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Wells Fargo & Co. defeated claims that it harmed workers’ retirement savings by keeping company stock in its 401(k) despite allegedly knowing that the stock value was artificially inflated because of a 10-year ongoing cross-selling scheme ( In re Wells Fargo Erisa 401(K) Litig. , 2017 BL 334045, D. Minn., No. 0:16-cv-03405-PJS-BRT, 9/21/17 ).
Participants failed to show that the plan’s fiduciaries couldn’t have concluded that a disclosure of the unethical sales practices prior to 2016 would have done more harm than good to their investments, Judge Patrick J. Schiltz of the U.S. District Court for the District of Minnesota held Sept. 21.
The opinion wasn’t a complete loss for the participants. Schiltz allowed them to amend their claim of breach of the duty of loyalty, but they will have to specify exactly who breached the duty, when, and how.
The lawsuit follows the 2016 announcement that thousands of Wells Fargo employees had engaged in unethical sales practices, including opening more than 1.5 million deposit accounts and issuing over 500,000 credit-card applications for customers without their knowledge. The scheme allegedly started in 2005. The bank was fined $185 million by federal banking regulators, and the price of Wells Fargo stock dropped sharply.
The decision is the latest example of how difficult it is for investors to meet the challenging pleading standard imposed by a 2014 U.S. Supreme Court decision for claims of breach of fiduciary duty of prudence on the basis of inside information under the Employee Retirement Income Security Act. Wells Fargo joins a growing list of companies that have defeated such lawsuits, including Target Corp., Cliffs Natural Resources Inc., Reliance Trust Co., Lehman Brothers Holdings Inc., State Street Bank & Trust Co., RadioShack, Citigroup, Eaton Corp., Whole Foods Corp., JPMorgan Chase & Co., IBM Corp., and BP Plc.
In his ruling, Schiltz described the lawsuit as “one of many actions in which plaintiffs’ attorneys have taken what is essentially a securities-fraud action and pleaded it as an ERISA” claim to avoid the demanding pleading requirements of securities laws and to take advantage of the strict duties imposed on ERISA fiduciaries.
The participants alleged sufficient facts that there was an alternative action the bank could have taken—early disclosure—that would have been consistent with the securities laws, Schiltz held. However, they fell short on their allegations that a prudent fiduciary in Wells Fargo’s position couldn’t have concluded that publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price, he concluded.
The factors a fiduciary must consider to determine whether an early disclosure is appropriate aren’t exhaustive but are sufficient to make a point that an earlier disclosure isn’t always the best option, Schiltz said.
DiCello Levitt & Casey LLC, Elias Gutzler Spicer LLC, Levi & Korsinsky LLP, Douglas J. Nill PLLC, Zimmerman Reed PLLP, Beasley Allen Crow Methvin Portis & Miles PC, Lockridge Grindal Nauen PLLP, Grant & Eisenhofer PA, and Vinson & Elkins LLP represent the participants. Proskauer Rose LLP and Dorsey & Whitney LLP represent Wells Fargo.
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