The United States District Court for the District of New Jersey has ruled strongly against plaintiffs in a stock drop lawsuit filed by employees of Allergan in the wake of the firm’s acquisition by Actavis. 

Plaintiffs filed their class action challenge more than a year ago against the Allergan, Inc. Savings and Investment Plan and the Actavis, Inc. 401(k) Plan, claiming breaches pursuant to Sections 404, 405, 409 and 502 of the Employee Retirement Income Security Act (ERISA). According to the initial complaint, the defendants “permitted the plans to continue to offer Allergan Stock as an investment option to participants even after the defendants knew or should have known that Allergan Stock was artificially inflated during the proposed class period,” which ran February 25, 2014, to November 2, 2016.

Ruling in favor of a detailed motion to dismiss filed by defendants, the court cites a long list of precedent-setting cases, including the U.S. Supreme Court’s 2014 decision in Fifth Third v. Dudenhoeffer. While SCOTUS in that ruling made clear that there should be no special presumption of prudence for employee stock ownership plan (ESOP) fiduciaries, the court also determined that “allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or under-valuing stock are implausible as a general rule, at least in the absence of special circumstances.” In addition, for claims alleging a fiduciary breach based on non-public information, the Supreme Court held that plaintiffs must “plausibly allege an alternative action fiduciaries could have taken and would not have viewed as more harmful to the plan than helpful.”

As in other stock drop cases argued post Fifth Third v. Dudenhoeffer, the plaintiffs here have flatly failed to meet this high bar for proving standing. For example, on the matter of proving that plan fiduciaries should have known that the employer stock price was inflated, the court concludes bluntly that the plaintiffs’ examples, standing alone, do not rise above the speculative level of misconduct.

“As pled, plaintiffs have not set forth sufficient facts to establish or even infer that defendants engaged in collusive and/or fraudulent activity during the class period such that they could have insider information to that effect,” the decision explains. “Even if defendants had inside information of fraud or collusion, plaintiffs have not met the heightened pleading standard articulated in Fifth Third to maintain a cause of action for breach of the duty of prudence.”

In one interesting section of the ruling, the district court considers plaintiffs’ fourth suggestion for an “alternative action fiduciaries could have taken and would not have viewed as more harmful to the plan than helpful.”

“Plaintiffs propose that at the time of the Actavis-Allergan merger, instead of causing the plan to purchase significant amounts of Allergan stock, defendants could have directed cash assets from the acquisition be placed into the plan’s default investment fund or allocated based upon participant’s instructions,” the decision states. “This alternative action lacks sufficient detail to establish that a prudent fiduciary could not have found that reducing or redirecting purchases of Allergan stock would cause more harm than good, especially at the time of a merger. Furthermore, the Supreme Court in Fifth Third explained that ‘ESOP fiduciaries, unlike ERISA fiduciaries generally, are not liable for losses that result from a failure to diversify.’ Thus, this would not a viable alternative to the extent that it required the fiduciaries to diversify the plan.”

The full text of the lawsuit is available here and includes more detailed consideration of these proof-of-standing matters.