A federal district court judge has dismissed a stock drop suit against Peabody Energy, finding that plaintiffs failed to meet the standards of such cases set forth in Fifth Third v. Dudenhoeffer.
In a June 2015 complaint, and in a March 2016 amended complaint filed on behalf of participants in the Peabody Investments Corp. Employee Retirement Account; the Peabody Western-UMWA 401(k) Plan; and the Big Ridge, Inc. 401(k) Profit Sharing Plan and Trust, the plaintiffs allege plan officials breached their fiduciary duties by continuing to offer Peabody Stock as an investment option for the plans when it was imprudent to do so and by maintaining the plans’ pre-existing significant investment in Peabody Stock when it was no longer a prudent investment.
According to the complaint, the fiduciaries knew or should have known that Peabody stock was imprudent as a retirement investment vehicle because of the “sea-change in the basic risk profile and business prospects of the company caused by the collapse of coal prices, the company’s deteriorating Altman Zscore—a financial formula commonly used by financial professionals to predict whether a company is likely to go into bankruptcy—which indicated that Peabody Energy was and is in danger of bankruptcy, an excessive increase in the company’s debt to equity ratio, and increased costs due to the ill-advised acquisition of Australian company Macarthur Coal Ltd.”
Plaintiffs posit two alternative actions that the defendants should have taken: “directed that all company and plan participant contributions to the company stock fund be held in cash rather than be used to purchase Peabody stock”; and “closed the company stock itself to further contributions and directed that contributions be diverted from company stock.”
U.S. District Judge Audrey G. Fleissig of the U.S. District Court for the Eastern District of Missouri noted that Dudenhoeffer held with respect to public information claims against employee stock ownership plan (ESOP) fiduciaries, that “allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances . . . affecting the reliability of the market price as an unbiased assessment of the security’s value in light of all public information.”
Plaintiffs stated in the second amended complaint that withholding of the market projections from the public; objective criteria, such Peabody’s Z-Score predicting Peabody’s demise; Peabody’s overwhelming unserviceable” debt; and the defendants’ failure to properly investigate the continued prudence of Peabody Stock, individually and collectively, represent the kind of “special circumstances” contemplated by the Supreme Court in Dudenhoeffer. NEXT: No ‘special circumstances’ and no plausible alternatives