Whitley v. BP, P.L.C. 838 F.3d 523 (5th Cir. 2016) OpInIOn By

Whitley v. BP, P.L.C. 838 F.3d 523 (5th Cir. 2016)
OpInIOn By CIrCuIt JuDge CleMent:In this stock-drop suit, the question on appeal is whether the district court erred in holding that the plaintiff stock-holders’ amended complaint stated a plausible claim under the pleading standards of Fifth Third Bancorp v. Dudenhoeffer [the Supreme Court’s 2014 decision]. Because we conclude that it did, we reverse and remand. BP, p.l.c. (“BP”) is a multinational oil and gas com-pany headquartered in London, England. BP offered its employees a choice of investment and savings plans (the “Plans”) regulated by ERISA. The Plans included the BP Stock Fund—an employee stock ownership plan (“ESOP”) comprised primarily of BP stock—as an investment option. On April 20, 2010, the BP-leased Deepwater Horizonoffshore drilling rig exploded, causing a massive oil spill in the Gulf of Mexico and a subsequent decline in BP’s stock price. The BP Stock Fund lost significant value, and the affected investors filed suit on June 24, 2010, alleging that the plan fiduciaries: (1) breached their duties of prudence and loyalty by allowing the Plans to acquire and hold overvalued BP stock; (2) breached their duty to provide adequate investment information to plan participants; and (3) breached their duty to monitor those responsible for managing the BP Stock Fund. * * * ERISA protects participants in voluntarily estab-lished, private sector retirement plans. It does this “by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans.” It“provides that an employer who sponsors an employee plan may also serve as a fiduciary of that plan,” and it“imposes on the employer-fiduciary and on those who manage the plan strict statutory duties, including loyalty, prudence, and diversification.”36 Fifth Third Bancorp, at 2472. Here, the BP Stock Fund was an ESOP. “The term‘employee stock ownership plan’ means an individual account plan . . . which is designed to invest primar-ily in qualifying employer securities . . . .” When the share price of an employer’s stock decreases, the value of an employee-held ESOP account decreases as well. When the share price of an employer’s stock decreases significantly, the affected employees often sue to recover their losses on their investments in employer stock. Such actions are commonly known as “stock-drop” suits. * * * The Supreme Court noted [in Fifth Third Ban-corp] that “[i]n applying a ‘presumption of prudence’ that favors ESOP fiduciaries’ purchasing or holding of employer stock, the lower courts have sought to recon-cile congressional directives that are in some tension with each other.” “On the one hand, ERISA itself sub-jects pension plan fiduciaries to a duty of prudence,” while “[o]n the other hand, Congress recognizes that ESOPs are ‘designed to invest primarily in’ the stock of the participants’ employer, meaning that they are not prudently diversified.” After reviewing the “pertinent provisions of ERISA,” the Court held that “the law does not create a special presumption favoring ESOP fiducia-ries” and that “the same standard of prudence applies to all ERISA fiduciaries, including ESOP fiduciaries, except that an ESOP fiduciary is under no duty to diversify the ESOP’s holdings.” The Court nonetheless recognized the plaintiffs’“legitimate” concern “that subjecting ESOP fiduciaries to a duty of prudence without the protection of a special presumption will lead to conflicts with the legal prohibi-tion on insider trading” because “ESOP fiduciaries often are company insiders and because suits against insider fiduciaries frequently allege . . . that the fiduciaries were imprudent in failing to act on inside information they had about the value of the employer’s stock.” *
Turning to pleading standards, the Court stated that“where a stock is publicly traded, allegations that a fidu-ciary should have recognized from publicly available information alone that the market was over-or under-valuing the stock are implausible as a general rule, at least in the absence of special circumstances.” The Court then stated:To state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plau-sibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.* * * [T]he district court here erred when it alteredthe language of Fifth Third to reach its holding. In Fifth Third, the Supreme Court stated that the plaintiff’s pro-posed alternative must be one that “a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.” But herethe district court stated that it could not determine, “on the basis of the pleadings alone, that no prudent fiduciary would have concluded that [the alternatives] would do more good than harm.” These statements are not equivalent. Under the Supreme Court’s formulation, the plaintiff bears the significant burden of proposing an alternative course of action so clearly beneficial that a prudent fiduciary could not conclude that it would be more likely to harm the fund than to help it. Here, the stockholders have failed to do so. * * * Intheir amended complaint, the stockholders state that their proposed alternatives “(a) could have been done without violating the securities laws or any other laws; (b) should have been done to fulfill Defendants’ fiduciary obligations under ERISA; and (c) would not have been more likely to harm the BP Stock Fund than to help it.” Aside from these conclusory statements, the stockholders do notspecifically allege, for each proposed alternative, that a prudent fiduciary could not have concluded that the alter-native would do more harm than good, nor do they offer facts that would support such an allegation. * * * The amended complaint states that BP’s stock wasovervalued prior to the Deepwater Horizon explosion due to “numerous undisclosed safety breaches” known only to insiders. In other words, the stockholders the-orize that BP stock was overpriced because BP had a greater risk exposure to potential accidents than was known to the market. Based on this fact alone, it does not seem reasonable to say that a prudent fiduciary at that time could not have concluded that (1) disclosure of such information to the public or (2) freezing trades of BP stock—both of which would likely lower the stock price—would do more harm than good. In fact, it seems that a prudent fiduciary could very easily conclude that such actions would do more harm than good. Accordingly, we find that the stockholders’ amendedcomplaint is insufficient, and the district court erred in granting the stockholders’ motion to amend. * * *