The 5th U.S. Circuit Court of Appeals has affirmed a district court’s dismissal of a case alleging Radio Shack continued to offer company stock as an investment option in its 401(k) plan when it was no longer prudent to do so.
The case was first introduced years ago, and the U.S. District Court for the Northern District of Texas used the presumption of prudence then used by courts to dismiss the suit. However, the lawsuit was refiled after the Supreme Court in Fifth Third Bank v. Dudenhoeffer clarified that fiduciaries of employee stock ownership plans (ESOPs) are not entitled to any special presumption of prudence under the Employee Retirement Income Security Act (ERISA).
The three named plaintiffs in the class action filed suit against the members of the plan’s retirement committee, RadioShack’s board of directors and the plan trustees. They also sued the plan administrative committee and trustees of the RadioShack Puerto Rico 1165(e) Plan. The plaintiffs settled with the trustees.
The appellate court noted in its opinion that Dudenhoeffer establishes different standards for duty-of-prudence claims based on public information and insider information, respectively.
The plaintiffs contend that the committee defendants breached the duty of prudence by failing to respond to publicly available information that warned of RadioShack’s decline and suggested that RadioShack stock was too risky for a retirement plan. They argue that Dudenhoeffer does not apply to public-information claims that a stock was excessively risky, and that even if it applies, RadioShack’s declining economic condition gave rise to special circumstances that entitle them to relief.
But, the 5th Circuit concluded these claims fail under the standard announced in Dudenhoeffer and that no special circumstances warrant relief. According to the opinion, Dudenhoeffer establishes that for publicly-traded stocks, “allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or under-valuing the stock are implausible as a general rule, at least in the absence of special circumstances.”
The appellate court also found that under the Dudenhoeffer standard, the plan fiduciaries did not breach the duty of prudence by relying on market price as a fair indicator of the value of RadioShack stock. “Although the complaint references scores of news articles and analyst reports detailing RadioShack’s demise, the complaint provides no plausible reason that the negative commentary from these sources was not incorporated into the RadioShack stock price. The same is true of the complaint’s discussion of debt, financial statements, and downgrades to RadioShack’s stock, bond, and credit ratings,” the court’s opinion says. “On the contrary, the overall decline in the price of RadioShack stock during the class period shows that the market accounted for this negative information.”
According to the opinion, the retirement plan committee held an ad-hoc meeting on July 11, 2014, to consider the propriety of RadioShack stock as a plan investment option given a recent rating downgrade. The committee considered freezing or capping future contributions, removing the stock from the plan, and aggressively educating participants about the importance of diversification and risks of investing in a single stock. The committee decided to freeze future plan participant investment in RadioShack stock “as soon as administratively feasible,” September 15, 2014. The committee declined to divest the stock, reasoning that it would force participants to sell their shares at an all-time low and would send a negative message about the company’s prospects.
The appellate court said the plaintiffs fail to plausibly allege that a press release in which a RadioShack executive said he believed the stock may be worth nothing made the market price of RadioShack stock unreliable at the time the committee froze plan purchases of the stock months earlier or at the time the release was made.
The plaintiffs did not plausibly plead that any defendant had information not available to the public, the 5th Circuit said. It found that even if assuming the defendants had insider information, the plaintiffs’ non-public information claims would not satisfy Dudenhoeffer. To state a duty of prudence claim based on nonpublic information, “a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”
The complaint alleges the committee defendants should have frozen plan contributions to the fund earlier, disclosed inside information to the market to deflate the stock price, or liquidated the plan’s holdings of RadioShack stock after disclosing the alleged inside information. “Because a prudent fiduciary could conclude that each of these actions would have done more to harm the plan than to help it, the district court properly dismissed the plaintiffs’ duty of prudence claims based on insider information,” the appellate court’s opinion states.