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March 14 — The Department of Labor has begun quoting Shakespeare in its ongoing effort to impose liability on BP Plc and other companies accused of tanking their company stock plans through fraudulent activities.
Borrowing a phrase from “The Merchant of Venice,” the department's March 11 amicus brief advises employee stock ownership plan fiduciaries that “truth will out”—in other words, that they won't do more harm than good to the ESOP by disclosing a corporate fraud that will ultimately come to light and potentially do even more damage to the fund.
The department's brief to the U.S. Court of Appeals for the Fifth Circuit is part of a coordinated effort with the Securities and Exchange Commission—which filed its own brief—to articulate how ESOP investors can hold plan fiduciaries liable for investing their retirement savings in company stock when an ongoing fraud threatens the stock's value.
Although the agency briefs will be viewed favorably by plaintiffs' counsel and workers at other companies with ESOPs, the briefs offer no help to workers in cases that don't involve corporate fraud or misrepresentations. Those suits have faced an increasingly uphill battle in recent years, with courts dismissing cases against J.C. Penney Corp. and RadioShack Corp..
The agency briefs filed against BP attempt to answer questions raised by the U.S. Supreme Court in 2014, when it created a new pleading standard for ESOP participants challenging drops in company stock price.
In Fifth Third Bancorp v. Dudenhoeffer, 134 S.Ct. 2459, 58 EBC 1405 (U.S. 2014), the Supreme Court held that when stock-drop lawsuits allege that stock is artificially inflated because of undisclosed fraud—like the allegations against BP—participants must identify an alternative course of action that fiduciaries could have taken other than continuing to invest in the stock. That course of action must be consistent with securities laws and not, in the view of a prudent fiduciary, likely to do more harm than good to the value of company stock, the Supreme Court said .
In light of these directives from the Supreme Court, the district judge who heard the case against BP asked the Fifth Circuit to answer the following question: “What plausible factual allegations are required to meet the ‘more harm than good to the fund' pleading standard articulated by the Supreme Court” .
The agency briefs attempt to answer this question. In particular, the DOL brief identifies alternative actions unlikely to do more harm than good to the fund, while the SEC brief explains how the DOL's suggested actions can be accomplished without running afoul of federal securities laws.
Although the DOL identified several actions available to ESOP fiduciaries—including halting future stock purchases through an official blackout—each of the department's suggestions boiled down to a recommendation that plan fiduciaries make corrective disclosures that would alert the public to the fraud and correct the stock price downward.
According to the department, such disclosures—whether made by plan fiduciaries themselves or by the corporate insiders responsible for the fraud—may drive a stock price downward, but they won't do “more harm than good to the fund.”
That's because the truth will come out anyway, causing the fund to react accordingly, the department argued.
Speaking both to the BP case and in general, the DOL said that “although a corrective public disclosure likely would have decreased the value of the stock already held by the Plan, a reasonable fiduciary would have understood that such a drop in value would have eventually occurred anyway once the fraud was revealed, potentially through a safety disaster, and thus would have acted to stop any further harm to the Plan by refusing to purchase more BP stock until the fraud was disclosed.”
Moreover, failing to disclose the fraud “does not prevent the ultimate loss in value to the plan, but merely ensures that, in the interim before the market learns the truth, the Plans will buy still more stock at inflated prices, causing further harm.”
In its brief, the SEC explained how the DOL's suggested actions could be accomplished in compliance with federal securities laws.
According to the SEC, disclosing the fraud won't violate securities laws as long as the disclosure is made to the general public. A disclosure made only to ESOP participants could violate selective disclosure rules or constitute an illegal tip under insider trading prohibitions, the commission said.
Further, suspending future stock purchases through a blackout would be permissible as long as the fiduciaries imposed a concurrent ban on stock sales, the commission said. The suspension also must be “promptly and accurately disclosed in a Form 8-K—including the reason for the suspension,” the commission said.
Finally, the agencies identified and approved of other potential courses of action, including urging those responsible for the fraud to make disclosures and reporting possible violations to the proper federal agency.
The DOL brief was filed by M. Patricia Smith, G. William Scott, Thomas Tso and Eirik Cheverud. The SEC brief was filed by Anne K. Small, Michael A. Conley, John W. Avery and David D. Lisitza.
To contact the reporter on this story: Jacklyn Wille in Washington at email@example.com
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Text of the DOL's amicus brief is at http://www.bloomberglaw.com/public/document/Ralph_Whitley_et_al_v_BP_PLC_et_al_Docket_No_1520282_5th_Cir_May_/2. Text of the SEC's amicus brief is at http://www.bloomberglaw.com/public/document/Ralph_Whitley_et_al_v_BP_PLC_et_al_Docket_No_1520282_5th_Cir_May_/3.
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