Court Dismisses Fiduciary Breach Claims against KV Pharmaceutical

A federal court has dismissed claims by employees of KV Pharmaceutical Co. that the company breached its fiduciary duties by continuing to offer company stock in the its retirement plan at a time when the stock price was dropping steadily.

The U.S. District Court for the Eastern District of Missouri rejected plaintiffs’ arguments that the Employee Retirement Income Security Act (ERISA) does not include a presumption of prudence for plans that invest in company stock; courts only extend the presumption to fiduciaries of employee stock ownership plans; and the presumption is an evidentiary standard that should not be applied at the motion to dismiss stage. 

The court said that while the 8th U.S. Circuit Court of Appeals has not yet adopted the presumption of prudence, most other courts have adopted the presumption and have found that it can be applied at the motion to dismiss stage. 

While the court found that the allegations in the employees’ complaint were sufficient to overcome the presumption of prudence, it said their complaint was deficient because it did not meet the heightened pleading requirements set forth in Federal Rule of Civil Procedure 9(b), which applies to claims that “sound in fraud” and requires that the allegations be pleaded with particularity. According to the court, the employees repeatedly asserted that the defendants made false and misleading statements, but the employees did not allege that the defendants made any statements regarding KV Pharmaceutical’s operational and financial status.  

“Although plaintiffs cite to KV’s press releases and [Securities and Exchange Commission] filings in their amended complaint, plaintiffs fail to allege the specific statements in these public announcements were false and misleading,” the opinion said. 

The case was brought on behalf of all employees who invested in the company’s Class A and Class B common stock between February 2, 2003, and the present. It alleged that during the class period, KV Pharmaceutical’s stock had a steady decline due in part to several warning letters issued by the U.S. Food and Drug Administration.  

According to the opinion, in December 2008, KV Pharmaceutical recalled its painkiller hydromorphone, causing a significant drop in the company’s stock price. The stock price fell even further after the company suspended shipment of all of its FDA-approved drugs in tablet form, and stopped manufacturing and distributing all its products in January 2009. 

The case is Crocker v. KV Pharmaceutical Co., E.D. Mo., No. 4:09-CV-198 (CEJ), 3/24/10.