A federal district court judge has dismissed claims in a combined Employee Retirement Income Security Act (ERISA) and securities lawsuit about the decline in Target Corp.’s stock price after its failed attempt to open stores in Canada.

A proposed class action lawsuit was filed in July 2016 by a participant in Target Corporation’s 401(k) plan, which alleges the company violated its fiduciary duties under ERISA by continuing to allow participants to invest in the company stock fund when it was no longer prudent. The plaintiff in the suit suggested several actions Target could have taken when it knew or should have known its stock price was artificially inflated. Less than a week later, another ERISA challenge was filed against Target.

U.S. District Judge Joan N. Ericksen of the U.S. District Court for the District of Minnesota agreed with the defendants’ argument that the plaintiffs’ claims fail under the pleading standards articulated by the Supreme Court in Fifth Third Bancorp v. Dudenhoeffer. Ericksen noted that the Supreme Court held that in order for plaintiffs to state a claim “for breach of the duty of prudence on the basis of inside information,” they must plausibly allege an alternative action that the defendant fiduciaries could have taken that would have been consistent with the securities laws, and “a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.” The Supreme Court noted one example of an action that would be inconsistent with securities laws: “divesting the fund’s holdings of the employer’s stock on the basis of inside information.”

The plaintiffs alleged that Target defendants should have taken the following alternative actions to protect plan participants from artificially-inflated Target stock prices: (1) refrained from purchasing Target stock by “freezing” purchases and/or sales of Target stock in the Fund; (2) held plan contributions in cash or some other short-term investment rather than making future purchases of Target stock; disclosed the nonpublic, material information to the public; sent targeted letters to plan participants encouraging them to diversify holdings; sought guidance from the Department of Labor (DOL) or Securities and Exchange Commission (SEC) or outside experts; or resigned as fiduciaries.

“The [amended complaint] does not include sufficient allegations supporting the general proposition that a prudent fiduciary could not have concluded that refraining from purchasing stock by freezing stock purchases or freezing stock sales would do more harm than good,” Ericksen wrote in her opinion. “Plaintiffs primarily allege in a conclusory way that these alternative actions would have saved plan participants from future losses. Such naked assertions are analogous to those the Supreme Court found insufficient in Amgen.” 

According to the opinion, outside of the conclusory allegations, the plaintiffs allege that because the fund’s purchases during the first half of 2014 represented “one quarter of one percent” of market trading volume, it was “extremely unlikely” that a freeze implemented by the fund would have had a negative, appreciable effect on share price. “But this allegation is non-responsive to Dudenhoeffer’s concern that ceasing purchases could send mixed signals, causing a drop in stock price,” Ericksen wrote.

In addition, she said, choosing to hold investments in cash, rather than to invest in stock, on the basis of nonpublic information, presents the very same “between-a-rock-and-a-hard-place” scenario discussed in Dudenhoeffer. “To wit, plan participants have sued fiduciaries for holding too large a cash buffer, thereby creating ‘investment drag.’ Thus, here too, plaintiffs fail to plead sufficient facts to meet Dudenhoeffer’s pleading standard,” Ericksen said.

As for disclosing information to the public, among other points, Ericksen noted that the plaintiffs may not simply allege that because a stock price drop was inevitable, ipso facto almost any legal alternative action aimed at softening losses to participants would do more good than harm. “Moreover, plaintiffs’ theory as to why Defendants should have disclosed nonpublic information about the supply chain problems—because Target Canada was ‘doomed’ to failure—rests on hindsight. But compliance with ERISA’s duty of prudence is not evaluated from the ‘vantage point of hindsight,’” she wrote.

According to Ericksen, sending targeted letters recommending diversified holdings would likely add nothing to the information already provided to plan participants and could pose the same disclosure problems previously discussed. In addition, she said, seeking the DOL and SEC’s guidance is really no different from disclosure because doing so would still require public disclosure, and it is also unclear how outside experts would have affected Defendants’ decision-making. Finally, Ericksen said resigning would only shift responsibility to other fiduciaries. “Without allegations explaining how any of these alternatives would have been prudent in the circumstances or led to different decisions, plaintiffs fail to meet Dudenhoeffer’s pleading standard,” Ericksen wrote.

The court also dismissed a securities lawsuit, saying plaintiffs failed to show how Target’s public statements were misleading and contained omissions. Ericksen said pleading fraud by hindsight is a failure under pleading standards in securities litigation.

The plaintiffs in both the securities and ERISA actions requested leave to amend if the court decides to dismiss all or any part of their claims. Ericksen denied their requests.