A federal district court has found that retirement plan participants suing Exxon Mobil for continuing to offer company stock in its retirement plan when it was no longer prudent to do so have failed to meet the pleading standards set forth in a U.S. Supreme Court decision in Fifth Third v. Dudenhoeffer.
This is not the first time that U.S. District Judge Keith P. Ellison of the U.S. District Court for the Southern District of Texas turned away Exxon retirement plan participants’ claims. When they first filed the lawsuit, the plaintiffs stated that throughout the class period, Exxon repeatedly highlighted the strength of its business model and its transparency and reporting integrity, particularly with regard to its oil and gas reserves and the value of those reserves. These were misrepresentations, they allege, and when the truth was uncovered, the stock price for Exxon shares dropped, resulting in losses for participants.
The first complaint offered alternative actions Exxon could have taken, as the standards set forth in Fifth Third v. Dudenhoeffer requires plaintiffs to suggest alternative actions fiduciaries could have taken that could not be believed to do more harm than good. They included that the Exxon defendants, as the plan’s trustees, could have halted new purchases or investments of Exxon stock. They could also have tried to effectuate, through personnel with disclosure responsibilities, or, failing that, through their own agency, truthful or corrective disclosures to cure the fraud and make Exxon stock a prudent investment again. Defendants also could have directed the plan to divert a portion of its holdings into a low-cost hedging product that would at least serve as a buffer to offset some of the damage the company’s fraud would inevitably cause once the truth came to light. Ellison previously found that these alternative actions did not meet the standard set forth in Dudenhoeffer.
Allowing participants to file a second amended complaint, this time they suggested that Exxon fiduciaries should have sought “out those responsible for Exxon’s disclosures under the federal securities laws and tried to persuade them to refrain from making affirmative misrepresentations regarding the value of Exxon’s reserves.” But Ellison again finds this does not meet the standard that plaintiffs must suggest alternative actions fiduciaries could have taken that could not be believed to do more harm than good. “As other comparable companies made corrective disclosures, remaining silent may have communicated to market investors that Exxon was facing the same troubles, which would have had much the same outcome as a corrective disclosure,” he wrote in his opinion.
Ellison pointed out that a recent decision in Jander v. Retirement Plans Comm. of IBM does not affect his conclusion. In that case, the court found the following circumstances persuasive: the defendants allegedly knew that the stock was “artificially inflated through accounting violations;” defendants had the power to make corrective disclosures to correct the price; general economic principles suggest that the reputational damage to a company increases the longer a fraud continues; the stock was traded in an efficient market; and eventual disclosure was inevitable, because the business was being sold. Ellison said two arguments—that the fraud became more damaging over time and that the eventual disclosure was inevitable—do not apply in the Exxon case.
He said the argument that reputational damage to the company would increase the longer the fraud went on directly contradicts the 5th U.S. Circuit Court of Appeal’s decision in Martone v. Robb. In addition, Ellison said, the inevitability of the disclosure in Jander also differentiates the Exxon case because there was no major triggering event that made Exxon’s eventual disclosure inevitable. The plaintiffs argue that the investigations into Exxon by state attorneys general and the Securities and Exchange Commission (SEC) made it inevitable that the non-public information would come to light. However, Ellison pointed out that these investigations resulted in no charges within the class period. “The investigation by the New York Attorney General’s office continued until October 24, 2018—about two years after the end of the class period—and only at that point was Exxon sued for allegedly defrauding shareholders,” he wrote.“Thus, Plaintiffs’ Second Amended Complaint does not show that a prudent fiduciary could not conclude that remaining silent could have resulted in a drop in stock prices that would have done more harm than good to the Plan. Although Plaintiffs argue that the drop would have been minor and temporary, the Court has already rejected that argument as inappropriately relying on hindsight,” Ellison concluded, dismissing the case.