Edison Executives Beat ERISA Challenge to Stock Losses

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By Jacklyn Wille

July 7 — Two Edison International Inc. executives convinced a federal judge to dismiss a lawsuit attacking their decision to offer workers Edison stock in the company's 401(k) plan ( Wilson v. Edison Int'l Inc. , C.D. Cal., No. 2:15-cv-09139-JAK-PJW, 7/6/16 ).

The lawsuit— filed on behalf of a proposed class of more than 20,000 Edison workers—accused the company's chief executive officer and vice president of violating federal benefits law by keeping artificially inflated Edison stock in the 401(k) plan. A federal judge dismissed the lawsuit July 6, finding that the workers failed to sufficiently identify what the executives should have done differently in this specific circumstance.

The decision by Judge John A. Kronstadt of the U.S. District Court for the Central District of California is noteworthy for its application of recent pronouncements from the U.S. Supreme Court about how judges should evaluate lawsuits challenging drops in stock price under the Employee Retirement Income Security Act. The Supreme Court opined on this topic in both 2014 and 2016 by creating new pleading standards for workers bringing these types of cases.

The next significant interpretation of these standards is likely to come from the U.S. Court of Appeals for the Fifth Circuit, which is currently hearing a lawsuit involving BP Plc's Deepwater Horizon oil spill. In that case, the Fifth Circuit has received briefs from the Department of Labor and the Securities and Exchange Commission attempting to flesh out the Supreme Court's directives.

Samuel E. Bonderoff, an attorney with Zamansky LLC who represents the Edison workers and workers bringing similar lawsuits against IBM Corp., Whole Foods Market Inc. and American Express Co., said he was “heartened” that Judge Kronstadt allowed them another attempt to state their claims.

“While we’re disappointed that the court granted defendants’ motion, we’re heartened by its decision to give us leave to replead and to provide us with such useful guidance about how to articulate these claims to the court’s satisfaction,” Bonderoff told Bloomberg BNA July 7.

Counsel for the Edison executives didn't immediately respond to Bloomberg BNA's request for comments.

More Harm Than Good

Kronstadt explained that the workers must allege an alternate action that plan fiduciaries could have taken instead of holding the disputed company stock. That action must be consistent with securities law, Kronstadt said, and the workers must show that a prudent retirement plan fiduciary “could not have concluded” that the suggested action “would do more harm than good” to the plan.

The Edison workers argued that these pleading requirements are satisfied by allegations that a defendant “concealed a fraud about which that person had knowledge.” According to the workers, they met this standard by alleging that Edison executives knew about undisclosed improprieties in the company's dealings with the California Public Utilities Commission.

Siding with the Edison executives, Kronstadt found that allegations of a "known fraud" alone won't satisfy the pleading standard established by the Supreme Court. Kronstadt said that workers also must show that a prudent plan fiduciary couldn't have concluded that disclosing the fraud would do more harm than good to the plan.

Judge Requires Specificity

In finding that the workers failed to meet this standard, Kronstadt focused on the complaint's “conclusory allegations” that weren't sufficiently “specific to this action.”

“The Complaint fails to account for the risk that the market might overreact to the proposed public disclosures, causing harm to Plan participants that was greater than the potential decline in share price upon disclosure of the claimed improper conduct,” Kronstadt said.

Munger Tolles and Olson LLP represents the executives. The workers are represented by Zamansky LLC, Corbett Steelman & Specter and Kirby Noonan Lance & Hoge.

To contact the reporter on this story: Jacklyn Wille in Washington at jwille@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

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