Compliance

Allergan Stock Drop Challenge Blames Fiduciaries For Losses

For claims alleging a fiduciary breach based on non-public information, the high court has held that plaintiffs must plausibly allege an alternative action fiduciaries could have taken and would not have viewed as more harmful to the plan than helpful.

By John Manganaro editors@assetinternational.com | March 14, 2017
Page 1 of 2

Plaintiffs have filed a class action challenge against the Allergan, Inc. Savings and Investment Plan and the Actavis, Inc. 401(k) Plan,  claiming breaches pursuant to Sections 404, 405, 409 and 502 of the Employee Retirement Income Security Act (ERISA).

According to the compliant, “this case is about the failure of the defendants, fiduciaries of the plan, to protect the interests of the plan’s participants in violation of the defendants’ legal obligations under ERISA.” Defendants, the complaint argues, “breached the duties they owed to the plans, to plaintiff, and to the putative class members who are also participants, by, inter alia, retaining common stock of Allergan as an investment option in the plans when a reasonable fiduciary using the ‘care, skill, prudence, and diligence … that a prudent man acting in a like capacity and familiar with such matters would use’ would have done otherwise.”

The complaint suggests defendants “permitted the plans to continue to offer Allergan Stock as an investment option to participants even after the defendants knew or should have known that Allergan Stock was artificially inflated during the class period,” which runs February 25, 2014, to November 2, 2016.

“Defendants knew or should have known that material facts about Allergan’s business had not been disclosed to the market, causing Allergan Stock to trade at prices above which it would have traded had such facts been disclosed,” plaintiffs argue. “Defendants were empowered as fiduciaries to remove Allergan Stock from the plan’s investment options or to take other measures to help participants, yet they failed to do so or to act in any way to protect the interests of the plans or their participants, in violation of defendants’ legal obligations under ERISA.”

As with other stock drop cases, participants may not find it as easy as they expect to prove standing, even with the well-established fact that they clearly did suffer significant financial losses as a result of continuing to hold Allergan stock. While the U.S. Supreme Court made clear in Fifth Third vs Dudenhoeffer that there should be no special presumption of prudence for employee stock ownership plan (ESOP) fiduciaries, “allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or under-valuing stock are implausible as a general rule, at least in the absence of special circumstances.” In addition, for claims alleging a fiduciary breach based on non-public information, the high court held that plaintiffs must plausibly allege an alternative action fiduciaries could have taken and would not have viewed as more harmful to the plan than helpful.

It is up to the United States District Court District Of New Jersey to decide in this particular case whether there was indeed such a plausible alternative action available to fiduciaries. Plaintiffs, among other arguments, suggest the fiduciaries here had a duty at the very least to freeze the offering of the “falsely inflated securities.”

NEXT: Does the argument have merit?