U.S. District Judge Richard J. Sullivan of the U.S. District Court for the Southern District of New York ruled that the company and its fiduciaries were still entitled to the prudence presumption even though its plan documents did not specifically mandate that a company stock fund be offered in the 401(k). Sullivan ruled that it was clear from the plan documents that Wyeth “presupposed” the existence of employer stock in the plan.
Participant Carlos M. Herrera filed the suit in 2008 alleging that the company stock fund was no longer a prudent investment during the period covered by the complaint because Wyeth stock was artificially inflated. According to the court, roughly $434 million of the plan’s assets were invested in Wyeth stock during the relevant period.
Herrera alleged that the stock price inflation occurred 2006 and 2007 because investors expected Wyeth to come to market with a drug called Pristiq that it developed it to treat both major depressive order and menopause symptoms such as hot flashes and night sweats. According to the court. Herrera alleged the company knew of clinical studies that called Pristiq’s effectiveness into question.
However, in July 2007, Wyeth announced that the U.S. Food and Drug Administration sent a letter to Wyeth indicating that Pristiq had been designated “approvable” for treatment of vasomotor symptoms—an intermediate step between the agency’s final approval and a rejection. On hearing the news, investors sent the company’s stock price down 10% from $56 per share to $50.30 per share and it kept falling during the class period, to a low of $38 per share.
In throwing out the case, Sullivan asserted that the roughly 10% stock drop that occurred after the FDA’s “approvable” letter was disclosed, and the 21% percent drop in price during the period covered by the suit, was not enough to rebut the presumption of prudence. The court also dismissed Herrera’s claim that the defendants breached their fiduciary duties by making misstatements and failing to disclose material information about company stock.
The case is Herrera v. Wyeth, S.D.N.Y., No. 08 Civ. 4688 (RJS).