care, skill, prudence, and diligence … that a prudent man acting in a like capacity and familiar with such matters would use’ would have done otherwise.”

The complaint suggests defendants “permitted the plans to continue to offer Allergan Stock as an investment option to participants even after the defendants knew or should have known that Allergan Stock was artificially inflated during the class period,” which runs February 25, 2014, to November 2, 2016.

“Defendants knew or should have known that material facts about Allergan’s business had not been disclosed to the market, causing Allergan Stock to trade at prices above which it would have traded had such facts been disclosed,” plaintiffs argue. “Defendants were empowered as fiduciaries to remove Allergan Stock from the plan’s investment options or to take other measures to help participants, yet they failed to do so or to act in any way to protect the interests of the plans or their participants, in violation of defendants’ legal obligations under ERISA.”

As with other stock drop cases, participants may not find it as easy as they expect to prove standing, even with the well-established fact that they clearly did suffer significant financial losses as a result of continuing to hold Allergan stock. While the U.S. Supreme Court made clear in Fifth Third vs Dudenhoeffer that there should be no special presumption of prudence for employee stock ownership plan (ESOP) fiduciaries, “allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or under-valuing stock are implausible as a general rule, at least in the absence of special circumstances.” In addition, for claims alleging a fiduciary breach based on non-public information, the high court held that plaintiffs must plausibly allege an alternative action fiduciaries could have taken and would not have viewed as more harmful to the plan than helpful.

It is up to the United States District Court District Of New Jersey to decide in this particular case whether there was indeed such a plausible alternative action available to fiduciaries. Plaintiffs, among other arguments, suggest the fiduciaries here had a duty at the very least to freeze the offering of the “falsely inflated securities.”

NEXT: Does the argument have merit? 

The complaint frequently cites the decision in Fifth Third to argue ESOP fiduciaries cannot rely on a “presumption of prudence” to defend their offering of employer stock. Other cases with similar allegations have resulted in both successful and unsuccessful defenses for the employers, hinging mainly on whether the party filing suit could successfully allege another plausible action that a prudent fiduciary should have known to take.

Attempting this, the text of the lawsuit takes a deep dive into Allergan’s business practices, examining a long series of releases and regulatory filings that plaintiffs suggest proves the company behaved in a willingly misleading way.

“During the class period, the company made a series of reassuring statements about Allergan’s engagement in conduct that would eventually result in an antitrust investigation by the U.S. Department of Justice and subject it to likely criminal charges for suspected price collusion,” the complaint suggests. “Given the totality of circumstances prevailing during the class period, no prudent fiduciary could have made the same decision as made by defendants here to retain and/or continue purchasing the clearly imprudent Allergan Stock as a plan investment.”

Specifically, plaintiffs argue their plan fiduciaries should have known the company “was conspiring to raise its profits in violation of antitrust laws. Rather than continue to make short-term profits at the risk of long-term fines and penalties, defendants should have taken action to protect the plan from holding and purchasing artificially inflated stock.”

Plaintiffs admit that “disclosure might not have prevented the plan from taking a loss on company stock it already held, but it would have prevented the plan from acquiring … additional shares of artificially inflated company stock … Full disclosure would have cut short the period in which the plan bought company stock at an inflated price … None of those steps would have violated securities laws or any other laws, or would not have been more likely to harm the plan’s stock holdings than to help it, and could have avoided or mitigated harm caused to the plan.”

Plaintiffs go so far as to suggest defendants should have known to redirect company and plan contributions from the company stock to be held “in cash or some other short-term investment.” They suggest “a refusal to purchase company stock is not a transaction within the meaning of insider trading prohibitions and would not have required any independent disclosures that could have had a materially adverse effect on the price of Allergan Stock … Alternatively, defendants could have disclosed (or caused others to disclose) Allergan’s legal issues so that its stock would trade at a fair value.”

To remedy the breaches of fiduciary duties as described in the complaint, plaintiffs “seek to recover the financial losses suffered by the plan as a result of the diminution in value of company stock invested in the plan during the class period, and to restore to the plan what participants would have received if the plan’s assets had been invested prudently.”

The full text of the complaint is here.