Appeals Court Again Cites Dudenhoeffer in Rejecting Stock Drop Suit

The 8th U.S. Circuit Court of Appeals has affirmed a pro-defense district court decision stemming from an Employee Retirement Income Security Act (ERISA) “stock drop” lawsuit.

Like the U.S. District Court for the Eastern District of Missouri, the 8th Circuit has determined that the lead plaintiff—a former employee of SunEdison Semiconductor LLC, referred to in the decision as “Semi” and noted for being at one stage a wholly owned subsidiary of parent company SunEdison, Inc.—has failed to state an actionable claim.

The outcome echoes the results of many similar lawsuits that have been decided after the Supreme Court established tougher stock drop litigation pleading standards in an influential case known as Fifth-Third v. Dudenhoeffer. Also of note, a different set of plaintiffs has asked the Supreme Court to reconsider “whether Fifth Third’s ‘more harm than good’ pleading standard can be satisfied by generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time.”

As spelled out during the initial trial, on April 21, 2016, SunEdison filed for bankruptcy. In August 2017, the lead plaintiff brought suit derivatively on behalf of the plan and, in the alternative, as a putative class action on behalf of plan participants. The plaintiff claims that Semi, the investment committee of Semi’s retirement savings plan, and the members of the investment committee breached their fiduciary duties under ERISA.

Specifically, the plaintiff alleges that between July 20, 2015, and April 21, 2016, the defendants knew or should have known that SunEdison was in poor financial condition and faced poor long-term prospects and therefore should have removed SunEdison stock from the plan’s assets. The district court dismissed the complaint as to all defendants for failure to state a claim—other than two named fiduciaries, who were dismissed for lack of timely service—and denied leave to amend the complaint.

The text of the appellate decision notes that the retirement plan at issue was created in May 2014, after Semi spun off from SunEdison. The plan made several investment options available to its participants, including a fund that invested solely in the common stock of Semi’s former corporate parent.

Case documents show the lead plaintiff, among others, elected to exercise this option and held shares of SunEdison common stock through his individual plan account. The plan was later amended to freeze contributions to the SunEdison stock fund, and pursuant to the amendment, effective February 1, 2015, participants could retain their existing investments but could no longer direct additional investments into the SunEdison stock fund.

“By mid-2015, case documents recount, it was widely reported that SunEdison was facing liquidity problems and was in financial distress due to an ambitious series of acquisitions. On July 20, SunEdison issued a press release announcing that it would acquire yet another company, Vivint Solar, Inc., for $2.2 billion. Markets reacted poorly, and SunEdison’s stock price fell from $31.56 per share to $26.01 per share in a week. On August 6, SunEdison issued another press release, reporting a $263 million loss in its second quarter. That same day, the financial press warned that SunEdison had a $10.7 billion corporate debt load and negative cash flow from operations. By the end of the day, SunEdison’s stock closed at $17.08 per share,” the decision states.

By January of the following year, the financial press was reporting that SunEdison might not survive the year, and SunEdison’s stock closed at $3.02 per share. Case documents note that contemporaneous commentary suggested that SunEdison stock was risky “due to its generally disappointing historical performance and feeble growth in earnings per share as well as the company’s high debt-management risk.” In April, SunEdison and certain of its subsidiaries filed for bankruptcy. Between July 20, 2015, and April 21, 2016, the market price of SunEdison stock fell from $31.66 to $0.34. As a result, those who had invested in SunEdison stock through Semi’s retirement plan effectively lost the entire value of their investment.

Turning to its own legal analysis of whether the fiduciaries of the plan committed any actionable breaches during this affair, the 8th Circuit points to a few key precedent-setting cases, most notably Fifth Third.

“The [Supreme Court] opined that where a stock is publicly traded, 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,” the 8th Circuit explains. “This is because ERISA fiduciaries, who could reasonably see little hope of outperforming the market based solely on their analysis of publicly available information may, as a general matter, prudently rely on the market price. In its analysis, the [Supreme Court] embraced the view that a security’s price in an efficient market reflects all publicly available information and represents the market’s best estimate of its value in light of its riskiness and the future net income flows that those holding it are likely to receive. Noting that the complaint at issue did not point to any special circumstance that rendered reliance on the market price imprudent, the [Supreme Court] remanded for the lower courts to apply its guidance in the first instance.”

With this standard in mind, the 8th Circuit roundly rejects the appeal.

“The similarity between plaintiff’s allegations and those that the Supreme Court deemed insufficient to plausibly state a breach of the duty of prudence in Dudenhoeffer is undeniable,” the decision states. “The complaint presents a series of public announcements by SunEdison that spurred negative commentary by the financial press and concomitant drops in stock price. The complaint faults the defendants for failing to act on this publicly available information and alleges that the declines in SunEdison’s stock price and reports of SunEdison’s extraordinary debts and liquidity problems should have prompted them to investigate and ultimately determine that divesting from SunEdison stock would be prudent as early as July 20, 2015. It contains no allegations that the circumstances indicated to the defendants that they could not rely on the market’s valuation of SunEdison stock.”

The Circuit Court notes that the plaintiff’s attempts to evade Dudenhoeffer are unavailing.

“We reject the argument that Tibble v. Edison International saves the deficient duty-of-prudence allegations,” the decision explains. “The Supreme Court’s acknowledgment in Tibble that an ERISA fiduciary has a continuing duty to monitor trust investments and remove imprudent ones does not exempt this complaint from meeting Dudenhoeffer’s pleading requirements. … Plaintiff cannot distinguish Dudenhoeffer on the basis that it only applies to duty-of-prudence claims in the context of employer securities. The Supreme Court in Dudenhoeffer explicitly rejected the contention that fiduciaries of employee stock ownership plans are entitled to a special presumption of prudence. As such, we see no indication that the court intended to limit Dudenhoeffer to employer securities.”

The full text of the 8th Circuit decision is available here.