Supreme Court Declines to Review Question About Dudenhoeffer Pleading Standards

The U.S. Supreme Court has denied a petition to review proceedings in a case alleging that fiduciaries of the SunEdison Inc. Retirement Savings Plan continued to offer SunEdison stock as an investment option in the plan when they knew or should have known it was imprudent to do so.

Like many stock drop cases following the Supreme Court’s previous decision in Fifth Third v. Dudenhoeffer, the SunEdison case was dismissed after a judge found the allegations did not meet the pleading standards of Dudenhoeffer. Specifically, a lower court and the 8th U.S. Circuit Court of Appeals decided plaintiffs in the SunEdison case offered “no allegations that the circumstances indicated to the defendants that they could not rely on the market’s valuation of SunEdison stock.”

In 2016, a former employee of SunEdison Semiconductor LLC, referred to in court documents as “Semi,” alleged 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. SunEdison, Semi’s parent company, had filed for bankruptcy on April 21, 2016.

According to case documents, pursuant to a plan amendment, effective February 1, 2015, participants could retain their existing investments but could no longer direct additional investments into the SunEdison stock fund. The plaintiffs presented evidence of SunEdison press releases announcing losses, as well as financial press reporting that SunEdison was in financial distress. Between July 20, 2015, and April 21, 2016, the market price of SunEdison stock fell from $31.66 to $0.34.

In its decision affirming a lower court decision, the 8th Circuit wrote: “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. 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.”

“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 stated.

In his petition to the Supreme Court, the plaintiff noted that in Dudenhoeffer, the high court unanimously held that the question whether a plaintiff had plausibly alleged a claim under the Employee Retirement Income Security Act (ERISA) for breach of the fiduciary duty of prudence had to be answered by conducting a “careful, context-sensitive scrutiny of a complaint’s allegations” because the content of the duty of prudence “turns on ‘the circumstances . . . prevailing’ at the time the fiduciary acts.” He claimed that the 8th Circuit “discarded the core lesson of Dudenhoeffer and imposed a categorical heightened pleading standard on ERISA plaintiffs alleging a breach of the duty of prudence based on the fiduciary’s decision to hold an unduly risky asset despite publicly available information and inside information evincing the asset’s imprudence.”

The question he asked the high court to answer was “whether Dudenhoeffer’s ‘context-sensitive scrutiny of a complaint’s allegations’ can be met where a court presumes an asset must be prudent if it is publicly traded and presumes that a reasonably prudent fiduciary would never conclude that it ‘would not do more harm than good’ to freeze purchases of a company’s assets based on inside information.”

The Supreme Court denied the petition on January 21.