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Fifth Circuit Affirms Dismissal of ERISA Stock Drop Action
Tuesday, August 7, 2018

The Fifth Circuit agreed that a participant in Idearc’s 401(k) plan failed to plausibly plead that the plan fiduciary’s failure to act on publicly available information about Idearc amounted to a breach of fiduciary duty in connection with making Idearc stock available as an investment option in the plan.  The decision was guided by an earlier Supreme Court decision in which the Court ruled that allegations that a fiduciary should have recognized from publicly available information alone that the market was overvaluing or undervaluing the stock are implausible as a general rule, at least in the absence of “special circumstances.”  The Fifth Circuit first rejected the participant’s argument that where, as here, an imprudence claim was based on publicly available information, he need not prove “special circumstances” if the underlying allegations are that the stock was too risky as opposed to artificially inflated.  The Fifth Circuit also disagreed with the participant’s assertion that defendants’ alleged fraud constituted a “special circumstance,” because the alleged fraud was “by definition not public information” and the participant did not allege how the alleged fraud would affect the stock’s market price in light of all public information.  Second, the Fifth Circuit concluded that, even if defendants acted imprudently by failing to consider alternatives to continuing to invest in Idearc stock, Kopp failed to allege facts supporting the conclusion that defendants would have acted differently had they engaged in proper monitoring of the stock, and that an alternative course of action could have prevented the plan’s losses.  Lastly, the Fifth Circuit declined to infer that defendants acted with inappropriate motivations by maintaining the stock fund as an investment option because they stood to gain financially from Idearc’s success.  In so ruling, the Court found that a potential conflict does not equate to a plausible disloyalty claim, and that Kopp’s allegations at most showed that defendants acted to protect the value of Idearc stock, which was consistent with protecting the plan.  The case is Kopp v. Klein, 2018 WL 3149151 (5th Cir. June 27, 2018).

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