While public pension funds have received compensation for JP Morgan’s alleged “London Whale” trading scandal misconduct, participants in its own 401(k) plan did not fare so well.
The case, which had previously been dismissed for plaintiffs’ failure to overcome the Moench presumption of prudence for employee stock ownership plan fiduciaries, was sent back to the U.S. District Court for the Southern District of New York by the 2nd Circuit to determine the effect of a Supreme Court decision in Fifth Third Bancorp v. Dudenhoeffer.
After first finding that the defendants, JP Morgan Chase Bank and JP Morgan, were not named fiduciaries to the plan and that plaintiffs had not put forth sufficient evidence to prove they were de facto fiduciaries, U.S. District Judge George B. Daniels nevertheless went on to determine whether the plaintiffs had proved an imprudence claim under the new Dudenhoeffer standard. Under that standard, he noted that plaintiffs must satisfy two requirements to state a claim for breach of the duty of prudence on the basis of inside information. First, they must “plausibly allege an alternative action that the [D]efendant[s] could have taken that would have been consistent with the securities laws,” and second, they must plausibly allege “that a prudent fiduciary in the same circumstances [as Defendants] would not have viewed [the alternative action] as more likely to harm the fund than to help it.”
The plaintiffs proposed two alternative actions that the defendants could have taken: plan fiduciaries could have stopped new purchases of the JP Morgan company stock fund by plan participants, and they could have disclosed JP Morgan’s purported misconduct to plan participants. According to the opinion, both the plaintiffs and the defendants agreed that the proposed alternative actions would both have required defendants to make public disclosures about JP Morgan’s purported misconduct.
This led Daniels to consider Dudenhoeffer’s second prong that requires plaintiffs to plausibly allege “that a prudent fiduciary in the same circumstances [as Defendants] would not have viewed [the alternative actions] as more likely to harm the fund than to help it.” He found that plaintiffs failed to plausibly allege that a prudent fiduciary in defendants’ circumstances would not have viewed making public disclosures of JP Morgan’s purported misconduct as more likely to harm than help the company’s stock price and therefore, the 401(k)’s company stock fund, so they failed to state a claim for breach of the Employee Retirement Income Security Act’s (ERISA’s) duty of prudence.
Daniels dismissed the case. His opinion may be viewed here.